Gross margins the main issue of discussion following Synaptics (NASDAQ:SYNA) 2Q report.
- Cowen notes that Q2 revenue was strong in both PC and music players, with 3c EPS upside from operations plus a 7c boost from lower taxes. Strong backlog for the March quarter prompts them to raise estimates. While GM guidance below 40% for the first time has psychological impact, firm believes a broader product set should drive faster growth and bottom-line benefits. Finally, firm sees further upside potential from the handset segment.
GM is expected to be about 39% in Q3, below the historical target range of 40-45%, due to the mix of consumer notebooks, and third party content and price competition in multimedia controls. However, with projected revenue up 47% Y/Y, EPS are 10% better than their prior model. Firm believes SYNA is strategically focused on driving incremental sales and operating profit, with actions such as moving more engineering to Asia, and the launch of OneTouch, configurable solutions, which allow customers to rapidly design their own interfaces.
- Bear Stearns notes SYNA reported 2Q07 upside and provided in line EPS outlook on higher revs. While declining gross margin is a concern, it attributed the decline to mix shift and noted that it is actively taking steps to improve margins. Firm is raising their ests and 2007 price target from $33 to $37. They would take advantage of any weakness in the stock given the increasing adoption of touch interface solution across increasing number of segments (consumer electronics, cellphones, etc.).
From a larger perspective, as a leading provider of user interface solutions, SYNA is well positioned to continue to benefit from the accelerating adoption of mobile devices (notebooks, cellphones, MP3 players, etc.). As seen in AAPL iPhone and LG Prada (uses SYNA), touch interface solutions like SYNA's are becoming critical as device sizes continue to shrink with increasing features and complexity of functionalities.
- First Albany says that consistent with what they believe were whisper expectations, the raised 3Q revenue guidance appears to reflect the continuation of Synaptics' dual source status in the iPod click-wheel business. However, the gross margin is expected to be only 39% in 3Q, 172 bps lower than their prior estimate.
According to the firm, the deterioration of the gross margin during 2Q reflects the ongoing mix shift toward low end notebooks and lower margin multimedia applications. While management hopes to reverse some of the gross margin degradation with cost improvement programs and the ramping of higher margin OneTouch offering, firm is prudently modeling in a sub-40% gross margin for the next few quarters.
Notablecalls: My best guess is that GM decline is rather a trend than a flip. Look at what the co is doing - clickwheels and touchpads, neither of them is what one would call something really unique or extraordinary. iPod clickwheels are dual-sourced so SYNA is not the only one with the knowhow, touchpads are really impossible to use and have plenty of makers. Only iPhone's touchscreen seems to be interesting, but hey, that's not SYNA's. With the stock trading at 25x 2007 EPS and GM set to decline, see no reason to own the stock.