Jennifer Jarman - The Blueshirt Group, LLC Richard A. Bergman - Synaptics, Inc. Wajid Ali - Synaptics, Inc..

John Vinh - KeyBanc Capital Markets, Inc. John Joseph Donnelly - Stifel, Nicolaus & Co., Inc. Robert W. Stone - Cowen & Co. LLC Paul Coster - JPMorgan Securities LLC Ambrish Srivastava - BMO Capital Markets (United States) Charlie Lowell Anderson - Dougherty & Co. LLC Vijay Raghavan Rakesh - Mizuho Securities USA LLC Rajvindra S. Gill - Needham & Co. LLC.

Good day, and welcome to the Synaptics Fourth Quarter Fiscal Year 2018 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Jennifer Jarman with The Blueshirt Group. Please go ahead, ma'am..

Thank you, Brad. Good afternoon and thank you for joining us today Synaptics' fourth quarter fiscal 2018 conference call. With me on today's call are Rick Bergman, President and CEO; and Wajid Ali, CFO. This call is also being broadcast live over the Web and can be accessed from the Investor Relations section of the company's website at synaptics.com.

A quick reminder that we have posted a supplemental slide presentation on our Investor Relations website. The supplementary slides have also been furnished as an exhibit to our current report on Form 8-K filed with the SEC earlier today, and add additional color on our financial results.

In addition to the company's GAAP results, management will also provide supplementary results on a non-GAAP basis, which exclude share-based compensation, acquisition-related costs and certain other noncash or recurring or non-recurring items.

Please refer to the press release issued after market close today for a detailed reconciliation of GAAP and non-GAAP results. Additionally, we would like to remind you that during the course of this conference call, Synaptics will make forward-looking statements.

Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business.

Although Synaptics believes our estimates and assumptions to be reasonable, they are subject to a number of risks and uncertainties beyond our control and may prove to be inaccurate. Synaptics cautions that actual results may differ materially from any future performance suggested in the company's forward-looking statements.

We refer you to the company's current and periodic reports filed with the SEC, including the Synaptics Form 10-K for the fiscal year ended June 24, 2017 for important risk factors that could cause actual results to differ materially from those contained in any forward-looking statements.

Synaptics expressly disclaims any obligation to update this forward-looking information. And with that said, I'll now turn the call over to Rick Bergman.

Rick?.

Thanks, Jennifer, and I'd like to welcome everyone to today's call. We are pleased to end the fiscal year on a very strong note. Q4 non-GAAP bottom-line results came in at the high end of our guidance range, driven by non-GAAP gross margins that exceeded our expectations and were up a healthy 520 basis points year-over-year.

This is a direct reflection of the success of the acquisitions made a year ago, which launched an exciting transformation for Synaptics with the addition of industry leading, consumer IoT platform as well as a corporate-wide focus on maximizing profits within our product portfolio.

The expansion of our business has resulted in a technologically innovative and highly differentiated product lineup that has enabled us to focus our growth priorities on products providing greater opportunities for gross margin contribution and profitability, and we are clearly beginning to see the proof points.

After four consecutive quarters of gross margin improvement, it's clear that this strategy is working. Our transition to Synaptics 3.0, a more diversified company with greater earnings power, is well underway. This evolution also requires difficult, but practical decisions to maximize our goal of growing our more productive businesses.

We have, therefore, decided to restructure the discrete optical fingerprint business for mobile. I want to be clear that the mobile market represents a very compelling opportunity for Synaptics through our multiple core product offerings, particularly with recent positive trends leveraging OLED, TDDI and chip-on-film.

Concurrently, we are making big strides in auto and the PC market in a large part due to our fingerprint solutions. What this change does open up is the ability to channel even greater focus and investments on profitable verticals such as audio, AR/VR and automotive, where we stand to further benefit from exciting growth and margin opportunities.

This will create the potential for even greater gross margin expansion over time, where leveraging our technology leadership, we can now aspire to break the 40% threshold.

While we don't expect this to occur in a linear fashion as we continue to pursue attractive, profitable opportunities in the mobile market, such as the highly integrated solutions, we recognize that we are clearly changing as a company and can now realistically set our sights on this goal.

