Synaptics Inc (SYNA) 2005 Q1 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Synaptics first quarter conference call.

[OPERATOR INSTRUCTIONS]

I would now like to turn the conference over to Alex Wellins with the Blueshirt Group. Please go ahead sir.

Good afternoon and thanks for joining us today on Synaptics first 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 web site at synaptics.com. With me on today's call are Francis Lee, President and CEO of Synaptics and Russell 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 SEC filings including form 10K for the fiscal year ended June 30, 2004 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 everyone for joining us on the call today. We are pleased to report another quarter of record revenue and profitability. Revenue for our first fiscal quarter of 2005 was $38.1 million, up 8% from the prior quarter and 29% over the same quarter last year.

GAAP net income was up 19% over the previous quarter to $4.4 million dollars or $0.16 per diluted share. As expected first quarter shipment ended into the notebook market were down compared to the previous quarter while revenue from the new market applications increased significantly as we continue to capitalize on the rapid growth in the portable digital entertainment segment.

As a result, new market revenues grew to approximately 33% of total revenue during the September quarter, our highest quarterly revenue to date. As anticipated we experienced another back end loaded quarter with roughly 60% of revenue occurring the last month. Once again, I'm very proud of our strong execution demonstrating our ability to meet our customers need despite their challenging order pasts. I'm also pleased to announce that our visibility is much improved as we end the September with a record back log of $39.5 million.

Now I'd like to make a few comments about our progress during the past three months. In previous quarters I reported that we were exploring opportunities for capacity technology in the best top PC market, which resulted in two design wins.

As originally announced the first design wins go into production is a scrolling solution in the new Logitech V500 cordless mouse, which utilizes our capacitive solution for vertical and horizontal scrolling. The second design win recently announced by NEC uses a Synaptics interface solution in a desktop tower.

The NEC easy home desktop PC has multimedia functionality which is successful via remote control and a Synaptics light touch capacitive button array located on the front of the tower. Synaptics interface module is mounted beneath the plastic casing, creating a sleek and stylish industrial design.

Both of these implementations illustrate how our technology is applicable to the broader PC market and we continue to work to diversify our revenue in this area. We expect revenue from both of these applications in the December quarter. Next, as we previously announced we continue to broaden our customer base in the portable digital entertainment segment.

In addition to Apple, Creative and Samsung, two new MP3 design OEMs have announced designs that use Synaptics capacitive based interfaces which allow for you unique industrial designs. The first, HD300 by Digital Way, is a 20 gigabyte hard disk drive MP3 player that's currently available at Best Buy which uses our under plastic capability for scrolling.

The second design, the m:robe, is the first hard disk drive based MP3 player designed for Olympus. The m:robe uses our illuminated scroll strip with a capacitive light tough button resulting in a completely solid state interface solution. In addition, Creative has recently announced another MP3 player, Zen Micro, which incorporates an illuminated scrolling and selection interface from Synaptics.

As you know, portable music players are experiencing phenomenal growth and our expanding customer base will better position us to capitalize on this market. Finally, Synaptics was honored to be selected from hundreds of companies to participate in the DEMOmobile 2004 conference held in early September.

DEMOmobile is a well known launch platform for new products and technologies for the mobile phone market. Our Synaptics has been engaged in discussion with top tier mobile OEM for some time. We publicly introduce our capabilities for the mobile phone market at this event.

In addition to press and analyst, the audience included a broad range of mobile industry leaders throughout the value chain, including mobile handset manufacturer, operators and mobile technology companies. We were very encouraged by the positive response we received and, in fact, of the 33 demonstrators we are one of the six selected to receive a prestigious award for the launch of our mobile touch product line.

In summary, we are off to a very good start to fiscal 2005. As we indicated last quarter we expect the issues regarding limited near term visibility and supply chain uncertainty to improve over the balance of the calendar year, and that appears to be the case. Looking ahead we're excited about opportunities to broaden our product applications in the PC market and continue to expand our presence in the portable digital entertainment segment further diversifying our customer base.

As a result we expect the December quarter to be our third consecutive quarter of record revenue and earnings as we continue to capitalize on our position as a dominanant player in our key market. We remain very excited about opportunity in the mobile sector and introduction of our mobile touch solution in the cell phone market.

