Synaptics Inc (SYNA) 2004 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Synaptics second quarter conference call. At this time, all participants are in a listen-only mode. Following today's presentation instructions will be give for the question-and-answer session. If anyone needs assistance at any time during the conference, please press the star followed by the zero. As a reminder, this conference is being recorded today, Thursday, January 22nd of 2004. I would now like to turn the conference over to Mr. Alex Wellins from the Blueshirt Group. Please go ahead, sir.

Good afternoon and thank you for joining us today on Synaptics' second quarter conference call. 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 www.synaptics.com.

With me on today's call are Francis Lee, president and CEO of Synaptics and Russ Knittel, the company's chief financial officer. We'd like to remind you that during the course of this conference call, Synaptics' management will make forward-looking statements including predictions and estimates that involve a number of risks and uncertainties. Actual results may differ materially from any future performance suggested in the company's forward-looking statements. We refer you to the company's Form 10-K for the fiscal year ended June 20, 2003, on file with the SEC for important risk factors that could cause actual results to differ materially from those contained in any forward-looking statement. We expressly disclaim any obligation to update this forward-looking information.

And now I'd like to turn the call over to Francis Lee. Francis?

Thanks, Alex, and thanks to everyone for joining us on the call today. We are very pleased with our second quarter performance, which exceeded our forecast as we post another consecutive quarter of record revenues and unit shipments and shipped the highest quarterly profitability in our history. I am going to start off by giving you some highlights of these results.

We achieved record revenues of $34.3m with growth of roughly 16% from the preceding quarter. GAAP net income for the quarter was $3.5m, or 13 cents per diluted share compared to $2.3m, or 9 cents per diluted share in the prior quarter. That represents an increase of approximately 54%, demonstrating the scalability and leverage of our virtual manufacturing model.

The second quarter was marked by solid growth in the PC market and very strong growth in the non-notebook market. Notebook revenue increased approximately 7% during the quarter and was driven by strong sales of notebook computers during the holiday season, as consumer demand remained high. Approximately 16% of total revenue during the quarter was generated by non-notebook applications, representing 100% increase over last quarter and our highest level to date. This was primarily a result of strong shipments in the portable music player market.

With the expansion of Apple's iPod product line shipments of our design win with our second OEM customer, Samsung, we continue to see the portable digital entertainment market as a sustainable revenue driver for the company.

As we exceeded that seasonally strongest quarter of the year, we experienced strong bookings resulting in the backlog of $17.7m. As we look at general trends in the PC market, we expect to see the impact of seasonality in the March quarter, but believe it will be at the lower end of historical trend for the industry. When encouraged by some analyst commentary and reports suggesting a low single-digit upswing for IT spending in 2004, however, in terms of the main pattern, we believe the near-term trend for product mix remains unchanged from the past few quarters.

I will now talk about some of the specific progress during the past three months, starting with the notebook market. First, we revealed our SpeakerPad product in compact in November, which integrates an audio subsystem into the Synaptics TouchPad. Media and customer response to this solution has been positive, and we are encouraged by the interest our customers are showing in this integrated solution.

Second, we continue to see a lot of interest in our TouchPad under-plastic design. In fact, activities underway in this area suggest that more OEMs will be adopting this innovative approach to TouchPad solution in the not-too-distant future.

Third, we are seeing some traction with some of our product announcements. I am happy to report that we secured our first design win for our LuxPad illuminated TouchPad and expect to ship production units within the next six months.

Finally, our second design win with Samsung for integrated Fingerprint TouchPad solution began shipping in the quarter. While customers continue to express interest in this solution, adoption has been slow, which reflects the current environment of a prime sensitive enterprise market and soft corporate spending.

And now I'll move on and discuss the solid progress we made in our new market during the quarter. In the portable digital entertainment segment, we announced in December the Synaptics capacity touch technology has been integrated into the new Samsung yepp YP780 MP3 player. This flash-based MP3 player utilizes Synaptics' Light Touch product to replace all the mechanical buttons on a player with a thin and durable touch sensor. Additionally, the design also highlights our under-plastic capabilities which allows the sensor to be remain underneath the plastic casing of the device resulting in a streamlined design that can stand up to the relatively harsh consumer environment.

