Synaptics Incorporated: Fiscal 2023 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Synaptics is a fabless semiconductor company developing mixed-signal solutions for connected devices. The filing covers the 13-week quarter and six months ended December 24, 2022, compared with the periods ended December 25, 2021. The company operates in one reportable segment across IoT, personal computing, and mobile applications.
On October 25, 2022, Synaptics acquired Emza Visual Sense Ltd., a developer of ultra-low-power artificial-intelligence visual sensing solutions, for $15.8 million in cash. The acquisition was not material to consolidated results.
Key Financial Metrics
| Metric | Three Months Ended December 24, 2022 | Year-over-Year Change | Six Months Ended December 24, 2022 | Year-over-Year Change |
|---|---|---|---|---|
| Net revenue | $353.1 million | Down 16.0% | $801.2 million | Up 1.0% |
| Gross margin | $186.7 million; 52.9% | Down 60 basis points | $442.4 million; 55.2% | Up 180 basis points |
| Operating income | $46.1 million; 13.1% margin | Down 40.6% | $158.1 million; 19.7% margin | Up 14.4% |
| Net income | $22.0 million; 6.2% margin | Down 68.3% | $86.6 million; 10.8% margin | Down 21.1% |
| Diluted earnings per share | $0.55 | Down from $1.71 | $2.14 | Down from $2.70 |
| Operating cash flow | Not separately provided for the quarter | — | $128.5 million | Down from $180.7 million |
Quarterly revenue consisted of $239.3 million from IoT applications, $56.5 million from PC applications, and $57.3 million from mobile applications. Six-month revenue consisted of $582.0 million from IoT, $121.7 million from PC, and $97.5 million from mobile.
Quarterly operating expenses were $140.6 million, including $89.3 million of research and development, $42.4 million of selling, general and administrative expense, and $8.9 million of acquired-intangibles amortization. No restructuring costs were recorded in fiscal 2023, compared with $5.1 million in the prior-year quarter.
Income tax expense increased to $17.4 million in the quarter and $56.5 million for the six-month period, compared with $2.0 million and $7.9 million, respectively, in the prior-year periods. The higher tax burden reflected changes involving foreign withholding taxes, research-and-development capitalization and GILTI, among other items.
Liquidity, Cash Flow, Debt and Capital Allocation
- Cash and cash equivalents were $818.8 million at December 24, 2022, compared with $824.0 million at June 25, 2022. Short-term investments were $40.1 million.
- Net cash provided by operating activities was $128.5 million for the first six months, while investing activities used $18.8 million and financing activities used $115.0 million.
- Cash uses included $74.5 million for share repurchases, $49.1 million for payroll taxes on equity award settlements, $15.5 million for the Emza acquisition, and $15.3 million for property and equipment.
- Total debt was approximately $979.9 million at carrying value, consisting primarily of $395.3 million of 4.0% senior notes due 2029 and $584.6 million under the term loan facility due 2028. The company had no borrowings outstanding under its $250 million revolving credit facility.
- The company remained in compliance with its credit facility covenants. A 1-percentage-point increase in interest rates would increase annual interest expense by approximately $5.9 million based on the term-loan balance at quarter-end.
- The board had authorized $1.8 billion for share repurchases through July 2025. Remaining authorization was $502.9 million at December 24, 2022; 633,546 shares were repurchased during the six months.
- Management stated that existing cash, expected operating cash flow and available revolving-credit capacity should be sufficient for working capital, acquisitions and debt service for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue declined 16.0% as all three product markets weakened. IoT revenue fell 8.5%, PC revenue fell 31.7%, and mobile revenue fell 24.9%.
- The quarterly revenue decline reflected lower IoT average selling prices, reduced PC unit demand and customer inventory reductions, and weaker mobile demand. IoT units increased 2.9%, but average selling prices declined 11.1%.
- Six-month revenue increased 1.0%, driven by a 24.6% increase in IoT revenue, which more than offset declines of 29.0% in PC and 37.0% in mobile revenue.
- Quarterly gross margin declined because of lower average selling prices and product mix. Six-month gross margin improved because of favorable product mix and higher average selling prices.
- Quarterly operating income declined substantially despite the absence of restructuring charges, primarily because of lower revenue and gross profit. Six-month operating income increased, helped by the absence of prior-year restructuring charges and stronger gross margin.
- Interest expense increased as the company incurred a full quarter of interest on the $600 million term loan and experienced higher variable interest rates. The term-loan interest rate had increased by 465 basis points by the end of the second quarter compared with the prior-year period.
- Operating cash flow declined year over year, while inventory turns decreased from six to three. Accounts receivable improved, with days sales outstanding declining to 65 days from 67 days in the comparable period.
Outlook, Management Commentary, Risks and Unusual Items
Management reported reduced demand in certain applications as customers and channel partners continued to work through accumulated inventories and requested order delays. The company is cautiously optimistic that the slowdown is temporary, but warned that a global recession could prolong the recovery. The filing does not provide a clear quantitative revenue or earnings guidance range.
- Key operating risks include semiconductor cyclicality, global economic deterioration, customer concentration, dependence on IoT applications, inventory corrections, pricing pressure, and reliance on third-party manufacturers and limited-source suppliers.
- Rising interest rates are increasing borrowing costs on the variable-rate term loan and could constrain financing capacity for future acquisitions.
- COVID-19 impacts had not materially affected consolidated results as of the filing date, but renewed outbreaks, variants or containment measures could disrupt employees, customers and suppliers.
- Customer and inventory obligations included $68.3 million of customer obligations and $8.6 million of inventory obligations in other accrued liabilities at quarter-end.
- Gross unrecognized tax benefits increased to $51.2 million, excluding amounts from contractual-obligation estimates because settlement timing could not be reliably determined.
- The company is exposed to potential intellectual-property infringement claims. It has not recorded a liability for indemnification obligations, and historical costs have not been significant.
- Acquired-intangibles amortization remained material, totaling $65.2 million for the six months. Share-based compensation was $62.6 million for the six months.
Most Important Facts for Investors to Verify
- Whether demand and customer inventory normalization improve, particularly in PC and mobile markets.
- Whether IoT growth can offset continued weakness in PC and mobile applications.
- The effect of higher variable interest rates and future LIBOR-to-successor-rate transition on cash interest expense.
- Compliance with leverage and interest-coverage covenants, including the impact of acquisitions or further revenue declines.
- Inventory turns, purchase obligations and potential excess or obsolete inventory charges.
- The sustainability of cash generation after share repurchases, equity-award tax withholding, debt service and acquisitions.
- Changes in the effective tax rate arising from foreign withholding taxes, GILTI, research-and-development capitalization and uncertain tax positions.
- Future acquisition-related amortization, goodwill and intangible-asset impairment exposure.