With that, I'll now turn it over to Wajid, and then I'll finish up with a deeper dive into our recent progress..

Thank, Rick. Synaptics posted a solid quarter and annual results despite challenging supply conditions and periods of weakness in the general mobile market over the course of the year. Revenue for fiscal 2018 of $1.63 billion was down 5% from the last fiscal year.

Revenue for the June quarter of $388 million was down 1% sequentially and down 9% year-over-year. I will note that our diversification strategies have enabled Synaptics to weather negative trends in the mobile market far better than others in the mobile supply chain.

As reflected in the presentation materials released in advance of this call, revenue for mobile, IoT and PC products was approximately 57%, 25%, and 18%, respectively. Revenue for mobile products was down 36% compared with the year-ago quarter and down 10% sequentially. Revenue from IoT products was up 319%, year-over-year, and 8% sequentially.

Revenue from PC products was up 23% year-over-year and 17% sequentially. During the quarter, we had two customers above 10% of revenue at 12% and 13%.

For the June quarter, our GAAP gross margin was 32.8%, which includes $17.7 million of intangible asset amortization, $900,000 of share-based compensation, and $600,000 of inventory fair value adjustment charges.

GAAP operating expenses in the June quarter were $136.3 million, which includes share-based compensation of $17.3 million, acquisition-related costs of $6.3 million, consisting of intangibles amortization and transitory post-acquisition compensation program costs, restructuring expenses of $3.4 million, transaction-related costs of $1 million, consisting of legal and consulting fee, and approximately $800,000 of costs related to the arbitration of matters associated with the prior acquisition.

In the June quarter, we had a GAAP net loss of $1.5 million or a loss of $0.04 per diluted share. And for fiscal 2018, the GAAP net loss was $124.1 million or a loss of $3.63 per diluted share. On a non-GAAP basis, our June quarter non-GAAP gross margin of 37.8% was above the high end of our guidance range, and primarily reflects overall product mix.

June quarter non-GAAP operating expenses were above the high end of our expectations at $107.5 million and were relatively unchanged from the preceding quarter. For fiscal 2018, our non-GAAP tax rate was 12%, down from 13%. The changes in our non-GAAP tax rate provided $0.04 per diluted share in fiscal Q4 and for the year-end total fiscal 2018.

Non-GAAP net income for the June quarter was $35.7 million or $1 per diluted share, a 14% decline year-over-year as compared with $41.4 million or $1.18 per diluted share in the fourth quarter of fiscal 2017. Non-GAAP net income for fiscal 2018 was $141.4 million, or $4.05 per diluted share, down 19% from $173.9 million last fiscal year.

Turning to our balance sheet, we ended the quarter with $301 million of cash, an increase of $18 million from the preceding quarter. Cash flow from operations was $8 million for the quarter and $145 million for the year. Receivables at the end of June were $289 million and DSOs were 67 days. Inventories were $131 million and inventory turns were 7.4.

Capital expenditures for the year were $34 million and depreciation was $39 million. We continue our commitment to generating shareholder value by repurchasing $93.6 million or 1.7 million shares this fiscal year. Now, I will make a few comments regarding our quarterly outlook.

Based on our backlog of approximately $267 million entering the September quarter, subsequent bookings, customer forecasts, product sell-in and sell-through timing patterns, as well as expected product mix, we anticipate revenue for the September quarter to be in the range of $390 million to $430 million.

We expect the revenue mix from mobile, IoT and PC products to be 62%, 22%, and 16% respectively.

This guidance primarily reflects a sequential increase in our mobile business due to an increase in TDDI, chip-on-film, and DDIC shipments, partially offset by continued shortages on a few of our products, and sequential declines in our IoT and PC businesses.

I will now provide GAAP outlook data for our September quarter, and will follow with non-GAAP outlook data. We anticipate the stock-based compensation charge in the first quarter to be in the range of $18.1 million to $18.6 million.

In addition, September quarter GAAP expenses will include non-cash charges of approximately $20 million related to intangibles amortization, of which approximately $17 million will be reflected in cost of sale.

