According to news on October 31, American chip manufacturer ON Semiconductor announced its third quarter financial report for fiscal year 2023 on October 30, local time. Although the performance was slightly higher than market expectations, its performance guidance for the fourth quarter was significantly lower than Analysts' expectations directly caused its stock price to plummet.
According to the financial report, ON Semiconductor's revenue in the third quarter of 2023 was US$2.18 billion, a year-on-year decrease of 0.54%, 1.43% higher than analysts' consensus estimate of US$2.15 billion; the net profit attributable to the company was US$582.7 million, down from the previous year. It was US$311.9 million during the same period; adjusted earnings per share were US$1.39, exceeding market expectations of US$1.34, compared with US$1.45 in the same period last year, a year-on-year decrease of 4.14%.
Under GAAP standards, the gross profit margin was 47.3%, compared with 48.3% in the same period last year; the operating profit margin was 31.5%, compared with 19.4% in the same period last year.
By business unit, the automotive business unit's revenue reached a record US$1.2 billion, a year-on-year increase of 33%; the industrial sector's revenue increased slightly year-on-year, reaching a record US$616 million.
However, ON Semiconductor's fourth-quarter performance expectations were unexpectedly lower than market expectations.
ON Semiconductor expects fourth-quarter revenue of $1.950 billion to $2.050 billion, compared with the consensus estimate of $2.18 billion, and adjusted earnings per share of $1.13-$1.27, below the consensus estimate of $1.36.
ON Semiconductor CEO Hassane El-Khoury explained in an interview with Bloomberg TV on Monday that "an anomaly with customers" was dragging down the outlook. But he declined to name the company, calling it "an automotive original equipment manufacturer in North America" (using the original equipment manufacturer's abbreviation).
“I don’t want to talk about the specifics of the client,” El-Khoury said.
Notably, El-Khoury said the recent severe UAW strike against legacy automakers in Detroit is not the reason for the weak outlook.
"We don't see an immediate impact. It's really not a big deal. We can't pinpoint the impact," El-Khoury said, citing the shutdowns at three affected automakers including Ford Motor Co., General Motors Co. and Stellantis NV. Any impact will be felt in the coming quarters. But suppliers like ON Semiconductor have gotten good news in recent days, with members of each of the three companies reaching temporary labor agreements in the past week.
In fact, before the financial report was released today, ON Semiconductor maintained a vigorous development trend because the demand for automotive and industrial chips continued to grow. Amid the supply chain challenges of 2021, automotive and industrial chips have been among the most short-supplied areas, and demand remains strong even into 2022. This is in sharp contrast to the continued decline in other chip markets such as personal computers, mobile phones and cloud servers.
Several reports appeared in the financial press this summer pointing to a significant slowdown in electric vehicle sales. There may be a combination of factors behind this. The most prominent issues may be rising interest rates, making cars more expensive, and the potential saturation of the market for early EV adopters, with range anxiety and costs limiting mass adoption.
It's worth noting that electric vehicles tend to use more semiconductors than internal combustion engines, with ON Semiconductor CEO Hassane El-Khoury once pointing out that electric vehicles have 14 times more chips than internal combustion vehicles in the powertrain alone. Therefore, when the development of electric vehicles slows down, the impact on automotive chip manufacturers will be magnified.
More than half of ON Semiconductor's revenue comes from automotive-related chips, providing chips for electric vehicle transmission systems and assisting driver assistance systems such as cameras and sensors. Its customers include European automaker Volkswagen.
Previously, ON Semiconductor put automobiles first in its performance goals from 2022 to 2027. The company expects that in the past five years, the automotive business is expected to grow at a compound annual growth rate of 19%. Its main products include silicon carbide, IGBT, assisted driving (ADAS) related chips, power management and safety management chips required for electrification. With automobiles as the main driving force, ON Semiconductor expects annual revenue to grow at a compound annual growth rate of 10% to 12% from 2022 to 2027, and gross profit margin will increase from 49.2% to 53%.
However, ON Semiconductor's latest financial report has confirmed the slowdown in the electric vehicle market, and this impact may continue to expand in the future.
"Our industry checks indicate continued deterioration in order rates in automotive and industrial end markets," said Summit Insights Group analyst Kinngai Chan.
Analysts at Deutsche Bank said ON Semiconductor's guidance showed the company was "finally succumbing to macro pressures" such as weak auto demand.
Hassane El-Khoury also said on the post-earnings conference call: "We are starting to see some weakness, European tier 1 customers are dealing with inventory, and there are increasing risks to vehicle demand due to high interest rates."
Previously, Tesla CEO Elon Musk also expressed concerns about the impact of high interest rates on car buyers. The world's most valuable automaker (also considered a leader in the electric vehicle industry Sheep)'s latest quarterly results fell short of revenue expectations.
Affected by changes in the automotive market and future performance expectations, ON Semiconductor also announced the layoff of approximately 900 employees on the same day. This has further fueled concerns that weak demand for electric vehicles (EVs) is starting to hit the automotive chip market.
Hassane El-Khoury said in an interview that the company still expects demand for electric vehicles to grow, but at a slower pace. The layoffs announced Monday are part of a larger strategic shift to make more profitable chips in-house and save costs by outsourcing others.
"The timing seems to be a reaction to the macro (economic environment), but timing has always been part of the strategy," El-Khoury said.
ON Semiconductor has laid off 1,360 employees so far this year and forecast revenue of $1.95 billion to $2.05 billion, below expectations of $2.18 billion, the report said.
Affected by lower-than-expected fourth-quarter performance guidance and pessimistic expectations for the future auto market, ON Semiconductor's stock price fell 21.77% that day, closing at $65.34 per share. It was ON Semiconductor's biggest one-day drop since March 2020.
Hassane El-Khoury acknowledged the depth of the stock market's decline, which is expected to wipe out most of the 34% year-to-date gain through Oct. 27, but said investors would view the reversal as a "brief, short-term reaction."
"This reaction does not reflect our long-term view of the business," El-Khoury said. "We're going to get through this."
"Following this disappointing outlook, we are not surprised by today's share price action as investors may be wary of ON Semiconductor returning to its old cyclical pattern," analysts wrote in a note on Monday. manner."
Even so, some analysts say they believe ON Semiconductor's structural improvements will produce better results than in past cycles. They maintain a buy rating on the stock.
Analysts at Craig-Hallum said they believe weak demand for electric vehicles will adversely affect ON Semiconductor in the short term. They said it would be a "more difficult year" for the company and investors should "remain cautious." "We note that recent uncertainty in the auto industry, including the recently resolved UAW strike, rising interest rates, and lower demand for electric vehicles, could have a negative impact in the coming quarters or much of 2024."
Analysts at Wolfe Research added that ON Semiconductor has so far managed to avoid weakness due to its non-cancellable orders, long lead times and strength in the automotive segment, but lingering challenges in the market mean that this This situation will be "unsustainable".
