Good day, and welcome to the Synaptics First Quarter Fiscal 2020 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jason Tsai, Head of Investor Relations. Please go ahead..

Thank you, Brandon, and good morning. Thank you for joining us today on Synaptics’ first quarter fiscal 2020 conference call. My name is Jason Tsai and I am the Head of Investor Relations at Synaptics.

With me on today’s call are Michael Hurlston, our President and CEO, Dean Butler, our CFO, and Saleel Awsare, Senior Vice President and General Manager of our IoT Division. 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 non-recurring and 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 29, 2019, 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 Michael..

Thanks, Jason, and I’d like to welcome everyone to today’s call. We got out a bit ahead of ourselves earlier today so I hope we maintained a decent audience for our actual discussion. Certainly, I’m happy to be speaking to you for the first time since I joined in August. I’m excited for the future of Synaptics given wide array of leadership technology.

With the addition of Dean Butler as our new CFO, we have a strong leadership team in place to continue to drive the corporate transformation the company began earlier this year and to become a stronger, more profitable company long-term. Let me start with a quick recap of our financial performance this past quarter.

We had numerous highly successful product launches with many of our tier one OEM customers. I’m happy to report that revenue, gross profit and operating profitability all exceeded our forecasts from three months ago. Revenue was $340 million and exceeded the high-end of our range.

Our gross margins were also better as the early actions we’ve begun in focusing on higher margin products have begun to show results. This is the first time in over five years that we have achieved non-GAAP gross margins of over 40%.

Better OpEx controls with more disciplined spend and more selective project investments also resulted operating expenses that were lower than expected. As a result, non-GAAP net income increased more than 200% sequentially to $41 million and non-GAAP EPS of $1.22.

This is a great start to our fiscal year and I believe we are putting the pieces together to drive this type of strong performance more consistently going forward. As part of our corporate transformation, I see an opportunity for us to better align our operations by breaking down internal silos and improve efficiencies.

By removing redundancy and streamlining our operations, we have should be able to further improve our overall corporate profitability and performance.

We are undergoing a full review of our product portfolio and look to further invest in areas where our strong technology and IP will deliver higher margins and growth long-term for the company as well as reduce investments in areas that are more commoditized. Now, let me provide some insights and updates to our mobile and PC businesses.

In mobile, we are continuing to focus on the higher gross margin, premium segments of the market which continues to shift towards flexible OLED displays to enable some of the most advanced designs in the industry.

We continue to win with our advanced touch controller ICs for premium OLED smartphones with tier-one mobile OEMs due to our superior performance and differentiating features. Our solutions are enabling exceptional touch performance in a new generation of phones with displays that fold and bend.

And we continue to win major designs with our display drivers across both OLED and LCD. One example of our success in mobile is with a recently launched flagship Android phone by a leading China OEM that leverages our most advanced touch controller IC for unmatched OLED touchscreen performance.

This enabled the world’s first active pen capability on flexible OLED display powered by our single-chip, dual y-octa solution that eliminates the need for two or three chip alternatives that require more real estate and are more expensive. The same phone is also paired with our premium OLED flexible display driver IC.

Jumping to our PC business, Synaptics continues to remain the market share leader for both touchpads and secure fingerprint sensors. We have numerous new design wins across all the OEM leaders including Dell, HP, and Lenovo.

I wanted to take this opportunity to make clear that we remain committed to this business as we look to extend our leadership while continuing to innovate and differentiate. With that, let me turn the call over to Saleel and have him give you an update on the IoT business.

Saleel?.

Thank you, Michael. Our IoT business continues to build upon our strong relationships with some of the world’s largest OEMs. We saw several successful launches of new products powered by our IoT solutions from some of the world’s leading consumer electronics companies and we are even more excited by what’s in the pipeline for 2020.

We are building a strong franchise around our edge computing SoC products, and this quarter, a leading U.S. search provider launched a new smart speaker, and a new smart Wi-Fi mesh router solution, both of which packs one teraop of performance using our quad-core SoC with integrated neural network accelerators.

