ON Semiconductor Corporation (NASDAQ:ON) has demonstrated remarkable resilience and adaptability in navigating the current semiconductor market downturn. The company's strategic focus on high-growth megatrends in the automotive, industrial, and AI data center markets has positioned it well to weather the storm and emerge stronger.

Financials

In the fiscal year 2023, ON Semiconductor reported annual revenue of $8.253 billion and net income of $2.183 billion. The company's annual operating cash flow reached $1.977 billion, while its free cash flow stood at $401.9 million. These impressive financial results underscore the strength of ON Semiconductor's business model and its ability to generate consistent cash flows, even in challenging market conditions.

During the second quarter of 2024, the company reported revenue of $1.735 billion, a decrease of 17% year-over-year. However, ON Semiconductor's non-GAAP gross margin remained strong at 45.3%, demonstrating the company's ability to maintain profitability despite the market downturn. The company's non-GAAP operating margin for the quarter was 27.5%, further highlighting its operational efficiency.

Business Overview

The company's revenue decline was primarily driven by an ongoing inventory correction in the automotive and industrial end markets, which together contributed 79% of ON Semiconductor's total revenue in the quarter. While the company is facing short-term demand uncertainty, its long-term outlook remains unchanged. ON Semiconductor is at the forefront of the fastest-growing segments of the automotive, industrial, and AI data center markets, and it expects to resume its growth trajectory as end-customer inventory levels normalize.

In the automotive market, ON Semiconductor's revenue declined 11% sequentially and 15% year-over-year to $907 million. However, the company's automotive revenue has nearly doubled since the fourth quarter of 2020, largely driven by increasing content for vehicle electrification and advanced driver-assistance systems (ADAS). The company's industrial revenue was $468 million, down 2% sequentially and 23% year-over-year, but ON Semiconductor is seeing pockets of stabilization in this market.

Geographically, the company is seeing signs of recovery in the Asia-Pacific region, particularly in China, where demand is improving in both the automotive and industrial end markets. ON Semiconductor's revenue from the Asia-Pacific region, including China, increased sequentially in the second quarter of 2024.

ON Semiconductor's strategic focus on power and sensing technologies has been a key driver of its success. The company's intelligent power and sensing solutions have become synonymous with high efficiency and performance, which are critical to solving customer problems and addressing high-growth megatrends.

Recent Developments

In the second quarter, the company announced the acquisition of SWIR Vision Systems, a specialist in short-wave infrared (SWIR) technology. This acquisition will strengthen ON Semiconductor's industrial and defense product offerings, leveraging the company's manufacturing and R&D expertise to accelerate the commercialization of SWIR technology.

The company's silicon carbide (SiC) business continues to be a key growth driver, with ON Semiconductor expecting to outgrow the SiC market by 2x in 2024 through share gains and its geographical and market diversification strategy. The company is a SiC market share leader in China and is designed into nearly 60% of the battery-electric vehicle (BEV) models from Chinese OEMs.

ON Semiconductor's collaboration with Volkswagen Group, announced in the second quarter, further solidifies its position in the automotive market. The company will be the primary supplier of a complete powerbox solution as part of Volkswagen's next-generation traction inverter for its Scalable System Platform, featuring SiC-based technologies.

To support the growing demand for its SiC products, ON Semiconductor announced a multi-year investment in the Czech Republic for a vertically integrated SiC manufacturing facility. This strategic expansion, subject to approval by the European Commission, will enable the company to meet the rising demand for its SiC modules and other power semiconductors by bringing front-end manufacturing and advanced packaging capabilities to Europe.

Outlook

Looking ahead, ON Semiconductor's guidance for the third quarter of 2024 reflects the ongoing market uncertainty. The company expects revenue to be in the range of $1.7 billion to $1.8 billion, with non-GAAP gross margin between 44.4% and 46.4%. The company's non-GAAP earnings per share are expected to be in the range of $0.91 to $1.03.

Despite the current market challenges, ON Semiconductor remains committed to its long-term financial model and continues to invest in research and development to drive future growth. The company's capital allocation strategy remains focused, with 78% of its free cash flow deployed for share repurchases over the past 12 months, significantly higher than its stated long-term target of 50%.

Conclusion

In conclusion, ON Semiconductor's resilience and innovative approach have positioned the company well to navigate the semiconductor market downturn. The company's strategic focus on high-growth megatrends, coupled with its investments in power and sensing technologies, have enabled it to maintain profitability and market leadership. As the market recovers, ON Semiconductor is poised to capitalize on the opportunities in the automotive, industrial, and AI data center markets, delivering long-term value for its shareholders.