As we move into the seasonally strongest quarter of the year, we are well positioned to benefit from inclusion in some of the hottest consumer devices on the market and remain focused on meeting anticipated strong demand from our customers. I will now turn the call over to Russ for a review of our detailed financial results for the first quarter and provide some guidance on our business outlook.

Thank you Francis. Unless I specifically note otherwise, all the numbers I discuss regarding our quarterly results will be on a GAP basis. Revenue for our first fiscal quarter was 38.1 million, a sequential increase of approximately 8% over last quarter's 35.1 million and an increase of approximately 29% compared with 29.6 million during the same period last year.

Revenue from new market applications increased more than 81% sequentially to approximately 33% of total revenue, again, primarily reflecting the rapid adoption of our product solutions for the high growth portable music player market. As anticipated, unit shipments into the notebook market were down sequentially resulting in roughly a 10% decline in revenue from notebook applications as duel pointing revenue was down 28% sequentially and represented approximately 17% of total revenue.

Gross margins for the quarter were better than expected at 45.1%, compared to 43.2% in the preceding quarter primarily reflecting the impact of two factors. The first was a richer product mix coming out of our higher than typical turns business owing to our lower back log level going into the quarter. The second positive factor on gross margins was better manufacturing yields.

Total operating expenses for the quarter of 9.9 million were up as expected from 9.5 million in the preceding quarter, but were below forecast primarily reflecting timing of our recruiting efforts. R&D costs of 6 million were up from 5.6 million in the prior quarter primarily reflecting the impact of our annual performance review cycle and higher project spending on both our internal and external development programs.

SG&A costs of 3.8 million were essentially unchanged from the prior quarter as the impact of our annual performance review cycle was offset by lower costs related to our tax planning and market research activities. Total head count at the end of September was 199, compared to 197 at the end of the June quarter.

Our head count will continue to increase as we are actively recruiting to staff our internal and external initiatives and meet the demands of our increasing business levels. Non cash charges related to the amortization of deferred stock compensation for the September quarter totaled approximately 102,000 down from 120,000 in the prior quarter.

Net interest income which comes primarily from investments in tax exempt issues was approximately 242,000 compared to 233,000 in the prior quarter. Effective tax rate for the year is currently expected to be approximately 41%, which is in the middle of the 40 to 42% range that we indicated on our earnings on last earnings call.

GAAP net income for the quarter was 4.4 million, an increase of 19% compared with 3.7 million in the prior quarter and an increase of approximately 95% compared with the 2.3 million in the comparable quarter last year. GAP EPS for the quarter was $0.16 per diluted share, compared to $0.13 per diluted share on the prior quarter and nine cents per diluted share in the comparable quarter last year.

Now a few comments on our balance sheet. We ended the quarter with total cash and short term investments of 97.3 million, up from 96.3 million at the end of the June quarter. Cash flow from operations was approximately 175,00 for the quarter as working capital increased approximately 4.7 million, primarily reflecting the impact of the back end loaded revenue on accounts receivables and the planned increase of our ASIC inventory levels.

Stock option exercises and employee stock purchase plan contributed approximately $1 million for the quarter. Capital expenditures were approximately 246,000 and capital depreciation was 222,000 in the quarter. Receivables at the end of September were 29.5 million up from 21.9 million at the end of the June quarter, resulting in an increase in our DSO's to 70 days from 56 days at the end of the June quarter reflecting the impact of the back end loaded quarter referred to earlier.

We made progress in building our ASIC inventory level toward our targeted six month supply, which resulted in a sequential increase of 1.2 million, raising our total inventory level to 7.7 million. As a result, inventory turns for the quarter were 11 compared to 12 in the prior quarter.

I'd like to make a few comments regarding our near term business outlook. We entered the September quarter with a record back log of 39.5 million and are projecting substantially sequential revenue growth in the December quarter in the range of 35 to 45%. Looking at the current product mix in our back log and customer forecasts for the quarter, much of the upside is again expected to come from strong demand for portable music players.