The value proposition for the consumer is that these new generation of products with AI at the edge will deliver much better performance and speed with lower latency by learning and processing commands locally. This can enable a three to 10 times improvement in performance as compared to their previous generation product.

We have a strong pipeline of new products ranging from sound bars to 5G gateways and media streamers that are being introduced by hardware OEMs and service providers globally using our edge AI computing platform.

These new products are building upon our expertise in edge technology that offers any combination of voice, video, and computer vision with AI capabilities.

By incorporating more of our proprietary software, firmware and intelligence into these solutions, we will enable better performance with greater personalization and customization while enhancing privacy and security to deliver a more seamless user experience for the consumer in a multitude of connected devices that will become more pervasive in our lives.

This includes Verizon, who also announced a new 5G home router featuring Synaptics’ Far-Field Voice DSP and integrated Alexa wake word technology. For our high-speed wired connectivity franchise, we made a small acquisition in this space last quarter that will significantly expand our TAM longer-term.

We are seeing our opportunity in high-speed wired connectivity increasing meaningfully over the next few years, and will continue to invest in this key area.

For our digital audio SoC solutions for headphones, we launched in the box with a leading Korean OEM with their newest flagship handset last quarter, their first flagship shipping with a USB-C wired headset.

We are excited by this opportunity and continue to invest in our differentiating roadmap as we are seeing more leading Android smartphone OEMs looking to make USB type C wired headsets a standard for their upcoming flagship handsets. Lastly, let me touch upon our auto business.

We are excited about the long-term opportunity with our leading technology and capabilities for enabling touchscreens, and are very pleased to have design-ins at six major OEMs across Europe, North America, Japan, and China.

Many of these OEM’s are planning to transition the majority of their future display systems to a simpler and lower cost integrated solution platform using TDDI and we are winning the majority of these sockets. With that, I'll turn the call back over to Michael.

Michael?.

Thanks for the update Saleel. Before I turn the call over to Dean to discuss the financials, I'd just like to say that I'm really excited about the opportunity ahead for Synaptics.

Since I've been onboard, I've been really impressed by the strong team we have in place, our broad portfolio of technology and IP, and the great customers and partners we have today.

We still have a lot of work ahead of us as we continue down the path of transformation but I'm confident that we have the building blocks in place to drive Synaptics to become an even stronger company built on differentiated and sustainable franchises that generate better profitability long-term.

Now let me turn the call over to Dean to review our first quarter financials and provide our outlook.

Thanks Michael, and hello everyone. Before I get started, I'd just like to say that it's an honor for me to join Synaptics and I'm excited to be part of such a great company.

Revenue for the first quarter of fiscal 2020 of $340 million was approximately 3% above the high end of our guidance range, up 15% from the preceding quarter, and down 19% from the same quarter last fiscal year. Our revenue beat for the quarter primarily reflects better than expected demand from Huawei.

We had two customers above 10% of revenue, at 12% and 12%. For the September quarter, our GAAP gross margin was 37.1%, which includes $15.4 million of intangible asset amortization, $700,000 of share-based compensation costs and a $1.2 million partial reversal of a previously accrued loss on a supplier commitment agreement.

GAAP operating expenses in the September quarter were $123 million, which includes share-based compensation of $10.5 million, intangibles amortization of $2.9 million, restructuring expenses of $6.6 million, retention program costs of $3.8 million, and a $3.7 million charge related to an acquisition of a technology start-up company.

We accrued a GAAP tax benefit in the quarter of $4.9 million. GAAP net income for the quarter was $4.0 million, or net income of $0.12 per diluted share. On a non-GAAP basis, our September quarter non-GAAP gross margin of 41.5% was above the high end of our guidance range and primarily reflects an overall better product mix.

The September quarter non-GAAP operating expenses were below the low end of our guidance range at $95.5 million and down $5.6 million from the preceding quarter; primarily reflecting the benefit of the restructuring we announced in the June quarter and prudent expense management. Our non-GAAP tax rate was 12%.

