Semtech (SMTC) Tops Q2 Earnings, Meets Sales Estimates

Semtech Corporation (NASDAQ:SMTC) reported second-quarter fiscal 2017 earnings of 29 cents per share, which beat the Zacks Consensus Estimate of 25 cents. Adjusted earnings per share exclude one-time items but include stock-based compensation expense.

Revenues

Semtech’s total revenue was $135.9 million, up 3.6% sequentially and 8.1% year over year. The upside was driven by strong demand for the company’s consumer and industrial end-markets, partially offset by weakness in the enterprise computing and communication markets.

Reported revenues came within the management’s expected range of $130.0 million to $140.0 million and were in line with the Zacks Consensus Estimate of $136.0 million.

Distribution sales represented approximately 64% of total revenue, while direct sales accounted for the rest.

Bookings

During the quarter, bookings decreased on a sequential basis. However, the book-to-bill ratio was above 1.

Margins

Reported gross margin was 60.2%, up 30 basis points (bps) sequentially and 10 bps year over year. The increase was due to improved manufacturing efficiencies and higher revenues.

Semtech’s operating expenses (selling, general and administrative (SG&A) + product development and engineering) of $59.1 million were down 4.7% from $62.0 million in the year-ago quarter. As a percentage of sales, both SG&A, and product development & engineering expenses decreased. The net result was an operating margin of 12.1%, compared with 2.4% in second-quarter fiscal 2016.

Net Income

On a GAAP basis, Semtech recorded net income of $9.0 million or 14 cents per share. In the year-ago quarter, the company had reported a loss of $0.31 million or breakeven earnings.

On a pro-forma basis, Semtech generated earnings per share of 29 cents, compared with 22 cents a year ago.

Balance Sheet & Cash Flow

Semtech ended the quarter with cash and cash equivalents of $238.9 million, compared with $216.0 million in the previous quarter. Accounts receivables were $57.0 million, up from $49.2 million in the prior quarter. Days sales outstanding increased by four to 36 days.

Total debt (short-term plus long-term) was $247.7 million, compared with $252.3 million in the previous quarter.

During the quarter, cash flow from operations was $31.7 million, capital expenditure was $2.6 million and free cash flow amounted to $29.0 million.

Guidance

For the third quarter of fiscal 2017, management expects revenues in the range of $134.0 million to $142.0 million, while the Zacks Consensus Estimate is pegged at $138.8 million. Gross profit margin is expected within 59.7–60.3% on a GAAP basis and 60.0–60.5% on a non-GAAP basis.

Management projects SG&A expense within $32.5–$33.5 million, and research and development expense of $24.7–$25.7 million, both on a GAAP basis. The company anticipates stock-based compensation expense of $6.2 million and amortization of acquired intangible assets of $6.4 million.

Accordingly, based on a share count of 66.0 million, GAAP earnings per share are expected in the range of 49–53 cents, while non-GAAP earnings are projected to be within 34–38 cents. The Zacks Consensus Estimate is pegged at 31 cents.

Tax rate is projected in the range of 19–21% on a GAAP basis and 21–23% on a non-GAAP basis. Capital expenditure is anticipated to be roughly $10.0 million.

Our Recommendation

Semtech Corporation manufactures a wide range of analog and mixed-signal semiconductors, including Standard Semiconductor Products, Rectifier and Assembly Products and Other Products. The company reported decent results in the second quarter of fiscal 2017, with the bottom line exceeding our estimates and the top line matching the same.

We believe that Semtech’s new design wins, product introductions and solid execution will boost revenues and margins in the near term. However, challenges to several key end markets could weigh on the company’s prospects.

Currently, Semtech has a Zacks Rank #3 (Hold). Some better-ranked stocks in the same space include Silicon Laboratories Inc. (NASDAQ:SLAB) with a Zacks Rank #1 (Strong Buy), and Intel Corp. (NASDAQ:INTC) and Inphi Corporation (NYSE:IPHI) , both carrying a Zacks Rank #2 (Buy).

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