We continue to see strong progress from our relationship with Apple. As you know, Apple recently launched two new versions of its very popular iPod -- the new smaller-sized mini and the 15-gigabyte version of the traditional iPod. Synaptics is pleased to announce that our capacity technology will be utilized in both of these new designs.

In addition, Apple and HP recently announced a strategic alliance under which HP, with private label, and Apple's current iPod design that uses Synaptics capacity of touch technology. We believe the Apple/HP partnership is very significant and should help expand iPod's market-leading position. While it's still a little early to speculate on the potential impact on Synaptics, it's clearly a positive force, and we look forward to updating you on this development in the future.

In addition to the Apple and Samsung design, we also expect to see some revenue in the March quarter from a design win with a third OEM in the portable music player market. In the mobile segment, we continue our development work with customers who have expressed interest using our technology in both next-generation cell phones and PDAs. I am pleased to report that we have recently secured a design win for a PDA device, which we expect to begin shipping within the next six to nine months.

In summary, Q2 was a terrific quarter, and we believe we remain very well positioned going into calendar 2004. We continue to see strong demand for our existing products, and our ongoing efforts in the non-notebook market suggesting increase design activity in the months ahead. We are optimistic regarding the environment for consumer demand in the new year and would expect to benefit from any potential uptick in corporate spending.

At this juncture, we continue to lay the foundation for long-term growth and in stepping up our investments in certain areas in an effort to accelerate our growth trajectory and further improve our operating efficiencies. Our strategy is working, and we continue to build on our past success and to drive profitability within our proven financial model.

With that, I will now turn the call over to Russ, who will review our detailed financial results for the second quarter and provide some guidance on our business outlook.

Thank you, Francis. Unless I specifically note otherwise, all the numbers I discuss during our quarterly results will be on a GAAP basis.

Revenue for the second fiscal quarter was $34.3m, a sequential increase of approximately 16% over last quarter's $29.6m. Product sales into both the notebook and portable music player markets contributed to our increased revenue with particular strength in the demand for portable music players, which resulted in doubling our quarter-over-quarter revenue for these applications.

Revenue was up approximately 42% compared to $24.2m in the comparable quarter last year, again reflecting strength and demand in the notebook market, where our unit shipments increased approximately 48% year-over-year and the significant revenue contributions from the portable music player market.

Revenue from dual-pointing applications for the quarter trended down as anticipated and represented approximately 25% of total revenue compared to 27% of total revenue in the September quarter. Our initial expectations going into fiscal 2004 was that revenue from dual-pointing applications would represent 20% to 30% of our revenue during the year.

Given the continuing trend in notebook demand for single-pointing solutions and the increased revenue contributions from portable music players, we currently expect that revenue from dual-pointing applications will represent 20% to 25% of our total revenue for fiscal '04.

Non-notebook revenue for the second quarter represented approximately 16% of total revenue compared to 9% of revenue in the September quarter and 3% of revenue in the same quarter last year. This increase is primarily attributable to the strong demand we have seen from the portable music player market. As a result, we now expect that revenue from non-notebook applications will represent approximately 15% of our total revenue for fiscal year 2004, which is up from our initial expectations of slightly more than 10%. Our success in the portable music player market is the first major step toward our goal of revenue diversification.

Gross margins of 41.3% for the December quarter were within our target range of 40% to 45% and compare to 41.1% in the preceding quarter and 42.5% in the same quarter last year. As in the September quarter, margins at the low end of our range primarily reflect a product mix weighted toward single-pointing solutions.

Total operating expenses for the quarter declined slightly to $8.6m compared to $8.7m in the preceding quarter, which, as a reminder, included one-time costs of $432,000 associated with the integration of our NFM acquisition that closed at the end of our June fiscal year 2003.

Noncash charges related to the amortization of deferred stock-based compensation for the December quarter totaled $132,000, slightly less than $137,000 in the prior quarter. R&D costs for the quarter were essentially unchanged from the prior quarter at $5.1m. SG&A costs were $3.3m compared to $3.2m in the prior quarter, primarily reflecting increased staffing, higher compensation costs, and commissions.

