Semtech (SMTC -17%) saw its stock plummet from 52-week highs to two-month lows following a decent Q1 performance and in-line Q2 guidance. The sudden drop came after an unexpected CEO change. Paul Pickle, the former CEO, left due to operational differences with the Board. Hong Hou, a Board member for under a year, has been appointed as the new CEO.
The abrupt departure of Mr. Pickle, who was instrumental in SMTC's turnaround over the past year, has investors worried. Despite a solid quarterly report driven by strong demand in its infrastructure end market, underlying issues have surfaced. SMTC designs advanced chip components used in data centers and high-end consumer electronics, benefiting from the AI trend. However, Q1 revealed some cracks that today’s CEO news has magnified.
- Industrial net sales fell 5% quarter-over-quarter to $115.6 million, more than half of Q1 revenues. This was expected but reversed a previous positive trend. IoT systems sales dropped 57% year-over-year and 26% sequentially. The company expects flat to slightly positive industrial growth in Q2 and a stronger recovery in the second half of the year.
- Despite an encouraging 2H25 recovery outlook, SMTC has significant ground to cover to return to positive revenue growth. Q1 saw a 12.9% year-over-year sales decline, the first since 4Q23. Q2 projections of $207-217 million in revenue indicate an 11.1% year-over-year drop at the midpoint.
- SMTC is relying heavily on its data center market to offset shortfalls. Q1 infrastructure net sales surged 44% year-over-year and 42% sequentially to $56 million, driven by data center growth and a doubling of hyperscale data center revenue, reflecting strong AI trends. However, data center demand, at just 10% of total revenues, needs to grow significantly to impact quarterly performance meaningfully.
Paul Pickle took over as CEO in summer 2023 after shares dropped about 75% from late 2021 highs. He and his team cut costs, stabilized cash flows, and reignited growth. The Board's current disagreements over the company's future direction, despite significant recovery during Pickle's tenure, are unsettling investors. Debt levels and cash flows also need improvement, with GAAP OpEx spiking last quarter due to a goodwill impairment in two segments caused by demand headwinds. Without clear direction, SMTC shares may continue to face selling pressure.
