Executive Summary / Key Takeaways

• Synaptics is demonstrating a clear recovery trajectory, fueled by strong performance in its Core IoT segment and strategic initiatives like the Broadcom acquisition, moving past prior inventory challenges.
• The company's differentiated technology in Edge AI processors and wireless connectivity, including new Wi-Fi 7/8 and broad market chips, provides a competitive edge and is expected to drive significant future growth, particularly in the Core IoT segment.
• Recent financial results show sequential and year-over-year revenue growth, improving operating margins, and positive cash flow from operations, supported by lean channel inventories and healthy order trends.
• Management's outlook anticipates continued sequential revenue growth through the end of calendar year 2025, underpinned by strong backlog and bookings, despite ongoing macroeconomic uncertainties and softness in the automotive market.
• Prudent capital allocation, including debt reduction via convertible notes and a share repurchase program, enhances financial flexibility while the company invests in organic growth and potential tuck-in M&A.

Setting the Scene: Synaptics' Strategic Evolution in the Semiconductor Landscape

Synaptics Incorporated operates as a fabless supplier of premium mixed-signal semiconductor solutions, engineering the interface between people and connected devices across the home, work, car, and mobile environments. The company's portfolio is built around three foundational elements of the Internet of Things (IoT): sensing, processing, and connecting. Leveraging a variable cost model, Synaptics outsources all production, minimizing capital expenditures and inventory risk while maintaining a global footprint to serve its diverse customer base, many of whom have significant operations in Asia.

The recent history of Synaptics has been marked by a strategic pivot and recovery from market headwinds. Following a period of significant inventory digestion that impacted revenue, particularly in fiscal year 2024 which saw a 29% decline, the company has successfully navigated these challenges. By the fourth quarter of fiscal 2024 and into fiscal 2025, Synaptics reported being largely clear of excess inventory, with channel inventories becoming notably lean. This stabilization has paved the way for renewed incremental revenue growth, albeit initially at a slower pace than hoped due to muted end-demand recovery across several markets.

Central to Synaptics' current strategy are three key pillars: investing in its core product lines within the Enterprise, Automotive, and Mobile Touch markets; aggressively pursuing growth opportunities in the high-potential Core IoT segment, specifically wireless and processors; and maintaining prudent capital allocation. This strategic framework aims to leverage the company's established market positions while capitalizing on emerging trends like Edge AI and advanced connectivity.

Within the competitive semiconductor landscape, Synaptics faces a diverse set of rivals, ranging from large, diversified players to more specialized firms. In the broader connectivity and AI SoC markets, companies like Qualcomm (QCOM) and Broadcom (AVGO) represent significant competitors with vast scale, extensive R&D budgets, and deep ecosystem integrations. These giants often lead in raw processing speed and bandwidth. However, Synaptics carves out its niche through specialized human interface technologies and a focus on energy efficiency and cost-effectiveness at the edge. For instance, Synaptics' AI SoCs are highlighted for their energy efficiency, claiming up to 20% greater energy efficiency in AI processing compared to certain competitors, a critical factor for battery-powered IoT devices. While QCOM may offer faster CPU/GPU performance, Synaptics' solutions can present a lower per-unit cost, potentially 10-15% less, appealing to cost-sensitive OEMs.

In specific segments like automotive and IoT sensors, Synaptics competes with companies such as STMicroelectronics (STM) and NXP Semiconductors (NXPI). Here, Synaptics differentiates through performance metrics like faster response times in fingerprint technology (10-15% quicker) and superior accuracy in touchpads (up to 99%). While STM and NXPI may have stronger established positions in certain automotive sub-segments or offer more cost-oriented microcontroller solutions, Synaptics aims to gain share through technological performance and AI integration. Synaptics' focus on ultra-low power Edge AI, claiming 30% greater battery efficiency in wireless devices compared to equivalents, provides a tangible competitive advantage in power-constrained IoT applications.

Despite its technological strengths and niche leadership positions (often cited as holding number one or number two market share in many core markets), Synaptics operates at a smaller scale than industry behemoths like QCOM and AVGO. This can translate to higher operating costs (potentially 5-10% higher) and exposes the company to the scale advantages of larger rivals. Furthermore, like most fabless semiconductor companies, Synaptics is dependent on third-party foundries and OSAT partners, making it vulnerable to supply chain disruptions and cost fluctuations. However, the high R&D investment required to compete in these advanced semiconductor fields acts as a significant barrier to entry, helping to protect Synaptics' market share against smaller or newer entrants.

