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Semtech (SMTC) Up 17.2% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Semtech (SMTC - Free Report) . Shares have added about 17.2% in that time frame, outperforming the S&P 500.

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

Semtech Earnings & Revenues Beat Estimates in Q3

Semtech Corporation’s fiscal third-quarter 2020 non-GAAP earnings of 41 cents per share surpassed the Zacks Consensus Estimate by a couple of cents. The reported earnings increased 7.9% sequentially but decreased 34.9% year over year.

Non-GAAP revenues of $141.01 million increased 2.8% sequentially but decreased 18.7% from the prior-year quarter. The sequential increase was driven by growth in IoT and hyper scale data center markets.

Revenues surpassed the Zacks Consensus Estimate by 0.8% and came within the guided range of $135-$145 million.

Its key growth drivers are product differentiation, operational flexibility, and 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 31% of its total revenues — increased 16% on a sequential basis, driven by a strong rebound in PON demand.

Also, industrial and communications end markets increased 2% and 1% sequentially, representing 34% and 10% of the total revenues, respectively. Revenues from the industrial market decreased, as growth from the LoRa business was offset by broad industrial weakness. This represented 34% of total net revenues.

Also, sales to the high-end consumer market represented 25% of total revenues. The figure decreased 3% sequentially due to lower smartphone demand. Roughly 16% of high-end consumer revenues were attributable to mobile devices and 9% to other consumer systems.

Revenues by Product Group

Signal Integrity Product Group revenues contributed 42% to total sales. The reported figure increased 6% sequentially. The increase was driven by strong demand from the hyperscale data center and PON segments, partially offset by weakness from the base station and broader industrial markets.

Revenues from Protection Product Group represented 28% of the total revenues. The figure was flat sequentially, driven by strength in the mobile business and increase in broad-based demand from industrial and automotive markets.

Revenues from Wireless and Sensing Product Group, which contributed 30% to total revenues, increased 1% sequentially.

Bookings

Bookings, which accounted for roughly 42% of shipments, decreased on a sequential basis during the quarter. The book-to-bill ratio was above 1.

Margins and Net Income

Non-GAAP gross margin was 61.6%, down 60 basis points (bps) sequentially and 10 bps from the year-ago quarter.

Semtech’s adjusted operating expenses of $52.9 million were down 2.6% on a year-over-year basis.

As a result, its operating margin of 24% was up 110 bps sequentially but down 640 bps year over year.

Balance Sheet & Cash Flow

Semtech ended the quarter with cash and cash equivalents of $283.1 million versus $287.8 million in the fiscal second quarter. Accounts receivables were $61.4 million, up from $58.6 million in the fiscal second quarter. Long-term debt was $179.1 million, down from $183.7 million in the fiscal second quarter.

During the quarter, cash flow from operations was $33.3 million, capital expenditure amounted to $3.5 million and free cash flow totaled $29.8 million.

Guidance

For fiscal fourth-quarter 2020, management expects revenues in the range of $130-$140 million. 

Non-GAAP gross profit margin is expected within 61-62%. Management projects SG&A expenses within $28-$29 million, and research and development costs in the range of $24-$25 million. Non-GAAP earnings per share are expected in the range of 33-39 cents. 

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -20.11% due to these changes.

VGM Scores

Currently, Semtech has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

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

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions has been net zero. Notably, Semtech has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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