[Abrupt Start] Synaptics' third quarter, fiscal 2019 conference call. My name is Jason Tsai and I am the Head of Investor Relations at Synaptics.

With me on today’s call are Kermit Nolan, our Interim CFO and Chief Accounting Officer, and Saleel Awsare, Senior Vice President and General Manager, of our IoT Division, Corporate Marketing & Investor Relations.

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. In addition to a supplemental slide presentation, we have also posted a copy of these prepared remarks 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 excludes share-based compensation, acquisition related costs, and certain other non-cash or recurring or non-recurring items.

Please refer to the press release issued after the 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 30, 2018, for important risk factors that could cause actual results to differ materially from those contained in any forward-looking statement.

Synaptics expressly disclaims any obligation to update this forward-looking information. I will now turn the call over to Saleel Awsare.

Saleel?.

Thanks, Jason, and I’d like to welcome everyone to today’s call. I’m happy to be speaking to you today on behalf of the Board and our Executive Leadership Committee.

I will first discuss the opportunities that lie ahead for Synaptics and update you on our business and then I will turn the call over to Kermit to discuss our financial results and outlook.

Synaptics is undergoing a corporate transformation, focused on driving innovation, unlocking the untapped potential within our extensive portfolio of technologies and expertise, and aligning the business towards better profitability longer-term.

Our Board and executive leadership committee is committed to improving shareholder returns by carefully evaluating the opportunities ahead in the markets we serve, and making the right investment choices to further improve our gross margins.

We are thoroughly reviewing our product portfolio to better leverage our best-in-class solutions with an eye toward positioning the company for higher gross margins and profitability longer-term. We are moving quickly to strengthen our performance and address the challenges we face.

With that said, let me now share a few product and customer highlights.

For our IoT division, Synaptics is laser focused on innovating at the Smart Edge, and we are very pleased to share that our new AS3- hundred family of SoCs, announced at CES earlier this year, has already begun shipping millions of units to a major customer, a full quarter ahead of schedule.

The AS3-hundred family is at the heart of our Smart Edge AI AudioSmart solution, the world’s first commercially available, fully integrated SoCs that incorporate machine learning neural network acceleration, a proprietary wake word engine, and highly-advanced far-field voice processing.

This is also our first shipping design in 22nm, enabling a broad variety of voice-enabled Smart Home devices including hubs, Wi-Fi repeaters, speakers and appliances. We are the leading solutions provider for intelligence at the edge, and we expect to capitalize and extend this lead.

Smart Edge requires innovative technologies and integrated platforms that support the full range of consumer needs.

Synaptics is building on its legacy as the leader in human interface technology to deliver a broad range of differentiated integrated solutions that encapsulate voice and audio, video and display, AI, as well as security and consumer privacy.

The market and adoption for these solutions are still in their infancy, and our differentiated portfolio will deliver best-in-class capabilities to the entire ecosystem and drive meaningful growth for our business over the next several years.

We will continue to leverage our industry- leading technology and will launch some very exciting new products later this year that will drive further integration of our human interface portfolio. In the mobile space, we continue to win major OEM’s smartphone designs for both LCD and OLED displays.

In LCD, we are enabling more infinity displays with our Full-HD TDDI COF solutions, including two new designs from Huawei and additional wins with other large OEMs. Our low power Full-HD TDDI solution also has flagship design wins at OPPO and Vivo.

In OLED, we continue to win share in the high-end segment of the market and expect to see upcoming flagship devices from leading handset OEMs continue to be supported by our best-in-class OLED discrete DDICs and touch sensors.

While OLED solutions will continue to be a strong growth driver for our mobile business, we anticipate that LCD-based smartphones will remain a vital part of our customers’ portfolio for the next few years.

We are seeing ongoing development with our largest customers for LCD-based handsets for their next- generation flagship and mainstream smartphones.

We are excited by the progress we are making and are dedicated to supporting all of our large handset OEM customers as they ready their next-generation devices that will launch later this year, whether it be for LCD or OLED.

Smartphone headsets are transitioning from analog to digital, and we continue to leverage our best-in-class digital audio SoCs for this rapidly emerging USB-C headsets market.

With that, we are pleased to announce a new USB-C headset design win with an additional top-three smartphone OEM for their upcoming flagship smartphone that will be included in every box worldwide. We will ship a few million units in the current quarter for this new design win, and it is expected to grow throughout the rest of the year.