Further, as Rick indicated, we will initiate a restructuring of our mobile fingerprint business, primarily targeting our optical fingerprint products.

The total restructuring charge is expected to be in the range of $8 million to $10 million over the first two quarters of fiscal 2019, and most of this charge will be reflected in the September quarter. Finally, we expect our GAAP tax rate for fiscal 2018 to be in the range of 20% to 25% for the fiscal year.

I will now provide non-GAAP outlook data for our September quarter. Taking into account our overall revenue mix, we expect non-GAAP gross margin in the September quarter to be between 37% and 38%. We expect non-GAAP operating expenses in the September quarter to be in the range of $105 million to $109 million.

We anticipate our non-GAAP long-term cash-based tax rate for fiscal 2019 to be in the range of 11% to 13%. Non-GAAP net income per diluted share for the September quarter is anticipated to be in the range of $1.05 to $1.25 per share. Now, I'll turn to our outlook for fiscal 2019.

We anticipate a low-single-digit revenue increase, driven by growth across the majority of our product platforms, including chip-on-film, OLED, TDDI, touch, automotive, PC, fingerprint and the broader IoT business.

This is expected to help offset an estimated $50 million in continued near-term headwinds from mobile product shortages as well as reduced emphasis and contributions from the lower-margin-generating mobile capacitive fingerprint market. To be clear, these headwinds have already been accounted for in our Q1 and fiscal year 2019 outlook.

We expect operating profits to be in the range of 10% to 13% for the fiscal year. We anticipate our restructuring initiatives will generate approximately $20 million in annual savings, which we plan to channel back into our higher-growth IoT business.

These reinvestments notwithstanding will put us back on a path of focusing on and improving gross margins and earnings and expect to achieve bottom-line growth in fiscal year 2019 over the prior fiscal year. With that, I'll turn the call back to Rick..

Thanks, Wajid. I'll now drill down into some specifics around Q4, starting with our mobile business.

The condition of the overall market appears to have stabilized somewhat versus the June quarter, although as Wajid mentioned, we continue to work through some mobile-related product shortages that are impacting our ability to realize our full potential in certain areas.

We are making solid progress, but expect this trend to persist through the second half of the calendar year. That being said, Synaptics continues to lead in touch and display technologies for LCD smartphones.

As you know, there has been a resurgent in LCD phones given the price point and evolution of OLED supply, and Synaptics is well positioned to capitalize on this trend. We continue to forge ahead in driving bezel-free infinity display smartphones, and our high performance chip-on-film technology has garnered serious interest with our key customers.

Our chip-on-film solution have begun appearing in the market as discrete and TDDI solutions and remain on track to achieve meaningful volume in the current quarter.

Turning to OLED, Synaptics has firmly established ourselves as a leader in OLED touch controllers and our expanding position in serving the broader OLED market is driving fresh appreciation for our touch business. We are very excited about renewed opportunities to deploy OLED touch at key customers along with our mission to lead in OLED display.

We recently announced that our ClearView OLED display driver is now in full production with ASUS on its high-performance smartphone. The OLED panels powering this model are manufactured by one of our key customers in China.

Our close relationships with the China's display manufacturers uniquely positions Synaptics to lead in this market as they ramp to support the broad OEM demand for OLED panels. We expect additional designs from multiple OEMs to begin shipping in the near future.

As I mentioned earlier, our PC fingerprint business is strong and growing due to our unique solution and key partnerships.

In fact, we recently announced our new generation Match-in-Sensor fingerprint solution is production-ready with PC peripheral integrations expected to ship in the current quarter, and Windows-based notebook PCs expected to ship with the next refresh cycle.

With that, we also announced a joint initiative with AMD, centered on delivering a new industry benchmark in highly-secure biometric fingerprint authentication for enterprise and consumer notebook PCs, based on the next-generation AMD Ryzen Mobile platform, and Microsoft's next-generation operating system.

Our long-standing leadership in touchpads and fingerprint security, along with key partnerships with leaders such as Microsoft and standards such as FIDO, has ultimately helped define the critical security requirements that OEMs now demand in their PC biometric development programs.

