Good day and welcome to the Synaptics third 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. Please go ahead..

Thank you. Good afternoon and thanks for joining us today on Synaptics' third quarter fiscal 2020 conference call. My name is Jason Tsai and I am the Head of Investor Relations. With me on today's call are Michael Hurlston, our President and CEO and Dean Butler, our CFO.

This call is also being broadcast live over the web and can be accessed from our 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 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 conditions, results of operations, plans, objectives, future performance and business, including our expectations regarding the potential impacts on our business of the COVID-19 pandemic.

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 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 statements.

Synaptics expressly disclaims any obligation to update this forward-looking information. Now before we get started, I would like to remind you that we are still planning on hosting our Analyst Day on June 9 and we look forward to discussing more details about our long term strategy and targets with you at that time.

And we will be sending out more details shortly. I will now turn the call over to Michael.

Thanks Jason. I would like to welcome everyone to today's call. I am pleased to be speaking with all of you again today and report a solid quarter despite the ongoing global uncertainty of COVID-19. During much of the March quarter, the supply chain in China was largely at a standstill due to the quarantine.

As the pandemic spread throughout the globe in subsequent weeks, we have seen different impacts to our product portfolio.

While our PC related businesses are benefiting from the increased number of people working from home, we are seeing weakness in part of our IoT business, as discretionary spending for consumer electronics and automotive declined meaningfully. Our mobile business was in line with our expectations during the March quarter.

Despite these challenges, our third quarter revenue was largely in line with the low-end of our expectations while our continuing to focus on higher value added solutions and higher margin products drove stronger gross margins and better than expected profitability for the company.

I am most also pleased we were able to close the divestiture of our mobile LCD TDDI business last month. We now have a much stronger P&L and balance sheet which should enable us to further improve our long term profitability while allowing us to invest in more differentiated products further increasing gross margins.

Dean will provide more details on our financial performance later in the call. Before I provide an update to our business, I would like to share with you my thoughts on how the global pandemic is affecting us and what we are getting to address those challenges.

First off, the health and safety of our employees is our top priority and we continue to take steps and implement measures to safeguard them. I am extremely pleased by their focus and execution in these uncertain times and thank them for their dedication.

As I said earlier, from a business standpoint, we have seen some areas that are faring better than others in the short term and we are seeing strong continued engagement with our customers across the globe.

We have been able to adapt and continue to deliver on our commitments to our customers and ensuring that we execute on our various roadmaps to effectively managing our supply chain. We see the supply chain normalizing and face minimal disruptions at this point.

We have put a team in place to look at contingency plans in the event the global pandemic and global economic conditions decline further and consider how we are positioned to deal with that.

Our intention is to continue to invest and stay engaged with our customers through all of this and as conditions return to normal, our customer engagements, increasing pipeline of new products and design wins will enable our growth long term. Now let me update you on our business.

In the mobile market, our customers have launched several highly anticipated handsets in the past couple of months with our display drivers as well as with our on-cell flexible OLED touch controllers, including the Huawei P40 Pro and Pro Plus phones.

We are introducing several new single-chip touch solutions that integrate a broad sweep of high-end capabilities and differentiation for all on-cell flexible OLED displays.

This includes delivering the fastest touch report rates in the industry as well as integrating Face Detect and Side Touch features to enable infinity displays and support for active pens.

As production and availability of on-cell flexible OLED panels continues to grow, our design momentum is accelerating and we are confident in maintaining our leadership position.

Assuming the current schedules hold, our flexible OLED touch solutions should be designed into at least 10 more flagship to mid-range phones by the end of this calendar year. Separately, our large handset customer launched their highly anticipated, low-end LCD smartphone last month using our DDIC and it has been well received in the market.

In IoT, following the successful launch of our versatile VS600 Smart Edge AI family of SoCs, we are seeing strong customer traction and design activity across multiple markets including service provider set-top boxes and retail OTT streaming products.

Serving as the entertainment hub of smart homes, set-top boxes are getting smarter with the addition of our powerful purpose-built SoCs that uniquely combine a CPU, NPU and GPU on a single platform, integrating audio, video, computer vision and AI.

Our customers are finding new ways to integrate our neural network accelerators in retail voice-enabled devices with premium sound bars and high-performance video including sound bars, cameras and smart displays.

We have strong partnerships with our ecosystem partners to drive significant design win activity and wins with service providers across Europe, Asia and the Americas along with numerous consumer electronics companies. We have a solid roadmap in this space and you will see initial product rollouts over the course of the next 12 months.

We are also excited about our new video interface products that have recently taped out. Those ICs support HDMI 2.1 and are optimized to drive up to 8K screens. Designs will be in commercial docks, travel docks and ultra-portable dongle accessories and these products are targeted to be at retail by the end of the year.

In addition, our existing multi-stream video products continue to see strong demand with growing volumes due to the increase of work from home and we are seeing a rise in new design activity. The increase in work from home activity continues to benefit our PC-related businesses and momentum is accelerating.

Enterprises are outfitting more of their employees with upgraded laptops. In addition, consumers are upgrading their laptops to enable video applications and students are also moving to remote learning. As a result, sales of our touchpads, fingerprint sensors and high-speed wired connectivity for docking stations are increasing sharply.

While the strength in our PC-related businesses is lasting longer than we previously anticipated, we don't expect this strength to be sustainable. Overall, I am pleased by our execution and our team's continuing focus.

Undoubtedly, there will still be uncertainty and volatility in the coming months due to COVID-19 but our focus remains on what we can control. We will continue to be there to support and engage with our customers and we will continue to invest in our portfolio of solutions that will drive operating results, even in an uncertain environment.

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

We expect non-GAAP gross margins in the June quarter to be between 45% and 47% reflecting the positive impact of the divestiture of our low margin TDDI product line.

