Synaptics Inc. (SYNA, Financial), a developer of interface solutions for mobile and internet of things devices, reported its third-quarter earnings on Wednesday, beating earnings estimates while missing revenue expectations.
Revenue declined 11.3% year over year to $394 million; sequential decline in revenue growth amounted to 8%. Analysts were looking for revenue of $401 million. Nevertheless, the company posted earnings of 92 cents a share, beating the consensus by 1 cent.
The market is showing mixed reactions as the stock was down 8% after the bell yesterday, but recovered to the pre-earnings level today.
What ignited the revenue decline?
The demand for Synaptics’ products has been soft on the high-end side of the market. A design loss at Samsung (SSNLF, Financial) didn’t help the company’s top line either. Samsung dropped Synaptics' fingerprint sensor socket from its Galaxy S9 in favor of Egis Technology's (ROCO:6462, Financial) chip. Up until then, Synatpics had been the supplier for Samsung’s flagship device. As the S9 was launched toward the end of February, quarterly results only reflect the March impact of the loss. Therefore, revenue might remain under pressure on a year-over-year basis going forward amid this particular design loss.
Egis Technology’s fingerprint sensor, which replaced Synaptics' product in Samsung phones. (Credit: techinsights.)
Synaptics generated 19% of its revenue from Samsung in 2017. This fell down to less than 10% in the third quarter of 2017. Moreover, revenue share from its top customer, Sanshin Electronics Co. Ltd. (TSE:8150, Financial), declined from 24% to 16% during the nine-month periods ended March 2017 and March 2016 respectively.
Fingerprint sensor woes
According to Synaptics' management, the capacitive fingerprint sensor market is no longer a growth market. The company remains the leading fingerprint sensor player in the PC market, however. The slowdown in mobile fingerprint growth is primarily driven by companies trying to move toward face recognition technologies. As a result, capacitive fingerprint sensors are no longer desired by some customers.
Note that capacitive fingerprint sensors make up around 5% of Synatpics' revenue. Given that automotive revenue stands at 3% as of the third quarter, the company will be able to offset the decline over the next couple of quarters.
What about the in-screen fingerprint sensor demand?
Although the technology is strong and sophisticated, the industry is just not ready to move toward in-screen fingerprint sensing due to high premium attached to the feature. Synaptics CEO Rick Bergman commented on in-screen sensors during the earnings call:
“But what I think the world is seeing globally is consumers just aren't willing to pay high premium for either flagship phones or incremental features that add a lot of costs to a phone … there is, as we've always said, there's a big substantial premium for the optical fingerprint solution … OEMs are either delaying, or in some cases, they're now making it a incremental feature.”
Overall, Synaptics is facing headwinds on the mobile side from its major customers, which is being reflected in the year-over-year decline in revenue. Revenue from mobile products, including display drivers, touch screen, TDDI and fingerprint sensors, declined more than 30% during the quarter.
Source: Synaptics’ 10Q, Q3 2018
For at least the short term, Synaptics will struggle to revitalize growth in the mobile segment. While the internet of things segment is witnessing growth, it is not enough to offset the decline in mobile. Note that revenue share from mobile is expected to go decrease from 62% to 58% in the next quarter. In short, mobile headwinds will continue to weigh down Synaptics’ revenue growth going forward.
Management remains optimistic
Despite weakness on the mobile front, the company is rooting for revenue growth in the near future.
“We continue to anticipate strong growth in the second half of the calendar year driven by seasonality and the rollout of new products”, Bergman said.Â
Management is also keen on making a shift toward internet of things, given the high margins attached to the business.
"Synaptics’ continuing transformation … growing momentum of our consumer IoT platform, is enabling us to focus our growth priorities on products providing greater opportunities for gross margin contribution,” Bergman said.
Moreover, unlike the in-screen fingerprint sensor market, original equipment manufacturers aren’t very sensitive to pricing in OLED displays. Synaptics is seeing healthy demand in this arena too.
To review, display drivers, including TDDI, OLED display drivers, far field voice solutions and improved margins are some of the positives heading into the second half of the year.
For the fourth fiscal quarter, Synaptics is guiding for mid-point revenue of $390 million, which is below the analyst consensus of $420 million.
Takeaways
Due to the weakness in mobile, especially on the fingerprint side, the company will struggle to post growth for the next couple of quarters. If growth in internet of things persists, it can help Synaptics revitalize its growth in 2019. Increasing internet of things sales will continue to boost the company's margins. Far-field audio products can have a material impact on Synaptics’ top line as most of the large technology giants have either developed or are developing smart audio products.
While the mobile business is declining, the internet of things market is promising and can take Synaptics higher if the benefits from voice interface solutions materialize.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