Now, let's jump to our fast-growing and high margin IoT business, where the consumer appetite for all-things smart home continues to create a tremendous and rapidly-growing market opportunity, ranging from the kitchen to the bedroom, and even the car.

Synaptics remains uniquely positioned as a leader in both world-class audio technology and video technology. And this is resonating with our customers, as we see the convergence of devices featuring both audio and video capabilities, for example, Android-based set-top boxes.

Far-field voice is one of the most exciting human interface technologies for consumer electronics market today. With our audio smart solutions, Synaptics is capitalizing on significant growth opportunities, as voice continues to rapidly proliferate in all major global voice service platforms, including those from Amazon, Google, Baidu, and others.

On that note, our far-field voice DSPs have been selected by Baidu for its new Duer Mobile Accessory platform. Market applications enabled by combining Synaptics' voice technology with Baidu's include a wide variety of on-the-go products, such as Bluetooth speakers, headphones, wearables, and automotive accessories.

Synaptics is a long-time partner of Baidu, and has collaborated with them on many far-field voice-enabled devices, such as Skyworth sound bars, and several smart speakers from brands, including Suning, Doss, Linekong and Kuker (18:47).

Addressing a global market, Samsung recently revealed its plan to add its Bixby digital assistant to every appliance. And we are pleased to announce that they have selected Synaptics' DSPs to drive its far-field voice requirements.

On the VideoSmart side of our IoT business, we continue to see the expansion of Android TV adoption in global service provider platforms, with companies using our multimedia SOC to bring 4K Ultra HD content to their subscribers.

In addition, strong enthusiasm remains for adopting far-field voice capability, in conjunction with bringing additional intelligence to the edge in the service provider platforms.

Let's now touch on our automotive business, where we continue to make strong progress leveraging our touch controllers, display drivers, TDDI, fingerprint sensors, and voice technologies.

Following last quarter's news, almost every top automotive display manufacturer is already building panels with our robust and unique TDDI solution, to validate complete system performance and reliability. And we are jointly targeting calendar year 2020 OEM platforms.

A really interesting application of our auto solution has been adopted by a major OEM to replace side-view mirrors with exterior cameras and interior OLED touch screen displays mounted in the door.

With regards to fingerprint in cars, we continue to see interest from OEMs beyond our first two design-ins that are anticipated to be in full production in calendar year 2020 and 2021.

In summary, we continue to demonstrate very positive momentum across our display and consumer IoT platforms, and remain excited by the prospects in front of us based on our technology leadership and expansive human interface portfolio.

We are executing on the plan we've articulated for you in recent quarters, by focusing on maximizing profitability as we prioritize the opportunities within our business. We are redirecting our resources in efforts from products that have evolved into boom and bust cycles in favor of higher quality lines of business.

Our consumer IoT business is a prime example, as we benefit from an expanded product portfolio with unique and differentiated technology allowing us to generate higher gross margins.

Our focus remains on targeting the right vertical markets within large markets we serve, enabling us to continue to drive improvements in gross margin and operating profits as we continue our evolution towards a more diversified company.

Validating this strategy, we are pleased to forecast a return to year-over-year earnings growth in the September quarter. Before we turn the call over to the operator, as we close out the year, I'd like to thank all of our employees around the world for their unwavering dedication and support. With that, we'll now start the Q&A session.

Operator?.

Thank you. At this time, we will open the floor for question and answers. And our first question comes from John Vinh with KeyBanc Capital Markets..

Hey, guys. Thanks for letting me ask a question here. First question is on the shortages that you guys are still encountering.

Is this still mostly around TDDI? Can you quantify what the impact to your September guidance is? And I assume you're trying to bring on some additional capacity, and are there opportunities later in the fiscal year to maybe minimize the $50 million headwind that you've baked into your full-year outlook?.

Hi, John, this is Rick. So, yes, I'm spending a lot of time with suppliers these days, working through this. Because as you can imagine, we've put a lot of effort and work in TDDI, and we want to fully seize the opportunity.

So, it continues to incrementally get better in the December quarter, and then we turn our guns on to what can we do in calendar year 2019 on both supply with the existing suppliers as well bringing on additional supply from alternative suppliers. So as Wajid mentioned, the $50 million kind of headwind is a ballpark.