Total headcount at the end of the quarter was 185, an increase of seven from 178 in the September quarter, as we continue to selectively add people to address new market initiatives, internal programs aimed at cost improvements and design efficiencies, and the demands of the increased business levels.

Net interest income, which comes primarily from investments and tax-exempt issues, was $195,000 for the quarter, essentially unchanged from the prior quarter.

Higher-than-expected revenue levels and the corresponding increase in profitability has resulted in an upward revision in our effective tax rate for fiscal year '04 to 38 to 39% compared to our prior estimate of approximately 37%. Consequently, our effective tax rate for the December quarter was 39.4% in order to normalize for the first half of the year.

GAAP net income for the quarter was ahead of our expectations at approximately $3.5m, or 13 cents per diluted share, primarily reflecting our higher-than-expected revenue level. This represents an increase of approximately 54% from the $2.3m, or 9 cents per diluted share in the immediately preceding quarter, and an increase of approximately 90% from the $1.8m, or 7 cents per diluted share for the comparable quarter last year.

Pro forma net income for the quarter was approximately $3.6m, or 14 cents per diluted share compared to $2.7m and 10 cents per diluted share in the prior quarter and $2m, or 8 cents per diluted share for the comparable quarter last year.

Now I'd like to talk about a few items related to our balance sheet. We ended the quarter with total cash and short-term investments of $84.3m, up from $79.6m at the end of the preceding quarter. Cash flow from operations was approximately $4.4m; capital expenditures for the quarter were approximately $254,000; capital depreciation was $266,000 in the quarter. Receivables at the end of the second quarter were $17.7m compared to $16m last quarter. DSOs at the end of the quarter were 47 days compared to 49 at the end of the September quarter. Inventory was unchanged from the prior quarter at $5.1m. Inventory turns for the quarter were 16 compared to 14 last quarter, reflecting the impact of the higher shipment levels in the December quarter.

Our outlook for the March quarter reflects our strong but sequentially lower backlog of $17.7m and industry reports that suggest sell through in the December quarter was generally at expected levels. Based on our current visibility, we expect to experience some seasonality in the notebook market but believe it will be muted compared to historical norms. We anticipate this will be offset by continued strength in the portable music player market and are therefore forecasting revenue for our third fiscal quarter to be essentially flat with the December quarter.

As Francis noted earlier, while some industry reports are pointing to a consumer-to-corporate handoff in notebook market demand over the course of the calendar year, our near-term visibility indicates continued demand weighted toward single-pointing solutions, generally reflecting the preferences of consumers and small businesses. As we look out into the June quarter, current visibility suggests revenues will be up slightly from the March quarter.

We expect to be able to maintain our gross margins within our target range of 40% to 45%, and based on our current backlog, we expect gross margins to be similar to the December quarter. We expect operating expenditures to increase in the March quarter by 10% to 12% reflecting expected increases in engineering project costs, higher compensation expenses associated with both the timing of headcount additions in the December quarter and planned headcount additions in the March quarter and, in addition, higher payroll taxes as we enter a new calendar year.

Over the next six months, we plan to add approximately 10% to our headcount for the same reasons I mentioned earlier and, as a result, we expect our expense levels to continue to increase through the duration of the fiscal year. As I previously noted, we expect our effective tax rate for the year to be between 38% and 39%. GAAP net income per diluted share for the March quarter is expected to be 11 cents. Noncash expenses related to the amortization of deferred stock compensation are estimated to be approximately $134,000.

In closing, we continue to execute well across both the notebook and new market segments of our business. We are successfully delivering on our product roadmap with the goal of extending our leadership position in notebooks into our new target markets. Our business fundamentals remain strong, and we are selectively investing our engineering resources to provide new innovative solutions aimed at accelerating our long-term growth by both building on our success in the notebook and portable music player markets and by further diversifying our revenue in the future.

That concludes our formal remarks, and we'll now turn the call over to the operator for the start of the Q&A session.

