Doug Freedman of American Technology Research listened carefully to Semtech, a player in the market for Pentium VRM components. He saw a 53 percent revenue growth over the past year, but worries that the shrinking book-to-bill ratio is a sign for the coming quarter. He still has some favorites in the analog camp. The largely unedited text of his report follows:
Semtech reported better than consensus revenue and EPS for the July quarter with in-line October quarter EPS guidance.
Revenue of $68.3 million increased 10.3% sequentially and 53.2% year-over-year. EPS of $0.22 was $0.01 above consensus and increased 15% sequentially and 633% year-over-year.
Semtech reported July quarter revenue of $68.3M and EPS of $0.22, both above consensus. Revenue growth was 10.3% q/q, ahead of our 7% q/q estimate. Revenue was above our estimates due to exceptional growth in new product lines (SETS and HID combine now for 6% of revenue). We were expecting weakness in China handsets and that the ATE market would slow the revenue growth. The EPS results were bolstered by the company's repurchase of 619K shares in the July quarter, which decreased the diluted share count by 100K shares. The company guided 3Q05 (October quarter) to 3-5% revenue growth, which was below our preview of 8% q/q, despite the 14 week fiscal quarter. We believe management has chosen the safe course of action for the 3Q guidance and has placed added value on consistent revenue growth. Our FY05 and FY06 EPS estimates remain unchanged at $0.88 and $1.06 respectively.
We think the news coming out of the call will be viewed positively for three reasons:
The surprise for the quarter was revenue growth of 10.3% q/q combined with a record gross margin. The mid-point of 3Q guidance is $71M, which looks to be conservative, given about $10M in turns orders are required with 10 weeks remaining in the quarter. Our EPS estimate for 3Q05 of $0.23 should be achievable with revenue growth of 4%. We believe that consensus EPS will likely remain unchanged. Given management's desire to manage to consistent revenue growth, despite the 14 week anomaly, we are reducing our q/q revenue growth rate to 4%, which is the company's mid-point, but is below our previous forecast of 8%. Our EPS estimate declines $0.01 to $0.23 for the October quarter.
Two of Semtech's new product lines are gaining traction and becoming meaningful growth drivers. The SETS product line saw revenue growth of 29% q/q, with bookings growth of 31% q/q and now represents 3% of sales. The SETS product also claims Cisco (CSCO, $18.97, NR) as a lead customer with a socket in the CSR1 router. The HID product line is also contributing to revenue with 60% q/q growth. The HID products are now 3% of sales. Semtech claims that both product lines are well above the company average gross margin.
R&D and SG&A expenses are being held in check, and despite the 14 week quarter adding 7.8% more days to the quarter, both R&D and SG&A are forecast to increase only 3% q/q. We are very impressed with Semtech's ability to scale expenses below the rate of revenue growth.
The BULLS will point to:
July quarter revenue growth of 10.3% q/q above both street and guidance. The gross margin in FY3Q is guided to a target of 60%.
Relative strength in sales and bookings coming from portable power (notebook) up 16% q/q, SETS and HID product lines. The desktop sector saw strength in the graphic card business.
Book-to-bill above one, with no major change to the cancellation pattern. Orders are being booked with short lead-times followed by orders with schedule dates weeks out. The company believes the orders booked out will likely be pulled in as demand firms and production schedules ramp.
The BEARS will point to:
Automatic test market (ATE) is weak, Agilent (A, $21.61, NR) has been a 13% customer of Semtech and recently reported a 38% decline in bookings. Semtech saw ATE bookings decline $500K in 2Q, how far will they fall in 3Q?
Wireless revenue into China - In Q2 China wireless sales were less than 10%.
Book to-bill no longer increasing.
Guidance revenue growth of 3-5% is less than the additional 7.8% increase in shipping days.
Gross margin and operating margin goals have been reached, no leverage left in the business model.
Read through to the analog sector
We still believe the analog semiconductor industry is in the midst of an expanded growth cycle and is experiencing slightly worse than normal summer seasonality as a result of increased capacity, reduced lead-times, and OEM/distribution over booking. In recent weeks, we have become more cautious on the sector, as the seasonal soft bookings have been more pronounced than expected. We continue to take a more cautious stance on the sector as we wait for end market demand to flow through to the semiconductor companies as we exit the summer season. Semtech's management is displaying the same cautious management style that separates Linear Technology (Buy) and Maxim (Buy) from other semiconductor companies.
We think investors should maintain a cautious stance until the impact of macro economic factors can be measured on the semiconductor growth cycle. Although we are another quarter into the cycle, we believe it is still to early to discount the end of the semiconductor growth cycle. We believe demand is in-line with supply, in the short-term, and inventory levels in the channel and at the OEM/CEM base remain at very health levels. Analog industry-wide capacity utilization is increasing (but in a controlled fashion), and average selling prices should remain firm. As a result, we believe operating metrics still have room for improvement and new historical peaks are and will continue to be set as revenue growth at Semtech appears safe for another quarter. We are maintaining our Hold rating on Semtech.
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