Business Context and Reporting Period
Synaptics Incorporated is a fabless semiconductor company supplying mixed-signal solutions for connected devices. This Form 10-Q covers the first quarter of fiscal 2024 ended September 30, 2023. The period comprised 14 weeks, compared with 13 weeks for the quarter ended September 24, 2022. Revenue is reported under the revised categories Core IoT, Enterprise and Automotive, and Mobile.
Financial Highlights
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Net revenue | $237.7 million | $448.1 million | Down 47.0% |
| Gross margin | $107.1 million; 45.1% | $255.7 million; 57.1% | Down 1,200 basis points |
| Operating income | $(35.2) million | $112.0 million | Declined $147.2 million |
| Net income | $(55.6) million | $64.6 million | Declined $120.2 million |
| Diluted EPS | $(1.43) | $1.59 | Declined $3.02 |
| Cash flow from operations | $45.4 million | $78.5 million | Down $33.1 million |
- Revenue by product application was $154.8 million from Enterprise and Automotive, $38.5 million from Core IoT, and $44.4 million from Mobile.
- Enterprise and Automotive revenue decreased 47.4%, primarily from lower units and average selling prices, partially offset by $27.0 million from an intellectual-property license.
- Core IoT revenue decreased 66.0%, primarily because customers reduced demand and inventory holdings.
- Mobile revenue increased 10.4%, driven by a 131.6% increase in units sold, partially offset by a 52.3% decrease in average selling prices.
- Operating expenses were $142.3 million, including $8.0 million of restructuring costs. Research and development was $86.5 million and selling, general and administrative expense was $42.3 million.
- The income tax provision was $15.0 million despite the pretax loss, reflecting the company’s interim tax methodology and jurisdictional tax items.
Liquidity, Cash Flow, Debt and Balance Sheet
- Cash and cash equivalents were $801.3 million at September 30, 2023, down from $924.7 million at June 24, 2023. Short-term investments were $23.1 million, providing total cash, cash equivalents and short-term investments of $824.4 million.
- The $123.4 million decrease in cash was primarily related to a $130.0 million cash payment to Broadcom for technology licenses and an exclusivity-period extension.
- Operating cash flow was $45.4 million. Investing cash flow was $(150.1) million, including the Broadcom payment, $16.6 million of short-term investment purchases and $6.7 million of capital expenditures. Financing cash flow was $(18.1) million.
- Total debt carrying value was approximately $975.6 million, consisting primarily of $395.8 million of 4.0% senior notes due 2029 and $579.8 million under the term loan facility due 2028. The company repaid $3.0 million of term-loan principal during the quarter.
- No borrowings were outstanding under the $250.0 million revolving credit facility. The company remained in compliance with its debt covenants.
- Working capital included $111.2 million of net accounts receivable and $131.7 million of inventory. Inventory turns decreased from four to three year over year.
- Cash held by foreign subsidiaries totaled $765.0 million. Management stated that substantially all could be repatriated without affecting the income tax provision.
- The company had $1.5265 billion of contractual obligations, including debt, leases, and purchase obligations. Gross unrecognized tax benefits totaled $39.3 million.
Material Changes Versus the Prior Comparable Period
- Revenue fell 47.0%, reflecting broad-based demand weakness, customer inventory consumption, delayed orders, lower units and price erosion.
- Gross margin declined from 57.1% to 45.1%, primarily because of an increased excess-obsolescence reserve and lower average selling prices, partly offset by the IP license.
- The company shifted from operating income of $112.0 million to an operating loss of $35.2 million and from net income of $64.6 million to a net loss of $55.6 million.
- Research and development and selling, general and administrative expenses declined modestly, but were higher as a percentage of revenue because of the revenue contraction.
- Interest expense on the term loan increased by $4.9 million year over year because the applicable interest rate increased by 338 basis points, partly offset by higher interest income.
- The company initiated restructuring actions, recording $8.0 million of charges, primarily severance and employee-related benefits. Approximately $10.0 million of total restructuring charges are expected, with completion targeted by the end of fiscal 2024.
- The company paid Broadcom $130.0 million under an amended wireless license agreement. Of this amount, $13.5 million was recorded as an intangible asset and $116.5 million as a non-current prepayment for technology products expected to be delivered through August 2025.
Guidance, Outlook, Commentary and Risks
- Management believes the demand slowdown is temporary, but expects the rebound may extend beyond calendar 2023 and potentially beyond 2024.
- Management identified global recession concerns, higher interest rates, customer inventory reductions, delayed orders and semiconductor-industry cyclicality as significant drivers of current weakness.
- Higher rates are increasing borrowing costs on the variable-rate term loan and could reduce borrowing capacity for future acquisitions. A 100-basis-point rate change would affect quarterly term-loan interest expense by approximately $1.5 million based on the September balance.
- The company expects its existing cash, operating cash flows, financing sources and available revolving-credit capacity to fund working capital, debt service and other requirements for at least the next 12 months.
- The war in Israel has resulted in office closures and employee military activations. Business-continuity plans are in place, but project timing and operations could be affected.
- Key risks include customer concentration, order cancellations or delays, excess and obsolete inventory, pricing pressure, reliance on third-party manufacturers and suppliers, intellectual-property claims, international operations and trade restrictions, cybersecurity, tax uncertainty, and leverage.
- Two customers represented 29% of first-quarter revenue, and five OEM customers represented approximately 40% of revenue. Three other customer receivable balances collectively represented 35% of accounts receivable at September 30, 2023.
- The company’s $2.3 billion share-repurchase authorization expires in July 2025; $893.9 million remained available, but no shares were repurchased during the quarter.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting.
Facts Investors Should Verify
- Whether customer inventory normalization and delayed orders improve sufficiently to support the expected recovery beyond 2024.
- The sustainability of the 45.1% gross margin and the potential effect of further price erosion or inventory charges.
- The timing and financial impact of the remaining restructuring actions and expected cost savings.
- Broadcom technology delivery milestones, the treatment of the $116.5 million prepayment, and the commercial returns from the licensed technologies.
- Exposure to variable interest rates, covenant headroom and the company’s ability to service approximately $975.6 million of reported debt.
- Customer concentration, product-category trends and the effect of continued weakness in Core IoT and Enterprise and Automotive applications.
- Operational effects from the Israel conflict, employee reserve activations, geopolitical developments and international supply-chain risks.