On Semiconductor Corporation (ON) is a leading global semiconductor manufacturer that has been at the forefront of powering the world's most innovative automotive and industrial technologies. With a rich history spanning over four decades, the company has established itself as a trusted partner for some of the largest and most influential companies across various industries.
Company History and Evolution
Founded in 1999 as a spin-off from Motorola and headquartered in Scottsdale, Arizona, ON Semiconductor has evolved from a small player in the semiconductor market to a diversified technology powerhouse. The company faced challenges in its early years, navigating the technology industry downturn in the early 2000s. However, ON Semiconductor persevered and continued to innovate, marking a significant milestone with the acquisition of AMI Semiconductor in 2008, which expanded its product portfolio and manufacturing capabilities.
Over the next decade, ON Semiconductor pursued a strategy of both organic growth and strategic acquisitions. A key development was the purchase of Fairchild Semiconductor in 2016, which strengthened the company's position in the automotive, industrial, and mobile end-markets. In 2020, ON Semiconductor embarked on a major transformation, refocusing its business on high-growth areas such as power management and sensing solutions for the automotive and industrial sectors. This strategic shift involved divesting certain business units and optimizing the company's global manufacturing footprint.
Despite the challenges posed by the COVID-19 pandemic, ON Semiconductor successfully executed its transformation plan, establishing itself as a leading provider of intelligent power and sensing solutions serving customers across diverse industries. Through its commitment to innovation, operational excellence, and customer partnerships, ON Semiconductor has navigated past obstacles and positioned itself for long-term success.
Technological Leadership
One of the key pillars of ON Semiconductor's success has been its ability to capitalize on the growing demand for silicon carbide (SiC) and gallium nitride (GaN) technologies. These advanced materials offer superior performance, efficiency, and reliability compared to traditional silicon-based semiconductors, making them increasingly valuable in applications such as electric vehicles (EVs), energy storage systems, and data centers.
The company's strength in SiC and GaN has been further bolstered by its strategic partnerships with leading automotive and industrial manufacturers. In 2024, ON Semiconductor announced a landmark deal with the Volkswagen Group, the world's second-largest automaker, to become the primary supplier of a complete powerbox solution for the company's next-generation traction inverters. This partnership underscores the trust and confidence that global industry leaders have in ON Semiconductor's technological capabilities and ability to deliver mission-critical solutions.
Financials
Financially, ON Semiconductor has demonstrated remarkable resilience in the face of market challenges. Despite the ongoing global semiconductor shortage and macroeconomic uncertainties, the company has consistently maintained a strong balance sheet and a commitment to prudent capital allocation. As of the latest reported quarter (Q2 2024), ON Semiconductor had a cash and short-term investments balance of $2.7 billion and access to an additional $1.1 billion in undrawn credit facilities, providing ample liquidity to fund its growth initiatives and navigate any near-term headwinds.
On the operational front, ON Semiconductor has made significant strides in optimizing its global manufacturing footprint through its "Fab Right" strategy. This initiative has enabled the company to enhance its cost structure and improve its gross margins, even during periods of market volatility. In the second quarter of 2024, the company's non-GAAP gross margin stood at 45.3%, demonstrating the effectiveness of its operational excellence efforts.
For the most recent fiscal year (2023), ON Semiconductor reported revenue of $8.25 billion, net income of $2.18 billion, operating cash flow of $1.98 billion, and free cash flow of $401.9 million. However, the company experienced a decline in financial performance in the most recent quarter (Q2 2024), with revenue of $1.74 billion (a 17% year-over-year decrease), net income of $338.2 million, operating cash flow of $362.2 million, and free cash flow of $221.1 million.
The decline in revenue and profitability metrics was primarily driven by an ongoing inventory correction in the automotive and industrial end markets, which together contributed 79% of the company's revenue. Management noted pockets of stabilization in the industrial market, particularly in the energy infrastructure segment, which is expected to recover in the second half of 2024.
Liquidity
ON Semiconductor's strong financial position is further supported by its robust liquidity. The company's $2.7 billion in cash and short-term investments, combined with $1.1 billion in undrawn credit facilities, provides a solid foundation for navigating market uncertainties and pursuing strategic growth opportunities. This financial flexibility allows ON Semiconductor to invest in research and development, expand its manufacturing capabilities, and pursue strategic acquisitions when appropriate.
The company's financial health is further evidenced by its debt-to-equity ratio of 0.406, current ratio of 3.01, and quick ratio of 1.95, indicating a strong balance sheet and ability to meet short-term obligations.
Product Segments and Performance
ON Semiconductor operates in three main product segments: Power Solutions Group (PSG), Analog and Mixed-Signal Group (AMG), and Intelligent Sensing Group (ISG).
The PSG segment, which includes the Automotive Power Division, Industrial Power Division, and Multi-Market Power Division, focuses on intelligent power solutions for the automotive and industrial markets. In Q2 2024, PSG revenue was $835.2 million, accounting for 48.1% of total revenue, with a gross margin of 41.8%.
The AMG segment, comprising the Power Management Division, Sensor Interface Division, and Integrated Circuit Division, provides analog and mixed-signal solutions for various applications. AMG revenue in Q2 2024 was $647.8 million, representing 37.3% of total revenue, with a gross margin of 49.7%.
The ISG segment, which includes the Automotive Sensing Division and Industrial and Consumer Solutions Division, focuses on intelligent sensing solutions. ISG revenue in Q2 2024 was $252.2 million, accounting for 14.5% of total revenue, with a gross margin of 44.9%.
Geographic Diversification
ON Semiconductor's revenue is well diversified across geographic regions. In the most recent quarter, Asia-Pacific (including China) accounted for 46.8% of total revenue, Europe for 23.8%, and the United States for 20.7%. The company has been actively diversifying its geographic footprint, with China seeing a recovery in both automotive and industrial demand.
Future Outlook
Looking ahead, ON Semiconductor's growth prospects remain firmly intact. The company is well-positioned to capitalize on the continued adoption of EVs, the proliferation of renewable energy infrastructure, and the rising demand for energy-efficient data center solutions. Additionally, the company's focus on diversifying its end-market exposure and expanding its geographic reach has helped mitigate risks and positioned it for sustained long-term success.
For Q3 2024, ON Semiconductor is guiding for revenue between $1.7 billion to $1.8 billion, non-GAAP gross margin between 44.4% and 46.4%, non-GAAP operating expenses between $305 million to $320 million, non-GAAP earnings per share between $0.91 to $1.03, and capital expenditures between $130 million to $170 million. The company expects automotive and industrial markets to be flat to slightly up sequentially in Q3 and sees signs of stabilization in the industrial market, with parts of the energy infrastructure market expected to recover in the second half of 2024.
Despite the recent market challenges, ON Semiconductor's fundamentals remain strong, and the company's innovative solutions, strategic partnerships, and operational efficiency position it as a compelling investment opportunity for long-term investors seeking exposure to the semiconductor industry's most promising growth drivers. The company continues to focus on capturing high-growth megatrends in the automotive and industrial infrastructure markets through its intelligent power and sensing solutions, investing in R&D to drive long-term growth and capitalize on opportunities in areas like silicon carbide and analog/mixed-signal technologies.