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Semtech (SMTC) Q2 Earnings Beat, Sales Miss, Guidance Weak

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Semtech Corporation (SMTC - Free Report) reported mixed fiscal second-quarter 2018 results with earnings beating the Zacks Consensus Estimate but revenues missing the same. While non-GAAP earnings of 48 cents beat the consensus mark by 2 cents, revenues missed the same by $3 million. Earnings increased 9.1% sequentially and 37.1% year over year.

Shares, however, plunged 13.6% in after-hour trading following weak top-line guidance for the current quarter. Revenues are expected in the range of $145.0 million to $153.0 million that implies 2.7% sequential decline at the mid-point of the guided range.

Over the last year, shares have gained 35%, significantly outperforming the industry’s 29.3% rally.

The company’s improved profitability was driven by Semtech’s differentiated growth drivers and diversification strategy. Key growth drivers for Semtech are product differentiation, operational flexibility and a specific focus on fast-growing segments and regions.

In the quarter, Semtech acquired AptoVision, a privately held company that provides algorithms for transporting video over Internet protocol (IP). The acquisition is expected to strengthen Semtech’s position in the video over IP Pro AV space. The company expects this acquisition to contribute roughly $2 million to fiscal 2018 revenues and be neutral to fiscal 2018 non-GAAP results.

The numbers in detail.

Revenues in Detail

Semtech’s total revenue of $153.1 million was up 6% sequentially and 13% year over year and was wihin the guided range of $147 and $157 million. The upside was driven by strong demand for the company’s enterprise computing, high-end consumer and industrial end-markets, partially offset by weakness in the communications markets.

Semtech Corporation Price, Consensus and EPS Surprise

Signal Integrity Product Group revenues contributed 43% to total revenue and were down slightly sequentially. Protection Product Group represented 29% of total revenue and was up 7% sequentially and 24% year over year.

Wireless and Sensing Product Group was up 19% sequentially and 59% year over year, contributing 21% to total revenue. Power and High-Reliability Product Group contributed 7% to total revenue and increased 6% sequentially.

Distribution sales represented approximately 65% of total revenue, while direct sales accounted for the rest.


During the quarter, bookings decreased sequentially but increased year over year, accounting for roughly 47% of shipments. Also, the book-to-bill ratio was above 1.

Margins and Net Income

Non-GAAP gross margin was 60.2%, up 110 basis points (bps) sequentially and 7 bps year over year due to the impact of lower sequential Comcast warrant expense and a more favorable mix.

Semtech’s operating expenses (selling, general and administrative [SG&A] plus product development and engineering) of $66.7 million increased 11.9 sequentially and 12.7% year over year. As a percentage of sales, SG&A increased while product development & engineering expenses decreased.

The net result was an operating margin of 27.5% that declined slightly sequentially but increased 500 bps year over year.

On a non-GAAP basis, Semtech recorded net income of $32.2 million compared with $22.7 million a year ago. On a GAAP basis, the company recorded net income of $12.6 million or 19 cents per share compared with $9 million or 14 cents per share a year ago.

Balance Sheet & Cash Flow

Semtech ended the quarter with cash and cash equivalents of $277.9 million, down from $297.1 million in the previous quarter. Accounts receivables were $61.2 million, up from $51.4 million in the prior quarter.

Long-term debt was $219.3 million compared with $226.5 million in the previous quarter.

During the quarter, cash flow from operations was $35.6 million, capital expenditure was $13.8 million and free cash flow totaled $21.9 million.


For fiscal third quarter 2018, on a non-GAAP basis, management expects revenues in the range of $145.0 million to $153.0 million. The Zacks Consensus Estimate is pegged at $160 million.

Non-GAAP gross profit margin is expected within 61.0–61.8%. Management projects SG&A expense within $27–$28 million, and research and development expense of $24–$25 million.

Non-GAAP earnings per share are expected in the range of 48–52 cents. The Zacks Consensus Estimate is pegged at 49 cents.

Zacks Rank and Stocks to Consider

Semtechl has a Zacks Rank #3 (Hold).Better-ranked stocks in the broader technology sector include Applied Materials (AMAT - Free Report) , Activision Blizzard (ATVI - Free Report) and Applied Optoelectronics (AAOI - Free Report) , all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Applied Materials, Activision and Applied Optoelectronics is currently projected to be 17.1%, 13.6% and 17.5%, respectively.

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