But when you know there's shortages, it feels a lot greater than that. But we're continuing to work through that, and yes, we hope in the second half of the fiscal year that things will certainly improve..

Great. Thanks. And then my follow-up is, if I look at the midpoint of your guidance into the September quarter, it looks like IoT is going to be down about 6.5%. That seems unseasonably down for you.

Can you just talk about why IoT is going to be down in September, when it typically I would expect it to be up? And then, obviously, your gross margin guidance is relatively flat. It seems like you've got some mix headwinds working against you, but you're still maintaining margins relatively flat.

What are the offsets to that?.

Sure. So I'll take a crack at this and then I'm sure Wajid will fill in. So in terms of the IoT, as you can tell from our prepared remarks, we're still very enthusiastic about our IoT business in the general sense in terms of the opportunities, the growth rates year-over-year, and so forth.

We do have some dependencies in that business on a couple of large customers. In this particular case, as you pointed out, there was a ODM shift, so they took a little more last quarter, will take a little less in this quarter, and so there's a slight dip in that number.

But in the December quarter, we clearly, given the seasonality and so on, expect to jump back on the growth curve there. And then in terms of gross margin, yes, as you pointed out, a little stronger mobile number, which pushes against the corporate average.

But as a company, again, as I stated in the scripted remarks, we've worked very diligently over the last few quarters to position ourselves to continue the gross margin trends that we've seen. So, it's kind of a combination of some good hard work everywhere in the company in all of our product lines, battling against the stronger mobile mix.

Anything you want to add, Wajid?.

Yeah, I mean, the only thing I'd add, John, is that we've had a couple of step functions in gross margin over the last couple of years. 18 months ago, we were trending in the 32% to 35% range for gross margins. It would bounce around, but it would be in that area.

And then in fiscal year 2018, again, we had some volatility between the quarters, but we were generally in the 35% to 38% range. And so, for fiscal 2019, we're really looking to hit the midterm model that we talked about at our Analyst Day, being 35% to 39%.

I think we can probably tighten that up a little bit, based on everything that Rick mentioned, but we're certainly seeing another step function this year for gross margins across our product lines..

Great. Thank you..

Thank you. Our next question comes from Kevin Cassidy with Stifel..

Hi, this is John Donnelly on for Kevin. Thanks for taking my question.

With the supply restrictions, do you have visibility into how this is impacting your customers' inventory? Or are they having difficulty sourcing as well?.

John, thanks for the question. It's hard for us to get great visibility with our customers. They don't share a lot. But I would say it's a general industry concern. So, we're getting a lot of calls right now, so I suspect our customers, in this case I'm particularly talking about the China OEMs are running pretty lean in terms of inventory..

Okay.

And are the shortages increasing the costs at all? Do you have any negative impact on gross margins from that in the second half of the calendar year?.

Well, we engage with our suppliers from a long-term perspective, so kind of through the good and bad in both directions. And when there's, call it, a shortage, it's our expectations that we don't get a price increase. I know that's been in the press there and likewise.

And typically, on the other side of the direction, too, with our customers, we kind of have that same long-term view. So, I would say that the short answer is, at this point, no, we don't anticipate that. That being said, this quarter's helping.

We don't have to do some of the usual price reductions that OEM customers expect naturally in the smartphone market. But how long that goes? It looks like the supply shortage or general shortage in the industry will persist through the end of the year, and maybe a general tightness in the industry, even longer..

Thank you..

Thank you. Our next question comes from Rob Stone with Cowen & Company..

Hi, guys. I wanted to start with a little more color on the decision regarding optical fingerprint sensors.

Is this because you don't see the market adopting in-display optical, or it's going to be some other solution? Or if there is adoption, it's just not at an acceptable price and margin profile for you? That would be the first question, and then I have a follow-up..

Okay. Yeah, thanks for the question, Rob. As you know or as you mentioned, our fiscal year starts July 1, and a couple of months before that we really take a big scrub on all of our products in the ROI and what provides the best investment going forward.

And as we did that analysis, it was becoming clear, and I used this phrase in the prepared remarks that optical was going to be one of those boom and bust cycles. And to a certain degree, we lived through that with our capacitive solutions a few years back, and we did fantastic.