Thank you, sir. Ladies and gentlemen, at this time we will begin the question-and-answer session. If you have a question, please press the star followed by the 1 on your pushbutton phone. If you would like to decline from the polling process, please press the star followed by the 2. You will hear a three-tone prompt acknowledging your selection. If you are using speaker equipment, you will need to lift the handset before pressing the numbers. One moment, please, for our first question.

Our first question comes from Andrew Neff. Please state your company name followed by your question.

Bear Stearns. Very nice quarter -- two quick things -- one, Francis, you mentioned the different drivers. What were the first two you mentioned? I also want to ask you about the PDA you mentioned. Is this a major brand PDA or is this -- I mean -- is this a minor one?

Thanks, Andy. Can you repeat your question? You said something about the drivers?

You were going through the different drivers, you were enumerating them in terms of different things driving -- I just want to catch the first two that you gave. And, also, I just wondered if you could give us some more details on this PDA that you mentioned.

Okay. On this -- first let me answer the second question first, okay? Obviously, Andy, you know, we cannot disclose who they are, and you know that, but as with a leader rather than with a non-leader. It's a name brand in the OEMs, Andy.

Regarding the two driver questions there, I'm a bit of at a loss in terms of specifically what you're talking about. Are you talking about the March quarter?

No, you were going through, you were enumerating the different reasons for the optimism that you had.

Oh, I see, I see. Okay, I think the optimism here is fundamentally that I think the sell through in the December quarter is reasonable. As you recall, Andy, one of the things I was worried about was inventory levels with respect to -- in the notebook sector. I think everything that suggests in that particular arena there is saying that there is no unexpected inventory build up and, frankly, the latest forecast in terms of the calendar year 2004, notebook growth has been pretty significant. So while there is still expectation of a seasonality, we expect it to be relatively mute as compared to the historical numbers.

The other thing about it is in the portable digital entertainment area, which, for us, is mainly at this time made up of the portable music player market, okay? We believe the market will continue to grow. As a matter of fact, there has been suggestion from the Juniper analysis that it's going to grow pretty big this calendar year, and you can see that we already introduced in more than one OEMs, you know, in the multiple models of the Apple iPod, who is the industry leader. So we are optimistic because that particular segment is going to grow in such a way that will compensate for any seasonality in the notebook market.

And then the last question would just be in terms of the competitive environment -- any changes that you're seeing either from [ALPS] or any -- in the non-PC business -- any emerging competition there?

Nothing that is expected, Andy, and nothing out of the ordinary that, you know, that we have not talked about earlier.

Okay, thank you.

Thank you, Andy.

Thank you. Our next question comes from Rob Stone. Please state your company name followed by your question.

SG Cowen Securities. Let me add my congratulations as well.

Thanks, Rob.

Thanks.

Furthering the question on competition, can you comment at all on pricing trends relative to the different product categories, single-point, dual-point, and so forth?

The single-point solutions, Rob, continue to be in the $3 to $6 range and, again, the dual-pointing solutions that we're selling into the marketplace today are in the $9 to $12 range, and there really hasn't been a change in that in the most recent quarter, and current visibility would suggest that, for at least the solutions that we're selling, we should stay within that range.

Okay. And with respect to the rising mix of non-notebook products, you know, now up to 16% in the latest quarter, what influence, if any, does that have on your gross margin thinking?

Well, again, we continue to target the 40% to 45% range, and based on our current visibility, you know, we believe we'll be at the lower end of that range.

That's certainly mostly influenced by the notebook mix you anticipate. My question is only, sort of, where, in the target range, the non-notebook products stack up -- if they're somewhere lower or higher within that range, if you are willing to say, at this point.

Yeah, I mean, we're not diversified well enough in that segment yet.

Okay, after you get up to five customers, I'll ask you again.

Okay, thank you.

A question for Francis. You said, in the beginning, something about making continued investments in technology development and building your efficiency. Does that relate to some of the headcount additions that Russ was talking about? Or is there something else you were referring to in terms of investments and developments?

