Syna hits it out of the ballpark

Record December quarter revenue of $464 million up more than double year-over-year- Second consecutive calendar year of over 50% revenue growth

http://www.marketwatch.com/story/synaptics-reports-results-f…

Andy

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Andy,

It’s showing a nice 8% bump in AH trading. Congratulations to all holders :slight_smile:

Dang, I should have bought this one.

I still want to get into XPO but never manage to complete my research.

Anirban

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Yea anirban they had me worried with Apple doing so well and Samsung slipping. I cant wait to read the conference call and 10Q. It looks like the acquisition, while dragging down net income, was a great move on their part. Non-Gaap eps was an amazing $1.46 this quarter up from $1.46 and they gave great guidance going forward.

Andy

Non- Gaap $1.46 up from $.86

Andy

Anirban,

I still want to get into XPO but never manage to complete my research.

I admire your discipline, analysis, and patience.

KLVanLiew

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By the way, Synaptics is up $10, or about 15%, in pre-market.

For those of you not familiar with Synaptics, it was my “Year End #15”. You can follow that thread here:

http://discussion.fool.com/year-end-15-syna-a-temporary-stall-31…

Saul

Saul, I did get in this month in SYNA. With sincere thanks, Chandra

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I notice that in non-GAAP EPS, the company is backing out huge expenses related to the acquisition, but seems to be counting the profit from that acquisition. Adding back those acquisition expenses drops non-GAAP EPS from $1.46 to $0.30 (compared to $0.67 last year if similarly normalized). I understand that the acquisition is a “one-time” thing, but it still feels as if management is acting as though those extra profits came for free, when they didn’t.

I’m not able to find where SYNA has ever accounted for the $475 million acquisition expense in their non-GAAP figures: has anyone else seen it? $300 million of that was funded with debt: are they even counting the interest they’re paying in the non-GAAP figures? It’s hard to know what all is lumped into that “Acquisition and integration related costs” category they’re backing out.

Neil
Long SYNA

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Like the GAAP, non-GAAP discussion, I suspect that there is a lot of this which is just ordinary accounting … but there are a lot of people who don’t understand ordinary accounting (including some accountants!).

It seems to me that buying a company is a lot like buying a machine. To buy the machine, one has to come up with the money one way or the other, cash or loans or something. With buying a company, some or all of the purchase price could be stock, which doesn’t actually cost one anything to issue, but does dilute everyone’s share. There are GAAP rules about how to “best” represent this expenditure, including the sometimes mysterious “good will” which corresponds to basically overpaying for the apparent value of the thing purchased. Obviously, one has to make the cash flow part work, but the rules for how the expenditure are actually booked are intended to present a “fair” view of the cost of the acquisition on the company. E.g., buy a truck that one expects to use for 5 years and it isn’t really the best representation to put all of that cost in the year of purchase. If a loan is involved, then the cost of servicing the loan and the interest is spread over the life of the loan, which is perhaps more obvious.

On the other hand, buying a company, the revenues from that acquisition are real and immediate … more to the point, perhaps, one presumably expects them to continue and even grow. So, there is no reason to spread that out in the same way that one spreads out the cost.

Admittedly, there are some funny bits involved in all of that. E.g., the truck you depreciated over 5 years may last 10 or 15. Or, you might use one of the accelerated depreciation methods you may have depreciated a large part of the cost of the acquisition after only a few years, but if one then turns around and sells for more than the depreciated value, one does have to recognize the revenue, so there is no cheating here.

Some of the changes about what needs to go in GAAP are more arguable than this, although it is not difficult to understand how they were well intentioned and the lack of these newer rules also led to other kinds of distortion in the past. The bottom line is … one really needs to dig into the financials to be sure that one is dealing with the right number(s) … a pain, but in the nature of reality in accounting.

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Saul, I did get in this month in SYNA. With sincere thanks, Chandra

Hi Chandra, Glad you got in before the big run-up. Congrats.
Saul

Neil,
I have been thinking about your question but I decided not to delve into it. Why? Because I have limited time and the question is ton far above my head. Its simply something that I will have to say “I do not know”. But I also do not think that the question is something that matters to my investment. let me explain why.

Remember when Chris and Saul where saying that this stock was cheap when the P/E was around 20? Everyone was excited and most of us bought in, now the p/e is around 80. What has changed? Well they bought RSP and Validity sensors. Both of these have caused net income and cash flow to decrease. But these should all increase as long as they do not keep acquiring more companies.

I think a better question is where these acquisitions a great use of their money and did they help the company grow. On the conference call the CEO and CFO both said that they expect 2015 revenues to increase by more than 75% over the prior year in part because of these acquisitions. Also sequential revenue was up 39 % and YOY was up 56%. So I do not think digging deeper will provide me with any better information on this investment. I think both of these acquisitions were great for the company and should help Synaptics tremendously going forward.

Andy

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Remember when Chris and Saul where saying that SYNA was cheap when the P/E was around 20? Everyone was excited and most of us bought in, now the p/e is around 80. What has changed? Well they bought RSP and Validity sensors. Both of these have caused net income and cash flow to decrease. But these should all increase as long as they do not keep acquiring more companies.

