ON Semiconductor Corporation – November 17, 2022

Today’s most exciting technologies such as 5G, artificial intelligence, augmented reality, and autonomous vehicles among many others, are only enabled by the cutting-edge efforts of the most advanced organizations on the planet. ON Semiconductor Corporation (onsemi) is one of these companies bringing the most sophisticated and complex ideas in technology to reality, creating products and solutions that are driving disruptive innovations to help build a better future.

With a focus on automotive and industrial end-markets, onsemi is accelerating change in megatrends such as vehicle electrification and safety, sustainable energy grids, industrial automation, 5G, and cloud infrastructure. The company offers a highly differentiated and innovative product portfolio, delivering intelligent power and sensing technologies that solve some of the world’s most complex challenges and lead the way to creating a safer, cleaner, and smarter planet.

onsemi’s intelligent power technologies enable the electrification of the automotive industry that allows for lighter and longer-range electric vehicles, empowers efficient fast-charging systems, and propels sustainable energy for the highest efficiency solar strings, industrial power, and storage systems.

While its intelligent sensing technologies support the next generation of smarter factories and buildings and enhance the automotive mobility experience with imaging and depth sensing that make advanced vehicle safety and automated driving systems possible.

onsemi continues to deliver record revenue levels stemming from continued growth in its focus markets of automotive and industrial applications. Furthermore, as the company takes a proactive approach to making structural changes to strengthen the business, it continues to secure contracts where semiconductor content growth is accelerating. Particularly in industries such as vehicle electrification, energy infrastructure, advanced safety, and factory automation.

Originally formed as a spinoff of Motorola’s Semiconductor Components Group, onsemi was founded in 1999. Motorola had been a pioneer in transistors, especially for commercial applications. It also pioneered the automotive electronics industry, from the first mobile radios in police cars in the 1940s to automotive electric controls and semiconductors in the 1970s.

Over the last two decades, the company has grown its footprint with an extensive list of acquisitions including semiconductor competitors, specialist hardware producers covering imaging, radar, power, and other micro-devices, as well as design, manufacturing, and fabrication facilities.

Along with Motorola, the acquisition of Fairchild Semiconductor in 2016 provided a foundation for the modern-day onsemi. Thanks to pioneering technology stemming from the early use of silicon and planar processes that produced the first commercially viable integrated circuits in the 1960s, Fairchild became the foundation for many of the innovations we see today.

Hassane El-Khoury has been the president and chief executive officer of onsemi since December 2020. El-Khoury is a seasoned professional with over twenty years of experience in the technology sector. His career has fostered a deep understanding of customer and design requirements in the automotive and industrial markets, as well as a systems-level understanding to form integrated customer solutions and business strategies. He has held several leadership roles throughout his career, most recently as president and CEO for Cypress Semiconductor, where he was the architect of its acquisition by Infineon Technologies AG in early 2020 for €9.0 billion.

El-Khoury has noted that onsemi is embarking on a transformational journey to revolutionize the semiconductor industry with a focus on driving intelligent power and sensing solutions to create a more sustainable ecosystem for future generations. Under his guidance, the company is looking to build a strong culture of innovators and forward, out-of-the-box thinkers interested in pushing the boundaries of expectation.

onsemi serves a broad base of end-user markets, including automotive, industrial, communications, computing, and consumer customers, among many others. Operating through three segments – Power Solutions, Advanced Solutions, and Intelligent Sensing segments, the company provides its intelligent products worldwide.

onsemi’s power solutions allow customers to achieve lower weights and reduce system costs through an unwavering focus on efficiency. It offers a wide range of semiconductor products that perform multiple application functions, including power switching and conversion, signal conditioning, circuit protection, signal amplification, and voltage regulation functions. The company also designs and develops application-specific standard products and circuits, radio frequency, and integrated power solutions, as well as provides foundry and design services for government customers. In addition, it develops image sensors, signal processors, and photon detectors, as well as actuator drivers for autofocus and image stabilization for a broad base of end-users in various end markets.

Coupled with its sensing integration, onsemi says its power solutions achieve higher efficiencies compared to competitors through lower temperature operation and reducing cooling requirements, all whilst saving costs and minimizing weight, and delivering the required power for a given battery capacity. The advanced proprietary features in smaller packages that deliver optimal results support a diverse range of use cases, and in particular, are enabling the next generation of automotive safety and autonomous driving.

While in the industrial space, onsemi is helping Original Equipment Manufacturers (OEMs) develop innovative products to navigate the ongoing transformation across energy infrastructure, factory automation, and power conversion.