But invariably, because it's somewhat of an optional solution and there's alternatives, it quickly went from a multi-dollar solution to a sub-$1 solution. And so, we enjoyed good money. But if you look over the entire period, it wasn't the type of sticky highly differentiated business that we now seek as a company.

And so, it would've taken additional investment or continued investment from our perspective. It somewhat hurts because we clearly were the innovators in the industry, and yes, we do see broader adoption of in-display fingerprint in the marketplace from a unit perspective and so on.

But we can see the ASP erosion has begun, and there'll be multiple suppliers in it. Just from a long-term investment, we have better fish to fry right now. And so, it was purely an ROI decision. Now, that doesn't mean we're stopping.

From the very beginning, when we went into this business, we said the ultimate solution was when fingerprint was truly integrated into the display.

And eventually, when the market was right, we would have TDDI FP, so we're going to continue the investments in research in that particular area when we think the market might be ready, so you could have true in-display across the entire screen with multiple cost to the – minimal cost, excuse me, to the end user..

Great. The other thing I was tantalized by in the prepared remarks is when you talked about seeing renewed opportunities with important customers in touch as the OLED market expands. We haven't heard you really talking about touch controller features for a long time.

I remember back in the day when resistance to water and glove touch, and various features, where Synaptics was a leader, helped you roll up a bunch of market share. And then, it's been pretty quiet.

So, what makes it interesting again in that segment?.

Yeah, great question, Rob. I'd say a few things. Clearly one, of course, as I mentioned in the prepared remarks, is OLED screens, in general. It's just a much more difficult touch experience. There's a lot more background capacitive today as you have to deal with it.

So now, OEMs are obviously moving towards flexible, which increases it yet another level. And then foldable or bendable screens is yet another level. So, there's a couple – the challenges that OLED screens provide, clearly, is the harder the problem is, the better Synaptics does.

And then secondly, if you look at the competitive makeup from the times that you were suggesting five years ago, when there was tens of competitors in capacitive touch, realistically, there's just a less than a handful of competitors there. And we are by far the leader from a technology and market share perspective in that particular segment.

So when these major OEMs are looking at future solutions, invariably they're talking to Synaptics, and it gives us a chance to really shine, because we have seven-some-odd years invested in OLED touch or OLED displays at this point with our very top architects and engineers..

Great. Thanks, I'll jump back in the queue..

Thank you. Our next question comes from Paul Coster with JPMorgan..

Yeah. Just a quick one, please.

The fingerprint business that you are discontinuing, what kind of revenues does that represent in the prior fiscal year that is going away?.

So, Paul, the revenues were fairly minimal. I'd say kind of in the sub $15 million to $20 million range is what's going away. We have bigger plans for it, as you saw at our Analyst Day, so we were expecting it to contribute about $100 million in fiscal 2019, and then more than that in fiscal 2020.

But the actual impact year-over-year is fairly minimal at a Synaptics level..

That was for optical..

Yes, that was for optical..

Did you want just optical, Paul, or the overall mobile?.

No, I just wanted optical, but you're welcome to share with us the entire fingerprint revenue..

That's much bigger..

Yeah, I mean, there's a much bigger trend on capacitive. So, optical was much smaller, but from a capacitive standpoint, we've been dealing with declines in that business for the last four quarters. Probably year-over-year, we'll be down $100 million on capacitive fingerprint.

And so, that's a portion of the business that we are not restructuring anymore. The focus of the restructuring was on the optical side..

Okay. Thank you very much..

Thank you..

Thank you. [Operator Instruction] And our next question comes from Ambrish Srivastava with BMO..

Hi, thank you. I just had a clarification, Wajid, on the restructuring and the savings from that.

This wasn't entirely clear, are there any savings going to flow through the P&L or those savings will be redirected towards other areas?.

Hi, Ambrish. No, the savings will be $20 million, but they will be fully redirected to the IoT business, so the benefit to the OpEx will be minimal..

Okay. And then, on the gross margin for the full year, what kind of trajectory should we expect? Because the business is a little bit different now with IoT, a bigger part, which carries bigger incremental margin than the rest of the business.

