Semtech Corp.
‘s (SMTC) fourth-quarter earnings beat the Zacks Consensus Estimate by 3 cents. Shares were up in response. The company’s closest competitors, Maxim Integrated Products (MXIM), Linear Technology Corp. (LLTC) and Intersil Corp. (ISIL) also beat the Zacks Consensus, as end markets continued to strengthen.


Revenue of $85.0 million was up 13.1% sequentially and up 35.6% year over year. The year-over-year increase came after four quarters of decline and basically validates the theory that the chip sector is on a growth path. The sequential strength was driven primarily by the communications market, although it was fairly broad-based across all geographies. In the last quarter, the company introduced 17 new products and won 680 new design wins.

While Asia remained the largest region with a 57% revenue share, North America was the turnaround story, representing 27% of total revenue. Europe brought in the remaining 16%. North America grew 32.8% sequentially. Europe grew 13.1%, while Asia saw relatively sluggish growth of 5.7%. Both distribution and OEM sales grew in the last quarter, and distributor inventories declined.

Revenue by End Market

The 61.6% sequential increase in communications was driven by strength in infrastructure spending, particularly in Asia and Europe. As a result, segment contribution jumped from 21% to 30%. Consumer, the largest segment, grew 2.6%, driven by increased demand for power management products in Asia and protection products in Europe. In North America, consumer applications, such as HD LCD display interfaces, were particularly strong. Computing, the only market that declined in the last quarter, was down 15.1% sequentially. The decline was a deliberate attempt by management to reduce exposure to this relatively low-margin business.

The advanced comm and sensing product line witnessed the strongest growth, with revenue increasing 11% sequentially due to momentum at communications infrastructure OEMs, as well as a pickup in the industrial business.

The company is also seeing great momentum in the protection business, which increased 5% sequentially. The protection product line is benefiting from the increase in the number of ports that require protection, as well as the increasing performance requirements of each port.

The power management business grew 2% sequentially and most of the increase came from communications and consumer applications. This is very encouraging, since the company has been trying to reduce its dependence on the lower-margin computing segment for some time now.

The power discrete business continued to be impacted by softness at military and aerospace customers, although management stated that there were signs the situation could improve in the current quarter.

The protection, power management, advanced comm and sensing, and power discrete product lines generated 54%, 23%, 15% and 8% of fourth quarter revenue, respectively.


Orders were up strongly in the last quarter, and we estimate the book to bill at 1.02. Turns sales grew strongly, both sequentially and on a year-over-year basis. We estimate that the backlog increased in the mid single-digits. Lead times have been quite short for a while now (in the 2-6 week range) and management did not mention whether they stretched in the last quarter.

Historically, management has always met or exceeded guided revenue numbers, and in the last quarter revenue was well over the high end of the guided range. Given the order momentum, the backlog growth and management’s history of conservatism, we expect the company to meet or exceed guidance in the April quarter as well.


Excluding the fair value adjustment related to inventory acquired from SMI and stock based compensation expenses, the pro forma gross margin for the quarter was 56.6%, up 115 basis points (bps) from the previous quarter’s 55.4%. The gross margin benefit comes from a more favorable mix of business, as communications and industrial markets were relatively stronger in the last quarter. Moreover, the company saw strength in the advanced communications & sensing product line, as well as the newer power management platforms, both of which generate relatively higher gross.

Operating expenses of $28.7 million were higher than the previous quarter’s $24.0 million. The operating margin was 22.8%, down 61 bps from 23.4% recorded in the previous quarter. The decline was primarily on account of higher R&D as a percentage of sales, helped by flattish SG&A and partially offset by lower COGS.

Net Income

The pro forma net income was $18.9 million or 22.2% net margin, compared to $16.4 million or 21.9% in the previous quarter and $9.6 million or 15.4% in the year-ago quarter. Our pro forma estimate may differ from management’s presentation due to the inclusion/exclusion of some items not considered by management.

Including the special items, the GAAP net income was $9.5 million, or $0.15 per share, compared to a loss of $20.9 million, or $0.34 per share, in the previous quarter and income of $6.3 million, or $0.10 per share, in the January quarter of last year.

Balance Sheet

Inventories were up 33.0% in the last quarter, with inventory turns dropping from 5.3X to 4.4X. The company built inventories in anticipation of stronger demand in the fiscal first quarter. Days sales outstanding (DSOs) increased from 31 to around 33. The company ended with cash and short term investments of $2.21 per share, after spending $180 million on the SMI acquisition. Capital additions were minimal at $1.4 million in the quarter, netting a free cash flow of $23.6 million. There were no share repurchases in the last quarter and the amount remaining authorized under the current plan was $15 million.


The first quarter guidance is for a sequential revenue increase of 7%-13%, with the GAAP gross margin flat to up 50 bps, GAAP R&D of $14.1 million, GAAP SG&A of $22.8 million and a GAAP tax rate of 18-21% (for the full fiscal year 2011). The company expects non-GAAP gross margins to be flat to up 50 bps, non GAAP R&D of $1.2 million, non GAAP SG&A of $1.1 million and a non GAAP tax rate of 22-25% (for the year). This is expected to result in non-GAAP net income of $0.27-$0.30. Capital spending is expected to be around $6 million, depreciation $1.9 million and amortization of acquired intangibles $2.4 million.

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