Shares of Semtech (SMTC 3.88%) crashed in early trading Thursday after the semiconductor chip maker announced plans to sell $250 million worth of senior convertible notes -- in other words, debt. As of 10:32 a.m. ET, its shares were down by 22.5%.
NASDAQ: SMTC
Key Data Points
What does Semtech need $250 million for?
Semtech explained that it needs the money "in order to prepay term loans outstanding under the Company's senior credit facilities" -- in other words, to roll over old debt before it comes due. The new notes will come due in 2028.
Management didn't say what interest rate it will be paying on this new debt, however. That probably won't be known until the debt issuance is priced. But considering how much interest rates have risen over the past couple of years, it's likely this debt issuance is going to raise Semtech's interest costs. And eventually, if the notes are converted into stock, this move will dilute the company's existing shareholders.
Why does Semtech need debt at all?
Valued at almost exactly $1 billion after Thursday morning's sell-off, Semtech has lost $440 million on the bottom line over the past year -- nearly half its market capitalization -- despite more than doubling its cloud data center sales last quarter. The company, which specializes in chips for Internet of Things devices and data centers, warned in its fiscal 2024 Q3 earnings report last month that it expects to lose money again -- up to $0.22 per share on an adjusted basis -- in the current fiscal quarter.
On the plus side, that would be only about a $14 million adjusted loss for the quarter -- much less than the company lost last quarter. On the other hand, though, Wall Street had been predicting that Semtech would report a profit in the current quarter, so things aren't going quite as well as hoped.
And that's the crux of the problem for Semtech. Unprofitable today, and expected by most analysts to keep losing money (on an annual basis) for the next two years, Semtech can't fund its operations by generating its own cash -- so it must borrow.
With $1.4 billion in debt on its books currently, and now forced to take on more expensive debt to stay on top of its obligations, things aren't looking great for Semtech financially right now.
