Sharp Credit – Credit News – Credit Information
All the enthusiasm that Synaptics (NASDAQ: SYNA) had built in recent months has been undone in a short span of time, as investors try to figure out what’s going on at the chipmaker. The company was in turnaround mode going into its 2019 fiscal second-quarter earnings report in early February. While it beat expectations then, recent executive turnover and a guidance cut have dented investor confidence.
CFO Wajid Ali moved to Lumentum Holdings in February. But the real shocker came in mid-March, when Synaptics announced that CEO Richard Bergman would depart immediately. At the same time, the company lowered its third-quarter guidance.
Though the press release specified that “Bergman’s departure was not a result of any disagreement with Synaptics on any matter relating to Synaptics’ operations, policies, or practices,” the chipmaker’s poor performance may have made a leadership change inevitable.
Image Source: Getty Images
A bad bet
Synaptics relies a lot on its mobile business, getting nearly two-thirds of its revenue from this segment. This is why the company spent much time and effort on developing an in-display fingerprint sensing technology for mobile devices.
Synaptics believed that the solution would find several takers because the smartphone industry was moving toward bezel-less displays. But rising costs, sales saturation, and the popularity of facial recognition technology turned out to be big barriers for in-display fingerprint sensing.
As a result, the company didn’t get much traction for its in-display fingerprint sensing product and eventually decided to focus its energy elsewhere. Synaptics announced late last year that it was moving “a large portion of our investment dollars from in-display fingerprint to consumer IoT.”
The move started to pay off in the first half of fiscal 2019. Synaptics scored Internet of Things (IoT)-related design wins in smart televisions and set-top boxes. Its top line started to stabilize, its profit margin rose, and earnings shot up. The company delivered adjusted earnings per share of $1.55 in the second quarter of fiscal 2019, up 40% from $1.11 in the prior-year period.
That said, Synaptics reported an 18% year-over-year decline in IoT sales in the second quarter. Mobile revenue was up 5%, and the company claimed that its mobile chips were gaining traction at smartphone OEMs such as Oppo, Vivo, and Huawei. However, Synaptics’ guidance indicates that the company’s overreliance on the mobile segment is coming back to haunt it again.
Back in February, Synaptics projected that it would produce $340 million to $380 million of revenue in the third quarter, with 62% of that coming from the mobile segment. However, in conjunction with the CEO transition announcement last month, Synaptics said that its revenue will come in at the lower end of the guidance range due to weak Chinese demand, which implies a double-digit year-over-year revenue decline. That’s a step backwards: Synaptics’ top line had stabilized over the past year but is now receding once again.
Synaptics Revenue (Quarterly YoY Growth) , data by YCharts . YoY = year over year.
According to the China Academy of Information and Communications Technology (CAICT), smartphone shipments in the country fell 15.5% last year. The decline seems to have accelerated in 2019, with CAICT announcing that February shipments were down 20% year over year. The state-backed research institute’s data suggest that February 2019 was the worst month for smartphone shipments in China since 2013.
With the Chinese smartphone industry expected to contract once again in 2019, it’s not surprising to see Synaptics’ Chinese smartphone customers holding back on chip purchases as they try to navigate the weak end-market environment.
Tough times ahead
It appears that former CEO Bergman had to pay for missteps related to Synaptics’ mobile and IoT strategy. The IoT business declined last quarter as Synaptics’ momentum in the smart speaker market tailed off. Furthermore, the IoT business is likely to contract again in the third quarter. Synaptics’ guidance calls for a roughly 19% revenue decline in that segment, while the weakness in mobile is already documented above.
So, there isn’t much clarity about where Synaptics is headed, because it lacks concrete catalysts and is undergoing a leadership change. Investors should probably stay away from the chipmaker unless and until there are visible signs of a turnaround.
10 stocks we like better than Synaptics
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has quadrupled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now… and Synaptics wasn’t one of them! That’s right — they think these 10 stocks are even better buys.
See the 10 stocks
*Stock Advisor returns as of March 1, 2019
Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.