While I am not a financial analyst, as a tech analyst, I make a habit of tuning into many tech companies’ quarterly earnings reports. It really is “ground truth” for companies as they’re under the scrutiny of the SEC and investors. I make myself available for comments and questions from the media, but it’s rare that I feel moved enough to write an entire column on a company’s quarter. That said, Synaptics’ Q4-2021 earnings report was special enough to warrant a more in-depth analysis in my opinion. The company is really the bellwether high-end for IoT and I had the chance to chat with Synaptics CEO Michael Hurlston to get a deeper dive.
To make sense of the company’s latest financials, it’s worth looking at Synaptics’ journey since its 1986 founding. Though the company originally distinguished itself as a manufacturer of computer trackpads, fingerprint readers and other biometric interfaces, its purview has expanded dramatically to include the likes of the IoT, mobile and automotive sectors. Amongst other things, it now builds touch controllers for car console displays, audio processors, neural network accelerators and video interfaces.
The company found itself floundering in the late 2010s, from an operational and market standpoint, trading below its value and struggling with its gross margins. I believe Synaptics has done a good job of refocusing under the recent leadership of Hurlston, developing product roadmaps and streamlining its portfolio to take full advantage of its impressive library of IP. Synaptics has even revamped its logo over the last few years, in case you hadn’t noticed.
The success of the new CEO’s strategy was apparent last year at Synaptics’ 2020 Financial Analyst Day, and in the company’s two strategic acquisitions of DisplayLink and Broadcom’s IoT wireless portfolio. Going into this week’s earnings report, I was looking for further evidence of the company’s continued transformation and turnaround, and I was not disappointed.
I think the market was looking for quarter after quarter of delivery. Q4-2021 was the eighth straight quarter of delivering on the promise and Wall Street noticed.
If you only look at the net revenue, which stayed relatively flat ($1.34 billion versus last year’s $1.3B), you might miss the bigger picture. Underneath the surface, however, a lot of big shifts happened.
The headline of the latest earnings report was the continued move to IoT as the main revenue driver for the company. It now accounts for 50% of all revenues and showing 143% growth for that product line year over year. Synaptics showed good performance in automotive, too, boasting 20 new customer engagements (on 45 different car models) and a strong push in EVs. These numbers are expected to grow as automotive center consoles become richer and more interactive. Hurlston also shared that automotive is one of the company’s fastest-growing sectors. For that matter, Synaptics is a full year ahead of its plans to hit its $100 million revenue goal for the sector by the end of FY2022.
Also, worth noting, while Synaptics’ mobile products previously accounted for over 80% of the company’s total revenue, they now comprise a modest 25%. While Hurlston acknowledged the anticipated growth and development of touch and display driver technologies, he noted that the new number is more or less on target with the company’s goal to operate with mobile consistently at 20-25% of its overall revenue mix. In our one-on-one, Hurlston cited the market vulnerability of relying too heavily on mobile. If a sector makes up 80% of your business, one bad year can be devastating. Furthermore, Hurlston sees IoT as a more sustainable growth opportunity than traditional mobile products.
Synaptics continues to improve on its gross margins, too, where it was struggling only a few years ago. It had a record quarter for both GAAP and non-GAAP gross margins, which Hurlston hails as the closest correlation to product values. Synaptics’ GAAP gross margin for the fiscal year 2021 came in at 45.6% (up from 40.7% the prior year), while non-GAAP landed at 53.6% (a considerable improvement on last year’s 43.7%). We also learned that Synpatics’ non-GAAP gross margins improved by a whopping 1,800 basis points over the past 24 months.
Synaptics’ earnings report further validates the story I’ve been reporting on over the last few years—a marked movement away from its traditional dependency on mobile and PC towards IoT. Furthermore, these numbers are a good indicator that its 2020 acquisitions of DisplayLink and Broadcom’s wireless portfolio are paying off.
All of this was nicely tied up by an updated company mission statement that Hurlston says “unifies all the elements” of Synaptics’ portfolio: a prerogative to engineer so-called “exceptional experiences” for users, from the office building to the commute to the home office. This strategy is clearly paying dividends in terms of cross-selling—according to Hurlston, over half of its customers now purchase solutions from three or more of Synaptics’ verticals. I believe this revised focus leaves Synaptics well-positioned to address two mega trends happening – the post-Covid adaptive/hybrid workplace and the proliferation of Edge AI for home IoT.
While I know I was saying Synaptics should be considered a premium “IoT” company, do we now need to look more closely at it as an “EoT” company for “experience of things”? I think that’s fair as that’s exactly what it does. The company engineers experiences for premium consumer and commercial IoT.
Quarterly results are very effective at highlighting the success (or, on the other end, failure) of a new company strategy. It’s hard to argue with the numbers, and the numbers tell me Synaptics’ refocusing and restructuring is paying off.