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Morningstar | Synaptics Reports Mixed Result Amid Ongoing Uncertainty; Maintaining $55 FVE

Synaptics has had a volatile few months after announcing the departure of CEO Rick Bergman in March and the second-quarter results continued in that vein as sales missed the low end of guidance. Macro conditions have not been helpful but despite a worse than expected outlook for the fiscal fourth quarter, we believe there are some signs of stabilization in the market (though we await signs of stability in the C-suite). Results pointed to soft near-term mobile demand but commentary suggested some glimmers of normalization in growth markets like Internet of Things and ongoing design activity in OLED smartphones. Management reiterated its intent to adjust strategy to address high margin opportunities and we expect them to provide a more detailed outlook on the long-term goals and initiatives during the end of fiscal year call next quarter. Shares remain in 4-star range of our unchanged $55 fair value estimate though we reiterate our no-moat and very high uncertainty ratings for Synaptics.

Revenue in the third quarter was $334 million declining nearly 22% sequentially and 15% on a year-over-year basis. Mobile and Internet of Things sales were hit extremely hard, declining 16% and 29% respectively versus the year-ago quarter, with uncertainty in China blamed for the soft demand. Management’s previous commentary had presaged weak demand for the firm’s Internet of Things products but decline exceeded guidance. We believe the firm’s human interface solutions, including far field voice solutions for smart home products, is solid and expect growth to return strongly in the upcoming quarter and continue throughout the calendar year. The PC market was a bright spot growing nearly 4% sequentially and 10% year over year. Synaptics has been gaining market share and fingerprint products remains stable area of demand in a mature market. The other area of positivity was the firm’s adjusted gross margins which expanded 60 basis points sequentially to 39.5%, despite the headwinds.

Management expect revenue in the upcoming quarter to continue to decline with total sales expected of $310 million at the midpoint. This implies a decline of 7% sequentially and 20% year over year. By segment, the outlook implies some recovery for the Internet of Things segment, which is expected to bounce back with double-digit sequential growth (though this would still represent high teens declines on a year-over-year basis) and PC sales roughly flat sequentially. Mobile products are anticipated to continue the recent weakness and decline in the high teens sequentially. That said, management expect mobile inventory issues at a key customer (which we suspect is Apple), which have contributed to the recent mobile headwinds, to have worked itself out by the end of the upcoming quarter. Adjusted gross margins are expected to decline 150 basis points on a sequential basis due to an unfavorable mix within the mobile market.