Synaptics Incorporated — Fiscal 2023 First Quarter Form 10-Q
Reporting period: 13 weeks ended September 24, 2022, compared with the 13 weeks ended September 25, 2021. Synaptics is a fabless semiconductor company operating in one segment, with products serving IoT, personal computing, and mobile applications. The interim financial statements are unaudited.
Financial Performance and Position
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net revenue | $448.1 million | $372.7 million | 20.2% increase |
| Gross profit | $255.7 million | $198.1 million | 29.1% increase |
| Gross margin | 57.1% | 53.2% | 390 basis-point increase |
| Operating income | $112.0 million | $60.6 million | 84.8% increase |
| Operating margin | 25.0% | 16.3% | 870 basis-point increase |
| Net income | $64.6 million | $40.2 million | 60.7% increase |
| Diluted earnings per share | $1.59 | $0.99 | 60.6% increase |
| Operating cash flow | $78.5 million | $58.3 million | 34.6% increase |
- Revenue mix: IoT revenue was $342.7 million, or 76.5% of revenue, up 66.6%. PC revenue was $65.2 million, down 26.4%, and mobile revenue was $40.2 million, down 48.7%.
- IoT growth reflected a 59.2% increase in units sold and a 4.5% increase in average selling prices. PC and mobile declines reflected weaker demand and customer inventory reductions.
- Gross margin benefited from favorable product mix and higher average selling prices, partly offset by a $6.6 million increase in acquired-intangible amortization included in cost of revenue.
- Research and development expense increased 3.9% to $89.5 million, while selling, general and administrative expense increased 7.5% to $44.7 million. Restructuring expense declined to zero from $1.4 million.
- Interest and other expense increased to $8.3 million from $5.9 million, primarily due to the Senior Notes and Term Loan Facility. The prior-year period included an $8.1 million loss on redemption of convertible notes.
- The income tax provision increased to $39.1 million from $5.9 million. Management cited fiscal 2023 tax law changes, including foreign tax credit regulations and research-and-development capitalization rules, as significant factors.
Liquidity, Cash Flow, and Debt
- Cash and cash equivalents were $867.8 million at September 24, 2022, compared with $824.0 million at June 25, 2022. Short-term investments were $44.0 million, resulting in total cash and short-term investments of $911.8 million.
- Operating cash flow was $78.5 million. Investing activities provided $2.3 million, including $7.7 million from investment maturities, partly offset by $6.2 million of capital expenditures. Financing activities used $35.0 million, including $13.4 million for share repurchases and $31.4 million for payroll taxes on equity award deliveries.
- Debt carrying value was approximately $980.8 million, consisting primarily of $395.1 million of 4.0% Senior Notes due 2029 and $585.7 million under the Term Loan Facility due 2028. The revolving credit facility had no outstanding balance and provides capacity of up to $250 million.
- Based on reported carrying values, cash and short-term investments exceeded debt by approximately $69.0 million, excluding lease liabilities and other obligations.
- Management stated that existing cash, expected operating cash flow, financing sources, and available revolving-credit capacity should satisfy working-capital, acquisition, debt-service, and other cash requirements for at least the next 12 months.
- The company remained in compliance with its credit-facility covenants. The Term Loan Facility carries variable-rate exposure, and management expects higher interest rates to increase future borrowing costs.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven overwhelmingly by IoT, while PC and mobile revenue contracted materially.
- Profitability improved substantially, with gross margin rising to 57.1% and operating margin rising to 25.0%.
- Net income increased despite a substantially higher tax provision.
- Operating cash flow improved, while financing cash outflows declined sharply because the prior-year period included $505.6 million paid to redeem convertible notes.
- The DSP Group acquisition, completed in December 2021, contributed to current-period research and development and other operating costs and expanded acquired intangible assets.
- Inventory increased to $179.4 million from $169.7 million at June 25, 2022, while management reported annual inventory turns declining from seven to four year over year.
- The company repurchased 119,631 shares for $13.4 million during the quarter. Remaining repurchase authorization was approximately $564.0 million.
Outlook, Commentary, Risks, and Unusual Items
- Management reported reduced customer demand and requests to delay orders during the quarter, attributing the trend partly to central-bank interest-rate increases and recession concerns. Management characterized the slowdown as potentially temporary but stated that a global recession could prolong recovery.
- No specific financial revenue, margin, or earnings guidance is provided in the filing text.
- Key business risks include dependence on IoT applications, revenue volatility, concentration among large customers, semiconductor cyclicality, customer inventory reductions, reliance on third-party manufacturers and limited suppliers, and the ability to secure adequate manufacturing capacity.
- COVID-19 had not materially disrupted results as of the filing, but renewed outbreaks, variants, lockdowns, or supplier and customer interruptions could adversely affect operations.
- Inventory purchase obligations and purchase commitments totaled $227.5 million. Total contractual obligations were $1.557 billion, including $1.261 billion of long-term debt principal and interest and $68.2 million of lease payments.
- Unrecognized tax benefits were $38.2 million, with no reliable settlement timing available. Intellectual-property infringement claims could result in significant litigation costs or damages, although the company reported no material recorded liability for indemnification obligations.
- Fiscal 2022 restructuring actions were complete as of September 2022, with $0.2 million of related liability remaining.
Investor Verification Priorities
- Verify whether IoT growth remains sufficient to offset continuing weakness in PC and mobile markets and assess the resulting revenue concentration.
- Track customer order delays, inventory levels, inventory turns, and potential inventory-obsolescence or purchase-commitment charges.
- Assess the effect of variable interest rates on the Term Loan Facility and future cash interest expense.
- Review the sustainability of the 57.1% gross margin, particularly as product mix, pricing, supply constraints, and acquired-intangible amortization change.
- Reconcile the elevated effective tax burden and monitor additional effects from R&D capitalization rules, foreign withholding taxes, and uncertain tax positions.
- Review debt covenants, mandatory amortization, the 2023 excess-cash-flow sweep, and the availability of the revolving credit facility.
- Monitor customer concentration, supplier capacity agreements, semiconductor demand cyclicality, COVID-19 developments, and intellectual-property litigation exposure.