A report from DigiTimes recently claimed Apple (NASDAQ:AAPL) has placed orders with Synaptics (NASDAQ:SYNA) for display driver chips for its next generation iPhone, widely referred to as the iPhone 7. According to a teardown report from Chipworks, the iPhone 6s/6s Plus each use a display driver chip provided by Synaptics.
Although it may not seem particularly newsworthy that Apple is continuing to use a supplier that it has sourced parts from in the past, this is actually a pretty big deal for Synaptics. Here's why.
Apple is said to be trying to work on its own display driver technology
According to the aforementioned teardown report of the iPhone 6s/6s Plus, Apple separates its touch controllers (which come from Broadcom (NASDAQ:BRCM) and Texas Instruments (NASDAQ:TXN) in the current iPhones) from the display driver.
However, DigiTimes reported earlier this year that Apple is working to build a custom solution that integrates both the touch controller as well as the display driver into a single chip. Synaptics is currently sampling its second generation of such a solution , referred to as TDDI (touch and display driver integration).
If Apple is successful in building its own TDDI solution -- something it apparently hasn't been able to get in order for the iPhone 7 -- then this would almost certainly mean lost revenue for Apple's display driver chip vendor (Synaptics) as well as for Broadcom/Texas Instruments, which supply the iPhone touch controllers.
This may mean Synaptics is "in" for the next few iPhones; long-term picture looks less positive
If Apple sticks to its typical iPhone release cadence, which should mean a totally new design next year and a significant internal upgrade in the second half of 2017, then I suspect Synaptics winning the display driver spot in the iPhone 7 should also mean that Synaptics should be able to bag the revenue throughout the iPhone 7s cycle as well.
The bad news, though, is that given Apple's track record and significant capacity to spend on chip projects, it is likely to succeed in developing that in-house TDDI chip within the next couple of years. This means investors in Synaptics, as well as Broadcom and TI, should expect the revenue associated with the display driver and touch controllers, respectively, to dry up at some point.
Will Apple use Synaptics' TDDI chips or a stand-alone DDI?
It might seem reasonable to expect Apple would choose to use Synaptics' second generation TDDI solution. After all, according to Synaptics, TDDI solutions offer significant advantages over solutions that separate the touch controller(s) from the display driver chip.
The DigiTimes report merely says Apple has placed "LCD driver IC orders" with Synaptics; it doesn't indicate Apple will be migrating to one of Synaptics' more integrated TDDI solutions. I believe, in the absence of an Apple-designed TDDI chip, Apple will continue to use discrete touch controllers and display drivers.
The reasoning behind this is simple: Apple has been using the Broadcom/Texas Instrument touch screen controller combination for several generations now, and I suspect any associated firmware/software that Apple has built in support of these chips is quite mature at this point.
If Apple were to move to a solution from Synaptics, then Apple might not be able to leverage the large amount of research-and-development work that has gone into fine-tuning the current iPhone touch architecture.
Although there may be technical benefits associated with moving to a Synaptics TDDI solution, the risk associated with transitioning away from the current architecture, coupled with the fact that the use of such a solution is expected to be fairly short lived, doesn't seem worth it.
Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. 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.