Technological Differentiation and Innovation: The Engine of Future Growth

Synaptics' investment thesis is deeply intertwined with its ability to develop and deploy differentiated semiconductor technology. The company's innovation spans its core human interface solutions, advanced connectivity products, and burgeoning Edge AI processors.

In the realm of human interface, Synaptics has long been a leader in touch and display technologies. Its expertise in extracting signal from noisy environments, particularly relevant for flexible OLED screens in high-end smartphones, provides a key technical advantage. The upcoming multi-frequency touch controller for foldable OLED phones exemplifies this, designed for low power and low latency, enabling thinner and larger panels while incorporating enhanced sensing and filtering capabilities. This technology is expected to launch in calendar Q3.

Within the Enterprise and Automotive segments, Synaptics is leveraging its core competencies to introduce new solutions. The User Presence Detection (UPD) solution for PCs, which uses AI to detect user presence for power savings and security, is gaining traction. This dedicated chip solution is positioned against competing FPGA-based and software-only alternatives. Synaptics argues its dedicated silicon offers lower cost and power efficiency, allowing it to push feature sets faster than software-only solutions. The company expects UPD products to double in FY2025, albeit off a small base, and is expanding its reach beyond its lead customer to next-gen AI PCs on platforms like NVIDIA (NVDA). In video interface, new products like Carrera and DisplayLink Pro are designed to support the latest standards like Thunderbolt 5 and are uniquely positioned to support both ARM and x86 processors, addressing the evolving PC landscape and expected to drive improvement in 2025 after inventory correction.

The most significant technological thrust, however, is within the Core IoT segment, particularly in wireless and processors. Synaptics is actively developing next-generation wireless solutions, including its first broad market Wi-Fi chip and its first Wi-Fi 7 device specifically for IoT. The broad market chip is designed for embedded edge IoT, targeting an incremental $3 billion SAM. It boasts a significantly smaller die size, enabling up to 50% system cost reduction and consuming up to 50% less power compared to similar high-performance devices, while maintaining performance. This chip was on track to sample in Q1 FY25, with revenue expected mid-calendar 2025. The Wi-Fi 7 device for IoT aims to deliver up to 2x higher throughput, greater transmit efficiency, and improved reliability for high-bandwidth applications like video streaming and AR/VR. Synaptics believes it is among the first to introduce Wi-Fi 7 to the IoT market and expects initial adoption in high-bandwidth applications.

In processors, the AI-enabled Astra platform is a key long-term growth driver. This platform, which recently won an EDGE Award, is designed for scalable context-aware Edge AI, featuring a novel tiering approach for dynamic power management. Synaptics highlights its value proposition as enabling AI capability at competitive price points ($5-$7 range) and acting as plug-and-play replacements for existing MPUs, allowing OEMs flexibility in developing AI use cases. The collaboration with Google (GOOGL) to integrate Google's MLIR core with Astra is a significant validation of Synaptics' AI technology, which is expected to deliver industry-leading inference per watt. While material revenue contribution from Astra is not expected until the second half of fiscal 2026, customer traction and funnel growth ($300 million increase in Q1 FY25) are ahead of schedule.

The strategic acquisition of Broadcom's Mobile Android Wi-Fi Business, closed in January 2025 for $198 million cash, significantly bolsters Synaptics' technological capabilities in Core IoT connectivity. This transaction adds Wi-Fi 8, additional Wi-Fi 7, UWB IP, next-generation GPS/GNSS products, and front-end modules, solidifying the wireless roadmap for over five years and expanding the field of use into AR/VR, Android smartphones, and consumer audio. This acquisition is expected to generate over $40 million in annualized sales in Core IoT and is slightly accretive to non-GAAP EPS. It strategically positions Synaptics to address the evolving ecosystem where smartphones act as hubs for edge IoT devices, potentially making Synaptics one of the first to market with Wi-Fi 8 enabling Edge AI.

