Synaptics Inc (SYNA) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentleman, and welcome to the Synaptics fourth quarter conference call. At this time, all participants are in a listen-only mode. [CALLER INSTRUCTIONS] As a reminder, this conference is being recorded, Thursday, July 28th, 2005. I would now like to turn the conference over to Mr. [Alex Wellen] from the Blueshirt Group. Sir, please go ahead.

Good afternoon, and thanks for joining us today on Synaptics fourth quarter and year-end 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 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 cap off a very successful year with a strong fourth quarter, as Synaptics achieved record revenues and profits in fiscal '05. Our revenue for the year was $208 million, up 56% from the prior year and net income was up 192% at $38 million or $1.30 per diluted share. Fiscal '05 was another year of record unit volumes with unit shipments up approximately 69% during the year, for (inaudible) growth and excellent execution in our target markets. We also made good progress on our diversification strategy, as we successfully grew our revenue outside of the PC market to approximately 41% of total revenue in fiscal '05 compared to 16% in fiscal '04.

Turning to the fourth quarter, our revenue of $56.8 million was in line with our expectations and represented an increase of 62% compared with $35.1 million in the same quarter last year. Net income was $12.2 million, up 227% compared with $3.7 million in the same quarter last year, resulting in earnings per diluted share of $0.41 compared with $0.13 in the year-ago period.

As expected going into the June quarter, strength in the PC market was offset by softness and demand for hot disk space, portable digital music players among some of our customers. As a result, revenue from PC applications grew 20% sequentially, while revenue from non-PC applications was down approximately 21%.

Synaptics recently achieved a key milestone in our diversification strategy as the first mobile phone using Synaptics' capacity of mobile touch technology was launched into the Korean market. The Samsung SCHF310 uses a unique, customized Synaptics interface for phone navigation and input. We are very excited that our long-standing assets are now being validated in the cell phone market and we continue to see strong design activity.

We are encouraged by the increasing momentum of our technology in a mobile space and expect to see additional phones incorporating our interface solutions within the next 6 months.

Now, I'd like to make a few comments about our progress in the PC and personal digital entertainment market during the past 3 months. Last quarter, we announced that we expected to be shipping products for a new PC preferred design win. I'm happy to announce that we have begun shipments for this new design and expect our customer to officially announce its product within the next few months. We hope to be able to share more with you on this innovative new implementation at that time.

During the quarter, we held our semi-annual marketing road shows for our PC customers. This is one of the venues we use for introducing new product concepts, including new ideas utilizing our LuxPad Illuminator Touch Pad products. One of the ideas we were very excited about is a [Gilmore] product concept which offers two more touch pad uses. In default mode the touchpad provides typical navigation functionality. When the second mode is engaged, buttons are illuminated on the touch pad surface. This button can be customized by the OEM then for both ease of use and functionality. Examples of this include multi-meter controls, a shortcut to popular website programs. The response has been very positive and we hope to update you on future designs incorporating some of these new product concepts over the next 6 months. In addition, we are seeing increased design activity for our light touch capacity buttons across multiple markets.

In our portable music player category, Creative recently announced a new 20 gigabyte SAN fleet which uses Synaptics' (pro-script) navigation and control. As I mentioned last quarter, we're encouraged by the continued interest in our solutions for the portable digital entertainment market and continue to secure design wins with both new and existing customers. We expect to provide more details on these new design wins over the next 6 months as we further expand our customer base in this market.

Now, I'd like to turn to a few recent corporate developments. Last quarter, we announced that the Board of Directors had authorized a repurchase of up to $40 million of our common stock. During the quarter, we repurchased approximately 1.1 million shares at an average purchase price of $18.60. We continue to believe that this represents an excellent use of capital and reiterate our focus on stockholder value and our confidence in Synaptics' future prospects.

Additionally, I indicated on our last call that we had made the decision to participate in a private equity financing of our spinout company [Phobion]. We invested approximately $4 million and following this investment, our ownership position is in the low teens. [Phobion] has made good progress in developing its (inaudible) digital imaging technology and we're optimistic about its future prospects.

Finally, I'd like to say that this conference call is being held in our new corporate headquarters located in Santa Clara, California. The renovations and move have been completed and we're excited with our location and opportunity to continue to grow the organization.

