Synaptics Inc (SYNA) 2006 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 given 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 Thursday, January 19, 2006. I would now like to turn the call over to Alex Wellins of the Blueshirt Group. Please go ahead, sir.

Good afternoon and thanks 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 synaptics.com. With me on today's all 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, 2005, for important risk factors that could cause actual results to differ materially from those contained in any forward looking statements. We expressly disclaim any obligation to update this forward-looking information. And now I would like to turn the call over to Francis Lee. Francis?

Thanks, Alex. And thanks, everyone, for joining us on the call today. We had another quarter of solid execution as revenue for the second quarter was $40.6 million, within our expected guidance range. Excluding the impact of non-cash share-based compensation, non-GAAP operating margin was 21.2% and non-GAAP net income was $7.5 million or $0.27 per share. During the December quarter revenue from PC applications grew 17% sequentially. As anticipated, strong demand for our solutions in PC based applications was off set by lower demand in portable music player applications. Revenue from non-PC applications represent approximately 9% of total revenue. And now I'd like to make a few comments about the progress we have made in our markets over the past 3 months. At CES this year we were pleased to see some of the show's most popular products utilizing our solutions.

Two products in particular, the Logitech AMEX 5000 laser keyboard and the creative Zen Vision:M both won CNET's best of CES awards, which honor innovations in consumer electronics. In addition to the best of CES products, there were a number of other companies highlighting products utilizing Synaptics' solutions throughout the show. Transcend demonstrated their T.Sonic 310 flash-based music player, which uses a Synaptics ScrollStrip with tap songs to navigate through the play list and adjust volume. Thomson announced a Lyra X3000, a portable multimedia recorder which plays VDO and music files, displays photos and slide shows, and includes an MPEG-4 recorder that hooks up to a TV, DVD or satellite box to record content in real time. The devise uses Synaptics' TouchRing interface to navigate on screen menu and contents. PortoPlayer announced their pre-face reference design for Window's Vista Slide Show, which offers a Synaptics interface to navigate through menus and contents on a secondary display located on top of a notebook computer.

Toshiba prominently displayed its new DynaBook TX line of notebook computers, which uses Synaptics new Dual Mode TouchPad. The solution incorporates our LuxPad illumination technology to provide a two mode touch pad for both curser navigation and quick launch application buttons with multimedia controls. Prior to CES Medion announced the MD 96500 notebook computer, which was the first to offer our leading edge Dual Mode solution. The recent [net] option of this interface solution by both Medion and Toshiba are excellent examples of Synaptics' continue innovation in creating interfaces that provide both unique design possibilities and added functionality. The Medion MD 96500 notebook also shifts with a remote control that incorporates Synaptics TouchRing interface and allows the user to navigate through a multimedia sensor and access movies, music and multimedia content. We're excited about interface technology is enabling an improved user experience in the remote control environment and see the opportunity to expand into other peripherals to control and access multimedia content.

On the cell phone front, we are pleased to see two new designs announced by Samsung, which utilized a Synaptics solution. The Samsung SPH-V6800 and SCH-B330 mobile phones are both targeted for domestic Korean market. The V6800 uses a MobileTouch interface that consists of a button keypad and provides both full navigation and easy internet access using our WiFi network. Additionally, the [keeper] provides access to carrier services such as application downloads, streaming video and live broadcast as well as shortcuts to the phone's [INAUDIBLE] applications. The B330 uses an ultra thin MobileTouch sensor in an innovative industrial design that provides music on demand controls on the outside of a clam shell phone. With this additional design wins we have further demonstrate the design flexibility of our MobileTouch technology with several different implementations, whether it's a keypad or scroll sensor in various shapes and sizes.

Continue to be encouraged by the response to our technology and the strong design activity in the mobile space. We look forward to updating you on new designs in this market throughout the fiscal year. Now I would like to make a few comments regarding the general business environment. It appears that inventory levels are generally in line with expected seasonality. But it's evident that our customers continue to closely monitor orders. This combination of seasonality and cautious order patterns have resulted in a further decline of our backlog as we enter the March quarter with approximately $15.5 million, down from $19 million entering the December quarter. Moving to industry trends. The recent CES show highlight announcements from content providers such as Yahoo or Google, illustrating that a market successfully moving multimedia content into portable formats. As mobile content increases, portable media centers and players require intuitive and easy way to access and manipulate the ever increasing amount of music and video files that are available.

