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Friday, Mar 29, 2024

Semtech Chips Not as Sexy As Digital, but Just as Hot

The world may be in the midst of a digital revolution, but a Newbury Park semiconductor manufacturer is finding that good old-fashioned analog chips are still mighty profitable. The company, Semtech Corp., manufactures a host of made-to-order analog semiconductor chips used by customers in the computer, communications, military, aerospace and automotive markets. Demand has caused the company’s profits to soar and its stock to triple in value since the beginning of the year. The stock, which trades on Nasdaq under the symbol SMTC, closed at $46.63 a share on Dec. 9. “Forty years ago, analog was the ‘in’ thing. Digital came along and took away the limelight,” said John Baumann, the company’s treasurer and head of investor relations. “Analog is starting to catch back up.” Semtech reported net income for the fiscal third quarter ended Oct. 31 of $8.4 million (24 cents a diluted share), an increase of 145 percent over $3.4 million (11 cents a share) for the like period a year ago. Revenues were $47.1 million vs. $28.5 million. A key to understanding demand for the company’s products is understanding the difference between digital and analog semiconductor chips. Simply put, digital semiconductors process information in binary code (zeros and ones), allowing computers and other electronic devices to make complex mathematical calculations. The problem with digital chips, though, is that they can’t communicate with the outside world. Humans can’t hear, see, taste or touch digital. That’s where analog chips come in. Analog chips provide a link between the real and digital worlds. You need analog chips to monitor things like speed, temperature, sound and current and convert that information into a language that digital chips can understand. For instance, the sound coming into a digital cellular phone must go through an analog chip on its way in. Once the information is processed digitally, it takes analog chips to bring the sound out to your ear. Same goes for digital television, communication networks, etc. “Digital is sexy. It gets all the headlines, and analog sort of flies under the radar,” said Baumann. The paradox of Semtech is that the more the world converts to digital, the more it needs analog chips to interact with humans. The big semiconductor manufacturers of the world, such as Intel Corp. and Cisco Systems, don’t like to mess with analog circuits, because they are fussier and tougher to engineer, Baumann said. “It’s a dirty job they (the digital-chip makers) don’t want to do,” he said. “We’re kind of like the plumbers of the electronic world. It’s better to pay someone who knows what they’re doing rather than try to do it yourself.” Robert M. Montague, an analyst with Morgan Keegan & Co. Inc. in Memphis, said Semtech’s forte is targeting the fastest growing segments of some of the fastest growing high-tech markets, such as communications products (like cell-phone handsets and local area networking gear). The company’s chips are also used in desktop computers, communications devices, surge protectors and in the semiconductor test industry, he said. “They’ve produced a very innovative stream of new projects that are being well accepted in the market,” said Montague. “That’s the result of two or three years of investment in product technology, and it’s beginning to pay off.” Semtech was founded in 1960 and went public in 1967. Until the early 1990s, it made electronic components, such as silicon diodes, for the military. But the downturn in the defense industry in the early ’90s forced the company to look to other markets. Semtech’s stock had been trading at around $54 a share in early December but has declined since then. Montague attributed the downturn to a broad pullback in computer and semiconductor stocks as a result of Y2K fears. Semtech’s peers such as Maxim Integrated Products Inc. and Linear Technology Corp., as well as the big boy Intel have all experienced similar price pressure in recent days, he noted, adding that despite the recent pullback, he remains bullish. “We think the dynamics of the industry are very positive,” he said. “If digital is the highway, then analog is the on- and off-ramp.”

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