At first glance, On Semiconductor's (ON, Financial) Q2 performance may seem relatively muted. The power and signal management chip maker delivered a modest earnings beat on revenues consistent with analyst forecasts while projecting Q3 figures in line with consensus. However, alarms were sounded leading into ON's Q2 report, especially from STMicroelectronics (STM, Financial), which lowered its FY24 outlook primarily due to stubborn challenges within the industrial and automotive end markets, the two sectors that comprise over three-quarters of ON's annual revenues. Meanwhile, Texas Instruments (TXN, Financial), which did project quarterly numbers marking sequential growth, cautioned that pockets of weakness remain across these two end markets.
Against this backdrop, ON's Q2 results and Q3 guidance were a sigh of relief, helping spur considerable buying demand today.
- Mirroring its peers, ON's segments in Q2 still endured year-over-year (yr/yr) and sequential declines. Adjusted earnings contracted by 25% yr/yr and 11% sequentially to $0.96, and revenues dipped by 17% yr/yr -- its fastest drop in over five years -- and 7% sequentially to $1.74 billion.
- Given the scope of its silicon carbide business -- the compound used across the EV space -- it is unsurprising that ON continued to encounter turbulence in the quarter as automotive demand remains suppressed in the face of high interest rates and sticky inflation. This shows up in ON's largest PSG segment (roughly half of total revenues), which moved 4% lower from last quarter. ON's smallest segment, ISG, fared the worst, tumbling by 13% sequentially. ISG comprises image sensors used in personal electronics, a market plagued by sluggish spending trends.
- However, softness was expected in the quarter, putting most eyes on ON's Q3 guidance. Unlike TXN, which firmly projected sequential bumps in earnings and revenues next quarter, ON's Q3 outlook still incorporated the potential for further declines, targeting adjusted EPS of $0.91-1.03 and revenues of $1.70-1.80 billion. Still, it was much better than the market feared, especially since the high end of each forecast represents a sequential lift, possibly marking the beginning of a long-awaited recovery in the industrial and automotive markets.
- Management remarked that parts of the industrial sector, such as energy infrastructure, should recover during the back half of the year. Geographically, ON is observing signs of recovery across Asia-Pacific, namely, China, a crucial market for ON. Meanwhile, ON is bullish on the data center and AI market, where it can leverage its silicon carbide portfolio to address the power consumption needs this industry will require.
ON has done enough for two consecutive quarters to gradually entice buyers back into its stock. Investors have been waiting on a broader recovery within the industrial and automotive markets, especially after ON's alarming 4Q23 guidance in late October, triggered by prominent European customers, such as Volkswagen Group, cutting orders as they work through excess inventories. With ON's Q3 guidance building in the potential to finally register sequential growth, investors are more confident that demand has troughed and ON is now on a path toward a significant recovery.