It is very clear that portable audio and video devices are getting a widespread acceptance among consumers and we expect this trend continue in 2006 and beyond. We feel more strongly than ever that a combined functionality and industrial design possibilities that Synaptics interface solution offer play directly into this trends. And we are very excited about unique ways that we can serve this market. This developments have led to multiple new, rapidly growing market opportunities. And not surprisingly, have resulted in new entrance within the competitive landscape. Today this consists mostly of single-chip providers as Synaptics continues to differentiate itself as a total solution provider with over 10 years of experience in interface system design, usability and innovation, with a track record of reliability and performance and a proven ability to meet our customer's needs. I will now turn the call over to Russ who will review our detailed financial results for the second quarter and provide guidance on our near-term outlook.

Thank you, Francis. As with the last quarter, in addition to our GAAP results, I will also provide supplementary results on a non-GAAP basis, which excludes the compensation expense and tax effects associated with expensing stock options in our employee stock purchase plan under FAS 123R. As Francis mentioned, revenue for the second fiscal quarter of 2006 was in line with our expectations at 48.6 million, down 6% sequentially as revenue from PC applications grew approximately 17%, but was offset by a 68% decline in non-PC applications, reflecting reduced demand for our solutions from the MP3 player market. As a result revenue from non-PC applications represented 9% of revenue, down from 27% in the prior quarter. Within the notebook market, demand continues to be driven by consumer purchases relative to corporate buying. And as a result our revenue from dual pointing solutions, which are used in notebooks targeted for corporate applications, was down approximately 7% from the previous quarter. But was roughly unchanged as a percentage of total revenue at 15%.

Gross margin for the quarter, including the impact of FAS 123R, was 45.7% compared to 45.8% in the September quarter. Non-GAAP gross margins was 46.0%, compared to 46.1% in the September quarter. Total operating expenses for the quarter were 15.3 million, including non-cash share-based compensation charges of 3.2 million. Excluding the impact of FAS 123R in the December quarter, non-GAAP operating expenses were up slightly from the preceding quarter at 12.1 million. This was lower than expected, primarily reflected timing of our staff and initiatives and lower than anticipated project related expenses. Turning to specific line items, R&D expenses were 8.3 million including 1.2 million of non-cash share-based compensation. Non-GAAP R&D expenses were 7.1 million compared to 7 million in the preceding quarter. SG&A costs were 6.9 million, including approximately 2 million of non-cash share-based compensation. On a non-GAAP basis SG&A expenses were approximately $5 million, compared to 4.9 million in the preceding quarter.

Total employee headcount at the end of December was 233 compared with 224 at the end of September. Going forward, though, we continue to expect our headcount to increase as we are actively recruiting to staff both internal and external initiatives. Net interest income was 1.4 million compared with 1.1 million in the prior quarter, reflecting the combination of higher average invested balances and higher average interest rates on those invested balances. Based on our results for the first half and our current outlook for fiscal 2006, we have lowered our estimated effective tax rate slightly. Our effective tax rate for the first half was 42.9%, resulting in a 42.3% effective tax rate for the current quarter. On a non-GAAP basis the effective tax rate for the first half was 37% resulting in a 36.3% effective tax rate for the quarter. Net income for the quarter was 4.8 million or $0.18 per diluted share.

Non-GAAP net income, which excludes 3.4 million of non-cash share-based compensation charges and the associated tax benefit of 724,000, was 7.5 million or $0.27 per diluted share. This was at the high end of our guidance range and compares to non-GAAP net income of 8.1 million or $0.29 per diluted share in the preceding quarter. Now a few comments on our balance sheet. We ended the December quarter with total cash and short-term investments of 230.2 million, up from 219.8 million at the end of September quarter. Our cash flow from operations was 9.1 million for the quarter and stock option exercises contributed 1.1 million. Capital expenditures in the quarter were 398,000 and capital depreciation was 404,000. Receivables at the end of December were 31.9 million compared with 32.9 million at the end of September. DSOs at the end of the quarter were 59 days compared with 57 days at the end of the prior quarter.

