Please see disclaimer at bottom of this document
January 31, 2006 Some notes
1. Conference call had lots of vagueness. No comment on Apple business. Too much emphasis on non-Gaap. Look people, options expense is an expense. This reminds me of the late 90’s.
2. Earnings release did not contain a statement of cash flows.
3. Constant insider selling. From option shares, nevertheless selling is feverish.
4. expects 3Q06 revenues to be in the $42M – $45M range. “currently anticipate revenue in the June quarter could be up sequentially from March quarter levels.”
5. Financial Statement Stuff
a. Book Value = 146,123. Tangible Book Value = 119,142.
b. shares outstanding 29,001 (this is down from 29,372 a year ago)
|Enterprise Value per share||$24.37|
Quick Income Projection 2006
|Net Margin %||15%|
|Stock Option expense (imputed, no basis)||$10,000|
|Deferred taxes (cushion)||$1,500|
|Adjusted Net Income||$15,500|
Quick Back of envelope valuation
|Current Enterprise Value||706,762|
|Future Value per share using 30M shares in 10N||19.86|
If we change these numbers to net income of 22,000, and growth of 15%, you get future value of $929M. Using FV of 929M, current market cap of $812M (ignoring EV), annual rate of return would be 1.36%.
I can’t sell this quick enough. I was able to sell 38,116 shares at $27.62, but the remaining 38,000 shares are tuff. I finally sold the remainder and the final average price was $27.57.
September 29, 2005 Review of 10K
1. Synaptics will celebrate their 20th anniversary in 2006.
2. Interesting to me that Synaptics actually pays Federal Corporate Income
Taxes. If you look at most recent 10Ks of Ebay and Qualcomm, you will see that they each have hundreds of millions if not billions of Federal Net Operating Loss Carry-forwards. This bodes well for Synaptics earnings quality.
3. With that said, Synaptics has recently been replaced in Apples, Ipod Nano. This could cause financial discomfort in the future. This will be a wait and see, as to how future financials pan out, starting with 1Q06 (9/30/05).
4. Principal competitors from 10K:
|Company||notebook touch pads||Notebook pointing sticks||IAppliance interface|
5. Foveon –
a. Made another $4M investment during fiscal year.
b. “Note Payable to a Related Party. The long-term note payable of $1.5 million to National Semiconductor Corporation (National) represents limited-recourse debt that is secured solely by a portion of our stockholdings in Foveon, Inc. (Foveon), in which National is also an investor. We do not anticipate making any payments under the limited-recourse loan with National, either prior to or at maturity, unless Foveon is participating in a liquidity event, such as an initial public offering of its equity securities or a merger, through which we would receive amounts in excess of our $1.5 million long-term note payable plus accrued interest expense.”
c. “We have an investment that consists of an ownership interest in the form of convertible preferred stock in a privately held development-stage company. As our initial voting interest exceeded 20%, we accounted for the investment under the equity method in accordance with Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock” (APB 18), and the Emerging Issues Task Force (EITF) topic D-68 and Issue No. 98-13 “Accounting by an Equity Method Investor for Investee Losses When the Investor Has Loans to and Investments in Other Securities of the Investee” and Issue No. 99-10 “Percentage Used to Determine the Amount of Equity Method Losses”. We considered our ownership of preferred stock and advances made to the affiliated company in determining the amount of equity losses to be recognized (see Note 2). The balance of our investment in this company was reduced to zero in fiscal 2000, pursuant to equity method accounting. During fiscal 2005, our investee issued additional preferred stock and we made an incremental investment in the amount of $4.0 million. As a result of the preferred stock issuance, our voting interest in the investee was reduced to approximately 15%. In addition, two of our board members also serve on the board of the investee. Our incremental investment will be accounted for under the cost method in accordance with APB 18 and EITF Issues No. 02-14 “Whether an Investor Should Apply the Equity Method of Accounting to Investments Other than Common Stock” and No. 03-1 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” because the investment is not “in-substance common stock” and will be reviewed periodically for impairment.”
6. Fundamental metrics are excellent. Yet, we need to see future quarters, as we really don’t know how much future growth has been lost in the Apple situation. We do not yet know the proliferation of Synaptics products in the mp3 market (excluding Apple), the cellular phone market and the continued success of the notebook market.
