Business Context and Reporting Period
Company: Synaptics Incorporated
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended March 31, 2009 (Fiscal Year 2009)
Business Overview: Synaptics develops and supplies custom-designed human interface solutions for mobile computing, communications, and entertainment devices. The company operates in one segment, serving PC and digital lifestyle product markets.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Mar 31, 2009 |
Three Months Ended Mar 31, 2008 |
Nine Months Ended Mar 31, 2009 |
Nine Months Ended Mar 31, 2008 |
|---|---|---|---|---|
| Net Revenue | $100,595 | $78,861 | $357,975 | $264,203 |
| Gross Margin | $40,707 (40.5%) | $32,173 (40.8%) | $145,106 (40.5%) | $108,682 (41.1%) |
| Operating Income | $10,635 (10.6%) | $6,432 (8.2%) | $55,005 (15.4%) | $38,681 (14.6%) |
| Net Income | $6,086 | $3,008 | $41,242 | $28,466 |
| Diluted EPS | $0.17 | $0.08 | $1.17 | $0.70 |
| Cash & Equivalents | $146,080 (as of Mar 31, 2009) | |||
| Short-term Investments | $28,376 (as of Mar 31, 2009) | |||
| Convertible Notes (Current) | $65,303 (as of Mar 31, 2009) |
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 27.6% quarter-over-quarter and 35.5% year-over-year (nine months). This was driven by a 240.7% surge in digital lifestyle product revenue (primarily mobile smartphones), which now accounts for nearly 50% of revenue, offsetting a 21.0% decline in PC application revenue due to the global economic downturn.
- Profitability: Operating income rose 65.3% for the quarter and 42.2% for the nine months, benefiting from operating leverage despite a slight compression in gross margin percentage (down 30 basis points Q/Q and 60 basis points Y/Y) due to product mix and pricing pressure.
- Investment Impairments: The company recorded a $2.9 million other-than-temporary impairment charge on Auction Rate Securities (ARS) for the quarter, bringing the nine-month total to $9.4 million. This contrasts with the prior year, which included a $4.0 million impairment of an investment in Foveon Inc.
- Debt Reduction: The company repurchased and retired $59.7 million of its convertible senior subordinated notes at a discount, resulting in a $3.6 million gain on early retirement of debt. The remaining $65.3 million balance is classified as a current liability due to a put option exercisable by noteholders in December 2009.
Guidance, Outlook, and Risks
- Market Outlook: Management cites industry estimates for calendar year 2009 projecting a 4% decline in the notebook market, a 2% increase in digital music players, and a 9% increase in mobile smartphones.
- Liquidity: The company holds $174.5 million in cash, cash equivalents, and short-term investments (excluding ARS). Management believes this, combined with operating cash flows, is sufficient for the next 12 months. However, $45.7 million of ARS investments are illiquid and may require a loss of principal to access.
- Stock Repurchase: $82.6 million remains available under the common stock repurchase program, which expires in 2010. No shares were repurchased in the nine months ended March 31, 2009.
- Risks: Key risks include the global economic downturn affecting PC demand, reliance on contract manufacturers, potential further impairments of ARS investments, and the impact of new accounting standards (FSP APB 14-1) on convertible debt accounting effective in fiscal 2010.
Investor Verification Checklist
- ARS Liquidity: Verify the current fair value and liquidity status of the $29.9 million in non-current Auction Rate Securities, which have failed to settle in auctions.
- Convertible Debt Maturity: Confirm the company's ability to fund the potential $65.3 million repurchase of convertible notes if noteholders exercise their put option on December 1, 2009.
- Customer Concentration: Review the dependency on major customers, with Customer A accounting for 24% of revenue in the quarter and 15% in the nine months.
- Product Mix Shift: Assess the sustainability of the revenue shift from PC applications (declining) to digital lifestyle products (growing) in the context of the broader economic environment.
- Accounting Changes: Monitor the impact of the upcoming adoption of FSP APB 14-1 on convertible debt, which is estimated to have a $1.1 million non-cash pre-tax impact per quarter.