So, how should we think about the trajectory of the margin? And we should be modeling within the 35%-39%, correct?.

Yeah, I think the right way to think about the margin model is 35% to 39%. The trajectory will be bumpy, to be quite frank with you. So, like we said, we'll see 37% to 38% in the first quarter. Based on what we're seeing, about our second quarter, it will be that, or maybe even slightly better than that, for the fiscal second quarter.

But then, as TDDI starts ramping up in fiscal Q3, we'll see some pressure on our gross margins, so it'll come down a bit. But then we're seeing some nice programs that are expected to ramp up on the IoT side that are new for us, back in fiscal Q4 again. So, it'll have a bit of a V and it'll be bumpy, but that's the general trend that we're seeing.

The midpoint of the 35% to 39% is a good average, but it'll move around based on product mix and seasonality. That was the main reason we provided an operating margin guidance of 10% to 13%, where some of the slower quarters will be lower from an operating profit standpoint and some of the stronger quarters will be higher on in the range.

And a lot of it will be driven by revenue, and the gross margin driven by TDDI and then IoT. So, hopefully, that gives some context around it..

That does. That's very helpful. Thank you..

Thank you. [Operator Instruction] And our next question comes Charlie Anderson with Dougherty & Company..

Yeah, thanks for taking my questions. I wonder if you guys could talk a little bit about the OLED DDIC product. I know there has been a lot of commentary out there in the market about demand for OLED, obviously, is strong, but maybe still some challenges in terms of getting that online.

So maybe just some of the general assumptions you're making for that business. I don't know if you want to share any percent or revenue for the year, or anything to sort of quantify how much of that is baked into the guidance. And then I've got a follow-up..

Hi, Charlie, I think you kind of nailed what we're seeing in the marketplace. Yes, the OLED mass production is a bit bumpy coming online. And we're seeing, obviously, progress from a number of these suppliers, and a number them – additional suppliers, I should say, are clearly moving into mass production.

But they're battling, as you would expect, yield, as you're bringing on these large factories. So, we're working with them hand in hand with our display drivers, and we're poised, ready to support whatever requirements that they have. So, it's not a huge growth opportunity for us. But it's still substantial, given the size of our companies.

So, I would think a bit less than 5% of our business is probably the right ballpark..

Okay. Perfect. Got it. And then on IoT, it's probably likely to be your fastest-growing area, I would imagine, in fiscal 2019. I wonder if you could put any brackets on the growth rate there? And then sort of within that, what are some of the – going to be the key categories you're counting on to sort of supply that growth this year? Thanks..

So maybe I'll start with the latter part. To a certain degree, it's somewhat across the board. So we obviously have some audio solutions, and those are doing quite very well, in our whole scheme of business. It's not a huge business, but nevertheless, very strong growth there.

Also, we mentioned the Android service provider platforms as well, that is doing very, very well year-over-year. So again, a lot of excitement there, because that tells – or that involves our high-end SoC devices.

In terms of the overall business, as we put it all together, you should anticipate growth rates in the 15% to 20%, fiscal year over fiscal year..

Great. Thanks so much..

Thank you. Our next question comes from Vijay Rakesh with Mizuho..

Yeah. Hi, guys. Just a question on the September quarter guide. It looks a little bit light versus seasonal. I know you mentioned shortages.

Are the shortages mostly TDDI? Just wondering if there's any chip-on-film shortages, but is that fair, all of it was TDDI?.

Hi, Vijay. Yeah, all of the shortages are TDDI. We're not seeing any shortfalls in supply from chip-on-film. We were actually able to get out a few million units in fiscal Q4 to start off that ramp, and it's going quite well moving into Q1 and as far as we see into Q2 as well..

Got it.

And as you look at the December quarter, any opportunity to make up some of the shortages? Or you think it ends up being some kind of a share loss there? Because I think FocalTech talked about similar capacity shortages as well, but between the chip-on-film and IoT, do you see a better-than-seasonal December quarter or...?.