Non-GAAP net income for the September quarter was $41.0 million, or $1.22 per diluted share, an 8% decline year-over-year compared with $44.6 million, or $1.24 per diluted share in the first quarter of fiscal 2019.

Now turning to our balance sheet, we ended the quarter with approximately $351 million of cash on hand, an increase of $23 million from the prior quarter.

The increase in cash for the quarter was primarily driven by cash flow from operations of $47 million, which was partially offset by $17 million of cash used in our share repurchase program for the purchase of 556,000 shares.

Receivables at the end of September were $232 million and DSOs dropped to 61 days, reflecting a more evenly loaded quarter relative to prior quarters. Inventories were $138 million and inventory days were 63, down from 75 days in the prior quarter. Capital expenditures for the quarter were $5.0 million, and depreciation was $7.2 million.

Now let me now discuss our outlook. Based on our backlog entering the December quarter of approximately $265 million, subsequent bookings, customer forecasts, product sell-in and sell-through timing patterns, as well as expected product mix, we are anticipating revenue for the December quarter to be in the range of $345 million to $365 million.

We expect the revenue mix from our Mobile, loT, and PC products to be 54%, 25% and 21%, respectively.

While our fiscal Q1 results and our fiscal Q2 revenue outlook are stronger than what we expected three months ago, it remains too early to determine whether this near-term strength is due to better end-demand or simply orders ahead of the expected tariff increases in December.

There remains significant macro uncertainty given the rapidly changing trade environment, so we believe it is prudent that we maintain our full-year revenue guidance of down 10 to 20% as compared to our full-year fiscal 2019 revenue. I will now provide GAAP outlook for our December quarter, and will follow with non-GAAP outlook.

We expect our GAAP gross margins to be in the range of 38% to 40%. We expect our GAAP operating expense to be in the range of $121 million to $126 million which includes non-cash charges for intangibles amortization, stock compensation, and we also expect to accrue restructuring costs and retention related costs.

Finally, we expect our GAAP tax rate for fiscal 2020 to be in the range of 15% to 20% for the fiscal year. I will now provide non-GAAP outlook for our December quarter. We expect non-GAAP gross margin in the December quarter to be between 40.5% and 42.5%, and anticipate this to be our second quarter consecutively with non-GAAP gross margin above 40%.

We expect non-GAAP operating expenses in the December quarter to be in the range of $90 million to $93 million. We are continuing to evaluate our portfolio and spend, and believe there could be additional cost savings longer term with a more disciplined resource allocation.

We anticipate our non-GAAP tax rate for fiscal 2020 to continue to be in the range of 11% to 13%. Non-GAAP net income per diluted share for the December quarter is anticipated to be in the range of $1.35 to $1.55 per share. This wraps up our prepared comments. I'd like to now turn the call over to the operator to start the Q&A Session..

Thank you. [Operator Instructions] Our first question will come from Charlie Anderson with Dougherty & Company. Please go ahead with your question sir..

Yes thanks for taking my questions. And welcome to Michael and Dean. And congrats on a good start.

I wanted to start on – Michael, since this is your first call, maybe if you could just sort of articulate what were some of the reasons that you're attracted to Synaptics on the first place? And then as you had a few months under your belt and you've assessed the operations, where do you see some of the most headroom for improvement either operationally or financially? And then I’ve got a follow-up..

Yes, good question. Certainly, some of the drivers – coming here I thought that the company was potentially underappreciated and I thought there was opportunity to drive shareholder value. We still have a lot of work but the early returns are certainly encouraging.

Also a lot of the technology that the company is engaged with, I have past experience with having competing against Synaptics on touch products, on – what was the old Marvell business on set-top box products.

So there was a lot of familiarity with the business and certainly believe that I can help the company near term in terms of some of the marketing and sales activity. So there definitely seems to be some opportunity to drive some shareholder value and certainly familiarity with the products were the key motivating factors..

