Can Synaptics Live Up to Its Promise of a Turnaround?

Synaptics' (NASDAQ: SYNA) efforts to turn its business around this year haven't yielded tangible results so far thanks to the smartphone slowdown. The human interface solutions specialist was counting on its integrated fingerprint sensing chip to arrest the flailing fortunes of its mobile business, but it failed to find enough takers.

So it wasn't surprising to see the chipmaker post weak fourth-quarter results that capped off a year worth forgetting. Synaptics' annual revenue was down 5% in fiscal 2018, and it swung to a net loss of $124 million from a profit of nearly $49 million in the prior year. However, management believes that it can turn things around in the new fiscal year and achieve a low single-digit increase in the revenue.

But will Synaptics be able to deliver?

The mobile conundrum could continue

Synaptics gets close to 60% of its revenue from the mobile business, which has been stalling thanks to weak demand for its chips. Its mobile revenue fell 36% annually in the latest quarter to $221.5 million as it lost a key customer. And its new fingerprint sensing chip failed to take off because most OEMs (original equipment manufacturers) weren't willing to spend a lot of money on an incremental feature.

Chinese smartphone player Vivo was one of the few to deploy in-display fingerprint sensing into its smartphones, but they turned out to be expensive devices. The Vivo Nex, for example, is priced at $636 even after a 6% discount. This makes it a difficult sell in price-sensitive markets like India, given that the more popular 128 GB variant of the OnePlus 6 goes for a much lower price of roughly $566.

Synaptics is confident that demand for its mobile chips will start picking up. But investors shouldn't take that faith at face value, as the company has failed to score a client that could help it move big volumes. ASUS is one of the companies using Synaptics' display drivers in its latest flagship smartphone, but it isn't as big a player as Samsung, Apple, or Huawei.

Synaptics needs one of the big smartphone OEMs to use its chips in larger volumes if it is to turn its mobile business around. But the problem is all of them seem to be moving away from the chipmaker. Apple, for instance, is reportedly going to go in-house and make its own display drivers. And Samsung shifted away from Synaptics' solutions earlier this year, choosing Egis Technology to supply fingerprint sensors for its latest flagship devices.

Huawei, on the other hand, was using Synaptics' chips until last year, but the chipmaker hasn't announced any new design wins with the Chinese smartphone giant. So it is difficult to say that Synaptics' mobile business will see a turnaround this year.

However, IoT is steadying the ship...

Synaptics' mobile business might be down in the dumps, but its freshly minted Internet of Things (IoT) segment has played a critical role in steadying the ship. Consumer IoT now supplies a fourth of Synaptics' total revenue, which is impressive considering that the segment didn't exist a year ago.

The chipmaker bought its way into the IoT space in July last year by acquiring Conexant for $300 million, and there has been no looking back. Synaptics pulled in over $96 million in revenue from the IoT segment last quarter, and it looks all set to sustain the momentum, as it is now pursuing a fast-growing niche within the IoT space.

The Conexant acquisition has allowed Synaptics to tap into the smart-speaker space, as the former supplied audio development kits for smart speakers based on Amazon's Alexa virtual assistant. Synaptics has hit the ground running in this market, scoring a series of design wins for its far-field voice digital signal processors (DSPs), which are critical to the operation of smart speakers.

The likes of Harman International, NTT Docomo, and now Baidu are using Synaptics' far-field voice processors. Baidu, for instance, will integrate Synaptics' processors into several devices based on its recently launched DuerOS Mobile Accessory (DMA) platform, including headphones, Bluetooth speakers, wearables, and automotive accessories.

But this is just the beginning. Demand for Synaptics' far-field voice DSPs should expand remarkably in the long run, as the smart-speaker market is expected to grow at an annual pace of 32% through 2022, according to IDC.

...but it won't be enough

However, investors shouldn't be under the illusion that IoT will help the company make a total comeback, as its mobile business does most of the heavy lifting. The company seems to be losing traction at key smartphone customers, and the contracts that it has landed won't do much to turn things around. In all, until and unless Synaptics lands a big smartphone win, its turnaround will remain a pipe dream.

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