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Semtech's (SMTC) Q2 Earnings and Sales Surpass Estimates

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Semtech Corporation’s (SMTC - Free Report) second-quarter fiscal 2023 non-GAAP earnings of 87 cents per share surpassed the Zacks Consensus Estimate by 2.4%. The reported earnings increased 33.9% year over year and 8.8% sequentially.

Net sales of $209.3 million also outpaced the Zacks Consensus Estimate by 0.4%. The same increased 13.1% from the prior-year quarter’s level and 3.5% on a sequential basis.

Top-line growth was driven by strong momentum across the industrial and infrastructure markets served.

Semtech’s LoRa business, ClearEdge and Tri-Edge platform and 10G PON products contributed well to its quarterly performance.

SMTC released 14 new products across the portfolio and achieved 3,200 design wins in the fiscal second quarter.

For the fiscal second quarter, shipments in Asia, North America and Europe represented 72%, 16% and 12% of net sales, respectively.

During the reported fiscal quarter, SMTC entered into an agreement to acquire Sierra Wireless for $1.2 billion.

However, Semtech witnessed less bookings in the fiscal second quarter than the prior fiscal quarter’s reading. Further, inflationary pressure, supply-chain challenges and the impacts of COVID in China remained headwinds.

Revenues by End Market

Net revenues from the infrastructure market represented 40% of its total revenues. The metric increased 25% year over year and 11% from the prior quarter’s level.

Net revenues from the industrial market, constituting 40% of total net revenues, increased 44% from the prior-year period’s level and 7% sequentially.

Net revenues from the high-end consumer market, accounting for 20% of total revenues, declined 31% year over year and 14% sequentially. The high-end consumer market consists of mobile devices and other consumer systems, reflecting net revenues of 9% and 11%, respectively.

Revenues by Product Group

Signal Integrity Product Group’s revenues, contributing 42% to total revenues, increased 19.5% year over year, driven by strong demand in the PON and data center markets. Also, the growing global Tri-Edge design wins in 100-gig, 200-gig and 400-gig PAM4 optical modules remain a tailwind.

Revenues from its Protection Product Group, accounting for 26% of the total revenues, were up 10% year over year. The increase was driven by robust smartphone demand in North America. However, weak demand from the Asian smartphone customers remained an overhang.

Wireless and Sensing Product Group revenues contributed 32% to total revenues. The same increased 8.1% from the prior-year fiscal period’s level. The upside was driven by record net sales of LoRa platform products.

Operating Results

Non-GAAP gross margin of 65.2% expanded 250 basis points (bps) from the last fiscal year’s quarterly figure.

Adjusted selling, general and administrative expenses for the fiscal second quarter increased 3.5% to $35.4 million from the last fiscal year’s quarterly number. Adjusted product development and engineering expenses also increased 15.2% from the year-ago quarter’s number to $36.5 million.

Non-GAAP operating margin of 30.8% expanded 370 bps from the same quarter’s figure in the last fiscal year.

Balance Sheet and Cash Flow

As of Jul 31, 2022, cash and cash equivalents were $362.2 million compared with $275.2 million on May 1, 2022.

Account receivables for the reported fiscal quarter were $71.1 million, up from $66.4 million in first-quarter fiscal 2022.

Long-term debt was $171.9 million, down from $181.8 million in the previous fiscal quarter.

For the reported fiscal quarter, cash flow from operations was $77.3 million compared with $50 million in the fiscal first quarter. Free cash flow amounted to $70 million compared with $41.7 million in the prior fiscal quarter.

Guidance

For third-quarter fiscal 2023, management expects net sales of $170-$180 million. The Zacks Consensus Estimate for the same is pegged at $216.9 million.

Non-GAAP gross margin is expected to be 65-66%. Also, management projects SG&A expenses of $33-$35 million, and research and development costs of $32-$34 million.

Non-GAAP earnings per share are expected within 60-66 cents. The Zacks Consensus Estimate for the same is pegged at 91 cents per share.

Due to macroeconomic headwinds and COVID-related issues in China, Semtech expects Signal Integrity Product Group, and Wireless and Sensing Product Group revenues to decline in the fiscal third quarter.

In the fiscal third quarter, Protection Product Group revenuesare expected to decrease due to the ongoing softness from the Asian smartphone customers.  

Zacks Rank & Stocks to Consider

Currently, Semtech carries a Zacks Rank #3 (Hold). Investors interested in the broader Zacks Computer & Technology sector can consider some better-ranked stocks like Arista Networks (ANET - Free Report) , ASE Technology (ASX - Free Report) and Monolithic Power Systems (MPWR - Free Report) . While Arista Networks sports a Zacks Rank #1 (Strong Buy), ASE Technology and Monolithic Power Systems carry a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Arista Networks has lost 16.6% in the year-to-date period. The long-term earnings growth rate for ANET is currently projected at 18.6%.

ASE Technology has lost 26.3% in the year-to-date period. The long-term earnings growth rate for ASX is currently projected at 23.1%.

Monolithic Power Systems has lost 7.9% in the year-to-date period. The long-term earnings growth rate for MPWR is currently projected at 25%.

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