Semtech (SMTC) Q2 Earnings Beat Estimates, Revenues Up Y/Y

Semtech Corporation SMTC 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.

Following second-quarter release, Semtech’s share price rose 9.6%. Also, shares have gained 38% in the past year, outperforming the industry’s 6.7% rally.

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. The Zacks Consensus Estimate is pegged at $172.9 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. The Zacks Consensus Estimate is pegged at 54 cents.

Zacks Rank and Stocks to Consider

Semtech currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry are Infineon Technologies AG IFNNY, ON Semiconductor Corporation ON and Rambus Inc. RMBS, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Long-term earnings growth for Infineon Technologies, ON Semiconductor and Rambus is currently projected to be 7.5%, 13.2% and 10%, respectively.

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