Synaptics is on an IoT roll (SYNA)
Synaptics (NASDAQ:SYNA) is on a roll, with very solid revenue growth in its IoT segment and huge margin expansion to boot. It is the result of two simple forces:
- A change of strategy towards high-end premium products
- A take-off in the IoT
Basically, what’s happening is that the combined forces of Moore’s Law and advances in AI are producing more and more IoT (Q2CC) solutions:
in the long run, in terms of growth, it’s these new categories that come into play and create new revenue streams that we can tap into.
These trends have spawned a host of products that didn’t even exist a few years ago:
The company has increasingly turned to premium segments of its markets, based on technological prowess (Q2CC):
we play in mainstream automotive where there’s quite a bit of competition, we feel like we have a level of differentiation, a level of integration and a level of performance enhancement that gives us the ability to sell at higher ASPs than our competitors. We are aiming for things that do AI at the edge, video transport, audio decoding-encoding with high end features, wireless connectivity, Wi-Fi 6 and 6E which is the cutting edge Wi-Fi standard today with lower power than any competing solutions
What types of high-end products? Well, things like their Katana low-power artificial intelligence processor, which is the foundation of their smart audio and video solutions, a mobile PC docking system that opens up a whole new market segment, their advanced OLED solutions and TDDI (touch and screen integration), their state-of-the-art WiFi 6 and WiFi 6 SE solutions, their ULE (ultra low energy) sensors, etc.
IoT (including automotive)
IoT is the segment that brings growth and is now by far their largest segment:
IoT revenue growth was an astounding 60% in Q2 and Q3 will be even better at nearly 100%, according to management guidelines. However, Q2 included almost a full month of their acquisition of DSP and Q3 will of course include it for the whole quarter, so the organic growth is lower.
Following the closing of the DSP acquisition, management raised its revenue guidance for the second quarter, but only by $10 million, so it looks like DSP’s revenue is in the range of $30 million. dollars per quarter maximum.
Still, the company’s annual IoT run rate exceeded $1 billion. The growth here comes from automotive, virtual reality and wireless. Automotive revenues have already hit a run rate of $100 million, and that’s no surprise (Q2CC):
Our Automotive TDDI products are now designed in more than 50 car models across more than 20 OEMs and we are seeing production ramps at six OEMs in Europe and Asia.
The market is moving from discrete to TDDI (touch and screen integration) and Synaptics happens to have a much larger share in the latter (they were pretty early on with that). Almost all new models contain TDDI technology.
For AR they have for example the AudioSmart Edge AI headset platform and (Q2CC):
Our display technology is the highest performing custom design for these headsets and is the first and only solution on the market that supports full resolution greater than 4K with 120 hertz refresh rates.
Even on current designs, the company already has a long trail of future revenue, as most of those gains have yet to start ramping up production.
In wireless, there are products like combo chips.
Then there is their partnership with Edge Impulse, a platform for developing edge machine learning solutions. Here is author SA A Kashyap of his excellent feature article:
These edge devices are used to provide connectivity between the LAN and the WAN. The partnership aims to integrate Synaptics’ Katana Ultra-Low-Power platform with Edge Impulse. The combination of the two will provide a complete solution allowing customers to build, train and deploy custom models of AI solutions for a wide range of applications. The Edge Impulse platform also provides the flexibility to build production-ready models at a much faster rate coupled with greater efficiency. It also has a model testing, training and optimization module for developers to provide seamless solutions. Edge Impulse’s innovative cloud-based platform allows the developer to deploy models in as little as five minutes without writing a single line of code.
Here, revenue was actually down 10% (and 7% q/q) but the business is gaining ground, according to management.
Similar to the PC segment, revenue was down quite significantly (26% YoY) in the quarter, but only 3% less than the prior quarter.
The Chinese mobile market is weaker than expected as many customers here have integrated their touch technology. So their position is strong and OLED display driver should be good and they will increase content per phone to high end. Their high-end OLED touch controllers are gaining traction.
The company completed the acquisition of DSP Group for $549 million in cash on December 2 and identified cost synergies of $30 million, which are on track. IoAT (Internet of Audio Things) DSP solutions are complementary.
DSP is expected to benefit from Synaptics’ much larger sales force and customer base to drive sales, so there are likely to be revenue synergies as well.
Some additional info:
- CapEx $8.5m
- Non-GAAP interest expense of $8 million in the March quarter.
- Inventories were at $133 million and accounted for a sizable portion of second-quarter growth, but that should be good for third-quarter results.
- Interest expense was $8 million
- The company consolidates its founding partners.
- The backlog increased during the quarter (compared to the previous quarter).
There are considerable supply chain issues (Q2CC):
In our case, the constraints are more prevalent in the newer, faster growing areas of our portfolio where new design gains significantly outweigh any additional supply we get.
But the company can pass the cost on to the pricing, which is therefore margin-neutral. The issues will remain in 2022, however. One should also be aware of the huge discrepancy between GAAP and non-GAAP figures, mainly due to equity compensation and acquisition cost:
These are GAAP margins, non-GAAP margins are significantly higher (non-GAAP gross margin was 59.5% in Q2). Non-GAAP gross margins at 59.5% and non-GAAP operating margin at 37% both reached record highs.
Within a few years, the gross margin increased from 40% to 60%, which a Q2CC analyst describes as follows:
one of the biggest leaps in the history of the semi-trailer industry and in terms of performance gains
Indeed, although the other side of this is that it will be difficult to achieve any further significant margin expansion.
Cash flow, already substantial, doubled in one year, quite remarkable but not surprising given the evolution of the margin:
The company increased its cash by $227 million in the quarter to $574 million, but that was partly cash from the DSP acquisition. The company has long-term debt of $983.5 million.
There was some dilution last year, but given the amount of cash flow the business generates, we expect that won’t happen again. The company may well start buying back shares, although the stock compensation is considerable.
It’s no surprise that valuation metrics have steadily increased, given the company’s performance:
These are, however, GAAP-based figures. Analysts on average see non-GAAP EPS for fiscal year 2022 (ending June) of $13.04 rising only slightly to $14.03 next year, but that’s a pretty valuation. reasonable.
- The company has a tremendous opportunity in the IoT market as new digitally enhanced products that are smarter and more connected than ever proliferate and the company is seizing the opportunity with both hands.
- The company is successfully executing a strategy to move into high-end market segments, producing seldom-seen margin expansion, aided by the shift to IoT.
- Supply chain challenges are here to stay in 2022, but the company can pass on most cost increases.
- Stocks are actually cheap on an earnings basis and with the cash windfall, the company can deleverage or coax shareholders with buyouts or even a dividend, or continue to acquire complementary companies.
- We don’t see much room for further margin expansion, however, but IoT growth will continue at a blistering pace and other segments may recover from a tough year.