Synaptics Incorporated — Q1 FY2018 Form 10-Q Summary
Business Context and Reporting Period
Synaptics develops semiconductor solutions for touch, display, fingerprint authentication, voice, speech, and video applications used in mobile, PC, and Internet of Things devices. The filing covers the 14-week quarter ended September 30, 2017, compared with a 13-week quarter ended September 24, 2016. Results include Conexant from July 25, 2017 and the acquired Marvell multimedia business from September 8, 2017.
Key Financial Metrics
| Metric | Q1 FY2018 | Prior comparable period | Change |
|---|---|---|---|
| Net revenue | $417.4 million | $386.2 million | Up 8.1% |
| Gross profit | $114.4 million | $123.4 million | Down $9.0 million |
| Gross margin | 27.4% | 32.0% | Down 460 basis points |
| Operating income/(loss) | $(16.9) million | $5.6 million | Declined $22.5 million |
| Net income/(loss) | $(26.5) million | $3.7 million | Declined $30.2 million |
| Diluted EPS | $(0.79) | $0.10 | Declined $0.89 |
| Cash flow from operations | $39.8 million | Improved |
Revenue by product application was $292.9 million from mobile, $65.3 million from PC, and $59.2 million from IoT. Mobile revenue represented 70.2% of total revenue, PC 15.6%, and IoT 14.2%.
Cash and cash equivalents were $199.7 million at September 30, 2017, compared with $367.8 million at June 30, 2017. Current assets were $649.4 million and current liabilities were $276.5 million. Inventories increased to $179.6 million from $131.4 million, primarily reflecting acquired inventory.
The company had $438.1 million of convertible notes, net, and no outstanding balance under its revolving credit facility. The notes have a 0.50% coupon and mature in 2022. The company also had $200 million of revolving capacity under its amended credit facility, subject to covenants, and was in compliance with those covenants at quarter-end.
Material Changes Versus the Prior Period
- Revenue increased $31.2 million, driven by IoT and PC growth, partially offset by lower mobile revenue.
- Mobile revenue declined 6.7%, reflecting a 9.8% decrease in units sold, partly offset by a 3.5% increase in average selling price.
- PC revenue increased 18.9%, reflecting 13.5% unit growth and a 4.8% increase in average selling price.
- IoT revenue increased 242.2%, primarily due to the Conexant and Marvell acquisitions.
- Gross margin declined primarily because of $15.7 million of inventory fair-value adjustments related to the acquisitions and a $3.8 million increase in acquired-intangible amortization charged to cost of revenue.
- Research and development expense increased 18.7% to $87.1 million, and selling, general, and administrative expense increased 16.5% to $40.3 million, primarily due to acquired employees and the additional week in the current quarter.
- The company recorded a $0.2 million restructuring credit, compared with $5.3 million of restructuring expense in the prior period.
- Conexant contributed approximately $23.2 million of revenue and $14.9 million of operating loss after acquisition. The acquired Marvell business contributed approximately $15.7 million of revenue and $4.1 million of operating loss.
Cash Flow, Capital Allocation, and Liquidity
- Operating cash flow was $39.8 million. Investing cash flow was $(408.2) million, including $396.8 million for acquisitions and $11.4 million for capital expenditures.
- Financing cash flow was $200.4 million, including $514.5 million of net convertible-note proceeds, $220.0 million of debt repayment, and $93.6 million for repurchases of 1,698,400 shares.
- Approximately $154.6 million of cash was held by foreign subsidiaries and was considered indefinitely reinvested; repatriation could create additional tax costs.
- The company stated that existing cash, expected operating cash flow, and available credit should be sufficient for working capital, debt service, contingent consideration, and other requirements for at least the next 12 months.
Guidance, Outlook, Commentary, and Risks
Management did not provide a specific revenue or earnings forecast in the filing. In November 2017, after the reporting date, the company committed to a restructuring plan intended to streamline operations and capture acquisition synergies. Expected annualized savings were approximately $40 million, with estimated fiscal 2018 costs of $8 million to $10 million.
Key risks include integration and execution risks from the acquisitions, continued weakness or volatility in mobile demand, product-margin pressure from new products and purchase-accounting adjustments, reliance on selected suppliers and contract manufacturers, customer concentration, foreign-currency exposure, intellectual-property litigation, and the ability to satisfy debt covenants.
The company retained $8.7 million related to the Validity acquisition earnout pending resolution of matters related to the Amkor litigation. Gross unrecognized tax benefits were $15.8 million, with a possible increase of up to $1.6 million within the next twelve months. The IRS was examining fiscal years 2014 and 2015, with no issues raised as of the filing.
Management concluded that disclosure controls were effective. The internal-control assessment excluded Conexant during its permitted first-year integration period; management was developing additional controls for the acquired business.
Important Facts for Investors to Verify
- Whether the Conexant and Marvell acquisitions deliver the expected IoT growth and synergies without sustained operating losses.
- Whether gross margin recovers after acquisition-related inventory fair-value adjustments and elevated intangible amortization subside.
- The pace of mobile revenue stabilization and the sustainability of PC and IoT growth.
- Progress toward the stated $40 million of annualized restructuring savings and the final restructuring cost.
- Convertible-note dilution, cash-settlement requirements, and the 2022 maturity or refinancing risk.
- Inventory levels, inventory turns, purchase commitments, and potential write-downs; annual inventory turns declined from nine to six after the acquisitions.
- Resolution of the Amkor-related indemnification matter and the $8.7 million retained Validity earnout.
- Potential tax effects of foreign cash repatriation, uncertain tax positions, and the ongoing IRS examination.