Inventories at the end of December were 6.9 million compared to 7.1 million at the end of September. And inventory turns in the December quarter were 15 times, down slightly from the 16 times in the prior quarter. Now I would like to make a few comments regarding our near-term business outlook. Based on the comments Francis made earlier, the reduced level of visibility from hard backlog and customer forecast entering the March quarter will result in much higher turns business and more back-end loading than is typical, resulting in a revenue outlook of 42 to $45 million. This guidance is based on anticipated seasonal declines in our markets coming off of the strong holiday period. We are anticipating that our gross margin percent will decline reflecting expected product mix changes and are forecasting non-GAAP gross margins to be in the range of 44 to 45%. This range, which remains at the high-end of our target model, reflects the reduced visibility resulting from both the lower backlog and the higher than average turns business I mentioned earlier.

We expect non-GAAP operating expenses in the March quarter to be up sequentially as we anticipate increased headcount from our ongoing staffing initiatives. For the March quarter we expect the impact of FAS 123R on both gross margins and operating expenses to be similar to the December quarter. Non-GAAP net income per diluted share for the March quarter is expected to be in the range of $0.15 to $0.18. While our visibility beyond the March quarter is limited, we currently anticipate that revenue in the June quarter could be up sequentially from March quarter levels. This current snapshot of our business is relatively in line with our earlier view for fiscal 2006 with revenue off no more than 10% from fiscal year 2005's record levels. In closing, we are pleased with our execution and solid operating results in the second quarter, which have further strengthened our balance sheet.

The array of products and new design wins highlighted on today's call are further evidence of the broad based applicability of our technology and our continued focus on innovation that allows customers to differentiate their products in the market place through unique industrial design, while at the same time enhancing end user experience in interacting with intelligent electronic devices. We believe our technology and capabilities are well suited to take advantage of the growing product trends that feature mobility, wireless connectivity, and expanding digital content. 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. Ladies and gentlemen, at this time we'll begin the question and answer session. [OPERATOR INSTRUCTIONS] Joel Wagonfeld with First Albany Capital. Please go ahead with your question.

Thank you. Two questions if I could. First, your guidance suggests that you are not seeing a big recapture or incremental volume from a key customer. I think that many of us had speculated you may see in the December quarter and the tone of your commentary for June suggests that that may not be definitive either. One, I was wondering if you could comment on the accuracy of that statement? And then secondly are you seeing any incremental competition in your core notebook segment from some of the new entrants that you alluded to that maybe offer a single chip solution and how are you competing against them, given that you have obviously a full solution, whereas they only have part of the solution? Thanks.

Okay, Joel. Our guidance is really come from the backlog and our forward-looking view that we have done. And this one particular key customers, that Joel you talk about, typically we don't like to comment on any particular level of business with any particular customers, so I just leave it at that. As far as the incremental competition is concerned, you are absolutely right that there's a lot more new entrance in the marketplace, but we feel that our capability to offered and [tie] solution, especially in the area of notebook, when we have a lot of application specific patents and knowhows remains to be a pretty tough barriers for people to crack that part of the market, Joel.

Thanks, could I follow up with one question?

Sure.

On the gross margin was it -- you alluded to I think two factors, one was mix as well as the higher turns business. Could you just elaborate a little bit on both of those given that the mix already kind of was skewing downward this quarter and what are the dynamics in terms of the lower gross margin on the higher turns business. Thanks.

With the lower gross margins I used the backlog as a proxy for predicting gross margins for the current quarter. When I look at the backlog going into this quarter it certainly indicates that gross margins will be down from the 46% range that we have been running. And the reason for the fairly broad range of 44 to 45% is just that we have less visibility given that we're going to have to depend on more turns business in actual closing out the quarter. So it's a combination of those two factors.