Before I turn the call over to Russ, I'd like to make some general comments regarding our near-term outlook, where we are seeing continued strong demand for notebooks, particularly from consumers, coupled with lower visibility in the hot disk drive space, MP3 market and continued uncertainty due to customer specific dynamics.

Despite the (inaudible) uncertainty, we have preset our outstanding performance and execution of fiscal '05 and expect fiscal '06 to fit well within our target operating model. Moving forward, we will continue to make investments that support Company growth and innovation. Design activities continue to increase at a healthy clip and we expect to continue hiring staff in fiscal '06 to support our efforts, as we capitalize on trends in our target market.

Synaptics remains well positioned with an expanded landscape as a fully integrated systems solutions provider, which continues to differentiate us as the leading player within our markets. We remain confident in our long-term growth strategy and see tremendous potential for our technology in multiple new markets, including the mobile (inaudible) and beyond.

I would like to take this opportunity to say thank you to our employees, partners and customers for helping to make fiscal '05 a truly phenomenal year for our Company. I would also like to thank our Board of Directors and you, our investors, for your continued support and belief in the promising future at Synaptics. I look forward to updating you on progress during the coming year.

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

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

Revenue for our fourth fiscal quarter was $56.8 million, essentially flat with last quarter's $56.7 million, but an increase of approximately 62% compared with $35.1 million in the same period last year. Revenue from PC applications accounted for 62% of total revenue, an increase of approximately 20%, as unit shipments in the notebook market were up approximately 28%. Most of the unit growth came from single pointing solutions, reinforcing our view that consumers and small businesses continue to be the primary drivers for the increased notebook demand.

However, we also saw an approximate 12% increase in our revenue from dual pointing applications, indicating improved corporate demand during the quarter and dual pointing revenue represented approximately 17% of total revenue in the quarter.

We saw a decline in shipments in the MP3 market, which we believe primarily reflects the reported inventory issues affecting some of our customers. And as a result, our revenue from non-PC applications declined approximately 21% and represented approximately 38% of total revenue in the quarter.

Gross margins for the quarter were in line with our expectations and remained steady at 46.2%, reflecting our ability to provide our customers with innovative, engineered solutions as well as our ongoing focus on cost improvements.

Total operating expenses for the quarter were $8.1 million, including the positive impact of a $3.8 million one-time settlement payment related to patent licensing, which we referred to on last quarter's conference call. Excluding this item, total operating expenses were $11.9 million compared with $11.2 million in the quarter. The 7% increase reflects higher costs related to our product development efforts, Sarbanes-Oxley compliance and additional headcount and recruiting activities. As a result, R&D expenses were up sequentially approximately 6% to $6.5 million and SG&A costs were up sequentially approximately 8% to $5.3 million.

Total headcount at the end of June was 219 compared with 212 at the end of the March quarter. Our headcount will continue to increase, as we are actively recruiting to staff our internal and external initiatives.

Net interest income was $1.1 million compared with $635,000 in the prior quarter, primarily reflecting higher average interest rates on invested cash balances. Our effective tax rate for the quarter was 36.8% and this brings our tax rate for the fiscal year to 34.9%.

Net income for the quarter was $12.2 million compared with $11.7 million in the prior quarter. It reflects an increase of approximately 227% compared with the $3.7 million in the comparable quarter last year.

Earnings per diluted share for the quarter were $0.41 compared with $0.38 per diluted share in the prior quarter and $0.13 per diluted share in the comparable quarter last year.

Net income for the fourth quarter includes the impact of the $3.8 million one-time payment I referred to earlier. Excluding this payment, income from operations would have been $14.3 million. An EPS per diluted share would have been $0.34.

Now a few comments on our balance sheet. We ended the year with total cash and short-term investments of $228.9 million, down from $232.6 million at the end of the March quarter. This decrease reflects the impact of our stock repurchase program, our investment in [Phobion] and the additional construction at our new corporate headquarters, partially offset by cash flow from operations.

Our cash flow from operations was approximately $23.8 million for the quarter and notable cash outflows for the quarter included our stock buy-back program under which we purchased $21.2 million of our common stock, our $4 million investment in [Phobion] and approximately $2.5 million of capital additions, most of which were associated with the buildout of our new corporate headquarters. Capital depreciation for the quarter was $316,000.

