Synaptics Has the Right Touch

Anyone reading Apple's (Nasdaq: AAPL  ) latest earnings report can't help but notice how wildly popular the iPod has become. What makes this gadget such a success? The brand name plays a part, but when you get down to the nuts and bolts (or in this case, the hard drives and LCD screens), it's the cool technology. Give the credit to Synaptics (Nasdaq: SYNA  ) , maker of the touch-sensitive click wheel that lets users easily scroll through the song catalogs. The company makes user interfaces for digital music players, cell phones, and notebook mouse touch pads. More than half of all notebooks made include Synaptics' flagship TouchPad product.

Synaptics' latest financial results, released last week, caught Wall Street's attention. The stock price jumped nearly 22% last Friday following a blowout quarter driven in large part by demand for the iPod. Net revenue for the second quarter of fiscal 2005 rose 65% to $56.5 million. The company earned $9.7 million, or $0.33 per share, in its second quarter. That equates to a whopping 178% increase from the $3.5 million, or $0.13 per share, pocketed a year earlier.

The profit surge reflected robust demand for portable digital music players and higher quarterly sales of non-PC products. The phenomenal growth of Apple's iPod played a substantial role, but other digital music player manufacturers -- such as Creative Technology (Nasdaq: CREAF  ) with its Zen Micro line of MP3 players -- contributed as well. This improved sales mix boosted operating margins to 28% vs. 17% a year ago.

Those numbers are impressive, but now the question is what have you done for me lately? Simply put, it's all about the forward guidance, and the CEO of Synaptics said that the company is entering the third quarter with a strong backlog of about $35 million. Revenues are expected to be flat, but continued strength in the digital music player market should offset any declines in notebook component sales. The estimates for fiscal 2006 show that the growth in earnings is forecast to be about 23%. At $36, Synaptics trades at a forward price-to-earnings ratio of 26, not expensive compared with other tech stocks.

While the popularity of MP3 players has definitely sweetened Synaptics' results, the company is making inroads into the cell-phone market. Handset manufacturers such as Nokia (NYSE: NOK  ) and Ericsson (Nasdaq: ERICY  ) are looking for that next application to cram onto a phone. As mobile phones evolve into multifunctional devices with access to rich content-based services and increased bandwidth, the user interface becomes critical in determining the overall success of the device. Synaptics, the cool tech company, has the right touch to secure a piece of this business, too.

Fool contributor Kelvin Taylor does not own shares of any of the companies mentioned.


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