It has been about a month since the last earnings report for Semtech CorporationSMTC . Shares have lost about 6.4% in that time frame, underperforming the market.
Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? 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 drivers.
Semtech's Q3 Earnings Beat, Sales Miss, View Weak
Semtech reported mixed fiscal third-quarter 2018 results with earnings beating the Zacks Consensus Estimate but revenues missing the same.
Non-GAAP earnings of 54 cents per share beat the consensus mark by 5 cents and increased 12.5% sequentially and a massive 45.9% year over year. Earnings came ahead of the guided range of 48-52 cents per share. Revenues of $150 million missed the consensus mark by $3 million and decreased 1.8% sequentially. However, revenues increased 9.6% year over year. Revenues were toward the higher end of the guided range of $145.0 million to $153.0 million.
Revenues by End Market
Sales to high-end consumer market represented 30% of total net revenues and were up sequentially. Roughly 23% of high-end consumer revenues were attributable to mobile devices, and 7% to other consumer systems. Sales to industrial market represented 28% of total revenues and were up sequentially. Enterprise computing and communications end markets witnessed weak demand and both decreased sequentially, representing 31% and 11% of total revenues, respectively.
Revenues by Product Group
Signal Integrity Product Group revenues contributed 41% to total revenues and were down sequentially but up 6% year over year. While the sequential decline was due to weak passive optical network (PON) and base station business resulting from demand softness in China, the year-over-year growth was driven by strength in data center business. Protection Product Group represented 32% of total revenues and was up 10% sequentially and 23% year over year. The increase was driven by smartphone strength in North America and Korea offset by softness in China's smartphone market.
Wireless and Sensing Product Group was down sequentially but up 29% year over year, contributing 20% to total revenues. The year-over-year increase was driven by strength in LoRa related business, partially offset by weakness in proximity sensing business. Power and High-Reliability Product Group contributed 8% to total revenues and increased 7% sequentially. The increase was due to increased designing activity in the automotive and industrial markets. Distribution sales represented approximately 66% of total revenues, while direct sales accounted for the remaining 34%.
During the quarter, bookings increased sequentially, accounting for roughly 50% of shipments. Book-to-bill ratio was roughly 1.
Margins and Net Income
Non-GAAP gross margin was 61.3%, up 10 basis points (bps) sequentially and 90 bps year over year due to the impact of lower inventory adjustments offset by less favorable product mix. Semtech's operating expenses (selling, general and administrative [SG&A] plus product development and engineering) of $53.2 million increased slightly sequentially and 2.5% year over year. As a percentage of sales, both SG&A and product development & engineering expenses decreased year over year.
The net result was an operating margin of 27.4% that was flat sequentially but increased 380 bps year over year. On a non-GAAP basis, Semtech recorded net income of $36.5 million compared with $24.4 million a year ago. On a GAAP basis, the company recorded net income of $13.3 million or 20 cents per share compared with $30.8 million or 46 cents per share a year ago.
Balance Sheet & Cash Flow
Semtech ended the quarter with cash and cash equivalents of $291.1 million, up from $277.9 million in the previous quarter. Accounts receivables were $66.5 million, up from $61.2 million in the prior quarter. Long-term debt was $215.7 million, down from $219.3 million in the previous quarter. During the quarter, cash flow from operations was $26.9 million, capital expenditure was $7.9 million and free cash flow totaled $19 million.
For fiscal fourth quarter 2018, on a non-GAAP basis, management expects revenues in the range of $138 million to $142 million. This implies 7.1% sequential decline at the mid-point of the guided range. The Zacks Consensus Estimate is pegged at $140.2 million. Non-GAAP gross profit margin is expected within 61.0-62.0%. Management projects SG&A expense within $26-$27 million, and research and development expense of $23-$24 million.
Non-GAAP earnings per share are expected in the range of 40-42 cents. This implies a massive 31.7% sequential decline at the mid-point of the guided range. The Zacks Consensus Estimate is pegged at 43 cents.
How Have Estimates Been Moving Since Then?
Analysts were quiet during the past month as none of them issued any earnings estimate revisions.
Semtech Corporation Price and Consensus
At this time, the stock has a nice Growth Score of B, though it is lagging a lot on the momentum 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 aggregte VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
The company's stock is suitable solely for growth based on our styles scores.
The stock has a Zacks Rank #4 (Sell). We are expecting a below average return from the stock in the next few months.
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