Synaptics (SYNA) announced September quarter (first fiscal 2018 quarter) earnings after the market close on November 7. Earnings of $1.03 a share were 7 cents a share above the Wall Street consensus. Revenue climbed 8.1% year over year to $417 million against the $399 million Wall Street projection. The company issued guidance for the December quarter of $410 million to $450 million in revenue vs the Wall Street projection of $430 million.
The stock was ahead a strong 8% in after hours trading on November 7 on the news. Shares closed at $40.27 today, November 10, up from $36.22% at the close on November 7 before the earnings news.
Why such a strong positive reaction to a relatively minor earnings beat and roughly inline guidance for the next quarter?
First, the company’s mobile chip business looks to have stabilized after two very rough quarters. Revenue from mobile products did continue to decline but fell just 7% year over year. Synaptics looks like it has replaced much of the revenue it lost from Apple (AAPL) for chips to drive iPhone display with revenue from fingerprint sensors in Samsung’s Galaxy Note 8. The company isn’t out of the woods in this area certainly–but if Synaptics can execute on its new optical finger print sensor and on chips to drive OLED displays in new smartphones, then the days of tumbling margins in this part of Synaptics business (70% of revenue) will be replaced with growth in fiscal 2018. This remains a challenged business, however, with margins under pressure across the sector with average selling prices still in decline. The company remains the dominant supplier of secure fingerprint readers for PCs and they are moving toward optical (from capacitive) finger print readers with half a dozen companies sampling systems and one top-tier Chinese customer likely to go ahead with mass production by the end of calendar 2017. But if this was all that Synaptics had in its product lineup, I would have suggested taking losses some months ago. (Synaptics is also scoring significant design wins in the automotive market at five major European OEMs for drivers of in-car displays, touch controllers, and fingerprint readers. In China a half million cars on the road now use Synaptic solutions. Obviously, though the competition here is intense.)
But, second, after acquisitions of Internet of Things units from Conexant Systems and Marvell Technology, Synaptics looks to have added a new engine of growth. Validating the company’s move in this direction, Synaptics has placed chips in Amazon Echo and Google Home products. In the December quarter Synaptics expects revenue from Internet of Things products to climb to 24% of total revenue from 14% in the most recent quarter. (These two acquisitions add to a transition at the company begun with the acquisition of Validity Sensors in 2013 and Renesas in 2014. Together the two deals expanded Synaptics products in human/digital interface systems.) The company had projected Internet of things revenue at $200 million to $250 million for fiscal 2018 but the current run-rate is more like $320 million. For the Internet of Things market Synaptics has solutions that separate speech from background noise in products like Amazon’s Alexa and the company is coming off design wins for headsets and earbuds at Plantonics and Sennheiser. A new VideoSmart solution is targeted at video and audio processing for virtual and augmented reality headsets (with design wins at Google and Harman Kardon.)
Synaptics shares have way to go before they recover their losses in my Jubak Picks portfolio. The shares are down 53% as of the close on November 10 since I added them to this portfolio on November 10, 2015.
But I do see light at the end of the tunnel for the very patient. I’m cutting my target price from the obviously unrealistic artifact of $115 (it’s an artifact of buying at $86.41) and setting a new one year target of $64 a share. Synaptics closed at $40.27 today, November 10.