Receivables at the end of June were $34.4 million, up from $32.4 million at the end of the March quarter. DSOs at the end of the quarter were 54 days and well within our target range of 50 to 55. Inventories at the end of June were $7.7 million compared to $10.8 million at the end of March and inventory turns in the June quarter were 16 times.

As we mentioned on the last conference call, we will adopt FAS-123R effective with the first quarter of fiscal 2006. Because share-base compensation expense does not represent a use of cash, once we adopt FAS-123R, we plan to supplement our financial reporting with non-GAAP results that will exclude the compensation expense and related tax effects associated with stock options and our employee stock purchase plan. We believe this supplemental information will be helpful to our shareholders and the investment community in providing transparency and historical comparability of our core operating results.

Now, I'd like to make a few comments regarding our near-term business outlook. Our backlog entering the September quarter was $25.4 million, down from the $31.2 million level we had entering the June quarter. Based on current visibility, we expect revenue in the September quarter to be down approximately 9% to 10% from the June quarter. This outlook anticipates seasonal growth in the notebook market, but weighted towards lower end consumer notebooks and reduced visibility in the hard disk drive MP3 player market.

Based on our current backlog, we expect gross margins in the September quarter to be similar to the June quarter levels. We expect operating expenses in the September quarter to be up sequentially, primarily reflecting the impact of our annual performance review cycle, planned staffing increases and expenses related to our recent relocation to our new offices.

For the September quarter and the fiscal year, we anticipate our tax rate, before the impact of FAS-123R, to be in the range of 38% to 41%, depending on profitability and the mix of income by tax jurisdiction.

Net income per diluted share for the September quarter is expected to be in the range of $0.24 to $0.25 excluding the impact of FAS-123R. While the after-tax impact of FAS-123R is very difficult to forecast, we currently anticipate that it will affect our annual results for fiscal 2006 in the range of $0.32 to $0.36 per share.

As you know, our pattern in the past has been to give directional guidance for the next quarter out, which in this case, would be our December quarter. Given the continued uncertainty regarding certain customer-specific dynamics, we do not feel comfortable providing definitive guidance related to our extended outlook.

However, as we did last quarter, we would like to share our current internal view for the December quarter which, given our limited visibility, results in an unusually broad range with revenues of $40 million to $50 million. Looking beyond the December quarter, taking into consideration our current design activity and the pipeline of identified opportunities, our current view suggests that our revenue for fiscal 2006 may be off approximately 10% from fiscal 2005's record levels.

In closing, we're making progress on our diversification strategy and we will continue to invest selectively to both improve our internal operating efficiencies and to capitalize on promising new market opportunities. Based on our continued strong design activity, our expanding customer base and our recent entrance into the cell phone market, we're optimistic that we can weather this current period of uncertainty, as we remain focused on our roadmap for long-term growth and capturing the many opportunities in front of us.

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. [CALLER INSTRUCTIONS] Sir, our first question comes from Joel Wagonfeld. Sir, please state your company name followed by your question.

First Albany, thanks. Two questions if I could. First, given your guidance and the sequential decline in the inventory, it appears that the ramp down at one of your major non-PC customers appears to be happening sooner and maybe more quickly than anticipated. I'm wondering if you can comment on how quickly you think some of your other opportunities, like headsets, might ramp to offset that decline? And then secondly, I'm just wondering in terms of your guidance, what you consider normal seasonal growth for notebooks in the September quarter? It's been double digits for the last 2 years. Is that kind of what you're thinking?

Okay, Joel. This is Francis, Joel. Like Russ said -- I said there is a certain amount of a visibility issue here with one of our customers here and obviously, because of that, we're just looking internal view in terms of what that looks like. As far as -- and by the way, Joel, by -- when I say "lack of visibility," we mean lack of visibility, right? So you mentioned something about whether it is faster than expected and so on and so forth. I don't quite understand the calibration of that, but I can certainly comment on the other kind of product you talk about. We shipped the first Samsung cell phones, okay, and there is very strong design activities in the pipeline. You can expect to have further releases into the market in the next 6 months, but this is the first time we're entering in a new market. A lot of those products are yet to be determined in terms of how successful they are. So it's very difficult for us to forecast what kind of success rate it is. Although having said that, the first product that was released into the Korean market actually has been doing quite well, even though it's limited to domestic Korean market, Joel.

