Year End #15: SYNA - a (temporary?) stall

Okay, here’s the story on Synaptics. I first got interested in them in about May of 2013, when Zacks recommended them. They were a touch screen manufacturer and their business was going straight up. Here’s what their 12-month trailing earnings looked like (in dollars):

Dec 2012 – 1.95
Mar 2013 – 2.23
Jun 2013 – 3.08
Sep 2013 – 4.02

Then in October of 2013, they bought a fingerprint detecting company and started integrating it into their own company. The problem they had was that they had so much interest and demand that they had to hire tons of people and spend a bunch of money. Here’s a great quote from the Jan 2014 conference call talking about the Dec 2013 report (after the acquisition).

Richard Bergman - President and CEO
“Well, Rob, as I said the top priority is for us is still growth. And as long as we see some great opportunities out there in the markets, in the businesses that we have, we’re going to continue to invest ahead of that curve. So both on the touch controller side as well as the fingerprint side, we see robust opportunities. So we’re investing in both of those businesses.

I will say in the fingerprint side, we’re having a tough time dealing with all the opportunities, so we’re trying to add as many people as quickly as we can over the next couple of quarters , but at the same time, we never compromise. We want the best people in the industry.

I think one of the things that gets a kind of little bit ignored about Synaptics is what we’ve done in terms of investment and R&D. We have kept that at nice, healthy percentages, so we can have that growth. But we do a really good job managing the SG&A side of things as well. It’s about 10% of our revenue. And in that way we kind of manage the overall OpEx, so more of that translates to the bottomline”.

With all this new expense, the growth in earnings tapered off and stalled out:
Dec 2013 – 4.35
Mar 2014 – 4.19
Jun 2014 – 4.26
Sep 2014 – 3.99

In June they acquired Renesas SP Drivers, the industry leader in small and medium-sized display driver ICs for smartphones and tablets. They felt this would entirely remake the company and allow them to produce platform-level solutions instead of just providing individual products. The formal closure of the acquisition was in the Dec quarter.They paid cash for Renesas and have been buying back shares of SYNA so they are investor friendly.

They predicted that their adj net income per diluted share for the December quarter is anticipated to be in the range of $1.00 and $1.30 per share. (That will be up from 86 cents). Estimating just above the middle of the range at $1.20, trailing earnings would rise to $4.33. At yesterday’s close of $60.70, they’d have a PE of 14. That sounds good to me.

Here’s the picture in a nut-shell:

Those of you who have attended my presentations in the past, remember that my focus has always been growth, growth and growth….With this steep ramp of our fingerprint ID solutions, we have incurred some initial start-up costs and expect to have opportunities in the supply chain to achieve some savings…

I initially bought at $40, added some at $60, sold back part of that when the price came back down to $60 (it’s been as high as $93). After writing up this summary, I’m thinking about buying some back. I have about a 4% position, much larger than the small positions I’ve been talking about but recently, but smaller than my mid-size CRTO, XPO, etc positions which are 6% to 7% positions.

Saul

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Saul,

Thanks for the great write up. Given the CEOs statements, I am anticipating that the next two quarters can be shaky though. I have 2.3% position in it and holding.

Anshuman

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Hi Saul,

The fingerprint sensor stuff doesn’t impress me. Apple essentially bought a small startup and used their solution as a base to rollout touch ID. I would speculate there are many others developing fingerprint tech for smartphones. The basic ideas & research has been around for years.

When I looked at it last, I couldn’t really figure out what they do that is a differentor for them. I see little to no systainable competitive advantages. If they sell solutions to smartphone companies, then the big boys will squeeze them. See what Apple’s done to GT and Invensense.

Looks like they can ride the wave of some acquired property for a while and then they need to find another wave to ride.

Anirban.

2 Likes

From a Seeking Alpha News Feed
Saul

Synaptics closes up 3.1% after Samsung fingerprint sensor report • 5:27 PM

SamMobile (pretty accurate with Samsung scoops) reports Samsung is “ditching the swipe-based fingerprint sensor” found on the Galaxy S5 and Note 4 (among other products) in favor of a touch-based sensor similar to Apple’s Touch ID.

Like Samsung’s existing sensors, the touch area sensors will be built into home buttons. “You wouldn’t have to swipe your finger on the sensor anymore; instead, you would just place your fingertip on the home key – at any angle – then lift it off, and that’s it.”

Synaptics (NASDAQ:SYNA) supplies the fingerprint sensors for S5/Note 4; the company could get an ASP boost from Samsung’s adoption of a touch area sensor. During its FQ1 CC (transcript), Synaptics mentioned it expected to start initial production of a touch area sensor in FQ2 (calendar Q4), and “to see phones in the market in early calendar 2015,” customer launch timings permitting.

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From Schwab News Feed. It looks like very good news:

Needham & Company reiterated a Strong Buy and $110 price target on Synaptics (NASDAQ: SYNA) saying checks indicate the company landed the area sensor for the upcoming Samsung Galaxy S6.

Analyst Rajvindra Gill commented, "DConsistent with our checks at CES in early January, reports from website SamMobile indicated that Samsung is including a touch area sensor for its upcoming Galaxy S6. We believe SYNA will remain the sole fingerprint supplier to Samsung and the dollar content per unit should increase significantly with area sensors: $3-4 vs $1.25-1.50. Longer-term, we believe TDDI (touch display driver integration) represents a paradigm shift in smartphone displays, one in which SYNA will ultimately dominate, in our view. Earnings of $6.50-7.00 remain very achievable in FY16 in our view, and hence we believe shares are considerably undervalued. "

4 Likes

From Schwab New Feed today:

BMO Capital initiated coverage on Synaptics (NASDAQ: SYNA) with an Outperform rating and a price target of $85.00.

From Seeking Alpha News Feed today

Stifel’s top tech picks for 2015 • 8:58 AM
…Synaptics (NASDAQ:SYNA): PT of $87 v. current $63.78. Implied upside: 36%…