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Semtech Corporation (SMTC - Snapshot Report) reported second-quarter fiscal 2015 earnings of 35 cents per share beating the Zacks Consensus Estimate by 6 cents. Adjusted earnings per share exclude one-time items but include stock-based compensation expense.

Revenues

Semtech’s total revenue was $145.7 million, up 9.6% sequentially but down 11.7% year over year. Reported revenues were at the higher end of management’s expected range of $138.0 to $146.0 million and surpassed the Zacks Consensus Estimate of $142.0 million. The sequential increase was driven by continued strength in the enterprise computing and communications end markets from infrastructure build outs and strength in industrial market for alternative energy applications.

Direct sales represented approximately 60% of the total second-quarter revenue, while distribution brought in the remaining 40%.

Bookings

In the quarter, bookings improved sequentially, resulting in a book-to-bill ratio of above 1.

Revenues by Geography

In the second quarter, Asia remained the largest contributor to Semtech’s revenues, with approximately 77% share versus 74% in the prior quarter. North America accounted for 13% of the revenues, down from 14% in the prior quarter. Europe contributed the remaining 10% of the revenues, down from 12% in the prior quarter.

Margins

Reported gross margin for the quarter was 60.5%, up 170 basis points (bps) sequentially but down 50 bps from the year-ago quarter. The sequential increase in gross margin was largely driven by a higher mix of Signal Integrity product group revenues, higher manufacturing volumes and absence of restructuring charges which was recorded in the prior quarter.

Semtech reported operating expenses of $66.2 million, down 13.2% from $76.3 million in the year-ago quarter. The significant decrease in operating expenses was due to lower equity stock-based compensation and restructuring expenses.

As a percentage of sales, selling, general & administrative (SG&A) expenses increased from the year-ago quarter, while product development & engineering expenses decreased. The net result was an operating margin of 15.1%, up from 14.8% in the year-ago quarter.

Net Income

On a GAAP basis, Semtech recorded net profit of $17.9 million (26 cents per share) compared with $19.1 million (28 cents per share) in the year-ago quarter.

On a pro-forma basis, Semtech generated net income of $23.3 million or 35 cents compared with $31.8 million or 46 cents in the year-ago quarter.

Balance Sheet & Cash Flow

Semtech ended the quarter with cash and cash equivalents (including temporary investments) of $238.7 million versus $241.2 million in the previous quarter. Accounts receivables were $68.5 million, up from $61.7 million in the prior quarter. Days sales outstanding improved 3 days to 41 days.

Total debt (short-term plus long-term) was $257.6 million versus $287.2 million in the previous quarter.

During the quarter, cash flow from operations was $38.4 million, capital expenditure was $6.3 million and free cash flow was $32.1 million.

In the last quarter, the company spent $10 million to buy back approximately 377,000 shares.

Guidance

For the third quarter of 2015, management expects revenues in the range of $142.0 to $152.0 million, while the Zacks Consensus Estimate is pegged at $153.0 million. Gross profit margin is expected in the range of 60.2–60.8% on a GAAP basis and 60.5–61.0% on a non-GAAP basis.

SG&A expense is expected within $31.7–$32.5 million and research and development expense in the range of $28.5 to $29.1 million on a GAAP basis. The company anticipates stock-based compensation expense of $8.6 million, amortization of acquired intangible assets of $6.4 million and interest and other expense of $1.6 million.

Accordingly, based on a share count of 67.4 million, GAAP earnings per share is expected in the range of 22–30 cents and non-GAAP earnings per share is expected within 42–48 cents. The Zacks Consensus Estimate is pegged at 39 cents.

Also, for the third quarter, tax rate is expected in the range of 11–13% on a GAAP basis and 14–16% on a non-GAAP basis. Capital expenditure is expected to be approximately $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 a decent quarter, with both earnings and revenues exceeding our expectations.

In the quarter, the company witnessed strong order momentum due to improvement in end markets. Also, management provided encouraging earnings guidance, indicating demand visibility, going ahead.

We believe the company’s new design wins, various product introductions and solid execution will drive revenue and margin expansion in the near term. However, challenges in several key end markets could weigh on the near-term growth prospects.

Currently, Semtech has a Zacks Rank #3 (Hold). Other stocks that have been performing well and are worth a look include Broadcom Corp. (BRCM - Analyst Report), Analog Devices (ADI - Analyst Report) and Fairchild Semiconductor International Inc.(FCS - Snapshot Report). All these stocks carry a Zacks Rank #2 (Buy).

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