The following is some ratio analysis:
You can see the formulas at this link : favorite ratiosand formulas.html
a. ROE = 26.26
b. Price to Growth Flow ratio is 8.57. This is healthy. This ratio is Price/ (eps + FWD 1Y R&D)
c. Flow Ratio = 1.16 . You want this number to be less than 1.25.
d. Operating margin 15%
e. Return on Capital 12.21
f. Return on Invested Capital (ROIC) 27.92%. Very healthy.
The above ratio analysis is hardly complete, but certainly something to work with. Again, one does not want to get to carried away with fundamental analysis here. The game may have changed dramatically with the apparent loss of the Apple contract.
7. I have recently been introduced to a Price to Sales rule of thumb. I haven’t applied this method to any analysis yet.
If we use this rule of thumb on Synaptics, we get the following:
|Net Income F2005||$ 37,985|
|Less: Stock Based Compensation (net)||(6,293)|
|Net Income adjusted||$ 31,692|
|Net Margin adjusted||15.23%|
|Price to Sales multiple from above||3X|
|Market Cap based on above multiple||$621,417|
|Current Shares outstanding||29,761|
|Current share price 9/28/05||17.87|
|Market Cap actual||$531,829|
|Share Price based on 3X revenues||20.88|
|Current discount based on above||14.60%|
Please understand that the above is merely theoretical and could be error filled or misinterpreted by me. Perhaps the discount is attributable to the loss of Apple as an Ipod customer.
One needs to understand that included in the market cap is an extra net cash over debt of $103,921. This brings the enterprise value of Synaptics to 427,908. Hence, one could argue greater value.
8. Here is a grid of bonds trading today. This is a substantial discount. This needs to be monitored. Bonds are unrated and convertible.
Issue: SYNA.GB SYNAPTICS Time and Sales
INCORPORATED 0.75 12/01/2024 Descriptive Data
In Rating —————— Last Sale —————— —————— Most Recent ——————
Portfolio Moody’s/S&P/Fitch Date Price Yield Date Price Yield
N/A / N/A / N/A 09/23/2005 80.061999 2.007881 09/23/2005 80.06 2.007881
9. Insider activity – There was heavy selling at prices in the $30’s. I noticed from September 2004, through February 2005. www.form4oracle.com . There has been some recent buying in the mid-teens, but only for a few hundred thousand dollars. Nevertheless, something to watch.
Insiders own 11.82% according to Yahoo. Using Yahoo is terribly dangerous, but for now, that is what I am using for this illustration.
10. We have seen estimates that Ipod contributed $56M to 2005 revenues.
11. I have also excluded dilution in the above calculation. Perhaps F2006 shares outstanding will be 31M.
12. Just some spreadsheet stuff I worked with. I am only using this as a roadmap since the future is so cloudy. We need to see Apple effects, cellular entry and potential proliferation into other mp3 markets. The following should not be used by any reader as any type of valuation or as any type of investment advise.
Here is a summary of the document.
|Price/ Net Cash Flow||#DIV/0!||60.42||48.96||32.45|
|Price/ Net Book Value||2.33||7.11||5.76||3.67|
|P/E Ratio Current||35.00||45.31||20.98||16.23|
|P/E Ratio Year 2||28.00||36.25||21.36||19.83|
|LT Debt / Shr. Equity||1.97%||1.97%||1.97%||86.41%|
|LT Debt / Current Assets||1.61%||1.09%||1.09%||45.71%|
|Return on Shr. Equity||0.00%||11.90%||11.90%||26.26%|
|PEG Ratio (Current)||2.33||1.81||2.10||1.62|
|PEG Ratio Year 2||1.87||1.45||2.14||1.98|
|PEGY Ratio (Current)||2.33||1.81||2.10||1.62|
|PEGY Ratio Year 2||1.87||1.45||2.14||1.98|
|Graham Ratio (current)||81.40||322.07||120.85||59.48|
|Graham Ratio Year 2||65.12||257.66||123.05||72.70|
|Growth Flow Ratio (s/b <12=nrml)||6.67||19.86||12.11||9.25|
|Cash King (s/b > 10 % )||0.00%||8.25%||8.25%||7.93%|
|Flow Ratio (s/b < 1.25 )||1.97||3.06||3.06||1.17|
|Intrinsic Value (current)||5.87||30.51||26.01||23.91|
|Intrinsic Value Year 2||7.34||38.13||25.54||19.56|
|Intrinsic Value Year 3||8.44||47.67||23.22||21.73|
|Intrinsic Value Year 4||9.71||59.58||25.54||23.91|
|Intrinsic Value Year 5||11.16||74.48||28.10||26.30|
|Intrinsic Value / Price (current)||-16.12%||5.20%||10.68%||33.93%|
|Intrinsic Value / Price Year 2||4.85%||31.49%||8.70%||9.58%|
|Intrinsic Value / Price Year 3||20.58%||64.37%||-1.18%||21.75%|
|Intrinsic Value / Price Year 4||38.67%||105.46%||8.70%||33.93%|
|Intrinsic Value / Price Year 5||59.47%||156.82%||19.57%||47.32%|
August 1, 2005
SYNA Warns on 7/28/05 with 8K and Conference Call
1. SYNA mentioned that based on current visibility, revenues will be down 9% to 10% in 1Q06. Based on lower visibility in MP3 market and anticipated seasonal growth in notebook market.