Oh, I think it resonates with what basically Russ said, okay, you know, and, Rob, as you know, we are a company that's, by and large -- you know -- people is our assets, right, so, you know, when we make any investment, a big chunk of it, really, is hiring. But, having said that, there's also outside services, you know, stuff like that, that's also in the incremental investment. But, by and large, it really is consistent with what Russ said at the end.

Okay, and any comments you'd like to make on technology roadmap in terms of spinning your ASICS or things like that that are upcoming in the context of calendar '04?

Yeah, as a matter of fact, activities in that particular area has been very strong, Rob, and we continuously are looking at, you know, not just ASICS but putting in new technologies and new implementation of the same technology together. One other thing I commented about, the TouchPad under plastic. I think you guys have heard me talk about it several times already. That technology actually continues to evolve, you know, Rob. I would, you know, tell you that it's not -- there's more challenge, you know, to be able to do that kind of technology in different form factors, like a notebook as well as like an Apple iPod. Or if you are familiar with Samsung's flash-based devices, I mean, those are a vastly different implementation of the same capacity of technology and the plastic, and it wouldn't have been possible without, you know, us meeting the technology roadmap and continue to deliver in innovative ways of using this technology in different solutions. So I guess the short version of the answer is yes, there is new ASIC coming out and, yes, there is new technology roadmaps that are helping us in some of these design wins and activities. And, yes, every time we enter into a new market, there are different nuances. You know, the same core technology and that remains to be the engine, which kind of fuels our growth.

Okay. So this PDA, if I understood you correctly, would probably be shipping sometime in the first half of your fiscal '05?

I believe what we said was within the next six to nine months, Rob, okay? And certainly is with one of the leaders in that space.

Right, so that puts it either late this fiscal year or early in your fiscal '05?

Within the next six to nine months, Rob.

Okay, great. Thank you.

Thank you. Our next question comes from Michelle Gutierrez. Please state your company name followed by your question.

Sure, it's Schwab Soundview Capital Markets. Good afternoon.

Hi, Michelle.

Hi, Michelle.

I wanted to ask, do you have any update on your [City One Song] programs, you know, the item that's been tested in the two cities in China?

Yes, Michelle, actually, the update has been -- the activity there has been very slow, okay? So there has really been not much progress, you know, and it's really out of our control. It is over there in China. There has been a number of priorities, you know, that those guys have been doing. As you know, China is a country and telecom, as a fact, has been growing pretty fast there. So there's really been no new update from our partnership.

Okay, and on the cell phone front, you said that you continue to sort of work with your OEMs. Is there any chance we might get an announcement anytime soon?

Well, I mean, Michelle, there is none that we have scheduled, okay? I think it will be very similar to kind of like a PDA. You know, we worked with this particular OEM for, you know, a while, and when it kind of meets our criteria we will announce it. I can pretty comfortably tell you, okay, that activities from our end here have continued to be very consistent, you know, with expectations, okay? The only problem about, you know, speculating on design win here is a lot of that really is out of our control, Michelle. I am actually very pleased, Michelle, with the level of work that has been going on.

Okay, great, and then you shared with us the price ranges for the single-point and the dual-point. How about the MP3 players? Is it also in the single-point area?

That's correct, Michelle. It's within the single-pointing price range that I discussed earlier -- $3 to $6.

Even the new ones are in that area as well?

Yes.

The new iPod and -- I'm assuming you're on the new HP/Apple MP3 player as well?

That's correct.

And then, do you give us any guidance on the number of units you sold during the quarter?

Just anecdotal evidence. I mean, it was another record quarter for us, and units were up 48% year-over-year. The last estimates I've seen for the industry suggest that it's probably -- the industry was up somewhere between 34% to 36%. So, again, I think we continue to grow our leadership in the notebook space and, again, that just positions us very well for working with essentially the same customer base as they also try to diversify their businesses -- moving into PDAs and MP3 players and things like that.

And do you have an estimate on what your market share is now? Is it pretty much the same or is it expanded?

I would say we're in the mid-50s, a little bit north of that.

And nothing has changed in the competitive landscape, is that correct?