Whoa, Andy, what are you looking at. Their trailing adjusted earnings are $4.59 (63+146+104+146=459). Their price, even after the post-earnings 12.5% run-up on Friday, is $76.8, and 76.8 divided by 4.59, gives a PE of 16.7. That’s why on a big down day, they were up so much. And after next quarter is reported, they’ll have trailing earnings of about $5.55, which gives a PE of 13.8. There is thus probably a lot more upside, and I added a little to my position yesterday, even at $75.

Saul

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Saul,
I am looking at Gaap diluted earnings which are at .97 with the last quarter. ( Q3 2014 -1.12, Q4 2014 .89, Q1 2015 .68, Q2 2015 .52) This is what we were talking about Saul in the other thread and I am still mulling over. I hope you didn’t think that was a knock on you or Chris because that was not my intention. I think when you two talked about it the Gaap diluted earnings had the P/E at around 16. I was just showing that changes in the company which bring down earnings are not all bad.

If Syna turns into a serial acquirer I am not sure if I should back out their acquisition charges. All of this is probably over my head but if I use a consistent method it should all come out in the wash. One thing I found out from you Saul is that by charting my companies I can get a more accurate picture of my companies. I didn’t realize how visuals really can show you better how a company is doing then just numbers.

Andy

One thing I found out from you Saul is that by charting my companies I can get a more accurate picture of my companies. I didn’t realize how visuals really can show you better how a company is doing then just numbers.

Hi again Andy,
Yes, charting really makes a difference, puts things in perspective and gives such an incredibly clearer picture of what’s going on. I’m glad it helped.

Saul

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Hi Andy,

On the conference call the CEO and CFO both said that they expect 2015 revenues to increase by more than 75% over the prior year in part because of these acquisitions. Also sequential revenue was up 39 % and YOY was up 56%. So I do not think digging deeper will provide me with any better information on this investment. I think both of these acquisitions were great for the company and should help Synaptics tremendously going forward.

Here are my issues. First, revenue without profit is meaningless. Expanding revenue is easy – in this case, they acquired it. But a company can also give away their product for free or even at a loss to expand revenue. So margins and profit are both very important to understand. You don’t see management say much about that, though. They focus on revenue.

Second, none of us would ever just report our profit on an investment without also considering our cost. Imagine if I told you “I used to have a stock that paid a $1/share dividend, but now I just bought one that pays $2/share! I doubled my profit!” Sure, but what if I paid 4 times as much for that stock? Or what if I was managing rental property for you, and I had a choice of using your money to buy a $300,000 house that brings $2k a month or a $1 million house that brings in $3k a month. If all I ever report to you is the rental income and ignore purchase price, then buying the million dollar house makes my performance look better even though it’s a markedly worse return on your investment. That’s insane.

And if you borrowed 2/3 of the money to buy your rental property, surely you would at least consider the mortgage payment you’re making each month when calculating your profit? Remember that SYNA financed $300 million of the $475 million purchase of Renesas with debt.

Right now, as far as I can tell, management is taking full credit in non-GAAP earnings for the income from its investments while completely ignoring the cost, which really gives me a cold feeling – like they’re trying to pull one over on me and hide their true performance. I just don’t think any reasonable person would account for things that way, and it makes me wonder why management is doing it (again, assuming I’m not just missing it)?

I’m not saying Renesas was a bad acquisition or that it won’t be very beneficial for the company going forward. But when you add back in the acquisition expenses that management backed out from non-gaap earnings, those earnings went down YoY, not up. And remember that management refused to disclose what Renesas’ margins looked like (and being an Apple supplier, I think that’s a legitimate question). To be fair, that’s not the reason for the acquisition – it’s for the technology and engineering talent, to push forward SYNA’s integrated display offerings. But I think there’s an ever-present risk with SYNA that they’ll be forever plowing whatever profits they make from the current generation of products into trying to stay ahead of the pack with the next generation in an endless race, and that we, as shareholders, won’t ever actually see much (or any) of those profits. Management’s attempts to obscure its earnings (as I see it) really highlights this risk to my mind. Plus, who wants a management that is trying to mislead the owners of the company to make themselves look better?

So that’s where I’m coming from, and that’s why it’s important to me.

Neil
Long SYNA

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Right now, as far as I can tell, management is taking full credit in non-GAAP earnings for the income from its investments while completely ignoring the cost, which really gives me a cold feeling – like they’re trying to pull one over on me and hide their true performance.

If they bought capital equipment and understandably recognized the revenue from that capital equipment in the initial year, would you expect them to recognize the full expense of that equipment in the first year?

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Hi Neil,
Thanks for the response.

Here are my issues. First, revenue without profit is meaningless. Expanding revenue is easy – in this case, they acquired it. But a company can also give away their product for free or even at a loss to expand revenue. So margins and profit are both very important to understand. You don’t see management say much about that, though. They focus on revenue.

