Synaptics Inc (SYNA) 2006 Q4 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to the Synaptics Fourth Quarter 2006 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. [OPERATOR INSTRUCTIONS]. As a reminder, this call is being recorded, Thursday, July 27, 2006. I would now like to turn the conference over to Molly Toller. Please go ahead.

Good afternoon and thank you for joining us today on Synaptics fourth quarter and fiscal 2006 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 Chief Executive Officer of Synaptics; and Russ Knittel, 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 10-K 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 obligations to update this forward-looking information.

And now, I would like to turn the call over to Francis Lee. Francis?

Thanks, Molly, and thanks to everyone for joining us on the call today. I am pleased to report that we have posted another year of solid operating performance at Synaptics. As you know, in contrast, the last year's record-breaking results, we faced some challenging customer specific dynamics during fiscal '06. In light of this, still we executed very well, achieving revenue for fiscal '06 of $184.6 million, essentially in line with the outlook we provided at the start of the year.

During fiscal '06, revenue from PC applications grew more than 28% and represented approximately 85% of revenue as we further increase our leading market share within our notebook segment and continue to capitalize on the shift towards digital lifestyle trend.

Turning to the fourth quarter, our revenue of $43.9 million was toward the high end of our expectation, representing an increase of 9% over the March quarter. As anticipated, we have a heavily back-end loaded quarter, corresponding with the PC industry data, showing an upward inflection in the month of June. Excluding the impact of non-cash share-based compensation, non-GAAP operating margins was 11.6% and non-GAAP net income was $4.2 million or $0.15 per share, again, at a high end of our guidance for the June quarter. Revenue from PC applications increased approximately 9% sequentially and non-PC applications grew approximately 4%. Backlog, entering the September quarter, was approximately $28.7 million, up significantly from $15.2 million last quarter. We believe the increased backlog reflects our customer's expectations for seasonal growth that normally occurs in the second half of the calendar year.

Now, I would like to make a few comments about the progress we have made in our markets over the past three months. We are still increasing DRAM momentum for our LightTouch solutions, which provide controls for multimedia features for notebook computers. Separate controls and efficient to the TouchPad, this solutions increase our revenue content per notebook. During the quarter, Alienware announced a 9700 series, which uses our LightTouch solution to provide a sleek control center for playing music and viewing movies and TV. Additionally, HP has launched a number of new notebook models, including HP dv2000 and Compact V3000 series to integrate our LightTouch controls with HP's QuickPlay technology, allowing users to play a DVD or music without booting up the PC. Our solutions provide multimedia controls in different configurations depending on the notebook platform. As we look to increase our contents in notebooks capacity base, buttons and multimedia controls enable our customers to develop products that we just lead in unique industrial designs. We continue to see interest from our notebook customers to incorporate a passive sensing in the ways other than a typical touch pad. As I mentioned last quarter, we are pleased to see our TouchStyk pointing solution incorporated into a number of ultra mobile PC designs.

During the quarter we announced that Asus, Founder, and AMTek are all shipping ultra mobile PC products utilizing Synaptics solution and we are excited to be participating in so many designs for this new PC category. Another area where we are seeing increased interest is in the PC peripherals space, including keyboard, mice, and monitor controls. Specifically during the quarter, Synaptics developed touch pad and scrolling solutions for new Lenovo and Acer keyboards, which are now shipping as part of home media centers. Microsoft also reasonably announced their first wireless rechargeable backlit desktop. And we are pleased to announce that we are participating in the keyboard design. The design calls for some unique new implementations of our technology and illustrates how Synaptics continues to evolve our capabilities to address new market opportunities. We look forward to updating you more on the specifics of this program where Microsoft makes its official product announcement.

On the cell phone side, we recently reported that Pantech & Curitel's has incorporated our mobile touch solution into the recently announced PT-K2300 mobile phone shipping in the domestic Korea market. The customer interface solution provides both display navigation as well as quick launch buttons to provide easy access to applications such as music and messaging. As Russ will detail in a few minutes, we expect a strong start to fiscal '07. We backlogged another indicators pointing to a strong first half. As I mentioned earlier we are benefiting from the expansion of our solutions in a variety of multimedia applications supporting the growing digital lifestyle trend in consumer electronics. The continued expansion of digital media, convergence of applications on hang out devices, and entrance to the home entertainment systems play directly in the Synaptics' strengths, not only does it provide a solid pipeline for continued growth in the notebook market but also for solutions to enhance the digital media experience and products from portable entertainment devices and cell phones to monitors, keyboards, desktops, and remotes. As we entered the new fiscal year, we believe we are only at the beginning of this very large and growing opportunities. While we continue to expand our markets and have our OEM customers pioneer the next wave of interface solutions, we are also preparing to strengthen our position as a total solutions provider. During the course of the year, we plan to enhance our core competencies in customer care structure through the establishment of two design centers in our offices in Korea and Taiwan. By moving our resources closer to our customers and localizing product development, we will be able to elevate our service levels by offering rich time design, engineering and product support. We continue to take pride in our ability to provide innovation, excellent service, and support to our customers and from our ongoing track record of solid execution and operating performance having shipped over 200 million units today. Our ability to provide an end-to-end solution for our customers continue to set Synaptics apart as a premier provider of Interface Solutions. And focusing on the entire process, from concept to design to delivery, we are able to help our customers solve problems, incubate ideas, and create new features of products that help differentiate their products in the marketplace. Going forward, we plan to further expand the facility we provide our customers by also enhancing our ability to compete more effectively within the evolving and increasingly complex competitive environment. We are very excited about the prospect ahead of us and are well positioned to deliver strong results in fiscal '07. There is no shortage of opportunities to pursue and we continue to invest our resources prudently in those areas that we believe have the most potential. We remain focused on maintaining our leadership in the PC market through expanded applications for notebook, PCs, PC peripherals, and a trend towards new multimedia interfaces. Additionally, we are continuing the work to further diversify our revenue in non-PC verticals, including portable digital entertainment devices and cell phones. Design activities remain very robust across all of these markets and we expect to continue hiring staff to support our growth efforts. [inaudible] the challenges we face in the dynamic fast-growing markets we serve, we are proactively taking the steps we feel are necessary to ensure our continued success. We are more confident than ever in our long-term growth strategy and expect fiscal '07 to be another positive year with strong year-over-year revenue growth and profitability. I would now turn the call over to Russ who will review our detailed financial results for the fourth quarter and provide guidance on our near-term outlook.