And in terms of the seasonality?

Well, notebooks, I don't know, historically, I think, from June to September, certainly in the last 4 years, there haven't been a whole lot of trends here that you can rely on. But I think we're expecting certainly something in the double-digit category.

Double-digit sequential growth?

Yes.

Okay. Thank you.

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

SG Cowen and Company. I wonder if you could just put a little more color on the context with the IP settlement, whether that's going to have any ongoing impact with respect to benefits in op ex or opportunities for additional licensing? And in relation to that, if you could comment on the competitive and pricing environment versus your traditional or new competitors?

Okay, Rob. As you know, Rob, we actually had filed 8K on the settlement with the exception we did bring out a few specifics. One of the specifics that Russ mentioned here is we did receive a one-time $3.8 million of cash payment, okay? The other part about that agreement with Alps is we cross-licensed certain patents in each other's portfolio and we have a broader coverage as a result of those cross-licensing agreements. And it's really limited to the few as well as to those patents. We don't expect that there's going to be any operational expenditures or incomes as a result of that agreement, other than the one-time cash payment and the cross-license of those patents. As far as the competition and the pricing environment are concerned, really, from the notebook market, that's pretty much the same as what we had talked about. We certainly continue to see a very strong consumer-type demand on the notebook computers, Rob.

And Rob, as you can tell from the filing, it's been in discussions that have been going on now for more than 2 years prior to this settlement and so we don't believe that it impacts the competitive dynamics in any way. I think what it does do, though, is it certainly signals to the market that this is a particular segment that is covered today by 2 major competitors who have just cross-licensed their technology. But I think it is an indicator that to get into this market, without stepping on the toes of either of those 2 parties, is probably a difficult thing to do.

I guess maybe another way you could describe it is that it buries the hatchet between you two, but maybe makes the fence around your area a little higher for outsiders?

I think that's right.

Okay. Thanks very much.

Thank you for your question, sir. Our next question comes from Joe Sullivan. Please state your company name followed by your question.

Craig-Hallum. A couple of questions. One, on the buy-back, it would appear maybe it's not going to take you too long to finish it up. Do you think that's something you guys will re-up?

Well, we were active with that program last quarter and as Francis said on the call, given the current share price levels, we think it still represents an excellent use of capital.

And so are there any plans to go beyond the $40 million?

All the Board has authorized to date is the $40 million, which we communicated to you on the call last time.

Okay. As far as the limited visibility, will there be any changes in your op ex plans?

No. And again, the way we view our company, Joe, is we have this core technology that we believe can be applied to multiple vertical markets, and we're aggressively going after those new market opportunities. The fact that we're guiding down next quarter, I don't think you should look at that as being a big negative. We just finished a year that was very, very outstanding for us. And in fact, if you looked at the 56% revenue growth year-over-year, more than 50% of that revenue pulled through directly to operating profit, which again is an indication of the leveragability and scalability that we have in our model as a virtual manufacturer. And as a result, we actually outperformed on the operating profit line, which ended up at more than 25%, almost 10 points above our target model. So we had a very solid year and even with growing expenses year-over-year, we still have lots of head room to operate within the target model that we've talked to you guys about since going public.

As far as the -- can you gauge for the full year? Can you give any indication what type of revenue you might expect from the new markets, the mobile handsets or any other markets that could come on line that's implied in that number?

(Inaudible) right now to get to that level of specificity.

Okay. That's all for me, thanks.

Thank you, sir. Our next question comes from Chris Kinkade. Please state your company name followed by your question.

America's Growth Capital. I'm just wondering if you could talk a little about your R&D efforts and give some color on some of the major projects you're focused on now?

Well, I mean -- hi, Chris. I mean the R&D efforts really cover a spectrum of stuff, some of that due to call technology. And just like Russ said a little earlier, the call technology extends across the spectrum of segments, and cost reduction will be another one of those things that we keep on focusing all the time. And when you see the excellent gross profit margin, that's really a result of a lot of the product development and R&D effort in that particular area. Having said that, we're also focusing a lot of the activities on the emerging markets, like the cell phones, like the PC peripherals, where we're making nuances to that in a number of areas, including chips, as well as software and firmware, to get us better prepared to compete in those segments. So I would say that, Chris, in general, it is not much different than how we did things before -- invest in core technology to target in the specific emerging segments, as well as protect the growth in the local market, as well as cost reduction.