How does a company give away a product for free and then claim its revenue? Unless your talking about something like Aeye is doing. I dont follow Aeye but on these boards I believe they were selling Intellectual property not a product. Your right Neil margins and profits are important, what I was saying is sometimes you can delve so deep that the return is negligible. There are easier ways to see if the investment was worth it, though it might not be as precise. Looking at the Gaap earnings and tracking the net income. Looking at the Cash flow statement and track Free Cash Flow. Look at the Balance sheet and track the debt. Its all there and management isn’t hiding anything, but with Non-Gaap, why wouldn’t they show the best of their story?

Right now, as far as I can tell, management is taking full credit in non-GAAP earnings for the income from its investments while completely ignoring the cost, which really gives me a cold feeling – like they’re trying to pull one over on me and hide their true performance. I just don’t think any reasonable person would account for things that way, and it makes me wonder why management is doing it (again, assuming I’m not just missing it)?

Neil, as was said on this board Non-Gaap comes with no rules. Management can do as they choose and they are not audited. This doesn’t bother me because I haven’t been following non-Gaap. I have been following the Gaap earnings and they have taken out the charge for the acquisitions. Both in this quarter and in Q3 of 2014. I see the Cash Flow dropped in Q3 also, but this quarters 10q hasn’t come out so I can’t see what the FCF has done. I have the P/E at 79.19 at this time. I am comfortable with that because as the company develops that will come down. I can not tell you whether Syna spent to much on the companies because how are you going to value it? I don’t think you will be precise enough to say that the companies were worth X amount of money. If you can my hat is off to you because that would be a great asset to have. What I can tell you though is that both of these acquisitions were needed by Syna to keep their company in the lead. These were great acquisitions. The fingerprint technology going forward will probably be in every smart phone for mobile payments. They are the only ones besides Apple, that has this technology. They are even moving into the chinese smart phone companies with their technology. As far as Rsp goes here are a few things that I have in my notes. The transaction gives Renesas SP Drivers an enterprise value of $515 million, or about 0.8 times revenue, compared with the 1.82 times the median for 37 chip company acquisitions over the past three years, according to figures in the statement and data compiled by Bloomberg.

http://www.bloomberg.com/news/articles/2014-06-10/synaptics-…

If you read through that it states that Apple was looking to pay 1 billion for the company also the article says they think that RSP’s margins might have been slipping.

But when you add back in the acquisition expenses that management backed out from non-gaap earnings, those earnings went down YoY, not up.

I realize this because I have been follow Gaap earnings. But I am looking at the company and what these companies will help them do. I can’t do what Saul does, jumping in and out of companies. I am still working and can’t watch my companies close enough. So I will put up with margin and earnings compression if I think the company can come out on the other side stronger. I believe they will. But, Like one of your posts earlier, This company does worry me because what if they have to keep buying companies to keep ahead of the competition? What if those acquisitions go badly and the company can not integrate them? What if the margins and earnings keep depressed because the competition is so tough? I look at the investments that I make and try to see what might happen, I worry about them, but I try to look past them and see where the company is going.

But I think there’s an ever-present risk with SYNA that they’ll be forever plowing whatever profits they make from the current generation of products into trying to stay ahead of the pack with the next generation in an endless race, and that we, as shareholders, won’t ever actually see much (or any) of those profits.

I completely agree, this is a real risk and something to watch.

Management’s attempts to obscure its earnings (as I see it) really highlights this risk to my mind. Plus, who wants a management that is trying to mislead the owners of the company to make themselves look better?

I think this is a little harsh Neil. As I said before, everything is in their Audited financials. I don’t think they are trying to hide anything.

Neil,
I am not trying to discourage you or stop you from digging deeper. You are a great asset on this board and I really appreciate all of your excellent contributions. I use to be obsessed with stock compensation. I would try to find exactly what the stock based compensation was and it kept me spinning my wheels. I still thinks its important, but when TomE told me to just look on the Cash Flow statement and follow that number it became easier to follow. Sometimes digging deeper can be very satisfying but I realized I needed to spend more time covering more companies than trying to dig out everything about a company. I just do the best I can. As I grow, maybe I will change my mind. I keep learning but I realize that I will never be as precise as people that have a formal education in finances. But I think I can be as good, if not better, in predicting where a company will be 3 years from now. With Syna that time frame is shorter because the technology changes so fast. I can only see out a year.

Andy
I feel completely at ease with management

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If they bought capital equipment and understandably recognized the revenue from that capital equipment in the initial year, would you expect them to recognize the full expense of that equipment in the first year?

That’s one way to do it. But no, I’d generally expect them to realize the depreciation or amortization that makes sense for that year. If it has a useful life of 10 years, then I’d expect to see 1/10th the cost each year (plus any interest expense, installation expense, etc). The equipment wasn’t free. That extra revenue and income came at a cost.

Neil

Great post, Andy.

How does a company give away a product for free and then claim its revenue?

Sorry, I meant at cost, not free.

Neil

Well, then, if they do it for capital equipment, why would you expect them to recognize all acquisition costs in the first year?

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