A month has gone by since the last earnings report for Semtech (SMTC). Shares have lost about 4% in that time frame, outperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Semtech 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 Q3 Earnings and Revenues Top Estimates
Semtech Corporation’s third-quarter fiscal 2023 non-GAAP earnings of 65 cents per share beat the Zacks Consensus Estimate by 3.2%. The reported earnings decreased 12.2% year over year and 25.3% sequentially.
Net sales of $177.6 million outpaced the Zacks Consensus Estimate of $175.8 million. The same decreased 8.9% from the prior-year quarter’s level and 15.1% on a sequential basis.
Top-line growth was driven by strength in LoRa business, ClearEdge and Tri-Edge platform and 10G PON products.
SMTC released 12 new products across the portfolio and achieved 2,189 design wins in the fiscal third quarter.
For the fiscal third quarter, shipments in Asia, North America and Europe represented 71%, 15% and 14% of net sales, respectively.
However, macroeconomic headwinds, softness in the consumer markets and the COVID-19 related issues in China affected the quarterly performance.
Revenues by End Market
Net revenues from the infrastructure market represented 39% of its total revenues. The metric increased 5% year over year but declined 17% from the prior quarter’s level.
Net revenues from the industrial market, constituting 41% of total net revenues, increased 7% from the prior-year period’s level but decreased 13% sequentially.
Net revenues from the high-end consumer market, accounting for 20% of total revenues, declined 43% year over year and 15% sequentially. The high-end consumer market consists of mobile devices and other consumer systems, each reflecting net revenues of 10%.
Revenues by Product Group
Signal Integrity Product Group’s revenues, contributing 44% to total revenues, increased 2% year over year, driven by growing PON deployments and strong demand in the data center market. Also, the growing global Tri-Edge design wins in 100-gig, 200-gig and 400-gig PAM4 optical modules remain a tailwind. However, weak economic environment in China affected the infrastructure demand and wireless space station business in the reported quarter.
Revenues from its Protection Product Group, accounting for 22% of the total revenues, were down 27% sequentially owing to the weak demand from the Asian smartphone customers. Robust smartphone demand in North America remained a tailwind. The broader industrial protection business performed well in the Americas and Europe markets. Solid design win momentum of Protection Shield solutions remained another positive.
Wireless and Sensing Product Group revenues contributed 34% to total revenues. The same decreased 3% from the prior-year fiscal period’s level. The downside was due to weak demand for LoRa solutions in China. Nevertheless, growing sales of LoRa products in North America and Europe remained a positive.
Operating Results
Non-GAAP gross margin of 65.5% expanded 170 basis points (bps) from the last fiscal year’s quarterly figure.
Adjusted selling, general and administrative expenses for the fiscal third quarter increased 6.6% to $36.5 million from the last fiscal year’s quarterly number. Adjusted product development and engineering expenses decreased 5.1% from the year-ago quarter’s number to $31.6 million.
The non-GAAP operating margin of 27.2% contracted 200 bps from the same quarter’s figure in the last fiscal year.
Balance Sheet and Cash Flow
As of Oct 30, 2022, cash and cash equivalents were $617.8 million compared with $362.2 million on Jul 31, 2022.
Account receivables for the reported fiscal quarter were $80.5 million, up from $71.1 million in second-quarter fiscal 2023.
Long-term debt was $455.1 million, up from $171.9 million in the previous fiscal quarter.
For the reported fiscal quarter, cash flow from operations was $18.2 million compared with $77.3 million in the fiscal second quarter. Free cash flow amounted to $11.1 million compared with $70 million in the prior fiscal quarter.
Guidance
For fourth-quarter fiscal 2023, management expects net sales of $145-$155 million.
The non-GAAP gross margin is expected to be 64-65%. Also, management projects SG&A expenses of $30.5-$31.5 million, and research and development costs of $29.5-$30.5 million.
The non-GAAP earnings per share are expected within 44-52 cents.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month.
The consensus estimate has shifted -5.85% due to these changes.
VGM Scores
Currently, Semtech has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. 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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