2. Claims that their product is integrated into over 50% of notebook computers.
Notes from CC
1. Revenues from PC applications grew 20% sequentially for quarter, whereas revenues from non-PC applications were down 21%.
2. Samsung using Synaptics in Korean market. Samsung SCHF310 using a Synaptics interface.
3. Expects further phone integrations within the next 6 months.
February 14, 2005
Here are my simple thoughts so far. If sell sides are speculating in their statements, then i think they could be wrong. If sell sides have info that public does not yet have, then they are correct. I do not believe that any of the sell sides are conspiring or doing anything wrong. I don’t think they are trying to drive down price in order to purchase more. Analysts have substantially reduced their estimates. I really have never seen this done before by a few majors, where the info turned out to be false. Did SYNA give any guidance, or did they just remodel their spreadsheets?
I was just toying with some numbers and projections. These numbers are really working with some revised analyst reports, and I am hoping that they are near worst-case scenarios. I have a feeling that if these numbers turn out to be too optimistic, that Wall Street will quickly revalue SYNA to a much greater devalued situation. Hence, if numbers are overstated in analyst projections, most investors will have no time to exit positions prior to any news. With that said, here goes a back of the envelope analysis (keep in mind that First Call has not updated their reports for the new expectations by several firms.
I used a 10% growth rate (arbitrary after 2007)
If eps is 1.95 in 2014 and multiple was say 15X eps, you would have 2014 share price of 29.25
Putting in the following in my TI BA II Plus:
23.00 PV (price i just bought at , yet i carried a cost of 7.00ish prior to repurchase)
Computed annualized return becomes 2.43% for 10 years. Hence, using a bad case scenario, one can try to reason that risk/ reward is not awful right now.
The above, I will use as a roadmap, and hope that the 2014 eps projections and multiple of 15X are higher than this projection. Also, hoping that a minority interest in Foveon pays off.
FYI here was some previous thoughts from my quick analysis in November 2004. At this time, I was trying to develop a decision whether to sell off my positions, which increase around 4 fold at the time, or just hold. I generally held, unless portfolios were too highly concentrated in SYNA. Incidentally, I bought NSM and SYNA at similar times (going from memory). I completely exited NSM, i think in 2003 or
2004 (near her highs). I kept SYNA only because of the GG Foveon connection.
Here was my previous analysis:
I used a 15% growth rate (arbitrary after 2007)
If eps is 3.60 in 2014 and multiple was say 18X eps, you would have 2014 share price of 64.80
Putting in the following in my TI BA II Plus:
23.00 PV (price i just bought at , yet i carried a cost of 7.00ish prior to repurchase)
Computed annualized return becomes 10.91 % for 10 years.
Here is what briefing.com said about SYNA today.
” 08:54 SYNA Synaptics estimates, target cut at CSFB (22.50 )
Firm cutting its EPS estimates and price target based on expectations SYNA is in line to lose a substantial portion of its business with Apple over the next twelve months. On Feb 9, firm confirmed Cypress Semiconductor (CY) has won design contracts for at least some of the next generation iPods, likely due out in the late summer or fall of 2005. The iPod business was expected to represent approx 30% of SYNA’s
revenue in fiscal 2006, and 45-50% of operating income. While firm has limited info regarding the extent of the Cypress win, CSFB anticipates Synaptics could retain between approx 40% and 50% of future unit volume. Firm believes the presence of another competitor in the personal digital entertainment space will impact the future gross margin SYNA can achieve in its non-PC segment. With these assumptions
in mind firm reducing its FY2006 EPS est to $0.95 from $1.30 and FY07 est to $1.05 from $1.47. Firm’s new estimates result in a $28 price target (down from $42). ”
Fleckenstein mentioned SYNA briefly in his last article on his site. Here are the minor mentions.
https://www.fleckensteincapital.com/index.aspx I don’t think that Fleck follows SYNA at all, but that he envisions the tear apart in the chips, could be similar to SYNA last week.
