ON Semiconductor (NASDAQ:ON), in their third quarter 2023 earnings conference call, reported revenue of $2.18 billion, non-GAAP gross margin of 47.3%, and non-GAAP earnings per share of $1.39, all surpassing their guidance midpoint. The company announced plans to become a global leader in the silicon carbide market by the end of 2023, aiming for over 25% market share. They also highlighted their growth in the electric vehicle (EV) market and their successful expansion of the world's largest silicon carbide fab in Bucheon.
Key takeaways from the call include:
- Record revenue achieved in Automotive and Industrial segments, driven by demand for silicon and silicon carbide.
- Strategic investment in silicon carbide, with plans to secure more than 25% market share globally by the end of 2023.
- Significant growth in the electric vehicle (EV) market, including design wins and long-term supply agreements with leading automotive players, including NIO.
- Healthy revenue reported in the energy infrastructure and medical sectors.
- Commitment to returning 50% of free cash flow to shareholders.
- Divestment of four fabs in 2022 as part of their fab-lite strategy to reduce fixed costs and consolidate operations in larger, more efficient fabs.
The company also reported on their Q3 earnings call that they are implementing their Fab Right strategy, which is expected to generate incremental cost savings over the next few years. The company's silicon carbide manufacturing output exceeded expectations, with Q3 gross margin for silicon carbide exceeding 40%.
ON Semiconductor's GAAP operating expenses for Q3 were $344 million, while non-GAAP operating expenses were $322 million. The company returned 75% of their free cash flow through $100 million of share repurchases and plans to continue returning 50% of free cash flow to shareholders.
For their Q4 guidance, the company expects revenue in the range of $1.95 billion to $2.05 billion, with a mid-single-digit decline in automotive and greater sequential declines in industrial and other end markets. They anticipate a non-GAAP gross margin between 45.5% and 47.5% and non-GAAP earnings per share in the range of $1.13 to $1.27.
Despite recent softness in demand from one customer, ON Semiconductor anticipates silicon carbide to grow 2x the market in 2024. The company plans to reduce utilization in the next several quarters but maintains a cautious outlook due to macro uncertainty and financial factors. The company expects silicon carbide to remain constrained through 2024 and has strategic inventory in place to support fab transitions. Pricing remains stable, and the company's conversations with customers have focused on demand rather than pricing.
The company is confident about the industrial and energy storage segments, which are less impacted by the residential market. The transition to 200-millimeter silicon carbide manufacturing is on track for 2024. Silicon carbide is expected to be accretive to corporate margins in 2024 and potentially higher. The decrease in the 2023 silicon carbide revenue forecast from $1 billion to $800 million is due to win-win negotiations with customers based on legally binding Long-Term Supply Agreements (LTSAs).
Finally, the CEO and CFO of the company discussed their silicon carbide business and future plans. They are on track to transition to 200-millimeter silicon carbide production by 2024 and are confident in their progress. The company expects silicon carbide to become accretive to corporate margins in Q4 of this year and potentially higher in 2024. They also mentioned that the long-term supply agreements (LTSAs) with customers are legally binding but can be adjusted if there is a win-win situation for both parties. The company has $5.7 billion of LTSA commitments over the next 12 months. Despite weakness in the industrial end market, they see strength in renewable energy and medical applications. They do not anticipate a significant recovery in the industrial sector in 2024.
InvestingPro Insights
Drawing on InvestingPro's real-time data and expert tips, we can gain a deeper understanding of ON Semiconductor's market position and future prospects.
According to InvestingPro, ON Semiconductor boasts a strong market cap of 28.2B USD, reflecting its significant presence in the Semiconductors and semiconductor Equipment industry. The company's P/E Ratio stands at 14.8, which, combined with its adjusted P/E ratio of 16.43 as of Q2 2023, suggests that it's trading at a high P/E ratio relative to near-term earnings growth. This could indicate that investors are willing to pay a higher price for the company's stock due to expected future earnings growth.
InvestingPro's data also shows a revenue growth of 9.61% over the last twelve months as of Q2 2023, despite a slight slowdown in the most recent quarter. The company's gross profit margin stands at a healthy 47.78% for the same period, indicating efficient operations and a strong ability to turn revenue into profit.
In terms of InvestingPro Tips, two key insights stand out. Firstly, ON Semiconductor yields a high return on invested capital, which is an encouraging sign for investors as it suggests that the company is effectively using its capital to generate profits. Secondly, the company operates with a high return on assets, indicating that it's efficiently using its assets to generate earnings.
For more insights and tips, consider subscribing to InvestingPro's premium service. With over 15 additional tips on ON Semiconductor alone, it provides a wealth of information to help you make informed investment decisions. For pricing details, visit our subscription page.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.