Semtech Adjusting to Abrupt CEO Change

Semtech Adjusting to Abrupt CEO Change
Semtech's Camarillo headquarters

Although share prices for Semtech Corp. had grown healthily this year after a slump in 2023, an abrupt CEO transition this month has disrupted that for now.

Semtech board member Hong Q. Hou was named as the head of the Camarillo semiconductor and Internet-of-Things products manufacturer effective June 6. He replaced Paul Pickle as president and chief executive.

The day after the announcement was made, the price of Semtech shares fell by almost 18% to close at $31.18 on the second highest trading volume of the past 52-week period. More than 11.9 million shares traded that day.

Semtech Chief Executive Hong Q. Hou

The stock price has continued to fall since then. It closed at $29.50 on June 18.

Ye Jane Li, chair of the Semtech board’s nominating and governance committee, called Hou “an exceptional leader” and said the board is excited to have him execute the company’s strategy and take Semtech to its next phase of innovation and growth.

“Hong brings deep technical, operational and strategic leadership in the hyperscale and semiconductor industries and is already intimately familiar with Semtech’s business,” Li said in a statement.

Hou has served on the Semtech board since July.

He most recently served as president of the semiconductor group at Brooks Automation, a provider of automated wafer handling and contamination control products for the semiconductor manufacturing industry headquartered in Chelmsford, Massachusetts.

Prior to that, Hou was corporate vice president and general manager of the cloud and edge networking group of Intel Corp. in Santa Clara. He held executive leadership positions as chief technology officer at Fabrinet West Inc. in Santa Clara, chief operating officer at AXT Inc., in Fremont and as chief executive at Emcore Corp. in Alhambra before that.

Hou said that he joined Semtech not only because of his experience with the tech industry but because of the company’s “unique opportunity to leverage its strong team and formidable portfolio of highly innovative technologies and products in supporting the artificial intelligence and Internet-of-Things revolutions currently underway.”

“I am acutely focused on maintaining our financial discipline while we position Semtech to capitalize on the compelling technological trends ahead,” Hou said in a statement. “I am confident in our goals to generate strong and sustained value for our stockholders long into the future.”

Craig Ellis, an analyst in the San Francisco office of Westwood-based B. Riley Securities Inc., said in a report from June 7 that the appointment was surprising even as the stock was pressured down in early trading that day.

But after looking into Hou’s background he viewed “the pullback as an enhanced entry opportunity in shares which now offer (approximately) 2x upside” to the firm’s retained $58 price target.

“We believe this is ideal context to champion the business overall and is especially relevant in optimizing the highly differentiated, high gross margin, and analog-based Signal Integrity business, the leading driver to (trailing) three-month investor share enthusiasm,” Ellis wrote in the report.

An abrupt CEO change

Pickle’s departure is unrelated to Semtech’s operational or financial performance, did not involve a violation of the company’s code of conduct and does not have an impact on any previously reported financial statements, Semtech said in a release.

The board’s decision resulted from differences between it and Pickle on how the chief executive and the board should work together in the best interests of stockholders, the Semtech release said.

On June 5, Pickle, who only took over as chief executive last June, participated in his final conference call with analysts to discuss fiscal first quarter financials with analysts.

“I’m pleased with Semtech’s solid first-quarter financial performance with net sales above the high end of guidance, along with meaningful declines in channel inventories across each of our end markets,” Pickle said.

Former Semtech CEO Paul Pickle

In its fiscal first quarter ending April 28, Semtech reported adjusted net income of $4.1 million (6 cents a share), compared to adjusted net income of $2.8 million (4 cents) in the same period of the previous year. Revenue decreased by 13% from the fiscal first quarter of the prior year to $206 million.

At least two analysts who follow Semtech have rated its stock as a buy.

Tore Svanberg, an analyst in the San Francisco office of Stifel Financial Corp. in St. Louis, said in a research report from June 6 that the company’s long-term prospects continue to brighten, with Semtech “making material design win progress across its portfolio of products, most notably within AI-based applications.”

“Although the (near term) remains somewhat mixed/subdued, we continue to believe in the (long term) outlook of the business, even as cost-cutting measures and other initiatives are already making a positive impact on the bottom line,” Svanberg said in his report.

Ellis, of B. Riley, also rated the stock as a buy.

He said in a research note from June 5 that the bright spot at Semtech was in company execution and that rising gross margins and well-managed operating expenses were aiding cash flow and auguring well for future leverage.

“Adding it all up, we believe a more visible (quarter over quarter) growth is gaining traction and can accelerate in FY26 while strategic carve-optionality remains a potential intermediate-to-long-term debt pay-down and value creation kicker,” Ellis said in the note.

Thus, his fiscal 2025 and 2026 year earnings per share estimates rose by 3% to 6%, and with increased execution confidence he increased his target price from $50 to $58, Ellis added.

U.S. looks to bolster its chip-making industry

The stock decline in Semtech comes at a time of positive outlook in the semiconductor industry.

A Deloitte study released earlier this year said that it is now predicted to see global sales of $588 billion.

“Not only would that be 13% better than 2023, but it’s 2.5% higher than 2022’s record industry revenues of $574 billion,” the study said.

The stock market is often a leading indicator of industry performance, the study added.

“As of mid-December 2023, the combined market capitalization of the top 10 global chip companies was $3.4 trillion, up 74% from $1.9 trillion in November 2022 and 17% higher than the $2.9 trillion we saw in November 2021,” the study said.

In a report put out in May by the Semiconductor Industry Association and Boston Consulting Group, it said that the U.S. would triple its domestic semiconductor manufacturing capacity from 2022 – when the CHIPS (Creating Helpful Incentives to Produce Semiconductors) and Science Act was enacted – to 2032.

“The projected 203% growth is the largest projected percent increase in the world over that time,” the report said.

The report also projects the U.S. will grow its share of advanced logic (below 10 nanometers) manufacturing to 28% of global capacity by 2032, up from 0% in 2022.

“Additionally, America is projected to capture over one-quarter (28%) of total global capital expenditures from 2024-2032, ranking second only to Taiwan (31%). In the absence of the CHIPS Act, the U.S. would have captured only 9% of global capex by 2032,” according to the report.

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