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Semtech (SMTC) Up 19.6% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

A month has gone by since the last earnings report for Semtech (SMTC). Shares have added about 19.6% 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 the most recent earnings report in order to get a better handle on the important drivers.

Semtech Earnings & Revenues Beat Estimates in Q2

Semtech Corporation’s fiscal second-quarter 2020 non-GAAP earnings of 38 cents per share surpassed the Zacks Consensus Estimate by a couple of cents. The reported earnings increased 11.8% sequentially but decreased 30.9% year over year.

Non-GAAP revenues of $137.1 million increased 4.4% sequentially but decreased 16% 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 1.78% and came within the guided range of $128-$142 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 27% of its total revenues, increased 4% on a sequential basis.

Also, industrial and communications end markets increased 24% and 4% sequentially, representing 36% and 10% of the total revenues, respectively. The industrial market was driven by strong growth from the LoRa business.

However, sales to the high-end consumer market represented 33% of total revenues, decreasing 15% sequentially due to lower smartphone demand. Roughly 16% of high-end consumer revenues were attributable to mobile devices and 11% to other consumer systems.

Revenues by Product Group

Signal Integrity Product Group revenues contributed 40% to total sales and increased 10% sequentially. The increase was driven by strength in data center and wireless space station markets. However, the PON market remained soft.

Revenues from Protection Product Group represented 29% of the total revenues and were up 4% sequentially, driven by increase in broad-based demand from industrial, automotive, and consumer markets.

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

Bookings

Bookings, which accounted for roughly 41% of shipments, increased on a sequential basis during the quarter. The book-to-bill ratio was above 1.

Margins and Net Income

Non-GAAP gross margin was 62.2%, flat sequentially but up 70 basis points (bps) from the year-ago quarter.

Semtech’s adjusted operating expenses of $30.4 million were up 7.8% on a year-over-year basis and 5.9% sequentially.

As a result, its operating margin of 22.9% was up 110 bps sequentially but down 600 bps year over year.

Balance Sheet & Cash Flow

Semtech ended the quarter with cash and cash equivalents of $287.8 million versus $287.3 million in the fiscal first quarter. Accounts receivables were $58.6 million, down from $66.5 million in the fiscal first quarter. Long-term debt was $183.7 million, down from $188.3 million in the fiscal first quarter.

During the quarter, cash flow from operations was $33.4 million, capital expenditure amounted to $1.6 million and free cash flow totaled $31.7 million.

Guidance

For fiscal third-quarter 2020, management expects revenues in the range of $135-$145 million. 

Non-GAAP gross profit margin is expected within 61.4-62%. 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 38-42 cents. 

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -5.51% due to these changes.

VGM Scores

At this time, Semtech has a nice Growth Score of B, though it is lagging a lot 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 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 downward for the stock, and the magnitude of these revisions indicates a downward shift. 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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