This follows our previously announced digital audio headset and dongle solutions shipping in the box with Google Pixel 3, and with multiple Huawei phones. The market for digital audio is growing very quickly, and our technology leadership in this space has enabled us to capture meaningful wins at the world’s largest OEMs.

We are very pleased with our progress and expect to see the wearables segment grow strongly for us as digital audio and active noise cancellation adoption for smartphones continue to expand.

On the topic of wearables, at the recent HP Reinvent World Partner Forum, HP unveiled its cutting-edge Virtual Reality headsets featuring Synaptics’ ultra-high-resolution VR display technology.

Our industry- first breakthrough display technology supporting higher resolution per eye has enabled OEMs to design a new generation of VR headsets with meaningfully better visual capabilities, bringing users a more immersive and better experience than ever before.

Other VR headset makers that recently announced products using our display technology include the Pico G2 4H headset, and Acer with its ConceptD OJO. Worth noting is that Synaptics is the only company delivering an end-to-end (GPU to Display Pixel) solution by leveraging our VR bridge. Just a quick note on our Automotive business.

We are pleased to have secured many design wins with our TDDI and Fingerprint-based solutions, both of which position us well as these cars begin to roll off assembly lines over the coming years.

We continue to execute on our long history of delivering best-in-class human interface innovation to the worlds’ leading technology companies, and we are excited by our strong pipeline of new products and design wins that will ramp later this year across all of our different products.

Lastly, I want to provide an update on our search for new executive leadership for Synaptics. The Board has engaged an executive search firm, and interviews for the CEO position are already underway. The priority is to fill this role before resuming the search for our next CFO.

Given Synaptics’ proven track record of technology innovation and market leadership, we expect to attract world-class talent and will update you as quickly as possible on our progress. With that, Kermit will now discuss our results and outlook..

Based on our overall revenue mix, we expect non-GAAP gross margin in the June quarter to be between 37.5 and 38.5%. Gross margin is expected to decrease slightly sequentially due to product mix within mobile. We expect non-GAAP operating expenses in the June quarter to be in the range of $102 million to $106 million.

Our OPEX is expected to be stable sequentially if you exclude the one-time reversal of compensation accruals in the March quarter. We anticipate our non-GAAP long-term tax rate for fiscal 2019 to be in the range of 11% to 13%. Non-GAAP net income per diluted share for the June quarter is anticipated to be in the range of $0.20 to $0.45 per share.

Let me finish with some commentary around what Saleel addressed. As we look to transform the company, we are reviewing options to drive profitability, align costs and increase cash flow as we manage through short-term challenges.

We will evaluate each of our product offerings carefully and look at opportunities with a much greater focus on profitability to drive investment choices.

As we complete the process, our goal is to emerge with a business that will drive our overall corporate gross margins into the 40s percentage range, while aligning spending to improve operating margins and drive our business towards greater long-term profitability. With that, I’ll hand it back over to Saleel..

Thanks, Kermit. While we continue to work through some residual supply chain issues that are impacting our short-term financial results, we remain keenly focused on executing on our strengths and delivering on the untapped potential of our product platforms.

This will entail an even more pronounced effort to reshape our portfolio towards higher margin products, with the goal of achieving meaningfully better gross margins longer-term.

We already have the building blocks and customer wins in place to execute across our IoT platform, where we expect a return to growth and to drive even greater momentum across the portfolio.

We will couple this with smart, targeted investments in key products and market opportunities, as well as a focus on spending alignment to conform with the product areas that we choose to focus on over time. We are intent on delivering consistent, improved profitability for Synaptics over the long-term.

We are in the initial phases of this process to directionally improve our long-term profitability and plan to keep you updated on our progress regularly. I am confident that we are making the necessary changes and focused on the right priorities to accelerate Synaptics into a stronger future.

Finally, we are participating in a few key trade events this month where we will demonstrate our latest innovations. This includes Display Week, which is next week in San Jose, and Computex in Taipei at the end of the month. If you are attending, we welcome you to stop by for a demo.

With that, I’ll now turn the call over to the operator to start the Q&A session..

[Operator Instructions] I see we have our first question from Kevin Cassidy with Stifel. Please go ahead..

Thank you for taking my question. The gross margin declined due to revenue mix within smartphone.

Can you say - are there other certain products that are getting more challenged on gross margin or is it simply because of the inventory that you had discussed?.

