What to Watch for When Synaptics Reports Tomorrow

Synaptics reports earnings on Thursday. Here's what we can expect.

Apr 23, 2014 at 10:00AM

Synaptics (NASDAQ:SYNA) will report its third-quarter earnings Thursday, as shares flirt with an all-time high. The report follows better-than-expected results from competitor Cypress Semiconductor (NASDAQ:CY), which battles Synaptics for design wins in touchscreen products like Samsung (NASDAQOTH:SSNLF) smartphones and tablets.

Meanwhile, Synaptics TouchPad business has fallen out of favor as the PC market declines, but it successfully diversified into mobile device touchscreens, and (more recently) added fingerprint sensors to its portfolio with the acquisition of Validity Sensors. The company is starting to make a comeback in its PC division, but the strength in mobile will be the key to its revenue growth in calendar 2014.

Let's see what we can expect from Synaptics on Thursday.

Stats on Synaptics

Analyst EPS Estimate

$0.57

Year-Ago EPS

$0.79

Revenue Estimate

$192.03 million

Change From Year-Ago Revenue

17.6%

Earnings Beats in Past 4 Quarters

3

Source: Yahoo! Finance.

Managing expectations
Synaptics is making a habit of disappointing investors with its forward guidance. After a disappointing second quarter outlook, the company repeated the act in January with a disappointing third quarter outlook. Management guided for $0.44 to $0.64 in EPS while the Street originally expected $0.64. Since then the average estimate has fallen to $0.57.

Revenue guidance was better than expected, however, as management expected $180 million to $200 million in revenue. The Street originally anticipated $182.5 million in revenue, but has since raised its expectations.

Shares of Synaptics have climbed 16.8% since it last reported earnings. The stock has soundly outperformed the S&P 500 in that time, which has returned about 2.8%. The stock price is just off the all-time high it reached at the end of February.

Recent developments
The biggest development in the last quarter was the release of Samsung's Galaxy S5. Although retail sales didn't begin until this month, the phone went into production last quarter.

Samsung sold 10 million units of its flagship smartphone in the first month of sales last year. One executive expects the S5 to outperform its predecessor despite a tough market for high-end smartphones.

This is great news for Synaptics, which provides the new fingerprint scanner for the Galaxy S5. It may also provide the touchscreen controller for the S5, but a recent teardown of the phone is unclear as to whether Synaptics or Cypress Semiconductor won the design. Synaptics won the design for the touch controller in the S4, however, so it's more likely that Synaptics also won the S5 -- especially considering it provides the fingerprint scanner.

Both Synaptics and Cypress are riding the rise in touchscreen devices. Cypress' Programable Systems Division, which includes its touch technology, is its fastest growing division (outside of its tiny Emerging Technology Division). The company is trying to offset declines in memory products and USB controllers linked to a declining PC market.

Synaptics, meanwhile, has successfully managed the PC market, and its PC division is doing a pretty good job of treading water. Last quarter, PC related revenue increased 5% sequentially, but was still down 4% year over year. The company is looking to expand its portfolio beyond trackpads, and now includes ThinTouch keyboards and touchscreens for PCs (although the latter is accounted for in its mobile division).

What to watch for
When Synaptics reports, investors should watch how much PC revenue declines. Management doesn't expect PC-related sales to be as strong as the previous quarter, which could mark the end of its sequential revenue growth streak for the division. Nonetheless, mobile revenue should outpace total revenue growth, especially with the design win(s) in the Galaxy S5. Also look for color on whether the Validity Sensors acquisition is turning profitable with the design win in the S5.

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Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Cypress Semiconductor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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