What happened

Shares of ON Semiconductor (NASDAQ:ON) surged after the company issued a weekend earnings report to trade up 9% as of 2:41 EDT on Monday.

Analysts had predicted the chipmaker would report pro forma profits of $0.36 per share on sales of $1.38 billion for the third quarter of 2019. ON hit that sales prediction, but missed on earnings, reporting ""non-GAAP diluted earnings per share" of just $0.33 -- but investors bid it up anyway.  

Semiconductor chip

Image source: Getty Images.

So what

So why would investors do that? That's a great question, because as it turns out, ON's results were actually even worse than the earnings miss implies. When calculated according to generally accepted accounting principles (GAAP), for example, not only did earnings miss expectations -- ON actually didn't earn anything at all, but rather lost $0.15 per share! And whereas sales met expectations, they were still down 10% year over year.  

There appear to be two reasons: First, ON blamed the earnings miss on "$170 million to settle all pending intellectual property litigation" with Power Integrations. That settlement may have been lighter than what investors expected. It also puts to bed certain litigation concerns that may have been weighing on the stock.

Now what

But guidance is another reason. According to ON, business in the semiconductor industry is now showing "modest signs of improvement," and as a result, management is predicting that fourth-quarter 2019 sales will range from $1.35 billion to $1.4 billion -- at the midpoint, slightly more than the $1.37 billion Wall Street had been anticipating. Management is also predicting it will earn GAAP gross profit margins of 35.7% to 36.7%, an improvement over Q3 numbers, which could enable the company to beat on earnings next quarter instead of missing as it did last quarter.

In short, investors appear willing to forgive Q3's "earnings miss" -- as long as management delivers on its promise to beat earnings next time around.