Thanks a lot.

Andrew Neff with Bear Stearns, please go ahead with your question.

Two questions. One, you made a comment, just want to follow-up on the lower gross margin, you talked about a mix shift. What sort of mix shift are you talking about there?

Well, again as we enter each quarter, Andy, somewhere between 15 to 25% of our revenue in that quarter will be from new designs that were won in prior quarters. So, as we have old designs going to end of life and new designs coming on board, you have to factor in the impact of that mix shift. And each quarter we see that generally in our backlog and the way our customers are forecasting their business going forward. So it's really a combination of those factors.

Second question is the -- does all of your business go into backlog or are there customers where you might be shipping to that doesn't necessarily go in your backlog?

Well, generally we are building to order, so all business will go through our backlog at any one point in time. And generally our cycle time or lead time for delivering products is in the four to eight week range. Generally all orders are reflected in backlog at some point during the quarter.

I guess another question, just as you look at the music player market, do you have the opportunity to build that business as you look out beyond the current quarter?

Well, we have talked about the OEMs that we have been designed into in the past and the fact that we work real hard every day to engage in design activity at those accounts whenever we have the opportunity. So we still feel very bullish about that marketplace. Clearly it's growing and we think we have the opportunity to continue to participate in that market. And again it ends up being a reflection of the actual design wins that you get at any point in time that ends up being built into the revenue that we see on a forward basis. The design activity are leading indicators for us and, as Francis said, design activity remains strong. It is a market that 's characterized by a dominant player and it's just a question of how those competitive dynamics develop over time and our ability to participate on a broad-based customer foundation.

And then lastly, you made a statement on the last call that you were not on the new Apple products, can you update us on that statement at all.

We can't comment specific to customers.

But you did comment on that previously. You did put out an 8K where you did comment.

At this point, we can't comment.

Okay. Thank you.

Aalok Shah with DA Davidson, please go ahead with your question.

Just a couple of quick questions. One is on the competition front. Francis, have you taken a look at the competitors' products out there and determined whether or not if they might be infringing on any of your patents at this point. And is there something that maybe we should be paying attention to on that front going forward that maybe somebody might be doing something with -- that might be using our patents going forward? And I will have a follow-up on that.

Typically we do pay a lot of attention, close attention on all of the competitive activities. And to the extent that we feel individuals infringing our patents, we do take actions as evidenced by the action that was publicly disclosed sometime ago last year. So we do take -- defend our intellectual properties seriously.

Do you feel like there's somebody out there that might be offering today a situation where maybe a product is very similar to yours today.

We don't like to comment on specifics, Aalok, because you know any particular actions that we might be taken is probably taken in private confidence first, before anything gets built into the public domain. So it's not something that we like to talk about at this time.

Francis, going forward, let's step out beyond the quarter. Longer term, how do you see this business going? Are we going to see more margin pressure? In about a year or so do expect people to come down on prices and how do you think you're going to be able to effectively compete on that?

Well, certainly from an opportunity perspective, okay, we're seeing actually more and more opportunities to apply the kind of Synaptics technologies, you know, into -- intuitively into many of those emerging devices. So I'm actually pretty excited about the opportunities. Now, clearly, a number of other suppliers are also seeing the same kind of opportunities and they have been entering into the market with so-called the same kind of technologies. I think one thing that differentiates us from the other people here is most of those engines coming in today are really chip suppliers,and what we really offer is a sub-system.

So we continue to differentiate ourselves through our sub-system, solution expertise, okay, and able to, with our proven track record [Z&C] just from this quarter's announcement, we have solution implemented in a number of ways in a different kinds of products and markets. So I think moving forward you are going to see that there's going to be a lot more opportunity for Synaptics, but you are also going to see, because of the wide open opportunities, a lot more people claiming that they know how to do this business and we have to continue to execute by bringing out new innovative solutions and serve those opportunities.

One last question for you guys. Can you give us any kind of metrics that you have right now in the design wins in the mobile space beyond the couple that you have announced so far?

