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Semtech Corporation (SMTC - Snapshot Report) reported third quarter 2013 earnings of 46 cents per share, surpassing the Zacks Consensus Estimate of 35 cents. The adjusted earnings per share exclude one-time items, but include stock-based compensation expense.

Revenue

Semtech’s total revenue was $160.9 million, up 29.9% year over year. Reported revenue was above the management’s expectation range of $148.0 million to $154.0 million. Third quarter revenue included $8.1 million of IP licensing revenue.

Direct sales represented approximately 64% of total third quarter revenue while distribution brought in the balance 36%.

Bookings

In the quarter, bookings grew across all end markets. Total bookings accounted for approximately 46% of shipments during the quarter.

Revenue by Geography

In the third quarter, Asia remained the largest contributor to Semtech’s revenues, with a share of around 68%. North America accounted for another 20%, with the balance coming from Europe.

Margins

Reported gross margin for the quarter was 60.2%, up 100 basis points (bps) from 59.2% in the comparable year-ago quarter. The increase in gross margin was driven primarily by a lower amortization of deferred value inventory adjustment related to the Gennum acquisition. A favorable revenue mix also contributed to higher gross margin in the quarter.

Semtech reported operating expenses of $69.0 million, which were 51.3% higher than the year-ago quarter’s $45.6 million. Operating margin was 12.2%, down from 18.7% in the year-ago quarter due to higher-than-expected operating expenses. As a percentage of sales, both selling, general and administrative (SG&A) expense as well as product development and engineering expenses increased from the year-ago quarter.

Net Income

On a fully diluted GAAP basis, Semtech recorded net income of $16.6 million (25 cents per share) compared with $27.0 million (40 cents per share) in the year-ago quarter and $10.0 million (15 cents per share) in the previous quarter.

On a pro forma basis, Semtech generated net income of $30.9 million compared with $31.8 million in the year-ago comparable quarter. Fully diluted pro forma earnings per share came in at 46 cents, compared with 47 cents in the year-ago quarter.

Balance Sheet

Semtech ended the quarter with cash and cash equivalents (including temporary investments) balance of $210.0 million versus $165.9 million in the previous quarter. Accounts receivables were $72.8 million, down from $77.3 million in the prior quarter. Days sales outstanding were 42 days, down from 43 days in the last quarter.

During the quarter, cash flow from operations was $54.9 million, free cash flow was $47.5 million and capital expenditure was $7.4 million. The company did not spend any amount on share repurchases in the third quarter.

Guidance

For the fourth quarter, management expects revenue in the range of $146.0 million to $152.0 million. Gross profit margin is expected to be in the range of 58.3%–58.9% on a GAAP basis and 61.5%–62.0% on a non-GAAP basis.

Selling, general and administrative expense is expected to be in the range of $32.3–$32.8 million and research and development (R&D) expense is expected in the range of $31.6 million to $32.1 million on a GAAP basis. The company anticipates stock-based compensation expense of $6.9 million, intangibles amortization charges of $8.2 million, transaction and other acquisition related expenses of approximately $1.3 million, reorganization and integration related expenses of $1.2 million, and interest and other expense of $4.4 million.

Accordingly, based on a share count of 68.0 million, GAAP EPS is expected in the range of 13 cents to 17 cents and non-GAAP EPS is expected to be 41–45 cents.

Also, for the fourth quarter, the tax rate is expected to be approximately 0%–2% on a GAAP basis. Capital expenditure is expected to be approximately $7.0 million.

Our Recommendation

Semtech Corporation is a manufacturer of a wide range of analog and mixed-signal semiconductors, including Standard Semiconductor Products, Rectifier and Assembly Products and Other Products. The company reported a robust quarter with earnings beating our expectations.

In the quarter, the company performed strongly with bookings increasing across all end markets and book-to-bill ratio above 1. However, we believe management provided a conservative fourth quarter revenue guidance, reflecting macro uncertainty and weakness in discrete analog.

We remain optimistic about the company’s long-term prospects, solid execution and its decision to reduce operating expenses going forward.

The company faces stiff competition, particularly from Analog Devices, Inc. (ADI - Analyst Report), STMicroelectronics NV (STM - Snapshot Report) and Texas Instruments Inc. (TXN - Analyst Report).

Currently, Semtech has a Zacks Rank #3 (Hold).

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