Yes Kevin, I’ll take that one.

So in terms of the mix and the impact on mix in the fourth quarter to mobile, it's really our integrated type products that are going to be impacted - they're going to impact to get the margin or push the margin down relative to our discrete products which of course the volume of the three products would be down in the fourth quarter..

And then maybe as you're thinking of the transformation of the company, is it possible to stay in the handset business and generate over 40% gross margin and maybe if you could talk a little bit about your thoughts around that it’s kind of seems like it’s a trade off of large markets versus gross margin?.

What we find is our products - I guess you could say in the general market things tend to get commoditized but being a leader in technology we see a path to continue down this - in the mobile market for what we think is a fairly extended period of time and then of course working with certain key customers.

So we do believe that there's a path to improving those margins. Again the overall mix of revenue - gross margin is going to be pushed into the 40s and again IOT will help support that again focus on the high end..

[Operator Instructions] We'll take our next question from Rajvindra Gill with Needham & Company. Please go ahead..

Yes thanks for taking my questions. So a follow-up on the strategic investment that you had mentioned evaluating different options so you could get to the target of 40%. But you know if you look at the different products within mobile, OLED, discrete TDDI and to a certain lesser extent fingerprint and then you look at PC and IoT.

How do we think about that conceptually in terms of the mix of those businesses and the goal to get to 40%? Should we expect to see more OLED revenue within mobile and more discrete than less integrated or how do we think about that in terms of the long-term direction of 40%..

So, good question Rajiv. So we would see - the way we look at it but we do believe OLED has a path to higher overall gross margins and the discrete products we believe will maintain some good gross margins.

Obviously the integrated products drag down the gross margin somewhat but doesn’t necessarily make them a bad investment especially if we could be on the leading edge in terms of delivering products. And of course within the mix we intend to grow IOT and Saleel if you want to add ye..

Rajiv this is Saleel. As you know IoT as I have said earlier in my prepared remarks will start growing in the second half of the calendar year in double-digits. And the gross margins in IoT continue to be very healthy and we see that moving forward.

And just to add to what the PC area is where we maintain our margins and we feel good about that as we move forward. So just adding to what Kermit said, we are directionally working towards this and move our gross margins into the 40s range..

And from my follow-up in the mobile business you had mentioned a customer working through to clear inventory you are helping to clear it fiscal Q1. I was wondering if you could provide some color with respect to that, was it share loss, was it just a drop in demand in China, was it a transition.

I am just trying to get a sense of the big mobile drop off quarter-over-quarter through September?.

We believe that we're maintaining market share in the mobile space, we’ve secured meaningful new design wins in OLED and LCD with numerous top handset OEMs and we believe both the flagship, as well as mainstream phones will help us maintain our share - concrete share..

And you expect that inventory to be cleared by September?.

Yes, that inventory in the supply chain should be cleared in the September quarter, yes..

I see we have our next question come from Anthony Stoss with Craig Hallum. Please go ahead sir..

Couple of questions Saleel. I am curious for you, you guys suggest on your PC business they are likely going to be flat end of September. Given nominal seasonality would cause that probably be up I am curious what you're seeing there.

And secondly maybe you can comment related to the mobile market on the pricing environment if it’s more aggressive than what you've been expecting or seeing in the past then I have a follow up after that?.

Yes, so Tony on the PC business let me just understand your question.

You are asking why we expected to be flat in the September quarter just to be clear?.

Yes..

There are couple of reasons, I mean we feel good about where we are at with the business. We have been gaining share in some segments as we have talked about in the past.

Specifically in some of the commercial PC that we are well engage with, so we feel really good and it’s a mature market so we don't expect big any if any gyrations in this and we are very well positioned and we are the leader in this space. So we understand the market well, and we feel good about it for the September quarter.

Your second half of the question was on mobile pricing is that correct?.

Yes correct..

Kermit, mobile pricing do you expecting more challenges..

At this stage I think it’s fairly stable, I wouldn’t expect it to be significant challenges. Again our goal is to continue to come out with leading-edge products for mobile customers..

Then as a follow up guys, and maybe not to put you on the spot without a CEO or CFO. Do you expect your fiscal year 20 revs, do you have a shot at that growing year-over-year.

And then also to put you on the spot without a CEO or CFO what can you do to cut costs are you hamstrung before you bring in a CEO to see what he wants to do?.