Yeah, there's been no significant change there. I mean -- we do hear of other people trying to get into the market. I have to say that we don't bump into them in competitive quotes today. So it's not clear to us what sort of fraction, if any, some of the new potential entrants are making in the marketplace.

Thanks a lot.

Okay.

Thank you. Our next question comes from Matthew Curtis. Please state your company name followed by your question.

Kenny Securities. Hi, Russ and Francis.

Hi, Matt.

Hi, Matt.

Hi -- a couple of quick questions. We saw out of Acer recently that they experienced some problems with shortages in monitors, so they tried to push out laptops in Q4, but they anticipate most of that to be resolved in the first quarter. Are you guys seeing any indication that there might be other potential bottlenecks that we might see as this industry continues to grow?

Well, I think it's pretty clear that -- I mean -- there have been some tight supply in certain areas for the notebook guys and even for some of the things that we need, we've run into that. But we've been able to manage through those, and we don't anticipate any potential negative impact from that based on the way we're managing our vendors and our OEMs today.

Okay, and then going into next year, obviously, we're looking for growth in the notebook space. I'm wondering, do you have any indication whether these supply shortages might be better handled by the industry, overall, going into next year, or whether we might see this same problem around the fourth quarter next year?

Well, I mean, that's a long ways off to try to speculate about what's going to happen in terms of component availability, but it's clear to us that, I think -- we expect notebook demand for this year to continue to be fairly strong and, again, we're very pleased with the progress and the sustainability of the growth rate in the portable music player market and, as Francis said, we're continuing to make investments in the portable handheld market. We now do have our first design win in the PDA space, and we continue to work with a number of the key players in the cell phone space. So I hope that we have, you know, a solid design win that we can announce to you guys in the future, but until we have one, all we can tell you is that work continues there, and we're very pleased with the level of activity within the target customers in working with us to find ways to implement our technology into their devices.

Okay. Speaking of those other non-notebook spaces, did you all mention what kind of ASP multiple you are expecting on the PDA design?

No, we didn't.

It looks like, obviously, with the higher sales and headcount, we expected SG&A to come up, but it looks like, as a percentage of sales, it decreased somewhat. Would you expect that leverage to continue as your sales increase going through this year?

Well, I think that's one of the good things about the financial model that we have. It's a pretty flexible and scalable model, as we move the revenue levels up. If you look at our performance through the first half of this year, I think you'll see that it maps very well on our target financial model. You know, we have the 40% to 45% gross margins. We're targeting SG&A in the 14% to 16% range -- SG&A in the 10% to 12% range with mid-teens of profit and 8% to 10% after tax. And, again, if you look at the first six months' results, I think you'll see that we're pretty much in line with that. You know, last fiscal year, where our revenues were relatively flat, and we continued to make conscious investments in those new markets, we did drive our R&D spending up above that target range of 14% to 16%. But, again, some of the work that resulted from that is now turned into revenue, which is helping grow the top line and bring us back within that range.

Okay, very good. And, along those lines, the DSOs and the inventory turns for you guys have been trending towards the better levels now for the better part of the year-and-a-half now. Are you looking at adjusting what your expectations from the DSOs and inventory turns are, going forward? Or are you expecting, basically, what it has been historically, still at this point?

Well, internally, I continue to kind of target DSOs at 55 days. I mean, I would not be surprised or disappointed if we were in that range. And a lot of what the impact that you see in DSOs, you know, depends on linearity of revenue within the quarter. We entered this last quarter with an all-time record backlog of over $19m, and so the linearity in this quarter -- I mean -- we just benefited, we got out of the gate very quick, right, which gave us a lot more time, if you will, to collect on those early sales in the quarter. And that's really what kind of fluctuates for us. The watch-out is, as more of these -- as more of our customers move manufacturing into China, you know, China has a reputation of being a little bit more difficult in terms of just getting cash payments approved to come out of the country. So we continue to target 50 to 55 days there. Obviously, we try to beat that, and we have been beating that fairly consistently, as you point out.

