No Surprises In Semtech's (NASDAQ:SMTC) Q2 Sales Numbers But Stock Drops

Jabin Bastian /
2023/09/13 4:25 pm EDT

Semiconductor company Semtech (NASDAQ:SMTC) reported results in line with analysts' expectations in Q2 FY2024, with revenue up 13.9% year on year to $238.4 million. However, next quarter's revenue guidance of $200 million was less impressive, coming in 19.2% below analysts' estimates. Turning to EPS, Semtech made a non-GAAP profit of $0.11 per share, down from its profit of $0.81 per share in the same quarter last year.

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Semtech (SMTC) Q2 FY2024 Highlights:

  • Revenue: $238.4 million vs analyst estimates of $237.4 million (small beat)
  • EPS (non-GAAP): $0.11 vs analyst estimates of $0.02 ($0.09 beat)
  • Revenue Guidance for Q3 2024 is $200 million at the midpoint, below analyst estimates of $247.7 million
  • Free Cash Flow was -$18.9 million compared to -$104 million in the previous quarter
  • Inventory Days Outstanding: 129, down from 159 in the previous quarter
  • Gross Margin (GAAP): 46.7%, down from 64.9% in the same quarter last year

“In the recent quarter, our net sales aligned with our projections and our non-GAAP gross margin and earnings per share each exceeded our estimates, largely due to focused cost-saving initiatives,” said Paul H. Pickle, Semtech’s president and chief executive officer.

Operating for more than 60 years, Semtech (NASDAQ:SMTC) is a provider of analog and mixed-signal semiconductors used for Internet of Things systems and Cloud connectivity.

The semiconductor industry is driven by demand for advanced electronic products like smartphones, PCs, servers and data storage. The growth of data and technologies like artificial intelligence, 5G networks and smart cars are also creating a next wave of growth for the industry. To keep up with ever changing customer needs requires new tools that can design, fabricate and test at ever smaller sizes and more complex architectures, and that is driving the demand for semiconductor capital manufacturing equipment.

Sales Growth

Semtech's revenue growth over the last three years has been mediocre, averaging 14.1% annually. As you can see below, this was a weaker quarter for the company, with revenue growing from $209.3 million in the same quarter last year to $238.4 million. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Semtech Total Revenue

Semtech had an average quarter as its revenue grew 13.9% year on year, in line with analysts' estimates. We believe the company is still in the early days of an upcycle, as this was just the second consecutive quarter of growth and a typical upcycle tends to last 8-10 quarters.

Semtech's management team believes its revenue growth will continue, guiding to 12.6% year-on-year growth next quarter. Analysts expect the company to grow its revenue by 30.7% over the next 12 months.

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Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

Semtech Inventory Days Outstanding

This quarter, Semtech's DIO came in at 129, which is 8 days below its five-year average. At the moment, these numbers show no indication of an excessive inventory buildup.

Key Takeaways from Semtech's Q2 Results

Although Semtech has a market capitalization of $1.45 billion and has been burning cash over the last 12 months, its more than $147.9 million in cash gives it the flexibility to prioritize growth over profitability.

We were impressed by Semtech's strong improvement in inventory levels and adjusted EPS result that outperformed Wall Street's estimates. On the other hand, its revenue guidance for next quarter significantly underwhelmed and its operating margin shrunk. Overall, this was a bad quarter for Semtech. The company is down 7.52% on the results and currently trades at $21.14 per share.

Semtech may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here.

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The author has no position in any of the stocks mentioned in this report.