ADI Analog Devices Inc

Semtech Corporation (SMTC) reported third quarter 2013 earnings of 46 cents per share, surpassing the Zacks Consensus Estimate of 35 cents. The adjusted earnings per share exclude one-time items, but include stock-based compensation expense.

Revenue

Semtech’s total revenue was $160.9 million, up 29.9% year over year. Reported revenue was above the management’s expectation range of $148.0 million to $154.0 million. Third quarter revenue included $8.1 million of IP licensing revenue.

Direct sales represented approximately 64% of total third quarter revenue while distribution brought in the balance 36%.

Bookings

In the quarter, bookings grew across all end markets. Total bookings accounted for approximately 46% of shipments during the quarter.

Revenue by Geography

In the third quarter, Asia remained the largest contributor to Semtech’s revenues, with a share of around 68%. North America accounted for another 20%, with the balance coming from Europe.

Margins

Reported gross margin for the quarter was 60.2%, up 100 basis points (bps) from 59.2% in the comparable year-ago quarter. The increase in gross margin was driven primarily by a lower amortization of deferred value inventory adjustment related to the Gennum acquisition. A favorable revenue mix also contributed to higher gross margin in the quarter.

Semtech reported operating expenses of $69.0 million, which were 51.3% higher than the year-ago quarter’s $45.6 million. Operating margin was 12.2%, down from 18.7% in the year-ago quarter due to higher-than-expected operating expenses. As a percentage of sales, both selling, general and administrative (SG&A) expense as well as product development and engineering expenses increased from the year-ago quarter.

Net Income

On a fully diluted GAAP basis, Semtech recorded net income of $16.6 million (25 cents per share) compared with $27.0 million (40 cents per share) in the year-ago quarter and $10.0 million (15 cents per share) in the previous quarter.

On a pro forma basis, Semtech generated net income of $30.9 million compared with $31.8 million in the year-ago comparable quarter. Fully diluted pro forma earnings per share came in at 46 cents, compared with 47 cents in the year-ago quarter.

Balance Sheet

Semtech ended the quarter with cash and cash equivalents (including temporary investments) balance of $210.0 million versus $165.9 million in the previous quarter. Accounts receivables were $72.8 million, down from $77.3 million in the prior quarter. Days sales outstanding were 42 days, down from 43 days in the last quarter.

During the quarter, cash flow from operations was $54.9 million, free cash flow was $47.5 million and capital expenditure was $7.4 million. The company did not spend any amount on share repurchases in the third quarter.

Guidance

For the fourth quarter, management expects revenue in the range of $146.0 million to $152.0 million. Gross profit margin is expected to be in the range of 58.3%–58.9% on a GAAP basis and 61.5%–62.0% on a non-GAAP basis.

Selling, general and administrative expense is expected to be in the range of $32.3–$32.8 million and research and development (R&D) expense is expected in the range of $31.6 million to $32.1 million on a GAAP basis. The company anticipates stock-based compensation expense of $6.9 million, intangibles amortization charges of $8.2 million, transaction and other acquisition related expenses of approximately $1.3 million, reorganization and integration related expenses of $1.2 million, and interest and other expense of $4.4 million.

Accordingly, based on a share count of 68.0 million, GAAP EPS is expected in the range of 13 cents to 17 cents and non-GAAP EPS is expected to be 41–45 cents.

Also, for the fourth quarter, the tax rate is expected to be approximately 0%–2% on a GAAP basis. Capital expenditure is expected to be approximately $7.0 million.

Our Recommendation

Semtech Corporation is a manufacturer of a wide range of analog and mixed-signal semiconductors, including Standard Semiconductor Products, Rectifier and Assembly Products and Other Products. The company reported a robust quarter with earnings beating our expectations.

In the quarter, the company performed strongly with bookings increasing across all end markets and book-to-bill ratio above 1. However, we believe management provided a conservative fourth quarter revenue guidance, reflecting macro uncertainty and weakness in discrete analog.

We remain optimistic about the company’s long-term prospects, solid execution and its decision to reduce operating expenses going forward.

The company faces stiff competition, particularly from Analog Devices, Inc. (ADI), STMicroelectronics NV (STM) and Texas Instruments Inc. (TXN).

Currently, Semtech has a Zacks Rank #3 (Hold).

 
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