While we are forecasting that sequential increase on the notebook side that is toward the lower end of normal seasonality. Although this is a broader range in revenue guidance than we have provided in the past, it's a reflection of the fact that our guidance is largely dependent on the strength of consumer spending in the holiday season for both notebooks and handheld music players. And we also continue to be watchful regarding any potential recurrence in supply chain issues.

As we look ahead to the March quarter we expect revenue to be in excess of September levels but down sequentially reflecting the impact of seasonal consumer patters, the extent of which will largely depend on the success of new product introductions and overall sell through in the December quarter.

Based on our current back log we expect gross margins in the December quarter to be similar to the September levels. We expect operating expenses to be up sequentially reflecting the impact of planned staffing increases and anticipated increases in project expenses. GAP net income per diluted share for the December quarter is expected to be in the range of $0.27 to $0.30.

Non cash expenses related to amortization of deferred stock compensation are estimated to be approximately 85,000. Would also like to note that our current lease in San Jose expires at the end of May next year, and we have made a decision to buy our own building rather than continue to be subject to the wide swings in Silicon Valley lease rates in the future.

We have begun the process of looking at available buildings and would expect to complete a transaction within the next few months so that we would have enough time to get the new building ready to ensure an orderly relocation next year.

In closing, we continue to diversify our revenue and our customer base by capitalizing on our innovation and the strong demand in the portable music player market and expect to see positive contributions from our broader PC initiatives while at the same time continuing to leverage our leadership position in the notebook market.

Our core technology, engineering know how and scalable business model as a virtual manufacturer are all key elements in our strategy to penetrate additional new markets as we move forward. We are looking forward to a tremendous second quarter and another solid year of revenue growth and operating performance.

That concludes our formal remarks and we'll now turn the call over to the operator to start the question and answer session.

Thank you sir.

[OPERATOR INSTRUCTIONS]

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

Bear Stearns. Three quick questions, I think. First of all, great outcome. Just one is, in the music player market do you see any competition emerging or how do you think that's going to shape up? I mean, is there - would it be surprising for customers to look for a second source, but so far these have all been sole sourced.

Second, any idea on the timing of the design win in the phone business? And then third, Russ, you talked in the past about steps you're taking to drive down the tax rate. Could you just sort of update us on what you're doing there?

OK. Hi Andy. Thanks for your comment. In the music segment, I mean, obviously the segment is growing very fast. OK. And we expect, you know, all kinds of competition in this segment. And as you, Andy, there is really, you know, no definitive agreement for, you know, in general for our business, you know, with any particular, you know, OEM.

So it's really Synaptics has got a winner business on our merits and we expect to continue to do so. And noting that is attracting a lot of competition. As far as the mobile phone is concerned, we continue to make progress but it is not a stage that, you know, we can have anything substantial that you like to talk to about in more detail. But I'm still very optimistic something is going to happen there. You know, with respect to tax rate, Russ.

OK. Andy, the tax plan that we've implemented, again, is going to result in a higher tax rate this year as we indicated on the last call than what we saw in fiscal year 2004. But, you know, assuming the tax laws don't change and, you know, counting provisions regulations for the way you report your tax provisions don't change, I would expect that next year our taxes would be back down in the 35 to 40% level.

And the year after that probably 30 to 35% and the year after that I would expect we would be sub 30% range.

Thank you gentlemen.

Thank you. Our next question is from Joe Sullivan. Please state your company name followed by your question.

Hi. This is Joe Sullivan with Craig-Hallum. Congratulations as well on a solid quarter. On a gross margin line, 45% is what I heard for the December quarter. What about beyond that? Is what you're doing sustainable? Is that sort of a new run rate?

Well we do target 40 to 45% gross margins on a blended basis. Clearly this is at the high end of the range. You know, our guidance for the December quarter is to be at the similar level. And again, our gross margins primarily reflect the impact of the product mix that's running through manufacturing since we are essentially on a variable cost model when it comes to delivery of products to our customers.

We have not changed the model. We continue to target the 40 to 45% range. And, you know, you do have quarter to quarter variations depending on the mix that's running through manufacturing and then you always have the positive impacts from potential better manufacturing yields then you expected going into the quarter. But it's primarily mix driven.