On the inventory turns, I would guess that we're probably going to be in the teens as we move forward. I mean -- the bulk of our inventory does represent our proprietary ASIC in either raw die or packaged form. We do try to target a six-month supply on that. Fortunately, in the last 18 months, we've benefited from a decline in silicon pricing, but if silicon pricing was to turn around and go the other way, you would see that impact in our inventory levels, which then, potentially, would have a slight impact on our turns, going forward.

Excellent, well, thank you very much and congratulations from me as well. Thanks.

Thank you.

Thank you. Our final question comes from Satya Chillara. Please state your company name followed by your question.

WR Hambrecht. Hey, guys, this is [Janam] for Satya.

Hi.

A quick question on your outlook for the notebook and MP3 markets. What are you guys seeing, like, in terms of unit growth in '04?

I'm sorry, would you repeat that?

For the notebook and MP3 player markets -- what's your outlook for, like, unit growth this year?

I think the last number I saw from IBC for notebook growth this year was somewhere between 20% and 25%.

Okay. And just, given, like, the way MP3 players are selling out everywhere.

The forecasts that I've seen from some of the industry gurus there suggest that that space is expected to grow at 50% compounded.

Do you guys have any visibility into, like, what your market share is in that market? Or what it could be at the end of the year, I mean, in terms of, like, between the hard disk drive and the flash-based players?

Yeah, that's right, if you look at that space, it is separated between those two different approaches. Some of the forecasts I've seen projects that the hard-disk drive guys will actually surpass the flash-based guys this year. Clearly, the Apple has been the big winner in the hard-disk drive space. We continue to be a participant and benefit from the success that Apple has had in that space. The recent announcement between Apple and HP we expect to be an additional growth driver for them. So I would think that our market -- clearly we're a leader in providing interface solutions into the hard-disk drive portable music player market today, given that Apple is the leader in that space. You're clearly going to see more entrants into this market, but I think all indications suggest that Apple will have a very good year and, again, we will benefit from that.

And you guys -- I'm not sure if I caught this, but you guys would say there's no market difference between -- the ASP between a flash-based player interface and hard-disk drive interface?

Well, we haven't commented on that. What we've said and what continues to be true is that if you look at the selling price of our solution into that marketplace, it's essentially in line with the same price range that we have for single-pointing solutions.

Okay. One last question, I guess, on the cell phone market. You know, the PDA design, that's clearly encouraging. When do you guys see, like, the smart phone, you know, cell phone, kind of, opportunity kind of materializing? Is that a late '04, 2005 kind of event?

Well, as I said a little earlier, it's difficult for us to speculate, you know, on design wins. Certainly it's even harder to speculate on revenues, right? Typically, you know, we forecasting here -- what we see here, okay, is the leading indicators, which is the design activities, okay? Design activity is something that is difficult to quantify to the outside world other than the fact that I can signal to you I'm continuing to be pretty pleased with the progress that we are moving ahead here. And I think it's immaterial. In a design win we will announce it, but certainly, you know, we haven't been at that stage as our last quarter yet.

I was just thinking that the cell phone market, it's converted pretty quickly to, like, these feature-rich phones, and it seems like the OEMs are just packing more and more functionality into their phones. So, clearly, a more advanced interface would be particularly useful in that market, plus, you know, the opportunity is big.

Well, that's exactly why Synaptics decided to participate in it. The same is true, by the way, in what is today, you know, a lot of people call the MP3 music player market, okay. We're actually a class -- part of digital entertainment, and Apple has clearly pointed out that as modern music, now they are loading various kinds of content into the same appliance, right? So we really see, as more content, more feature-rich, you know, of these devices become, you are absolutely right, they will need, you know, use the interface. There is a lot more intuitive as well as more flexible in terms of how you, you know, how you interact with the devices.

Okay, thanks a lot, guys.

Thank you.

Mr. Knittel and Mr. Lee, please continue with any closing comments.

Thank you for being on the call with us today, and we look forward to update you again next quarter. Bye-bye.

Ladies and gentlemen, this concludes the Synaptics second quarter conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3000 or 1-800-405-2236 followed by access number 566021. Once again, we thank you for your participation in today's conference and at this time you may disconnect.