SYNA article on SA

Synaptics: Appeal Increasing After Latest Sell-Off $SYNA

Here are my takeaways from the article:

  • This quarter was disappointing due to margin decrease (more weight of PC business than mobile) and approximately 12% dilution of common stock
  • Based on available data (little official guidance) Renesas can add around $175M to annual revenue, margins unknown
  • Market may have been expecting more commentary and optimistic guidance regarding Renesas, which is likely a supplier to iPhone 6 display makers

Valuation looks compelling against 20+% long term revenue growth and the vertical consolidation strategy they seem to be pursuing, given the Validity and Renesas acquisitions. Like other smartphone component makers, consistent design wins will be critical, alongside an ability to differentiate and keep margins up. Perhaps by acquiring Renesas, Synaptics will be able to start a dialog with Apple about utilizing some of its other offerings.

Renesas can add around $175M to annual revenue, margins unknown

It seemed pretty clear to me that Renesas is a low-margin, low-growth business. Management repeatedly mentioned revenue and addressable market opportunities of the combined businesses and did not once say anything about profits or earnings outside of its guidance for the next quarter. To me that speaks volumes.

I think the reality is that Synaptics is investing heavily – and probably will be for the next year or so – into its vertically-integrated screen offerings. I think that’s the right long-term move, and should position them well, but will probably mean depressed earnings for the next year or so. I think that’s the reason for the big sell-off: the market simply has no patience for heavy investment if it means sacrificing short-term profits.

Perhaps by acquiring Renesas, Synaptics will be able to start a dialog with Apple about utilizing some of its other offerings.

I have to think that Synaptics was already pitching things to Apple if it made sense for them to do so. I don’t think acquiring the Apple relationship adds much long-term value. Rick Bergman actually addressed this on the conference call:

Q. Okay. Thanks, Rick, and just maybe one final follow-up on RSP [Renesas SP]. I think you mentioned in fiscal 2015 modest revenue growth. But can you give a sense of the long-term growth outlook for RSP?

And if I understand that there’s one big customer in your revenue mix here and so when you did due-diligence prior to completing acquisition. How comfortable are you – you can sustain this business with this large customer over the next couple years?

A. Yeah, as you can imagine and actually future out there, we can’t comment about any specific large customers whether it’s our touch business or TDDI business. Again generically, any major OEM we’re going to have to go in there and earn the socket every time and they are going to look at multiple other solutions, different solutions type, in some cases they’ll look at vertical integration because they have that capability.

So its – we go in there with the battle in mind and when we do our due-diligence, we weren’t really focused on any particular customer – we are more focused on the technology, and the position in the marketplace and the ability as I mentioned in my prepared remarks to do something that we call smart display.

This isn’t about slapping two chips together and going out there with the TDDI solution. It’s about really building an entire platform solution over time that we will continue to add more value , more features, more performance, and really build that going forward and that’s where a lot of the value came to and that’s where – I mean, RSP was the clear target from us the very beginning. They had absolutely the best engineering talent when it comes to displays in the industry.

So this acquisition was clearly about the technology and engineering talent, and not at all about Apple (which is a good thing, IMHO).




Thanks for shedding some more light on this.