” SYNA: The Chip Roadmap Overnight markets were quietly higher, ditto our equity futures, as they completely ignored the disappointment at Dell and a couple other companies. Dell, like Cisco, was a disappointment, not a disaster, as it struggled a bit to make the estimates that had been set. Beneath
the hood, a few line items continued to look somewhat iffy, but nothing worth delving into.”
” Chart types are piling into Sox stocks because they figure the charts tell them everything’s okay. Sometimes that is the case. Other times, it’s the case of what recently happened to Synaptics. That is the roadmap that I believe lies ahead for most of the chip companies I follow, as well as many of the speculative highfliers, if not the market itself.”
This is what Cody Willard at TSC said on 2/9/05 (might have misinformation?)
” I mentioned on Monday that I was “nibbling a little bit of Synaptics (SYNA:Nasdaq), adding to a very small position” as I put it at the time. I don’t care how small a position is (and this one is one of my smallest at less than 1% of my fund), it hurts to have a stock down 21%. The company lost the touchpad business for Apple’s (AAPL:Nasdaq) Powerbook line to Cypress Semiconductor (CY:NYSE) today. That alone wouldn’t account for a 21% drop in the stock except that now there are lots of concerns about the company’s bread and butter growth segment, which is supplying the touch pad on the iPod. And if SYNA’s lost the Powerbook business, what’s to stop them from losing the iPod, too? Frankly, I don’t think SYNA is losing the iPod business (though to be clear, that is certainly a risk, and I was wrong about the stock when I wrote about it on Monday). I’ve doubled up on my still small position in the name down here.
Net long AAPL, SYNA”
Here are some notes I previously took on SYNA. Please note I see that my last sentence mentions jon stone, he recently did sell around $400 to $500k worth.
December 1, 2004
I just read a report on SYNA from Behind the Numbers. Here are some notes of that report. I’m not so certain that author fully understands SYNA based on my notes of October 25, 2004. Nevertheless, something to watch.
1. operating cash flow has dropped , while earnings have increased. this has not been there historic fashion. this was caused by increase in accounts receivable and inventory increase which was planned by management. Quarters sales were allegedly made at end of quarter.
2. cash flow includes around $1mil in tax benefits of stock options.
3. company outsources, hence cash flows should be positive.
4. DSO’s up considerably. concern over payment terms being given to less worthy customers? who are the two largest customers. I think one is Apple, who is the other?
5. did SYNA loosen payment terms or incentives to strengthen quarter?
6. are warranty cost reserves too low. reserve is now 1.6% of revenues, previously 3.3%.
7. A/r reserve has decreased from 1% of receivables, to 0.60%.
October 25, 2004
1.If you project revenues for F2005 of $170M and shares o/s of 29,200,000, you get sales per share of $5.82 . Keep in mind that I am not projecting $170M of revs, nor am I projecting F2005 share count of 29.2M.
2.Accounts Receivable at September 30, 2004 went up 34% QoQ, whereas sales went up a little more than 8%. On a YoY basis accounts receivable has increased 124%, whereas sales went up 29%. DSO should be watched here. There are some potential warning signs. On 1Q05 CC, SYNA claims that DSO went to 70 days from 56, because of back loaded quarter.
3.Inventory went up 17.76% QoQ.
4.Market cap with shares of 27,693,808 and price of 29.85 is $826,660,169.
a. Day, Shawn owns 65,509 shares. He owned 100,009 April of 2003. Seems to be on a regular sale program.
b. See report, there is an awful lot of insider selling.
c. Knittel, CFO owns 3065 shares, He owned 40,584 April of 2003.
6.Fully diluted shares outstanding is increasing at about an 8 to 11% annual rate.
1Q05 CC Notes
7.CFO claimed on 1Q05 CC that “revenues from new market applications increased more than 81% sequentially to approximately 33% of total revenue.”