Okay, great. And then on gross margin, I thought it was interesting that you have a similar mix in September by end market that you had in June, but yet the gross margins are up over 200 basis points.

So I wonder if maybe you guys can articulate what was going on there, maybe between within the segments in terms of products that helped enhance the margin. And as we look forward to maybe a higher margin profile over time, what are some of the products that are going to sort of carry you on your way there? Thanks so much..

I think, as Dean spoke, where on the mobile products, although the overall revenue mix was very similar within the segments, within the mobile segment in particular, our mix was better. It was more towards the high end products, the more margin-favorable products.

And as I said in my comments, and as we go forward, it's going to be our intention to focus more on those products and try to maintain consistency on the gross margin line, which is, I think, exactly what Dean read out.

So although, you're right on the macro mix, within each of the subsegments, you had some moving pieces and those moving pieces led to the favorability..

And then maybe I'd just add, Charlie, that as you can see in our guidance for this quarter, we actually believe this is a sustainable kind of margin position for us going forward..

Perfect. Thanks so much guys..

Thank you for the question. [Operator Instructions] The next question will come from Anthony Stoss with Craig-Hallum. Please go ahead..

My congrats as well. Welcome Michael and Dean. I know you didn't want to elaborate at whether you thought your strength in Huawei was tariff related.

But can you tell if you're taking share at Huawei? And then maybe for Dean, in terms of your December quarter guide, do you expect all the divisions to be up sequentially or up sequentially or would there be one or more down? Thank you..

Yes Anthony let me start with the first part. Relative to taking share, again, I think it's more mix-related. As we talked about we had design wins on the high end of their line, and I think that led to both revenue and margin favorability at Huawei.

Huawei is a customer that we continue to see strength in as we looked forward, but whether we're taking share or just improving our mix at Huawei, as Dean said, remains to be seen..

Yes as far as it comes for your second question, so what we kind of expect is that our PC business is relatively flat. We think our mobile business should do well, and we also believe our IoT business relatively flat quarter-on-quarter..

Got it. Any unusual competitive pricing? I mean given the gross margins are strong especially in the – or excuse me, on the mobile side do you – in the past Synaptics has a lot of pressure there. Is it just the transition to OLED? Or any thoughts on the competitive environment would be helpful. Thanks..

Yes, I think it's really mix related. Certainly we're continuing to see pressure at the low end of the market. That is very much true. And your comments to that effect still are there. I think what we've done is shifted our attention more to high-end handsets and had some success there, which really was the gross margin tailwind..

Yes, nice job guys. Thank you..

Thank you for the question. The next question will come from Raji Gill with Needham & Company. Please go ahead sir..

Yes, thank you. And I echo my congrats and welcome as well. The commentary around keeping the annual guidance down 10% to 20% year-over-year seems prudent to me. But I just wanted to get a sense of the impact on a quarter-by-quarter basis.

If you assume that it's going to be a pretty big drop-off in March and not really – and a small pickup in June, so it seems like a lot of orders might have been pulled in.

So I'm trying to balance between the pull in versus your competitive position at Huawei, your share gains at Huawei, because those indicate a pretty big drop-off in March and a small recovery in June..

Yes. As you might imagine, I mean the visibility on the dynamics being placed out there in the global trade war was potential pre-tariff kind of on action. It's difficult for assess. So we would kind of be cautious on that.

But I would really say if you look at kind of typical seasonality for us first half is generally kind of our high watermark, and if you follow a typical seasonality, we would typically be down a little bit from here, looking up to the second half of the year, which puts you back in the range of where we kind of anticipated a full year versus 2019..

Okay. And in terms of the gross margin, the margin at 41.5% based on a mix of 54% mobile, 25% IoT, 21% PCs. The mobile – the margin improvement is really related to a positive mix shift within mobile.

And so I wanted to get a sense back to my earlier point of how sustainable that mix shift within mobile to higher end products of Huawei is? And are there plans to kind of improve the IoT margins or improve the mix of IoT, which is obviously very high margin business as we go forward when you look at kind of strategic plan going forward?.

