Semtech Corporation SMTC reported fourth-quarter fiscal 2016 earnings of 10 cents per share, which beat the Zacks Consensus Estimate by a couple of cents. Adjusted earnings per share exclude one-time items but include stock-based compensation expense.
Revenues
Semtech’s total revenue was $118.6 million, up 2.4% sequentially but down 9% year over year. The sequential increase was driven by strong demand for the company’s enterprise computing and communication end markets, partially offset by weakness in the company’s industrial and high-end consumer end markets.
Reported revenues came toward the higher end of management’s expected range of $113.0 million to $119.0 million and beat the Zacks Consensus Estimate of $116.0 million.
Direct sales represented approximately 54% of total revenue, while distribution accounted for the rest.
Bookings
In the quarter, bookings increased sequentially, resulting in a book-to-bill ratio of more than 1.
Margins
Reported gross margin was 58.6%, down 150 basis points (bps) sequentially but up 250 bps year over year. The sequential decline was due to a higher mix of lower-margin optical products and lower absorption from continued inventory reduction efforts.
Semtech’s operating expenses (selling, general and administrative (SG&A) + product development and engineering) of $62.7 million were down 8.5% from $68.6 million in the year-ago quarter. As a percentage of sales, SG&A, expenses increased year over year, while product development & engineering expense decreased. The net result was an operating margin of 2.7% as against (10.6%) in fourth-quarter fiscal 2015.
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Net Income
On a GAAP basis, Semtech recorded net income of $1.2 million or 2 cents per share. In the year-ago quarter, the company reported a loss of $15.4 million or a loss of 23 cents.
On a pro-forma basis, Semtech generated earnings per share of 10 cents compared with 22 cents a year ago.
Balance Sheet & Cash Flow
Semtech ended the quarter with cash and cash equivalents of $211.8 million compared with $192.4 million in the previous quarter. Accounts receivables were $44.1 million, down from $54.9 million in the prior quarter. Days sales outstanding decreased 8 days to 38 days.
Total debt (short-term plus long-term) was $257.7 million as against $262.4 million in the previous quarter.
During the quarter, cash flow from operations was $34.4 million, capital expenditure came in at $2.3 million and free cash flow was $32.1 million.
Guidance
For the first quarter of fiscal 2017, management expects revenues in the range of $124.0 million to $132.0 million, while the Zacks Consensus Estimate is pegged at $116.0 million. Gross profit margin is expected to range within 58.6–59.7% on a GAAP basis and 59.0–60.0% on a non-GAAP basis.
SG&A expense is expected within $31.7–$32.7 million and research and development expense in the $25.0 million to $26.0 million range, both on a GAAP basis. The company anticipates stock-based compensation expense of $6.3 million, amortization of acquired intangible assets of $6.4 million and interest and other expense of $2.2 million.
Accordingly, based on a share count of 65.5 million, GAAP earnings per share are expected in the range of 9–13 cents, and non-GAAP earnings within 26–30 cents. The Zacks Consensus Estimate is pegged at 16 cents.
Also, tax rate is projected in the range of 20–24% on a GAAP basis and 19–23% on a non-GAAP basis. Capital expenditure is anticipated to be roughly $8.0 million.
Our Recommendation
Semtech Corporation manufactures a wide range of analog and mixed-signal semiconductors, including Standard Semiconductor Products, Rectifier and Assembly Products and Other Products. The company reported a decent quarter with both the top line and the bottom line exceeding our expectations.
We believe that the company’s new design wins, product introductions and solid execution will boost revenues and margins in the near term. However, challenges in several key end markets could weigh on the growth prospects.
Currently, Semtech has a Zacks Rank #3 (Hold). Some better-ranked stocks in the same space are MaxLinear, Inc. MXL, Inphi Corporation IPHI and Microchip Technology Inc. MCHP. While MaxLinear sports a Zacks Rank #1 (Strong Buy), Inphi and Microchip carry a Zacks Rank #2 (Buy).