And then on the non-notebooks for the current quarter, any help you can give as far as what the change in the ASP was for the iPod with the mini coming on and then also some of the new wins, did you have much revenue contribution in the current quarter from those or all those all going to flow into the December quarter?

Well, the pricing range for single pointing solutions, again, is generally in the $3-6 range and that's true whether it's a notebook application or a handheld application. We do have less revenue content in the two currently shipping versions of the iPod product line than we did in the third generation which is now end of life and that transition occurred this quarter. I mean it's really the new generation devices that are shipping today.

New design wins - we are going to see - we saw some rebel(ph) of revenue this last quarter but the big ramp is really starting next quarter and while nobody today is driving the same volumes in that market as Apple is because they are the leader in that space and they had an early lead in terms of product introduction. I'd say the other vendors are ramping nicely.

One last question from me. Aside from keeping up with the ramp in the products current, any undisclosed or unnamed wins in the quarter? Did you have any new design wins?

We didn't have any new design wins to report this last quarter.

OK. Good for me. Thanks.

Thank you, Joe.

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

Hi guys. SG Cowen. I haven't bought an iPod in this batch yet but I guess you didn't miss me.

We're waiting for you to weigh-in, though.

OK. I still have to do Christmas shopping. Could you comment, Francis, on the notebooks market? I think you mentioned that the unit's down and the dual point mix is down quite a bit. What your view is on market trend overall? Is that kind of a shift reflective of the mix of notebooks overall once you think about market share, etc. in that market?

Sure, Rob. I mean, first of all there is strength in the notebook market continues to be really turned by the consumers. I mean, I think we in the last couple of earnings calls, we talk about that in a corporate spending market, certainly Synaptics has not seen any significant movement. Moving higher than what we in general would like to see there. So it's still pretty much driven by the consumer factor.

As far as the holiday season is concerned, we expect seasonally to be stronger in the December quarter and there's really no change there. There's been a lot of reports about inventory issues off and on over the last several months and quarters and from our vantage point here we believe that visibility is getting better in that particular point but it's still pretty much guided by how consumers are going to spend in the consumer quarter as to the level of increases.

Now, keep in mind, in spite of all this negative news about inventory, year over year, '04 over '03, there is still a very good growth market for the notebook sector.

So do you think there is any possibility that the typical - you mentioned you thought the sequential growth would be towards the low end of normal seasonality. Do you think that may be because of reallocation of what consumers are spending towards some of these new digital handheld devices?

Well, I mean certainly a number of factors go into play here, Rob, but I think my biggest concern there is when you look at the general economy and certainly the latest consumer confidence index has shown a pretty significant drop so my concern here is just in general how consumers are spending money, number one, that probably dropped somewhat in how they spend their dollars in my mind, Rob, you know, everybody is paying in the U.S. for a $2, $2.40 gallon of gas. That doesn't bode well in terms of discretionary spending in my mind.

Yeah, that's true. Final question with respect to some of these new market applications that are not in the music player space with the scrolling strips and so forth. Does the same thinking with respect to the range of ASP apply for products like that or is there anything different on something like a mouse?

Generally speaking, Rob, our solutions today, if it's a single pointing solution, whether it's one directional or multidirectional are in that $3-6 range.

OK. Thanks very much.

Thank you. Our next question is a follow up question from Andrew Neff. Please go ahead.

Sorry, just if I could, just - could you remind us, Russ, about the timing of if you ship to Apple - I'm sorry, if Apple ships an iPod, when do you get paid for your contribution?

Well, we get paid based on sell-in and that's always been the case and that's true for all of the customers we ship to, because it is a custom - it is an engineered solution for that specific device. In terms of the differential between when we ship and when Apple ships, my guess is that's probably in the two to four week range.

Thanks.

Thank you. This concludes the question and answer session. Mr. Knittel and Mr. Lee, please continue.

Well, thank you for being on the call with us today. I really look forward to updating you again next quarter. Thank you.

Thank you. Ladies and gentlemen, this concludes the Synaptics first quarter conference call. If you would like to listen to a replay of today's conference, you may dial 303-590-3000 or 800-405-2236 followed by access number 11010352. Once again we thank you for your participation. Have a pleasant evening. You may now disconnect.