Yes, I think your read is right that the margin mix is something that we believe is sustainable. We're really focusing a lot more on high-end wins and trying to put more wood behind the arrow. So we've got reasonable traction as you like we know at two of the three major handset OEMs at the high end, and I think that's helped the margin mix.

I think with respect to the IoT business, it's a huge area of focus for us. I think we like our prospects there, both in the automotive segment and in edge SoC. And I think we have good design win traction in both segments.

But as you know the semiconductor tariff takes time for those design wins to materialize in our revenue line, in our gross margin line. So we're very focused on it. I think that we're trying to drive sales in both of those segments, but it's going to take some time to see pull through..

And last question from me Saleel. So there seems to be some good traction on the wired digital headsets with your USB-C products. I want to get a sense, are you guys moving into also wireless untethered air buds and competing with Cirrus and others. And how would you rank your kind of noise cancellation technology in that particular market? Thank you..

Great question Raji. Yes, we continue to lead in the USB Type-C tethered, wired headsets. And as I said earlier, that has become a franchise for us. And the true wireless and wireless is moving forward. And we have a robust roadmap in place. And I don't have a lot to share with you today, but I’ve just been looking out for it.

I'm very excited about our technology. If you come to CES, you will be able to see some of our great demos around ANC and noise cancellation. I believe we have market-leading solutions..

Thank you..

Thank you for the question. The next question will come from Vijay Rakesh with Mizuho. Please go ahead with your question, sir..

Yes, hi thanks. Welcome Mike and Dean, congratulations here.

Just on the IoT side, Saleel, is that – are you looking for that to be growing flat for the fiscal year versus the overall business let's say being in that down 10% to 20%?.

Vijay so we spoke at the last call and we are holding what we’ve said that we are going to grow in the double digit, in the low teens for the year, fiscal 2019 to fiscal 2020 and we are holding to that..

In the IoT..

In the IoT business, yes I want to be clear. Thank you, Michael. Does that….

Got it. And...

Yes go ahead..

Yes thanks. No, that helps.

And you look at the OLED shipments you had mentioned the single-chip that drives lower power on lower footprint, smaller footprint, what percent of your OLED – of your driver ICs do you think would be OLED exiting this year and if you look at the first half of next year?.

That’s hard to calculate, I don't know if I have that at the tip of my finger, Vijay. Again, it’s a focus area for us, but how the actual numbers breakdown, I don’t know..

Got it. And last question. I know you’ve mentioned and there’s potential for the pull-in.

Did your – is your mix on Huawei going up as you go in December – into the December quarter?.

So as we entering the December quarter, our Huawei’s mix is not going up. And so – what I would say on Huawei is, we think we’ve taken a conservative view for our Huawei exposure here in our December quarter. And we’re really comfortable on how we’ve modeled it into our outlook..

Got it. Thanks..

No change..

Yes, there’s no change in the overall exposure, that’s right..

Great. Thank you..

[Operator Instructions] The next question will come from Christopher Rolland with Susquehanna International Group. Please go ahead with your question..

Hey guys. Thanks for the question. Great quarter here and Michael, welcome aboard. I guess the first one is for you, Michael. Just talking about kind of how you’re thinking about Synaptics, their longer-term road map, the kind of strategic future that you see for Synaptics.

And I think some of the bigger questions are, are you going to continue to focus on the consumer or might you try to move into other areas? Are there some tech tuck-ins that you think you need to help fill out that road map? And then lastly, I’d say, sort of an overarching theme here for Synaptics of old at least is that the Taiwanese guys seem to cut-and-paste Synaptics technology almost like they’re gunning for you guys.

Any early thoughts on how you can break this cycle and differentiate?.

Okay, Christopher. Thanks for the question. Look I – and everybody said the same thing and congratulated us on the quarter. The quarter was a relatively good. We’ve got a lot of work to do. I think that we see opportunity. We still think that there is room to grow this business on both the top line and on gross margin.

