Synaptics Incorporated

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Synaptics Incorporated (SYNA) is a global company that develops and supplies human interface hardware and software solutions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Synaptics is a leading developer of human interface solutions that enable interaction between humans and devices. Their products include display drivers, touch controllers, fingerprint sensors, and wireless connectivity chips which are sold to OEMs (Original Equipment Manufacturers) that are in turn incorporated into consumer products like mobile phones, computers, tablets, automotive systems and smart home products.

  • Revenue Distribution: SYNA’s revenue streams can be broadly categorized into three groups: PC, Mobile, and IoT. The mobile business was their largest source of revenue in FY2022, with a 44.3% share. Revenue in both PC and IoT was very similar, with 29.5% and 26.2%, respectively. However, according to their latest quarterly report for 2023 (Q3), the company expects “IoT” revenue to become their dominant segment, as the industry undergoes shifts.

    • PC Applications: Synaptics’ PC product line includes fingerprint sensors, touchpads, and display technology for notebook computers, all-in-one computers, and other PC peripherals.
    • Mobile Applications: This segment caters to the smartphone, tablet, and other mobile device market. It consists of touch controllers and display drivers for phones, tablets, and other handheld devices.
    • IoT Applications: Synaptics’ product offering in the IoT market ranges broadly from smart audio solutions to connected devices for home automation and automotive systems.
  • Industry Trends:
    • The human-machine interface market is constantly evolving, with trends like increased reliance on touch, voice, and gesture control mechanisms.
    • The demand for more sophisticated display driver technology has grown because of the growth in the OLED and mini-LED markets.
    • The IoT (Internet of Things) space, encompassing the automotive, consumer, and industrial markets, represents a growing opportunity as more of these items become interconnected and “smart”.
  • Margins: Synaptics boasts a generally high gross margin for its business. The gross margin has hovered between 54-57% over the last 5 quarters, with their Q3 2023 margin being 55.8%. The operating margin is smaller as the company incurs R&D, marketing, and administrative expenses. For example, Q3 2023 operating margin was approximately 16.9%, which implies most of the money goes to the expenses.
  • Competitive Landscape: The market Synaptics operates in is characterized by intense competition with other semiconductor companies also developing human interface technologies. They compete with companies including Realtek, Texas Instruments, Analog Devices, Cirrus Logic, and Novatek. Their main competitive strategies focus on innovation, price and cost, quality, and customer relationships.
    • Differentiation: Synaptics’ expertise lies in developing integrated human interface solutions, that is, providing components that integrate several functions into a single chip. For example, their multi-protocol wireless chip combines Wi-Fi, Bluetooth, and GPS. The strength of their customer support, along with their relationships with suppliers, gives them an advantage.
  • Key Differentiators: In addition to the expertise described above, the firm aims for more intelligent interfaces through the use of artificial intelligence. The company aims to integrate AI into its devices and offerings with a focus on providing “human-like” experiences for users.
  • Latest information: in the latest earnings call, management spoke about the decrease in demand for PCs and mobile phones in the short-term due to the economy. However, they expect to outperform the market in the long term, as they have been investing in the growing IoT market. They expect the revenue from their IoT devices to become their main revenue segment in the next two to three years. They also mentioned they are aggressively controlling operating expenses to improve profit margins in this difficult environment.
    • Management did note that they are taking a more pragmatic approach to acquisitions in the short-term. In the past, their acquisitions tended to be for growth or synergistic effects. However, now they are considering acquisitions with lower margins, in order to capture value at good prices.

Financials

SYNA’s financial health can be analyzed through various metrics:

  • Revenue: SYNA’s revenue has grown at a robust pace over the last decade. In FY2018 revenue was $1.7 Billion. For fiscal year 2022, the company’s revenue was $1.8 Billion. Their guidance for FY 2023 (assuming the midpoint of estimates) is $1.3 Billion.
  • Profitability: SYNA’s gross margin is quite healthy with a high gross margin, as noted previously. However, operating margins have been slightly lower at around 15-17%. The net income is a low single digit percentage of the revenue.
    • For example, SYNA reported Q3 2023 revenue at $329 million and net income was $16.7 million (5% margin).
  • Cash Flow: Historically Synaptics has produced positive free cash flow, though it can fluctuate as the company takes on acquisitions and significant projects. For example, in Q3 2023, free cash flow was $32 million.
  • Balance Sheet: SYNA maintains a decent balance sheet, with an adequate amount of cash, and manageable debt level. As of Q3 2023, the company has $457 Million in cash, $223.3 million in short term debt and $582 million in long term debt.
  • Debt: While the company does have some long term debt, it is still manageable with a debt to asset ratio of 29.1% for Q3 2023. Most of their debt is held as senior notes.
  • Recent Issues: The company has been facing difficult economic conditions, which has resulted in lower revenue. Additionally, high inflation and supply chain disruptions have posed challenges for production and margins.

Moat Rating: 3 / 5

Synaptics possesses a narrow moat, primarily built on switching costs, network effects, and intangible assets. These factors create a degree of competitive advantage, but are not necessarily strong enough to produce extended periods of excess profitability.

  • Switching Costs: The primary driver of the company’s moat is high customer switching costs. It can be costly for OEM’s to switch suppliers and would entail expensive and long recertification. As a result, these relationships can be difficult to break and provide more predictable revenue.
  • Network Effects: While not as pronounced as other networking firms, SYNA’s technologies, particularly touch and fingerprint sensor technologies, often grow more valuable with increased user adoption and scale.

  • Intangible Assets: A portion of SYNA’s moat stems from its patents, but this is not as strong as other firms as those patents are likely to be overtaken by new technology. Additionally, brand recognition matters in this industry.

  • Risks to the Moat:
    • Disruptive technology could rapidly displace SYNA’s products, causing the obsolescence of the technology.
    • Competition from other chip makers could erode the pricing power of SYNA. Additionally, new startups with superior technology could take away SYNA’s market share, making it difficult for them to continue operations.
    • Customer concentration may reduce their bargaining power and place pressure on prices.
    • Poor management or allocation of capital: can lead to the erosion of their technology and cause the company to lose their competitive advantage.
  • Resilience: Though a technology firm, the high switching costs and market positioning help the business somewhat. It has survived tough times in the past.

Understandability: 3 / 5

The core business of SYNA is relatively straightforward to grasp, though their wide technology base can make it hard for a layperson to understand. They use their expertise in human-machine interfaces to generate revenue from sales of hardware and software components to other companies.

  • The value drivers and their effect on margins, revenue, and profitability are all explained reasonably well.
  • The nuances of specific products and their use cases, however, can be complex and difficult to understand.
  • The details of their balance sheet and financials, especially related to their acquisitions, are relatively complex and not easily understood.

Balance Sheet Health: 4 / 5

Synaptics’ balance sheet is in relatively good health.

  • They have adequate cash to cover the current needs of the company.
  • Though they do have debt, the leverage is not excessive and well within the boundaries for such a business.
  • They have good liquidity.
  • The company’s financial strength can help it weather any slowdowns that it may experience in the near term.