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Why Is Semtech (SMTC) Down 2.4% Since Last Earnings Report?

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A month has gone by since the last earnings report for Semtech (SMTC - Free Report) . Shares have lost about 2.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Semtech due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Semtech Q2 Earnings Beat Estimates, Revenues Up Y/Y

Semtech Corporation reported strong fiscal second-quarter 2019 results, wherein earnings and revenues beat the Zacks Consensus Estimate.

Non-GAAP earnings of 55 cents per share beat the consensus mark by 1 cent, and also increased 17% sequentially and 15% year over year. Earnings came within the guided range of 50-58 cents per share.

Non-GAAP revenues of $163.2 million increased 25.1% sequentially and 6.6% from the prior-year quarter. The increase was driven by growth in the IoT, data center and mobile markets.


Revenues were within the guided range of $155-$167 million.

The company’s improved profitability was driven by 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.

The numbers in detail:

Revenues by End Market


Sales to the enterprise computing end market were up sequentially, representing 31% of the total revenues.

Also, sales to the high-end consumer market increased on a sequential basis, representing 27% of the total revenues. Roughly 20% of high-end consumer revenues were attributable to mobile devices and 7% to other consumer systems.

The industrial and communications end markets recorded strong demand, and both increased sequentially, representing 30% and 12% of the total revenues, respectively.

Revenues by Product Group

Signal Integrity Product Group revenues contributed 42% to total sales and increased 5% sequentially. Continued strength in data center demand, PON, base station and video markets contributed to the growth.

Protection Product Group represented 28% of the total revenues and was up 13% sequentially. This was due to increasing use of protection for 10-gig Ethernet ports in enterprise cloud switches, and wireless access points and base stations.

Wireless and Sensing Product Group was up 6% sequentially, contributing 30% to the total revenues.

Bookings

During the quarter, bookings increased sequentially, accounting for roughly 39% of the shipments. Book-to-bill ratio was above 1.

Margins and Net Income

Non-GAAP gross margin was 61.5%, up640 basis points (bps) sequentially and 110 bps from the year-ago quarter.

Semtech’s adjusted operating expenses of $61.6 million decreased 7.6% on a year-over-year basis. As a percentage of sales, selling, general and administrative, as well as product development and engineering expenses decreased.

As a result, its operating margin of 28.9% was up 1,410 bps sequentially and 290 bps year over year.

Balance Sheet & Cash Flow

Semtech ended the quarter with cash and cash equivalents of $311.3 million, up from $303.3 million in the fiscal first quarter. Accounts receivables were $78.4 million, up from $65.6 million in the prior quarter. Long-term debt was $202 million, down from $206.6 million in the fiscal first quarter.

During the quarter, cash flow from operations was $84.4 million, capital expenditure was $4.9 million and free cash flow totaled $44.5 million.

Guidance

For fiscal third-quarter 2019, on a non-GAAP basis, management expects revenues in the range of $168-$178 million.

Non-GAAP gross profit margin is expected within 61.2-62.2%. Management projects SG&A expenses within $28-$29 million, and research and development expenses in the range of $25-$26 million. Non-GAAP earnings per share are expected in the range of 58-64 cents.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 25.1% due to these changes.

VGM Scores

At this time, Semtech has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions indicates a downward shift. It comes with little surprise Semtech has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.




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