The "so what" for investors is clear: Synaptics' focused R&D and strategic M&A are building a portfolio of differentiated technologies designed to capture growth in high-potential markets, particularly Core IoT. The quantifiable benefits in power, cost, and performance provide a competitive moat against rivals. Successful execution on the roadmap for new products like broad market Wi-Fi, Wi-Fi 7, and Astra processors, coupled with the integration of acquired Broadcom assets, is critical for achieving the company's stated goal of 25-30% compounded revenue growth in Core IoT over the next five years, which is double its long-term corporate growth target.

Financial Performance and Outlook: A Turnaround Takes Shape

Synaptics' recent financial performance reflects a business emerging from a downturn and beginning a growth phase, albeit with segment-specific nuances. For the three months ended March 29, 2025 (Q3 FY25), net revenue was $266.6 million, an increase of 12.3% compared to $237.3 million in Q3 FY24, and flat sequentially from Q2 FY25 ($267.2 million). For the nine months ended March 29, 2025, net revenue was $791.5 million, up 11.2% from $712.0 million in the prior year period.

The growth is heavily weighted towards the Core IoT segment, which saw revenue jump 42.7% year-over-year in Q3 FY25 to $67.5 million, representing 25.3% of total revenue. For the nine months, Core IoT revenue grew 52.6% to $188.2 million. This segment has shown consistent sequential growth, with Q3 FY25 marking the fifth consecutive quarter of sequential improvement, and Q4 FY25 guidance pointing to a sixth. This strength is attributed to improving demand, new design ramps, and the clearing of prior inventories, further bolstered by the partial contribution from the Broadcom acquisition in Q3 FY25.

The Enterprise and Automotive segment, the largest contributor at 57.7% of Q3 FY25 revenue ($153.8 million), grew 14.2% year-over-year but declined 3% sequentially. The year-over-year growth for the nine months was 8.1% ($460.5 million). Performance within this segment is mixed; PC products are seeing sequential improvement and market share gains, while the automotive market remains sluggish, impacting revenue and delaying the adoption of new technologies like SmartBridge.

The Mobile segment contributed 17.0% of Q3 FY25 revenue ($45.3 million), experiencing an 18.1% year-over-year decline and a 4% sequential decrease. For the nine months, Mobile revenue was down 12.2% ($142.8 million). This decline is primarily due to the end-of-life of product shipments to a large customer, a headwind that management stated was fully behind the company as of Q2 FY25. The focus is now on the high-end Android market and new product introductions to drive future growth.

Profitability metrics show some pressure from recent acquisitions. Non-GAAP gross margin was 53.5% in Q3 FY25, down from 53.6% in Q2 FY25 and 53.9% in Q1 FY25. The GAAP gross margin in Q3 FY25 was 43.4%, down from 46.5% in Q3 FY24. This decrease in gross margin, particularly on a GAAP basis, is primarily attributed to increased amortization of acquisition-related intangibles, notably from the Broadcom transaction.

Non-GAAP operating expenses were $101 million in Q3 FY25, up from $97.1 million in Q2 FY25 and $95.9 million in Q1 FY25. This increase reflects headcount-related expenses from the Packet Craft acquisition and Broadcom transaction, as well as incremental variable expenses. Despite this, the non-GAAP operating margin in Q3 FY25 was 15.6%, an improvement from 12.9% in Q3 FY24, but a sequential decrease from 17.3% in Q2 FY25. The GAAP operating loss was $26.3 million in Q3 FY25, compared to a loss of $17.4 million in Q3 FY24.

Net loss on a GAAP basis was $21.8 million ($0.56 per share) in Q3 FY25, compared to a net loss of $18.1 million ($0.46 per share) in Q3 FY24. For the nine months, GAAP net loss was $43.1 million ($1.09 per share) compared to $82.7 million ($2.12 per share) in the prior year period. The nine-month period benefited from significant income tax benefits ($44.6 million) related to one-time items, including a deferred tax benefit from a U.S. check-the-box election for the Israel subsidiary and a benefit related to the fiscal 2018 deemed repatriation liability. Non-GAAP net income was $35.3 million ($0.90 per diluted share) in Q3 FY25, a significant increase from $20.8 million ($0.53 per diluted share) in Q3 FY24, and above the midpoint of guidance.

Liquidity remains solid. As of March 29, 2025, cash and cash equivalents stood at $360.4 million, down from $876.9 million at June 29, 2024. This decrease was primarily driven by cash used in financing activities ($313 million) related to the full repayment of the Term Loan Facility ($583.5 million) using proceeds from the $450 million Convertible Senior Notes issuance and cash on hand, as well as common stock repurchases ($112.3 million). Cash used in investing activities ($289 million) was dominated by the Broadcom acquisition ($198.8 million).

