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Technology Stocks : Semtech -- Ignore unavailable to you. Want to Upgrade?

To: Jeff Bond who wrote (621)	12/18/1997 5:48:00 PM
From: Todd D. Wiener	Read Replies (2) \| Respond to of 886

A Classic Review, by Todd D. Wiener This week's topic: Semtech's 10-Q I have been studying the 10-Q for the past few hours. I'm glad to see that you all have had a chance to see the filing. I have a few comments. First of all, cash flow looks strong. As debt has been repaid over the past 18 months, quarterly cash flow has decreased by the amount repaid. When debt is completely gone, Semtech will no longer be making such payments. I figure that cash flow will be positively affected by approximately .10 per share over the next year (relative to the past year). "The Company estimates that two-thirds of sales into the Asia-Pacific region are to sub-contractors and offshore assembly operations of manufacturers that are supplying North American and European end-market demand." I don't agree, Jeff, that this is not a potential problem. Even though only 10% of total revenues are dependent upon demand in SE Asia, 22% depend upon the FINANCIAL CONDITION of those sub-contractors with whom Semtech does business. The risk I see here is the possibility that Semtech may not get paid. Hopefully, Semtech has established adequate reserves against their receivables. Although companies have reserves for doubtful accounts, they may not be sufficient to compensate for an illiquid customer who accounts for a sizeable chunk (although less than 10%) of sales. I'm not suggesting that anything is going to happen, but we'll need to keep an eye on days sales outstanding and operating cash flow (to identify stagnant receivables). Also, the book to bill doesn't reveal the Asian situation to be a hoax. Remember that the quarter ended only a week or so following the currency devaluations. There may be some effect felt in this quarter, and perhaps a greater effect in Q1 and Q2. Even so, I don't expect this to be a big problem, nor do I think demand for Semtech's products is going to wane. Speaking of book to bill, SEMI released the BTB last night for chip-equip. The BTB for Test/Assembly increased from a revised October number of 1.16 to a preliminary November number of 1.21. Semtech's ATE division (formerly Edge) provides ICs for the equipment manufacturers in the test segment, so this may suggest that Semtech is seeing continued strong demand for the ATE chips. "...Other strategic end-market applications." I believe this statement refers to Semtech's military & aerospace segment. Here's the sequential growth from Q2 to Q3 in Semtech's core segments: Computer $10.2M to $12.2M (+17%) Communications 3.2 to 4.0 (+25%) Military & Air 3.0 to 3.7 (+23%) Industrial 2.6 to 1.9 (-27%) Foundry 2.4 to 1.3 (-46%) If these trends continue, Semtech will experience an acceleration in margin expansion, due to the higher gross margins for communications. Also, Semtech is developing new communications products, in addition to their TVS line. Gross margins will benefit over the next few years for several reasons. First, as ATE and communications products gradually become a greater proportion of total revenues, the effect of their higher gross margins will be quite noticeable. It's certainly favorable that these 2 segments are 2 of the 3 fastest growing segments at Semtech. The second reason that gross margins will improve is the continued parade of new product offerings. These products have higher average selling prices than existing products, because they are both new and proprietary (many of them, at least). The higher R & D expenses should be more than offset by the higher gross margins. I suspect that S G & A expenses will decline slightly (on a percentage basis) over the next year. One important reason for this is the decreased selling costs for several products. There may be some cross-marketing opportunities between the ATE customers and customers of the other product lines. Higher cash balances over the next year should boost earnings slightly. Although I see a few potential negatives (mentioned above), I think that the company continues to perform very well. I like the improving operating trends that Semtech is experiencing. I am raising my FY99 estimate for Semtech, due primarily to the addition of the ATE division. I don't have all of the numbers worked out yet, but I'll post my estimates when I have finished. It certainly looks as if the Edge acquisition will be nicely accretive to FY99 results. I hope this was "Classic" enough. Todd