SYNA: Outperform , Target 42 from CSFB
Strong 2Q05 Results; Raising Estimates and TP to $42 (from $40); Reiterate Outperform
Synaptics reported 2Q05 earnings on January 20, 2005, of $0.33 per share versus $0.14 in the year-ago quarter and the consensus estimate of $0.29 on revenue growth of 65% y/y to $56.5 million.
Operating margin of 27.8% exceeded the year-ago quarter's margin of 16.7% primarily as a result of a 530 bp improvement in gross margin and operating expense leverage from higher sales. Gross margin was favorably impacted by a mix shift to a higher percentage of portable music players and from efficiency gains.
Non-PC revenue accounted for 43% of total revenue and increased nearly 350% to $24 million from $5.5 million in the year-ago quarter, driven primarily by explosive growth of the popular iPod music player, and to a lesser extent by strong contributions from relatively new music players such as the Zen Micro.
By far the greatest surprise in the press release was the sequentially flat revenue estimate management gave for the March quarter, typically a seasonally down quarter. Strength in the portable music player market continues to exceed expectations. Three new MP3 player design wins should help sustain the strong growth rates.
On the call management highlighted progress on the mobile handset front, with promising news anticipated within 3-6 months. The terms "optimistic" and "increasingly confident" were used to describe the potential for Synaptics's technology on mobile phones. The addition of MP3 player functionality on phones is driving interest.
As a result of the quarter's outperformance and increased revenue expectations we are increasing our FY05 EPS estimate to $1.10 from $0.83 and our FY06 estimate to $1.30 from $1.04. We are also increasing our price target to $42 from $40, which is based on a HOLT discounted cash flow analysis. We reiterate our Outperform rating.
