Semiconductor company Semtech (NASDAQ:SMTC) reported results ahead of analysts' expectations in Q4 CY2023, with revenue up 15.2% year on year to $192.9 million. Guidance for next quarter's revenue was also optimistic at $200 million at the midpoint, 2.4% above analysts' estimates. It made a non-GAAP loss of $0.06 per share, down from its profit of $0.47 per share in the same quarter last year.
Semtech (SMTC) Q4 CY2023 Highlights:
- Revenue: $192.9 million vs analyst estimates of $190.7 million (1.2% beat)
- EPS (non-GAAP): -$0.06 vs analyst expectations of -$0.04 (34.7% miss)
- Revenue Guidance for Q1 CY2024 is $200 million at the midpoint, above analyst estimates of $195.3 million (gross margin and adjusted EBITDA guidance also head for the period)
- Gross Margin (GAAP): 48.6%, down from 61.2% in the same quarter last year
- Inventory Days Outstanding: 133, down from 149 in the previous quarter
- Free Cash Flow of $12.21 million is up from -$12.42 million in the previous quarter
- Market Capitalization: $1.79 billion
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.
Semtech was founded in 1960 by Gustav H.D. Franzen and Harvey Stump, Jr. The two initially started Semtech to provide components for companies with aerospace and military contracts. The company went public in 1967.
Semtech is a pioneer and leader in LoRa (long range) technology for radio communication, which has become the de facto wireless platform of Internet of Things. LoRa encodes information on radio waves using chirp pulses, making its transmission robust against disturbances over longer distances and superior over WiFi and Bluetooth. LoRa is also well-suited for applications that transmit small chunks of data with low bit rate, making it ideal for the sensors that operate in low power mode found in IoT applications.
In addition, Semtech offers a portfolio of signal integrity products for optical data communications and video transport. The company’s signal integrity chips can be found in wireless base stations that enable cellular communications and high-definition broadcasts that enable television technologies.
Semtech’s customers include major OEMs and their subcontractors in the infrastructure, consumer, and industrial end markets. Semtech outsources the majority of manufacturing functions to third-party foundries and assembly contractors.
Competitors offering analog and mixed-signal semiconductors for infrastructure and communications include Cisco (NASDAQ:CSCO), KORE Group (NYSE:KORE), and NXP Semiconductors (NASDAQ:NXPI).Sales Growth
Semtech's revenue growth over the last three years has been mediocre, averaging 14.1% annually. But as you can see below, this was a strong quarter for the company, with revenue growing from $167.5 million in the same quarter last year to $192.9 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 had a decent quarter as its revenue grew 15.2% year on year, topping analysts' estimates by 1.2%. This marks 4 straight quarters of growth, implying that Semtech is in the middle of its cycle, as a typical upcycle generally lasts 8-10 quarters.
Semtech's revenue is projected to contract next quarter, with the company guiding to a 15.4% year-on-year decline. On the other hand, analysts seem to disagree and forecast 1.1% revenue growth over the next 12 months.
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.
This quarter, Semtech's DIO came in at 133, which is 10 days below its five-year average. At the moment, these numbers show no indication of an excessive inventory buildup.
Pricing Power
In the semiconductor industry, a company's gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor. Semtech's gross profit margin, which shows how much money the company gets to keep after paying key materials, input, and manufacturing costs, came in at 48.6% in Q4, down 12.6 percentage points year on year.
Semtech's gross margins have been trending down over the last 12 months, averaging 48.6%. This weakness isn't great as Semtech's margins are already slightly below the industry average and falling margins point to potentially deteriorating pricing power.
Profitability
Semtech reported an operating margin of 9.2% in Q4, down 13.3 percentage points year on year. Operating margins are one of the best measures of profitability because they tell us how much money a company takes home after manufacturing its products, marketing and selling them, and, importantly, keeping them relevant through research and development.
Semtech's operating margins have been trending down over the last year, averaging 10.7%. This is a bad sign for Semtech, whose margins are already below average for semiconductor companies. To its credit, however, the company's margins suggest modest pricing power and cost controls.
Earnings, Cash & Competitive Moat
Analysts covering Semtech expect earnings per share to grow 362% over the next 12 months, although estimates will likely change after earnings.
Although earnings are important, we believe cash is king because you can't use accounting profits to pay the bills. Semtech's free cash flow came in at $12.21 million in Q4, up 150% year on year.
As you can see above, Semtech failed to produce positive free cash flow over the last 12 months and shareholders will likely want to see an improvement in the coming quarters.
Return on Invested Capital (ROIC)
EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money the business raised (debt and equity).
Semtech's five-year average ROIC was negative 3.6%, meaning management lost money while trying to expand the business. Its returns were among the worst in the semiconductor sector.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, Semtech's ROIC over the last five years averaged meaningful decreases. In conjunction with its already low returns, these declines suggest the company's profitable business opportunities are few and far between.
Key Takeaways from Semtech's Q4 Results
We were impressed by Semtech's strong improvement in inventory levels. "End market demand for our semiconductor business has progressed from stable to growing," said Paul H. Pickle, Semtech's president and chief executive officer. We were also glad next quarter's revenue, gross margin, and adjusted EBITDA guidance all came in higher than Wall Street's estimates. Overall, this was an encouraging quarter for Semtech. The stock is up 10.1% after reporting and currently trades at $30.29 per share.
Is Now The Time?
When considering an investment in Semtech, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
We cheer for everyone who's making the lives of others easier through technology, but in the case of Semtech, we'll be cheering from the sidelines. Its revenue growth has been mediocre over the last three years, and analysts expect growth to deteriorate from here. On top of that, its relatively low ROIC suggests it has struggled to grow profits historically, and its growth is coming at a cost of significant cash burn.
Semtech's price-to-earnings ratio based on the next 12 months is 42.0x. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.
Wall Street analysts covering the company had a one-year price target of $31.90 per share right before these results (compared to the current share price of $30.29).
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