Cash flow from operations was positive in Q3 FY25 ($74 million) and Q2 FY25 ($24 million), but negative in Q1 FY25 ($11.4 million) due to cash tax payments. Days sales outstanding improved to 45 days in Q3 FY25 from 49 days in Q2 FY25 and 52 days in Q4 FY24, indicating efficient collections. Inventory days increased slightly to 96 days in Q3 FY25 from 87 days in Q2 FY25 and 88 days in Q4 FY24, reflecting inventory build to support anticipated demand. The company has $781.60 million remaining under its share repurchase authorization and believes its liquidity is sufficient for the next 12 months.

Looking ahead, management provided guidance for the fourth quarter of fiscal 2025 (ending June 29, 2025), projecting net revenue of approximately $280 million at the midpoint (±$15 million). This guidance implies accelerated sequential growth and continued year-over-year improvement. The expected revenue mix for Q4 FY25 is approximately 30% Core IoT, 54% Enterprise & Automotive, and 16% Mobile Touch, highlighting the increasing contribution from Core IoT. Non-GAAP gross margin is guided at 53.5% (±1%), non-GAAP operating expenses at $103 million (±$2 million), non-GAAP net interest and other expense at approximately $1 million, and a non-GAAP tax rate of 13-15%. Non-GAAP EPS is guided at $1.00 per diluted share (±$0.20).

Beyond Q4 FY25, management expressed confidence in a path for continued sequential revenue growth of approximately $10 million per quarter through the end of calendar year 2025, even within a low-growth economic environment. This outlook is supported by strong backlog and bookings trends extending into the September quarter and continued lean channel inventories. While macroeconomic uncertainties, particularly around the potential indirect impact of tariffs on end demand, and ongoing sluggishness in the automotive market remain factors to monitor, the underlying fundamentals of the business, driven by Core IoT momentum and strategic execution, appear healthy.

Risks and Challenges

Despite the positive momentum, Synaptics faces several risks. Macroeconomic uncertainties, including the potential impact of evolving tariff policies and trade restrictions, could disrupt supply chains, increase costs, and negatively affect end demand. While the direct impact of tariffs has been minimal so far, the indirect effects remain uncertain. The company remains dependent on its Core IoT and Enterprise and Automotive segments for a substantial portion of revenue, making it vulnerable to volatility and downturns in these markets. Cyclicality inherent in the semiconductor industry and target markets poses a risk to revenue stability.

Execution risk exists in successfully integrating acquired assets, particularly the Broadcom business, and realizing anticipated synergies and annualized sales contributions. The success of new product solutions for emerging markets, such as the broad market Wi-Fi chips and Astra processors, is not guaranteed and depends on market adoption and competitive dynamics. Delays in the adoption of new technologies, as seen in the automotive segment, can push out expected revenue contributions. Dependence on third parties for manufacturing and supply chain management exposes the company to risks related to yields, capacity, and delivery schedules. Geopolitical risks, including regional instabilities and hostilities, could also disrupt operations and supply chains. Finally, while debt has been restructured, servicing debt obligations requires significant cash flow, and the company's ability to settle convertible notes in cash or repurchase them upon a fundamental change depends on future performance and market conditions.

Conclusion

Synaptics appears to be at an inflection point, transitioning from a period of inventory correction and market softness to one of renewed growth, primarily propelled by its strategically expanded Core IoT segment. The company's differentiated technological portfolio, particularly in Edge AI processors and advanced wireless connectivity, provides a foundation for future expansion and a competitive moat against rivals. Recent financial results and forward guidance indicate a positive trajectory, supported by improving fundamentals like lean inventories and healthy order patterns.

While macroeconomic headwinds and segment-specific challenges, notably in automotive, persist, the strategic focus on high-growth Core IoT markets, augmented by key acquisitions and partnerships, positions Synaptics for potential outperformance relative to its traditional markets. The successful execution of its product roadmap, integration of acquired assets, and disciplined capital allocation will be critical determinants of whether Synaptics can fully capitalize on its opportunities and sustain the anticipated growth trajectory, making it a compelling story for discerning investors to watch.