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Semtech (SMTC) Down 13.8% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Semtech (SMTC - Free Report) . Shares have lost about 13.8% 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 catalysts.

Semtech Q3 Earnings Beat Estimates, Revenues Up Y/Y

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

Non-GAAP earnings of 63 cents per share beat the consensus mark by a couple of cents, and also increased 14.5% sequentially and 16.7% year over year. Earnings came within the guided range of 58-64 cents per share.

Non-GAAP revenues of $173.6 million increased 6.3% sequentially and 15.5% 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 $168-$178 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, along with a specific focus on fast-growing segments and regions.

Let’s delve into the numbers in detail:

Revenues by End Market

Sales to the enterprise computing end market, which represented 30% of its total revenues, were up on a sequential basis.

Also, sales to the high-end consumer market represented 29% of the total revenues, increasing sequentially. Roughly 20% of high-end consumer revenues were attributable to mobile devices and 9% to other consumer systems.

The industrial and communications end markets recorded strong demand, and both increased sequentially, representing 30% and 11% of the total revenues, respectively.

Revenues by Product Group

Signal Integrity Product Group revenues contributed 40% to total sales and increased 2% 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, which contributed 30% to the total revenues, was up 6% sequentially.

Bookings

Bookings, which accounted for roughly 37% of the shipments, decreased on a sequential basis during the quarter. The book-to-bill ratio was below 1.

Margins and Net Income

Non-GAAP gross margin was 61.7%, up 20 basis points (bps) sequentially and 200 bps from the year-ago quarter.

Semtech’s adjusted operating expenses of $54.3 million increased 2.2% 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 30.4% was up 150 bps sequentially and 610 bps year over year.

Balance Sheet & Cash Flow

Semtech ended the quarter with cash and cash equivalents of $312.2 million, up from $311.3 million in the fiscal second quarter. Accounts receivables were $83.8 million, up from $78.4 million in the fiscal second quarter. Long-term debt was $197.4 million, down from $202 million in the fiscal second quarter.

During the quarter, cash flow from operations was $136.4 million, capital expenditure amounted to $3.1 million and free cash flow totaled $48.9 million.

Guidance

For fiscal fourth-quarter 2019, management expects revenues on a non-GAAP basis in the range of $155-$165 million.

Non-GAAP gross profit margin is expected within 61.5-62.5%. Management projects SG&A expenses within $26.5-$27.5 million, and research and development expenses in the range of $24.5-$25.5 million. Non-GAAP earnings per share are expected in the range of 53-57 cents. 

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month. The consensus estimate has shifted -7.36% due to these changes.

VGM Scores

At this time, Semtech has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Semtech has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.




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