Well, we certainly have talked about -- Samsung announced that two more products using our solutions. There's a lot of design activities going in in there. We have not talked about specifically about a number of design win, per se, in the mobile sector. Mainly because, frankly, it's really such a new sector and there is increased complexity in the chain in the sense that it's not just the OEM that you have to deal with, there's also carrier that you have to deal with as well. So we have refrained from talking about specifically design wins in the particular sector, but I can assure you that design activity continue to be a pretty strong in the sector.

Okay, great. Thank you.

Thank you.

Jason Pflaum with Thomas Weisel Partners, please go ahead with your question.

Yes, good afternoon. Maybe just to start on the guidance again. If you could talk again about your visibility into Q1. Is Q1 this year -- it seems maybe perhaps abnormally back-end loaded. Maybe for perspective you can talk about your backlog coverage this year relative to say last year.

Okay. Well, normally you do expect seasonality into the March quarter. But clearly our backlog at $15.5 million is below what we would typically expect in terms of visibility or hard visibility for the current quarter. I think backlog year-over-year is down more than a factor of two from where we were last year at this point in time. And so as a result of that, it means that we will see higher turns business this quarter. And based on the visibility we have as it relates to customer forecasts, it suggests that we'll be back-end loaded in terms of being able to deliver against that forecast.

Okay. And maybe you can provide us some guidance by notebooks as far as unit expectation generally and then non-PC for Q1.

Well, we don't usually provide unit forecasts. If you look at the total notebook units over the last three years, sequential December into the March quarter, I think the range is somewhere between 2 to 7% sequential decline in the last three years. So that would suggest low to mid-single digits from an industry viewpoint. And we are coming off of a very, very strong December quarter this year. So I don't think it's clear today to anybody how much a drop-off we'll see in the March quarter, but I think it's pretty widely anticipated that we will see a decline in demand for notebooks in the March quarter.

Could you venture a guess as far as your current share of notebooks and how do you see that trending over next six months? Do you have decent visibility as far as some of your share momentum?

Our current view on market share is that we continue to be greater than 55% of the market. And within the next six months I don't see that share shifting much one way or the other.

Okay. That's great. Thank you very much.

Chris Kinkade with America's Growth Capital. Please go ahead with your question.

Hi, guys. Just wondering if you can quantify what sort of unit growth you saw in the notebook segment just in Q2?

Synaptics specifically?

Yes.

Our units in the most recent quarter, we were up more than 20%.

Okay. Great. Thanks a lot.

Joel Wagonfeld with First Albany Capital. Please go ahead with your follow-up question.

Thank you. On the mobile handsets I think in the past you had characterized the ramp to materiality as being kind of a longer term type of an event. Given the recent announcements, public announcements of the additional handset wins, does that suggest that handsets may become material sooner than previously anticipated?

Joel, not really. I think when we make the previous discussions about that, we're taking in account of the size of the current Synaptics business. Is also doing quite well. So it's actually within the knowledge that some of those products is really going to hit the market in this fiscal year and therefore, during the previous earnings call we had talk about you can expect to see incremental revenues in our Company this fiscal year coming from this segment. So our view remains to be bullish on this trend, but we also pretty repeating the same claim that it's a new segment for us, it's exciting segment, but really it's going to be awhile before this thing becomes meaningful.

Okay. Thanks.

If there are any additional questions, please press the star followed by the one at this time. As a reminder, if you are using a speakerphone, please remember to lift your handset before pressing the numbers. Derrick Wagner with Jefferies & Co, please go ahead with your question.

Thank you. Could you just give the capital expenditure outlook for fiscal year ending September '06.

September '06. I'm not sure we are year-to-date, but generally we spend somewhere between 1 and $2 million on CapEx. This year we will be a little bit higher than that because we still had some expenditures related to our facilitization of our new headquarters in Santa Clara. On an ongoing basis generally we're in the 1 to $2 million range for CapEx.

Okay. Thank you.

I'm showing no further questions at this time. Please continue with any comments you may have.

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

Ladies and gentlemen, this does conclude the Synaptics second quarter conference call. You may now disconnect and thank you for using AT&T Teleconferencing.