Okay. Thanks a lot.

Thank you, sir. Our next question comes from Toby Graham. Please state your company name followed by your question.

Hi, STG Capital. Sorry, I don't know if you already mentioned this, but when do you expect handsets to significantly impact revenues? When do you think it will be (inaudible) revenue?

Well, I mean this is the first program, Toby, that we have in the revenue base and as we said before, it is really difficult for us to predict and control because the OEM are the guys that control the schedule, as well as the launching of those products. What I can comment to you, Toby, however, is design activities in the Company remains to be very strong. A reasonable amount of our effort here is really focused on the cellular phone area. So over time, this thing is going to be pretty significant. But right now, it is not.

How long do design cycles usually take?

It really depends on which product and what customers. So far, it's been longer than I would like to see it, but mainly because we're dealing with pretty much new sets of customers and design teams, as well as new market dynamics. This particular product, it was just released into the market. We've been working on it, I would say, for over 12 months. Now, on this particular cell phone that Samsung has, they also got some pretty nifty technology besides our (inaudible) touch technology in there. So some of the design cycle is not because of our touch technology, but because of how they evolve that particular cell phone. And that's the part that makes it challenging for us to project, as well, in terms of when some of those things would take off and how would they take off.

What kind of dollar contents should we see on each phone?

Well, we don't comment in general about specific customers. In this particular case, we only got one. We're not going to talk about that.

Is it around the level of the MP3s or -- ?

Yes, they're in the same kind of range as what we had talked about before.

Okay, thanks.

Thank you, sir. Our next question comes from David Liebe. Please state your company name followed by your question.

The question is answered. Thanks.

Thank you. Our next question comes from David Alley. Please go ahead with your question. Please state your company name.

Kingsford Capital. I wanted to go back over to get some color on the exclusion of the $3.8 million from Alps. Russ, you were saying excluding that, it was $0.34 in the quarter?

That's correct.

Okay. And that's using the same tax rate of 37.5?

The tax rate for the quarter, I think, was 36.8%.

So that applies to that -- we'd apply that to get straight across -- to get that $0.34 number?

That's correct.

Okay. And then also, touching on the directional guidance, could you talk a little bit more about that 2 quarter out period to give us some better feel for that, what you were trying to get across there so we can digest it?

Well, again, at this point, given some of the fluid nature of relationships with customers, we just don't have a lot of visibility when we look out past the next 90 days. So it's really hard, given that lack of visibility, to have any real comfort level on what the revenue is going to look like. But what we've tried to do here is give you our best view, given all the information that we have today and we know it's a broad range, but it's a reflection of the visibility.

Okay. And I'm sorry, and again, I'm a little bit in shell shock, so could you repeat the range and then give me a sense of if, historically, it's been like this, or is this something that is because of the dynamics that have been shifting that we've been talking about for the past several months with the movement away from one category of product or the lessening of visibility in that category?

It is a reflection of those dynamics, primarily.

Okay. And again, did I hear correctly? It's $40 to $50 million at this point?

$40 to $50 million is the current view, again, based on the information we have today.

Okay. And then the expensing of the, and forgive me, but that would be 206 was it? Was that incremental to -- so the guidance for the next period, was that going to be ex that FASB guidance or is that going to be --?

You're talking about FAS-123R?

I'm sorry. Sorry, FAS-123.

That $0.24 to $0.25 does not include the impact of FAS-123R, that's correct.

Okay. Well, thank you. Best of luck

Thank you, sir. Gentlemen, there are no further questions at this time. Please continue.

Okay. Thank you for being on the call today. I just want to reiterate on my closing comments here that I want to thank our employees, partners and shareholders and the Board of Directors for having a great year. The fundamentals our Company remain to be very strong. We came off a great year of fiscal year '05. Design activities in the Company is extremely high. We continue to invest in our Company and we believe that FY '06 notwithstanding, some of the uncertainties given the customer, still represent a very bright future for the Company. And thank you and I look forward to updating you on the next quarter. Bye-bye.

Thank you, sir. Ladies and gentlemen, this concludes the Synaptics fourth quarter conference call. Thank you all for you participation. You may now disconnect.