So while it was better than we forecast, I would say that we still have a lot of opportunity here at the company and it goes to what your – the second part of your question which is, where do we see the road map going? I think we’re in the process of evaluating that. Dean is kicking off a full portfolio review.

We’re going to embark on that this quarter and really look at where we are from a technology standpoint and try to figure out where we do place our bets. What I can tell you in response to me, the last part of your question, certainly, the Taiwanese are competitors, Chinese are competitors at the low end of the market.

We generally want to be avoiding that piece of the business. I think in the past, there has been an atmosphere of grow the top line almost at all costs and not worry about gross margin and bottom line profitability. I think Dean, Saleel and myself have definitely altered that culture.

We want to be very disciplined in top line growth and grow profitably with good gross. So while we don’t have a clear answer yet on which technologies are going to be building blocks in which aren’t. We know that the theme has changed substantially from the past administration..

Excellent. Thank you. And then perhaps just getting into the leads a little bit more, maybe a little bit more detail on Huawei, why that was so much stronger there.

Is it just a unit thing or are you really taking share across the Huawei line? What do they like about the Synaptics products? And do you think that the share that you’re taking is durable? Thanks..

Yes, I mean, maybe part of it was Dean alluded to it during his comments around first half versus second half. I think took a fairly conservative view going into the quarter as to how the Huawei numbers would shape up. And we did better than expected.

So it wasn’t necessarily share gains or anything like that was probably a relatively conservative view of their forecast trying to be prudent on tariffs and other macro problems. Our view is they – their sales were far better than expected, and we got dragged along with that. I don’t know if Christopher that answered the question..

Yes, that’s great. Thanks a lot, looking forward to working with you guys..

Me as well, thank you..

Thank you. The next question will come from Brett Simpson with Arete Research. Please go ahead with your question..

Yes, thanks very much. Michael, I just wanted to ask – I mean I appreciate you’re still undergoing a full portfolio review and you’re relatively new to the business, but maybe you can just share with us from a higher level.

What are the areas where you think Synaptics has a real opportunity to transform the most? I mean, looking at IP and the skill sets and the resources today, what are you most excited about what the business has done this far? Thanks..

I would say two things are true, Brett. One, I think that our touch products both in mobile and PC are world class. And I think that in the past, we didn’t emphasize that enough. I think that we have opportunity and touch to take share. And again, I think focusing on high end and leading technology, I think, that’s a big opportunity for us.

I think the second big thing is this neural network that Saleel has talked about in the past. There are two aspects of that.

One is, we have intelligence built into our audio solutions and as Saleel spoke to, we do intend to move into the true wireless area of the market and use and take advantage of some of the neural networking there for wake words and simple commands that would be computed locally on the headset.

And then secondly, that very same technology is in our edge SoCs that we’ve talked about in the past, but we really want to use that to differentiate. I think that in the past our customers are using that neural network and they’re doing more of the differentiation.

Our intention going forward is going to apply our own software resources to exercise neural network and actually deliver more differentiation to our customers..

Great. And maybe just a quick follow-up, on the mobile business specifically, when you look at that book of business today, how much of that mobile business would you say is below the threshold of margin that you think is acceptable to the future Synaptics.

I’m just trying to get a sense for what portion of mobile really is maybe more of a commodity end versus where you think is really sort of acceptable margins going forward. Thanks..

Yes, I would say, this is Dean. And that is something we absolutely take a look at internally, but we don’t break that out that out externally. As Michael alluded to, that should be going through a portfolio review to make sure that you are aligning, our go forward strategy to the highest shareholder value creation..

Okay. Thanks very much..

Thanks, Brett. .

Thank you. There are no further questions at this time. I will now turn the call over to CEO Michael Hurlston..

I want to thank everybody for spending time with us this afternoon. I appreciate the questions and the attention and we look forward to speaking to you again next quarter..

Thank you. Ladies and gentlemen, this concludes today’s event. You may now disconnect your lines..