8.I haven’t seen an R&D projection. For now, I will use $6m per quarter.
9.Per CC for 1Q05 headcount will increase. Currently stands at 199.
10.Stock option exercises and esop contributions brought in $1M for 3 months ended September 30, 2004.
11.ASIC inventory increased to a “targeted 6 month supply.
12.Revenue growth for 2Q05 is expected to be in range of 35% to 45%. This is expected to come from strong demand in portable music players.
13.Revenue growth in 3Q05 expected to be in excess of 1Q05, yet not increasing at the guided rate of 2Q05 because of seasonality. Much of this depends on new product introductions.
14.Gross Margins expected to be similar to 1Q05, which were 45%. Target is 40 – 45% moving forward.
15.Net income for 2Q05 expected at $0.27 – $0.30.
16.Operating expenses expected to be up sequentially in 2Q05, because of increased staffing levels.
17.Tangible book value at September 30, 2004 is $4.075 per share.
18.Need to see 10Q for Statement of Cash Flows. In 1Q05 CC, SYNA mentioned cash flow from operations at $175,000, yet Capex was at $246,000. This of course is negative free cash flow.
19.Flow ratio is 1.59, desirable to be less than 1.25 generically speaking. At June 30, 2003 it was 1.41 and at June 30, 2004 it was 1.49.
20.according to 10K, there are 1,321,422 rule 144 shares. The total shares outstanding are 25,113,208. Hence 5.26% of outstanding is held by insiders. Yahoo profile indicates 4.43%. Perhaps that includes subsequent sales.
21.SYNA owns 17% of Foveon Corporation as of June 30, 2004 as discussed on page F-16 of 10K.
22.as of June 30, 2004, there were 226,273 Stock Option Shares Outstanding. The weighted average stock price for those shares were $15.98. The stock price on June 30, 2004 was 19.32. The 10k listed these shares as “antidilutive” . I need to look to see why these are antidilutive, when in fact they seem to be above water.
23.Some Insider stuff. http://www.nasdaq.com/asp/Holdings.asp?symbol=SYNA&selected=SYNA&page=holdingssummary
a. Shawn Day, currently owns 65,509 shares , he owned 100,009 on April 22, 2003. He has automatic selling in place, and the share price has increased substantially since 4/03. Hence, this is just something to watch.
b. Donald Kirby has around 7000 shares. His selling is only option related.
c. Russell Knittel, CFO, currently owns 3065 shares , he owned 40,584 on April 22, 2003. that appears to be more than option related selling.
d. Thomas Spade, currently owns 18,004 shares (i think the site has an error, whereas, i think he only owns 3004 shares. it does not appear that the recent sale of 15k shares was reduced) , he owned 40,004 on April 22, 2003. that appears to be more than option related selling.
e. William Stacy, currently owns 1 share , he owned 55,001 on January 23, 2004.
f. John Stone, currently owns 24,575 shares, does not look like he has ever sold !
If you are a client of ours, and if you have questions regarding Synaptics, please call our office. If you are not a client of Redfield, Blonsky & Co. LLC Investment Management Division and are reading these notes, we urge you to do your own research. We will not be responsible for any person making an investment decision based on these notes. these notes are a “by-product” of our research. We are not responsible for the accuracy of these notes. We are not responsible for errors that may occur in these notes. Please do not rely on us to monitor or update this or any other report we may issue. In theory, we could come across some type of data or idea, which causes us to eliminate our long position of Synaptics from our portfolios. We will not notify readers revisions to these notes. We are not responsible to keep readers of these notes updated for changes or material errors or for any reason whatsoever. We manage portfolios for clients, and those clients are our greatest concern as it relates to investing. Certain clients of Redfield, Blonsky & Co LLC may not have eBay in their portfolios. There could be various reasons for this. Again, if you would like to discuss Synaptics, please contact Ronald R. Redfield, CPA, PFS (partner in charge of investment management division).
Information herein is believed to be reliable, but its accuracy and completeness cannot be guaranteed. Opinions, estimates, and projections constitute our judgment and are subject to change without notice. This publication is provided to you for information purposes only and is not intended as an offer or solicitation. Redfield, Blonsky & Co. LLC and Ronald R Redfield, CPA, PFS, may hold a position or act as an advisor on any investments mentioned in a report or discussion.