Products are sold through distributors and direct to customers for ultimate use in a variety of products and markets. In general, onsemi maintains long-term relationships with key strategic end customers, which generally include minimum purchase commitments. Sales to distributors who resell to mid-sized and smaller OEMs and other companies accounted for approximately two-thirds of the company’s revenue in 2021. While sales to direct customers include manufacturers who provide contract services for OEMs, along with large multinationals and selected regional OEMs.

onsemi’s complementary focus on both power and sensing technologies is aligned with fast-growing secular megatrends in multiple end markets. Opportunities in automation and electrification across a wide range of industries should provide meaningful addressable market growth in years to come. The company currently has a key emphasis on gross margin and operating margin expansion, while at the same time achieving revenue growth in its end markets of automotive and industrial infrastructure, coupled with profitable growth opportunities in other end markets.

Additionally, it continues to rationalize its product portfolio by moving away from non-differentiated products, which have had historically lower gross margins. As a result, onsemi’s product development efforts are being directed towards building solutions in areas that appeal to customers in focused market segments and across multiple high-growth applications, including:
• Powering the electrification of the automotive industry with technologies that allow for lighter and longer-range electric vehicles and enable efficient fast-charging systems;
• Propelling the sustainable energy evolution with the highest efficiency solar strings, industrial power, and storage systems;
• Enhancing the automotive mobility experience with imaging and depth sensing technologies that make advanced vehicle safety and automated driving systems possible; and
• Enabling automation and data exchange with intelligent sensing technologies for smarter factories and buildings.

The volatility in global energy markets is driving an accelerated transition to alternative energy. And with a broad portfolio of Silicon Carbide (SiC) and silicon power modules, onsemi has emerged as a leader in this market. The top 10 solar inverter providers in the world collectively have a market share of 80%, and onsemi has now signed long-term agreements with eight of them. Traction for the company’s SiC solutions is complemented by continued growth in the silicon power business and as a result, it expects to see strong long-term growth in its alternative energy business. A key differentiating advantage for onsemi is its ability to offer silicon and silicon carbide solutions across a wide range of power and voltage requirements.

In 2022, the company has also targeted the streamlining of operations by undertaking several initiatives to achieve efficiencies including the divestment of manufacturing facilities, two office buildings, and the sale of its corporate headquarters facilities in Arizona. A transition to a lighter internal fabrication model aims to help financial performance to be less volatile and not as heavily influenced by internal manufacturing volumes. It also approved an exit plan to wind down its Wi-Fi solutions division within the Advanced Solutions Group segment, which will further enable investments to be directed to areas of strategic focus.

In its latest release, onsemi closed its sixth consecutive quarter of record financial results stemming from continued growth in automotive and industrial applications. Revenue of $2.19 billion beat analysts’ estimates and represented an increase of 26% year-over-year, with the auto segment up 51% and the industrial segment up 28%. While a softening in nonstrategic end markets of consumer and computing saw both declining mid-single digits sequentially.

Over the last 18 months, the company has taken a concerted approach to improve the predictability and reduce the volatility of the business, with the rationalization of the product portfolio exiting $277 million of business to eliminate exposure to products at dilutive gross margins. At the end of the third quarter, a record non-GAAP operating margin of 35.4% had increased by approximately 1,100 basis points year-over-year. As a result, gross profit increased $337.5 million, or approximately 47%, to a record $1.06 billion, up from $720.8 million in 2021.

While operating expenses did not change materially, the company declared a goodwill and intangible asset impairment of $271.8 million, which ultimately brought net income down to $311.9 for the quarter.

Looking ahead, onsemi is forecasting another robust quarter with revenue expected between $2.01-2.14 billion, aligning with consensus estimates that have the company closing out the full year with a record $8.31 billion in revenue, representing year-over-year growth of 23%. While full-year earnings per share estimates for 2022 are also forecasted to improve by almost 79% to $5.27 per share, up from $2.95 in 2021.

onsemi faces significant competition from major international semiconductor companies including Sony, Samsung, Broadcom, Infineon Technologies, Wolfspeed, STMicroelectronics, Texas Instruments, and Toshiba Corporation, along with smaller companies focused on specific market niches.

However, its competitive strengths include core competencies in leading-edge fabrication technologies and micro packaging expertise, coupled with the breadth of its product line and IP portfolio, where the company believes it maintains significant performance advantages over the competition.

While stocks in the semiconductor industry have experienced some weakness attributed to lower PC and smartphone demand, neither of these markets are of concern for onsemi. It remains attractively leveraged to growth not only in the auto sector due to EVs and automation, but also increased electrification across a range of end-markets, and as a result continues to post impressive results, delivering record numbers, and beating analysts’ expectations.