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Semtech Corporation (SMTC - Snapshot Report) reported fourth-quarter 2013 earnings of 39 cents per share, surpassing the Zacks Consensus Estimate of 34 cents. Adjusted earnings per share exclude one-time items, but include stock-based compensation expense.

Revenues

Semtech’s total revenue was $150.6 million, up 44.8% year over year. Reported revenues were toward the higher end of the management’s expectation range of $146.0 million to $152.0 million.

Direct sales represented approximately 60% of total fourth-quarter revenues, while distribution brought in the balance 40%.

Bookings

In the quarter, bookings grew across all end markets and the book to bill ratio was above 1. Total bookings accounted for approximately 41% of shipments during the quarter.

Revenue by Geography

In the fourth quarter, Asia remained the largest contributor to Semtech’s revenues, with a share of around 71%. North America accounted for 17% of the revenues, with the remaining 12% coming from Europe.

Margins

Reported gross margin for the quarter was 58.4%, up 100 basis points (bps) from the year-ago quarter and down 180 bps sequentially. The sequential decrease in gross margin was due to lower IP licensing revenues compared with the prior quarter.

Semtech reported operating expenses of $67.3 million, which were 47.3% higher than the year-ago quarter’s $45.7 million. Operating margin was 8.2%, down from 11.4% in the year-ago quarter due to higher-than-expected operating expenses. As a percentage of sales, product development and engineering expenses increased from the year-ago quarter, while selling, general and administrative (SG&A) expenses declined.

Net Income

On a GAAP basis, Semtech recorded net income of $13.1 million (19 cents per share) compared with $12.4 million (19 cents per share) in the year-ago quarter and $16.6 million (25 cents per share) in the previous quarter.

On a pro forma basis, Semtech generated net income of $26.7 million compared with $15.8 million in the year-ago comparable quarter. Pro forma earnings per share came in at 39 cents compared with 24 cents in the year-ago quarter.

Balance Sheet

Semtech ended the fourth quarter with cash and cash equivalents (including temporary investments) balance of $228.2 million versus $210.0 million in the previous quarter. Accounts receivables were $69.2 million, down from $72.8 million in the prior quarter. Days sales outstanding were 43 days, up from 42 days in the last quarter.

During the quarter, cash flow from operations was $35.2 million, free cash flow was $30.0 million and capital expenditure was $5.2 million. The company spent $7.5 million to repurchase approximately 263,000 shares.

Guidance

For the first quarter of 2014, management expects revenues in the range of $154.0 million to $162.0 million. Gross profit margin is expected in the range of 59.2%–59.8% on a GAAP basis and 61.0%–61.5% on a non-GAAP basis, flat year over year.

Selling, general and administrative (SG&A) expense is expected in the range of $35.4–$35.9 million and research and development (R&D) expense is expected in the range of $32.3 million to $32.8 million on a GAAP basis. The company anticipates stock-based compensation expense of $8.8 million, intangibles amortization charges of $7.8 million, transaction and other integration related expenses of approximately $1.7 million and interest and other expense of $4.1 million.

Accordingly, based on a share count of 68.0 million, GAAP EPS is expected in the range of 17 cents to 24 cents and non-GAAP EPS is expected to be 43–49 cents.

Also, for the first quarter, the tax rate is expected to be approximately nil to 2% on a GAAP basis. Capital expenditure is expected to be approximately $10.0 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 of above 1 reflecting strong growth. Management’s first-quarter guidance was above the analysts’ estimates, reflecting improvement in discrete analog.

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

Currently, Semtech has a Zacks Rank #3 (Hold). Other stocks in the sector that have been performing well and are worth a look include RDA Microelectronics, Inc , Supertex Inc and Microchip Technology Inc. (MCHP - Analyst Report). While RDA Microelectronics and Supertex carry a Zacks Rank #1 (Strong Buy), Microchip Technology carries a Zacks Rank #2 (Buy)

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