Yeah, I mean, we should see upticks in both chip-on-film and in IoT as well as our general mobile business. As far as the capacity shortages are concerned, we have a pretty good idea, plus or minus a few thousand wafers either way, how the capacity and supply is going to look for TDDI.

But we do start to see some improvements come right before Chinese New Year. But that's our third quarter. But we've got a very good idea of our supply plan between now and December..

Got it. Thanks..

Thank you. Our next question comes from Rajvindra Gill with Needham & Company..

Yeah. Thanks for taking my questions. The fiscal year 2020 guidance that was provided at the Analyst Day of about $2 billion of revenue, wondering what's the thought process around that target now, given all the different headwinds and tailwinds..

Okay, I'll start off, and maybe Rick will want to jump in on that one. So, the $2 billion target that we had put out there was a run rate target. So, we've talked about trying to get to a $500 million a quarter run rate. And so, that was the intent of the target. I think we had communicated that in prior calls as well.

As far as the drivers related to that target, we had eight favorable drivers moving in the direction to a $2 billion run rate. All organic, and one of them was in display. And so, we've kind of bracketed what we think the in-display impact to that $2 billion target is. But all the other seven drivers are moving in line with expectations.

And actually, as Rick mentioned earlier, where we originally thought that touch would be negative, could actually end up being positive for us. So, that might actually move from red to green in terms of a favorable driver. So yes, it is a bit of a stretch target, but we're continuing to be focused on it.

I think it's going to take a small M&A or two to get there, but we're certainly still focused on getting there.

Rick?.

Nope, you did a great job..

All right..

Thanks. And then on the 40% gross margin threshold, reaching it at some point. Currently – I'm trying to understand that from a mix shift perspective. So currently, 25% of your business is IoT, 16% is PCs, so you've got 41%, and the other – the rest is mobile.

How do we think about the mix to achieve a 40% gross margin? How much of that is going to contribute to that target, and then how much of it is better pricing, ASPs or cost restructuring going to smaller process nodes..

Yeah, Raj, I don't know if I can quantitatively break it down to that level for that goal. It's clearly, as you can see from the trend line, we're headed in the right direction, and we feel, based on what we're seeing, that that continues to be a target. Now, a lot of that is, as you pointed out, we have healthy growth in higher-margin business.

So, product mix plays a big role in that. Specifically, IoT is very good from a gross margin perspective. But even like, for example, within the mobile business, more and more we're going to focus on areas where margins are stronger.

Now that could be OLED touch we just finished talking about, OLED display drivers are certainly on the higher end of the margin stack, and then there's verticals that are quite interesting. So, we talked a long time about automotive.

And after years of investment, it's finally kicking in, from a revenue perspective, especially once we look at fiscal 2020, and have a pipelines filled with these design wins. And there's VR/AR as well, is another one that is starting to look like a compelling vertical for us..

And just last question, Wajid, so I'm trying to understanding the $50 million headwind in fiscal year 2019 related to shortages. How is that being quantified? Is that being based on a certain level of demand, a certain level of market share at your customers, a certain level of supply? I'm just trying to get a better sense of that. Thank you..

Yeah. No, what we're saying with the $50 million is that we, effectively, are getting demand and orders from our customers that would drive our revenue $50 million higher than what we we're projecting for fiscal 2019.

That doesn't include new contracts for the second half of fiscal 2019, where we actually believe we're going to have enough supply to meet them. We think most of the shortage – some of it will hit in the January timeframe, but most of that will be bracketed between fiscal Q1 and fiscal Q2, and some of the busier quarters for us.

So, it's actual POs versus what supply we see from our fab partners..

Thank you..

Thank you. [Operator Instruction] And our last question comes from Rob Stone with Cowen & Company..

Hi.

I wonder if you could just refresh us on how much automotive is contributing in terms of percent of total revenue now?.

Sure. Rob, it's – yeah, it's sub 5% of the company..

Okay. Thank you..

Thank you. At this time, there are no further questions in the queue. I would now like to turn the conference back over to management for closing remarks..

Thank you very much. Both Wajid and myself will be out on the road. So, hope to see you at the various conferences, or during our meetings. And thank you for attending our call. Bye..

Ladies and gentlemen, this concludes today's conference. You may now disconnect..