ON Semiconductor (ON), a major supplier of semiconductor-based solutions for energy-efficient electronics, saw its stock fall over 7% in early trading Monday after the company provided lower than expected guidance for the fourth quarter.

In its Q3 earnings results released before the market open, ON projected Q4 revenue of $1.13 to $1.27 billion and adjusted gross margins of 45.5% to 47.5%. This outlook fell short of analyst consensus estimates of $1.36 billion in revenue and 47.1% margins for the quarter.

ON attributed its conservative Q4 forecast to “market softness” and ongoing economic uncertainty impacting demand in some end markets. The company’s shares dropped as much as 7.2% to $67.80 Monday morning on the weaker outlook before paring some losses.

The disappointing guidance overshadowed ON’s better-than-expected Q3 results. The company posted revenue of $2.19 billion, up 0.5% year-over-year and surpassing estimates of $2.15 billion. Adjusted EPS came in at $1.45, down slightly from $1.45 a year ago but beating projections of $1.34.

“Our disciplined approach and execution resulted in another solid quarter, demonstrating the resilience in our business amid market softness,” said ON President and CEO Hassane El-Khoury. “Given the uncertain macroeconomic environment, we remain focused on controlling what we can control.”

Q3 Revenue Reflects Broad-Based Demand Despite Macro Headwinds

ON Semiconductor generated Q3 revenue of $2.19 billion, an increase of 0.5% compared to Q3 2021. Revenue increased 3% quarter-over-quarter.

By end market, ON saw revenue growth in industrial, computing, and automotive markets offset by declines in consumer and communication end markets. Notably, the automotive sector delivered record quarterly revenue, up 8% year-over-year.

Geographically, Q3 revenue from North America grew 14% annually while Europe revenue increased 4%. However, revenue from China decreased 10% year-over-year on COVID-19 disruptions and weak consumer demand. Japan and Asia-Pacific revenue also declined versus last year.

Gross profit margin came in at 45.1% in Q3, down from 45.7% a year ago attributed to inflationary cost pressures. However, margins improved 60 basis points sequentially through cost discipline and supply chain actions. ON expects further gross margin improvement in Q4.

Despite macro uncertainty, ON Semiconductor saw broad-based demand across most of its target end markets during Q3, underscoring its leading position in power management semiconductors. The company also continues to gain share and accelerated design win momentum, particularly in auto and industrial.

Q4 Guidance Reflects Conservative Approach

While ON Semiconductor delivered a solid Q3 performance, its disappointing Q4 guidance points to headwinds from the weakening global economy. The company sees revenue of $1.13 to $1.27 billion versus expectations of $1.36 billion.

“Given the uncertain macroeconomic environment, we remain focused on controlling what we can control,” said CEO El-Khoury. This includes aligning operations to slowing demand trends in some consumer-driven sectors.

ON stated its Q4 guidance reflects normal seasonal trends but also extra conservatism given potential softening demand and high channel inventory in consumer end markets. Specifically, the company sees weakening consumer electronics demand as rising inflation and interest rates strain budgets.

However, ON still expects Q4 automotive revenue to increase sequentially as this sector remains resilient. The company is also seeing strong industrial demand heading into 2023. ON is focused on maximizing margins amid a more challenging demand environment through supply chain improvements and cost management.

Despite Soft Outlook, ON Well-Positioned Long Term in Key Markets

While ON Semiconductor’s disappointing Q4 forecast weighed on shares Monday, analysts remain confident in the company’s long-term growth trajectory. ON continues to gain share in strategic automotive and industrial markets where secular growth tailwinds remain intact.

“We believe ON is one of the best positioned semiconductor companies heading into a downturn,” commented Morgan Stanley analyst Craig Hettenbach following earnings. He sees ON’s automotive and industrial exposure as positives despite near-term demand uncertainty.

ON has established itself as a major player in electric vehicle power semiconductors along with advanced driver assistance systems. It’s also benefiting from growth in industrial automation. The company expects to sustain above-market growth over the next decade.

“We remain focused on advancing our leadership in intelligent power and sensing technologies and delivering sustained revenue and profitability growth,” CEO El-Khoury affirmed. While ON took a conservative stance on Q4, its long-term growth story remains compelling for investors.