Let's represent MK's downsmash as "<1<--MK-->2>." The arrows being his sword, the numbers indicate which swing, and MK is his body. We'll call the person being hit "*," and the launch direction as "<--------/-------->."
Situation A)
*<1<--MK-->2>
<--------
The opponent is hit with the tip of MK's first downsmash swing and is sent flying horizontally to the left.
Situation B)
<1<--MK-->2>*
-------->
The opponent is hit with the tip of MK's second downsmash swing and is sent flying horizontally to the right.
Situation C)
<1<*--MK-->2>
-------->
The opponent is hit with MK's hand during his first downsmash swing. The opponent is sent flying horizontally to the right, directly into MK's second downsmash swing. The opponent is sent flying further horizontally to the right.
That's how I see it. It will only work at lower %'s or the opponent is sent too far out of the second swing's reach. On smaller characters it may or may not require improper DI. I haven't tested this much, but I think this is how it works. Please correct me someone if I am wrong.