We expect non-GAAP operating expenses in the June quarter to be in the range of $83 million to $86 million, also reflecting the positive impact from the divestiture of our TDDI product line. We anticipate that our non-GAAP tax rate for fiscal 2020 to continue to be in the range of 11% to 13%.

Our non-GAAP net income per diluted share for the June quarter is anticipated to be in the range of $0.85 to $1.25 per share. This wraps up our prepared remarks. So I would like to now turn the call over to the operator to start the Q&A session.

Operator?.

[Operator Instructions]. Our first question comes from Rajvi Gill with Needham & Co..

Yes. Thank you and congrats on the divestiture of TDDI, the successful divestiture of that business. If we look at the guidance, it implies IoT business is going to be down about 12% sequentially. My understanding, the mobile business, obviously.

But that the IoT business, since a lot of it is consumer-focused, wondering if you could describe the impact of COVID on IoT? Does that hurt demand for consumer IoT products in the retail stores or inflation at the home? Any color there will be helpful..

Yes. Rajvi, as you know, our IoT business is kind of a basket of different products and it's had various effects on various different things. But generally speaking, the negative impact has been on our in-home devices, whether those are speakers or some of the video devices we have seen some impact on.

And I think that's largely due to consumer spending patterns. We have seen our customers push out orders. I don't know if that demand comes back until we see some return to normalcy. But that's been the real impact on the IoT business..

The other thing I would maybe add, Rajvi, as you know, our IoT business includes an automotive business that we have reported there and no different from several others that sort of have automotive that's been challenging at this point..

Thanks for that. And then just on the mobile business, if you add the approximately $65 million a quarter back to the mobile business, it would imply that the mobile business has been growing sequentially. I just wanted to get a sense of the traction in mobile going into the June quarter.

What have you seen in the China handset market? What have you seen in the top customer in terms of design pipeline in the funnel? Any thoughts there would be helpful..

Yes. I mean I think that you are characterizing the position of sort of the overall position well, Rajvi. In general, we kind of have an unusual situation which is that we picked up some nice design momentum on our on-cell touch products. And that's led to kind of an unusual tailwind in that sector.

We have done very well with the Chinese handset makers. We think we are going to continue to do well. As I said, if the schedules hold, we expect to see about 10 more major phones flip to our on-cell touch solution. So that's been a nice tailwind.

Coupled with that, I mean we have still got a meaningful presence in our display driver product area and we have seen the new launch of some lower end LCD phones. And that's been good for our business. So we generally feel good about mobile. And as we look out, I think that you are going to see continued shift towards touch and maybe away from DDIC.

But we feel really good about our position in on-cell touch..

And just last question for me on the gross margin. Fantastic job on really moving the margins up through divestitures and mix shift, 46% for June.

As you look forward, what are some of the puts and takes on the margin line now that we have completed the divestiture, the drivers?.

Yes. Rajvi, I would say, we are sort of really focused on this one driving forward as you have seen since sort of Mike and I joined the company that's been a big emphasis. We are certainly not done. We continue to work this area.

We are fairly aggressive on trying to pursue cost reductions where we can, but also really focusing on the high value products that are in the portfolio and making sure that those are enable to shine the light. So as we focus on margin mix and cost going forward, I think that should continue to improve..

Thank you..

[Operator Instructions]. We will take our next question from Christopher Rolland with Susquehanna International Group..

Hi. It's David Haberle on behalf of Chris Rolland. Thanks for taking our questions. So maybe you can start by helping us frame these 10 new wins that you have for the on-cell flexible OLED touch.

Are there any pricing or margin differences between these ramping display versus your old OLED touch wins? Or is this similar to what you have won in the past?.

Against as compared to our previous OLED touch wins? Is that the question?.

Yes. The on-cell versus the previous OLED touch wins that you have.

Are these the same? Or are there pricing differences and margin differences? Can you explain that?.

Yes. There are in line from both a margin and ASP perspective with prior touch wins..

Got it. And then on the IoT side, you seem very confident in the Smart Edge AI SoCs and the traction that you have made there.

Are you currently seeing a lot of revenue from that product? Or should we be thinking about this as really a ramp over the next 12 months? And how big can this kind of product grow for you?.

Yes. Just to clarify, so these are a set of product that we announced back in January at CES. So it's a brand-new class of product for us. We are certainly seeing a lot of interest from the customer base and we think they are very promising. But to answer your question, no, today there is no revenue. These are new products..

Great. Thank you. And then I think my last question would probably be about the PC strength for next quarter. I mean it doesn't sound like you have ton of confidence this is going to hang around beyond the next quarter or so.

But is there design win momentum behind that as well? Or is really just the work from home trend that's pushing it? And as that phase ends, people go back to work the PC market will kind of go back to normal for you?.

Yes. I mean I think our design win pipeline is probably as strong as it's been both in fingerprint and on our core touchpad business. So I think the comments are more to do with the recent surge in PC buying due to work from home. That's part of it. We don't think it's particularly sustainable. We have had a good run in the PC business.

If you followed us over the last few quarters, there has been good strength. I think starting with a shift from consumer to commercial, commercial is where we have more exposure. And I think commercial picked up traction toward the end of last year and then this quarter I think it was more around work from home.

But our unusually high revenue levels, I think from the PC business are what we are characterizing as difficult to sustain. Our share, our position in the market, I think, is very much sustainable..

Great. Thank you..

And it appears there are no further questions at this time. I would like to turn the conference back to Michael Hurlston for any additional or closing remarks..

I would like to thank all of you for joining us today. We look forward to seeing you, at least virtually, at our upcoming investor conference during the quarter as well as our Analyst Day on June 9. Thank you..

That does conclude today's conference. We thank you for your participation. You may now disconnect. Good bye..