SYNAPTICS Inc quarterly report, Q3 FY2019

Synaptics Incorporated — Form 10-Q Summary

Business context and reporting period

Synaptics develops and sells human-interface semiconductor solutions, including touch, display-driver, fingerprint-authentication, voice, speech, and video products. Revenue is generated primarily from Mobile, PC, and Internet of Things applications and is concentrated among Asian customers and contract manufacturers.

The filing covers the quarter ended March 30, 2019, presented in the financial statements as March 31, 2019. This is fiscal 2019 third quarter; the supplied request label of “2018 Q3” does not match the filing period. The quarter comprised 13 weeks, compared with 13 weeks for the comparable 2018 quarter; the nine-month periods comprised 39 weeks in 2019 and 40 weeks in 2018.

Key financial metrics

Metric	Three months ended March 2019	Three months ended March 2018	Nine months ended March 2019	Nine months ended March 2018
Revenue	$334.0 million	$394.0 million	$1,177.1 million	$1,241.8 million
Gross profit	$116.0 million	$122.9 million	$406.7 million	$352.5 million
Gross margin	34.7%	31.2%	34.6%	28.4%
Operating income/(loss)	$(3.8) million	$(12.3) million	$27.0 million	$(53.2) million
Net income/(loss)	$6.7 million	$(13.7) million	$23.3 million	$(122.6) million
Diluted EPS	$0.19	$(0.40)	$0.66	$(3.61)

Quarterly operating margin was approximately negative 1.1%; nine-month operating margin was approximately 2.3%. The quarterly tax benefit was $15.3 million, contributing to reported net income despite a pretax loss. Nine-month tax benefit was $8.1 million.

Mobile revenue was $204.7 million in the quarter, down 16.4%, as units declined 31.0%, partly offset by a 21.2% increase in average selling prices.
PC revenue was $66.2 million, up 10.0%, driven by a 27.3% increase in average selling prices despite a 13.6% unit decline.
IoT revenue was $63.1 million, down 29.1%, reflecting a 24.2% unit decline and a 6.4% average selling price decline.
Research and development expense declined 11.8% year over year in the quarter, and selling, general, and administrative expense declined 9.8%.
Share-based compensation expense was $15.8 million in the quarter and $48.7 million for the nine-month period.

Cash flow, liquidity, and debt

Cash and cash equivalents were $323.8 million at March 31, 2019, up from $301.0 million at June 30, 2018.
Operating cash flow was $110.8 million for the first nine months of fiscal 2019, compared with $137.1 million in the prior-year period.
Investing cash flow used $14.9 million, including $17.7 million for property and equipment, compared with $431.6 million used in the prior-year period, which included $396.4 million of business acquisitions.
Financing cash flow used $73.1 million, primarily because of $77.3 million of share repurchases. The company repurchased 1.85 million shares during the nine-month period.
The company had $525 million principal amount of 0.50% convertible senior notes due June 2022, with a carrying value of $463.8 million. The notes have an initial conversion price of approximately $73.02 per share.
No amounts were outstanding under the $200 million revolving credit facility at March 31, 2019. The company was in compliance with its restrictive covenants.
Remaining share-repurchase authorization was $148.8 million as of March 31, 2019; the program was scheduled to expire in July 2019.
Management stated that cash, expected operating cash flow, and available revolver capacity should cover working-capital needs and debt-service obligations for at least the next 12 months.

Material changes versus the prior comparable period

Quarterly revenue declined $60.0 million, or 15.2%; nine-month revenue declined $64.7 million, or 5.2%.
Despite lower revenue, gross margin expanded by 350 basis points in the quarter and 620 basis points for the nine-month period.
Management attributed the margin improvement primarily to the absence of prior-year inventory fair-value adjustments related to acquisitions, lower acquired-technology amortization charged to cost of revenue, and product mix.
The company returned to profitability: quarterly net income improved by $20.4 million, while nine-month net income improved by $145.9 million.
Restructuring costs were zero in the quarter and $10.4 million for the nine-month period. The fiscal 2019 restructuring, including the mobile fingerprint optical business action, was complete at March 31, 2019.
Revenue recognition guidance was adopted at the beginning of fiscal 2019 using the modified retrospective method. Recognition was substantially unchanged, but $4.8 million of customer incentives were reclassified from accounts receivable to other accrued liabilities.
Inventory increased to $153.1 million from $131.2 million at June 30, 2018; management reported that annual inventory turns declined from seven to five and days sales outstanding increased from 67 to 72 days.

Outlook, risks, contingencies, and unusual items

The filing does not provide clear numerical revenue, earnings, or margin guidance. Management expects liquidity to be sufficient for at least the next 12 months but notes that future requirements depend on revenue, product development, restructuring, intellectual-property costs, manufacturing access, repurchases, and potential acquisitions.

Business risks include declining Mobile and IoT demand, customer concentration, dependence on Asian markets, product-cycle volatility, pricing pressure, short product lifecycles, and reliance on single or limited sources for certain components.
Customer A represented 17% of quarterly revenue and 20% of accounts receivable; Customer C represented 16% of quarterly revenue. The company generally does not require collateral.
Inventory purchase obligations and other commitments totaled $58.7 million; total disclosed contractual obligations were $618.6 million, including debt, leases, purchase commitments, and transition-tax payments.
Unrecognized tax benefits were $25.3 million, with accrued interest and penalties of $2.7 million. The company estimated that unrecognized tax benefits could increase by up to $3.9 million within the next 12 months.
Potential intellectual-property infringement claims could result in significant litigation costs, damages, and diversion of resources. The company believes existing ordinary-course legal matters will not have a material adverse effect.
The March 2019 quarter included a $2.2 million accrual for severance related to the former CEO’s termination. The nine-month results also included a $2.8 million investment impairment recovery and a $1.9 million arbitration settlement adjustment in operating cash flow.
The company expects to adopt the new lease accounting standard at the beginning of fiscal 2020, which it expects will increase reported assets and liabilities through recognition of operating lease right-of-use assets and liabilities.
Disclosure controls and procedures were determined to be effective, and no material changes to internal control over financial reporting were reported.

Important facts for investors to verify

Confirm the reporting-period labeling: the filing is for fiscal third quarter 2019, ended March 30, 2019, not 2018 Q3.
Assess whether Mobile and IoT unit declines persist and whether higher average selling prices can offset volume pressure.
Separate sustainable gross-margin improvements from the nonrecurrence of acquisition-related inventory adjustments and amortization effects.
Review the company’s ability to manage the $525 million convertible notes due in 2022, including potential cash settlement on conversion or redemption.
Monitor inventory levels, inventory turns, days sales outstanding, customer obligations, and customer concentration.
Evaluate the effect of share repurchases, share-based compensation, and potential dilution from convertible notes and equity awards.
Review tax exposures, foreign cash of $254.9 million, repatriation costs, and the pending tax matters described in the filing.