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Semtech Corporation (SMTC - Snapshot Report) reported first-quarter 2014 earnings of 35 cents per share, missing the Zacks Consensus Estimate of 38 cents. Adjusted earnings per share exclude one-time items but include stock-based compensation expense.

Revenues

Semtech’s total revenue was $162.4 million, up 39.2% year over year. Reported revenues were slightly above management expected range of $154.0 million to $162.0 million.

Direct sales represented approximately 61% of total first quarter revenues, while distribution brought in the balance 39%.

Bookings

In the quarter, bookings grew across all end markets, with high-end consumer enterprise computing and communications being particularly strong. Book-to-bill ratio was also above 1. Total bookings accounted for approximately 47% of shipments during the quarter, up from 41% in the last quarter.

Revenues by Geography

In the first quarter, Asia remained the largest contributor to Semtech’s revenues, with a share of around 73% versus 71% in the prior quarter. North America accounted for 16% of the revenues, down from 17% in the prior quarter. Europe contributed the remaining 11% of revenues.

Margins

Reported gross margin for the quarter was 59.9%, up 150 basis points (bps) sequentially and 1,250 bps from the year-ago quarter. The increase in gross margin was driven by lower amortization of fair value adjustment for acquired inventory as well as higher volumes.

Semtech reported operating expenses of $69.4 million, which were 0.7% higher than the year-ago quarter’s $68.9 million. The increase was due to higher payroll-related expenses from increased work hours and new product 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. The net result was an operating margin of 12.4%, up from (16.4%) in the year-ago quarter.

Net Income

On a GAAP basis, Semtech recorded net income of $14.8 million (22 cents per share) compared with $2.2 million (3 cents per share) in the year-ago quarter and $13.1 million (19 cents per share) in the previous quarter.

On a pro forma basis, Semtech generated net income of $24.2 million compared with $15.9 million in the year-ago comparable quarter. Pro forma earnings per share came in at 35 cents compared with 24 cents in the year-ago quarter.

Balance Sheet & Cash Flow

Semtech ended the first quarter with cash and cash equivalents (including temporary investments) balance of $230.4 million versus $228.2 million in the previous quarter. Accounts receivables were $80.2 million, up from $69.2 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 $17.2 million, free cash flow was $6.4 million and capital expenditure was $10.7 million.

In the last quarter, the company did not repurchase any shares.

Guidance

For the second quarter of 2014, management expects revenues in the range of $164.0 million to $172.0 million, up 3.4% sequentially at the midpoint. Gross profit margin is expected in the range of 60.8%–61.3% on a GAAP basis and 61.0%–61.5% on a non-GAAP basis.

Selling, general and administrative (SG&A) expense is expected in the range of $35.7–$36.2 million and research and development (R&D) expense is expected in the range of $32.7 million to $33.2 million on a GAAP basis. The company anticipates stock-based compensation expense of $8.8 million, intangibles amortization charges of $8.4 million, amortization of acquired intangible assets of $7.3 million, transaction and other integration related expenses of approximately $1.4 million and interest and other expense of $10.7 million.

Accordingly, based on a share count of 69.0 million, GAAP EPS is expected in the range of 21 cents to 29 cents and non-GAAP EPS is expected to be 50–56 cents.

Also, for the second quarter, tax rate is expected to be approximately 12% on a GAAP basis. Capital expenditure is expected to be approximately $12.5 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. Though the company’s earnings missed our expectations, both revenues and earnings were above the prior-year figures.

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 second-quarter guidance was up sequentially, reflecting improvement in discrete analog.

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

Currently, Semtech has a Zacks Rank #2 (Buy). Other stocks that have been performing well and are worth a look include Magnachip Semiconductor (MX - Snapshot Report), Microchip Technology (MCHP - Analyst Report) and Maxlinear Inc. (MXL - Snapshot Report), all carrying a Zacks Rank #2 (Buy).

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