Semtech Corporation (NASDAQ:SMTC) Q3 2018 Earnings Conference Call Transcript

Nov 29, 2017 • 05:00 pm ET

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Semtech Corporation (NASDAQ:SMTC) Q3 2018 Earnings Conference Call Transcript

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Presentation
Operator
Operator

Good day, ladies and gentlemen, and welcome to the Semtech Corporation's Third Quarter Fiscal 2018 Earnings Release. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to hand the floor over to Sandy Harrison, Director of Business Finance and Investor Relations. Please go ahead.

Executive
Sandy Harrison

Thank you, Karen, and welcome to Semtech's conference call to discuss our financial results for the third quarter of fiscal year 2018. Speakers for today's call will be Mohan Maheswaran, Semtech's President and Chief Executive Officer; and Emeka Chukwu, our Chief Financial Officer. A press release announcing our unaudited results was issued after the market closed today and is available on our website at semtech.com.

(Forward-Looking Cautionary Statements) During the call, we will refer to non-GAAP financial measures that are not prepared in accordance with generally accepted accounting principles. Discussion of why the management team considers such non-GAAP financial measures useful, along with detailed reconciliations of such non-GAAP measures to the most comparable GAAP financial measures, are included in today's press release. All references to financial results in Mohan's and Emeka's formal presentations on this call refer to non-GAAP measures unless otherwise noted. With that, I will turn the call over to Semtech's Chief Financial Officer, Emeka Chukwu. Emeka?

Executive
Emeka Chukwu

Thank you, Sandy. Good afternoon, everyone. For Q3 fiscal 2018, GAAP net sales were $150.3 million, a 2% sequential decline and an increase of 10% year-over-year. Q3 GAAP net sales included $6.2 million of expense for the Comcast Warrant. Q3 GAAP gross margin decreased 74 basis points sequentially to 59.5% due to the higher sequential Comcast Warrant expense, slightly offset by lower inventory adjustments. Q3 GAAP operating expense decreased approximately 2% sequentially due to lower share-based compensation. In Q3, interest and other expense was $800,000 compared to $2.2 million in Q2. The decrease reflects the benefit of foreign exchange gains realized from a stronger dollar and the lower net liabilities denominated in foreign currencies.

Moving on to the non-GAAP results, which exclude the impact of share-based compensation, amortization of acquired intangibles, acquisition or disposition-related and other nonrecurring charges not tied to current operations. Q3 fiscal 2018 net sales were $156.6 million, flat sequentially and an increase of 11% over the prior year. In Q3, shipments into Asia represented 75% of total net sales, North America represented 17%, and Europe represented 8%. Total net sales to distribution represented approximately 66%, and direct sales represented approximately 34%. Q3 bookings increased sequentially and resulted in a book-to-bill of approximately 1. Those bookings accounted for approximately 50% of shipments during the quarter. Q3 non-GAAP gross margin was 61.3%, an increase of 10 basis points sequentially or lower inventory adjustments, offset by less favorable product mix. We expect our Q4 non-GAAP gross margin to increase slightly sequentially due to more favorable mix. Q3 non-GAAP operating expense was $53.2 million, up slightly from Q2.

In Q4, we expect non-GAAP operating expense to decline between 4% and 8% sequentially as a result of lower worked hours and lower variable compensation