Semtech (NASDAQ:SMTC) Reports Q1 In Line With Expectations, Stock Soars

Radek Strnad /
2023/06/07 4:25 pm EDT

Semiconductor company Semtech (NASDAQ:SMTC) reported results in line with analyst expectations in Q1 FY2024 quarter, with revenue up 17% year on year to $236.5 million. However, guidance for the next quarter was less impressive, coming in at $238 million at the midpoint, being 1.92% below analyst estimates. Semtech made a GAAP loss of $29.4 million, down on its profit of $38 million, in the same quarter last year.

Is now the time to buy Semtech? Access our full analysis of the earnings results here, it's free.

Semtech (SMTC) Q1 FY2024 Highlights:

  • Revenue: $236.5 million vs analyst estimates of $235 million (small beat)
  • EPS (non-GAAP): $0.02 vs analyst estimates of -$0.08 ($0.10 beat)
  • Revenue guidance for Q2 2024 is $238 million at the midpoint, below analyst estimates of $242.7 million
  • Free cash flow was negative $104 million, compared to negative free cash flow of $24.5 million in previous quarter
  • Inventory Days Outstanding: 158, down from 291 previous quarter
  • Gross Margin (GAAP): 48.1%, down from 64.4% same quarter last year

“Semtech exceeded the midpoint of our revenue and earnings guidance as we see signs of business stabilization,” said Mohan Maheswaran, Semtech’s President and Chief Executive Officer. “As we continue to navigate this challenging macro-economic environment, we are taking steps to improve our operational efficiency and financial performance while focusing on executing our plans. With an expanded highly differentiated IoT portfolio, combined with our best-in-class High Performance Analog portfolio, we are well positioned to emerge stronger from this current cycle.”

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 13.4% annually. And as you can see below, last year has been even less strong, with quarterly revenue growing from $202.1 million to $236.5 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

This was a decent quarter for Semtech as revenues grew 17%, topping analyst estimates by 0.66%. Semtech's revenue turned from decline to growth this quarter, news that will be likely appreciated by shareholders.

Semtech's revenues returned to growth this quarter, and the company is pointing to a return to sustainable growth, with next quarter guided to 13.7% growth year on year and analysts agree, forecasting growth of 38.4% over the next twelve months.

In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business 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 inventory days came in at 158, 23 days above the five year average, suggesting that despite the recent decrease the inventory levels are still higher than what we used to see in the past.

Key Takeaways from Semtech's Q1 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on Semtech’s balance sheet, but we note that with a market capitalization of $1.41 billion and more than $164.2 million in cash, the company has the capacity to continue to prioritise growth over profitability.

We were very impressed by the strong improvements in Semtech’s inventory levels. And we were also excited to see that earnings outperformed Wall St’s expectations. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and operating margin deteriorated. Overall, it seems to us that this was a mixed quarter for Semtech. The company is up 9.18% on the results and currently trades at $24.5 per share.

Semtech may have had a tough quarter, but does that actually create an opportunity to invest right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 70% year on year and best-in-class SaaS metrics it should definitely be on your radar.

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