Yes, so we are not commenting on our 2020 fiscal 2020 revenue specifically but to your second half of the question we have executive leadership committee that have been put in place.

We have an Executive Chairman and I don't believe we have hamstrung, we are evaluating all of our businesses closely, and making sure that we're spending and investing wisely. We are investing in higher margin products, that’s going to drive better profitability longer term.

We will have a better sense as to these actions and we will need to take and we’ll continue to work through our internal evaluation but I’ll let you know we are doing that with urgency and stay tune I will give you a lot more clarity at next quarter's call..

We have our next question from Christopher Rolland with Susquehanna International Group. Please go ahead, sir..

It’s David Haberle on behalf of Chris Rolland. Thanks for taking my question.

I guess, to start out on the IoT win or the USB-C win rather maybe you can talk about how that’s ramp throughout the year and how material this will be kind of on an annual basis and then secondly there, is this a different win or a different OEM then win you have for USB-C design from the past?.

So let me start with the second half of the questions. It's definitely a different win, a new top three smartphone OEM is going to put our solution inbox shipped with every phone that's coming out and it’s a flagship phone by the way, stay tuned when you see it.

Is it materially going to be meaningful? I don't get into the ASPs or any of that but we did say that we're shipping millions of units this quarter and will grow throughout the year and the gross margins are higher than our corporate gross margins..

And then on the OLED side, how is capacity coming along at the Chinese OEMs there like you have a couple wins again this quarter, seems like you’re progressing nicely, is there anything holding you back from the capacity standpoint at this point?.

So I think when we’re talking before last quarter capacity limitation like we were really referring to our TDDI products particularly the crop products but if your question is on OLED, no I don't believe there's anything that holding its back.

I think there's a lot of opportunity in OLED and in particularly the - certainly the second half of this calendar year..

Let me add little bit more color please Kermit. The non-Korean OLED market is going to be around 60 million to 80 million units this year doubling from last year.

The industry analysts are expecting non-Korean OLED market to increase even faster next year and we are extremely well positioned with our solutions with the non-Korean OLED panel makers, so we feel good about it as we go forward..

[Operator Instructions] We will take our next question from Charlie Anderson with Dougherty & Company. Please go ahead..

First question Saleel on the AS 300 family, its sounds like your first win there that’s shipping now, kind of same question as the USB-C question before is that on existing customer or new customer and then a bit kind of curious how you feel like that ramp is going go in the back half, how much is that a contributor with that product to some of the growth and what types of end users are our customers are utilizing more products.

I have a follow-up..

Yeah, so let’s take the AS 300 product family, as we said in the prepared remarks we shipped a few million units early earlier than we have planned because our lead customer wanted to ramp and we see a ramp throughout the whole year and Charlie, the thing that really excites me about this is it's not one form factor, it’s going to multiple different form factor.

So I see utilization in more than just one kind of product. So I feel good about it as we go throughout the year..

And then second question on OpEx you kind of talked about a little bit but I know Synaptics has sort of worked with an envelope of the range in the 20s let's call it of OpEx as a percent of revenue over the past several years.

If you talk about 40s be an optimal at some point for gross margin, can you speak to what an optimal level as OpEx as a percent of revenue maybe R&D as a percent of revenue as a starting point? Thanks..

That's a good question. I mean at this stage we’re just evaluating all the businesses very closely within Synaptics and making sure that we’re spending and investing wisely.

We haven't made any final decisions about what those spend should look like in terms of the R&D in the SG&A dollars/OpEx dollars, but certainly we will have a little more color that we could share with you on next quarter's call..

[Operator Instructions] We will take our next question from Kevin Cassidy with Stifel. Please go ahead..

Just again going back to the goal of going over 40% gross margin, would some of that strategy include maybe selling or discontinuing some of the low-end products?.

Kevin, thanks for the first question, this is Saleel again.

As you know our gross margin has improved already seven quarters in a row, right and we have been focused on that here and we're continuing to evaluate all the businesses with a focus towards really investing in products that generate high margins for the company and driving growth from these products.

So currently, I don’t want to get into details because as I said we’re working with urgency in the organization, we will be able to give you more color the next time we all get on the call together but you just have to stay tune for it with us..

[Operator Instructions] It does appear that there are no further questions at this time. I would like to turn the call back over to Saleel for any final comments. Saleel Awsare I just want to take the opportunity to thank all of you for joining us for this call and we’ll talk to you in three months. Have a great day. Bye-bye.