Thanks Francis. In addition to our GAAP results, I will also provide supplementary results on a non-GAAP basis, which exclude the compensation expense and tax effects associated with expensing stock-based compensation in accordance with FAS 123(R).

Revenue for our fourth fiscal quarter was toward the high end of our guidance at $43.9 million, up approximately 9% from the March quarter, as we benefited from strong demand within our core PC market, which included new product launches, incorporating our Light Touch multimedia controls.

Within the notebook market, we saw more than a 25% sequential increase in revenue from dual pointing applications aided by new designs, which ramped at the end of the quarter. As a result, dual pointing revenue for the quarter was approximately 17% of total revenue, up from 15% in the March quarter.

Gross margin for the quarter, including the impact of FAS 123(R), was 43% compared to 44.9% in the March quarter. Non-GAAP gross margins were 43.4% compared to 45.2% in the March quarter. This was in line with our guidance and is also within our target range of 40 to 45% blended gross margins. Total operating expenses for the quarter were 17 million compared to 16.1 million in the preceding quarter, including non-cash share-based compensation charges of 3.1 million in both quarters. Excluding the impact of FAS 123(R) in the June quarter, non-GAAP operating expenses were 14 million, up approximately 8% from the preceding quarter, primarily reflecting the combination of higher product development related project costs, higher legal costs related to our intellectual property, and planned increases in staffing levels.

Total employee headcount at the end of June was 254, up from 235 in the March quarter. We expect our headcount to continue to grow based on planned staffing initiatives to fill positions required by our increased operating levels and to add skill sets necessary to meet our business objectives.

Net interest income was 1.9 million compared with 1.7 million in the prior quarter reflecting the impact of both higher average invested balances and higher interest rates. Our GAAP and non-GAAP tax rates for the quarter were 52.7% and 39.1% respectively.

As we have pointed out in our prior conference calls and in our SEC filings, we expect to continue to see substantial volatility in our GAAP effective tax rates, primarily due to the accounting treatment associated with our incentive stock options.

Net income for the quarter was 1.8 million or $0.7 per diluted share. Non-GAAP net income, which excludes 3.2 million of non-cash share based compensation charges and the associated tax benefit of $750,000 was 4.2 million or $0.15 per diluted share, essentially flat with the preceding quarter and at the high end of our guidance.

Now, few comments on our balance sheet. We ended the fiscal year with total cash and short-term investments of 245.2 million, up from $237.5 million at the end of the March quarter and 228.9 million at the end of fiscal 2005. Cash flow from operations was approximately 5.3 million for the quarter and 24.8 million for the year. Stock-option exercises contributed approximately 1.9 million for the quarter and approximately 8.5 million for the year.

During the year, we used 18.8 million to repurchase approximately 1.2 million shares of our common stock.

Capital expenditures were 693,000 for the quarter and approximately 3.1 million for the year, including approximately 1.6 million associated with the build-out of our headquarters in Santa Clara. Depreciation was 441,000 for the quarter and approximately 1.6 million for the year. Receivables at the end of June were 34 million compared to 29.7 million at the end of March resulting in DSOs at the end of the quarter of 70 days compared with 66 days at the end of the prior quarter. The increase in DSOs is a primarily reflection of the back-end loaded revenue we experienced in the June quarter.

Inventories at the end of the June were $10 million compared with 10.6 million at the end of March. Inventory turns for the quarter were 10 times compared to 8 times in the March quarter.

I would like to make a few comments regarding our near-term business outlook. As Francis mentioned earlier, our backlog increased by $13.5 million during the quarter to 28.7 million as our customers entered into what is typically the seasonally strongest quarters of the calendar year. Considering our backlog level and the other indicators we have today, our current outlook for the September quarter calls for sequential revenue growth of 20 to 25%. This outlook is based on the combination of expected seasonality in our target markets and in particular strong demand within our core PC market, reflecting the ramp of new designs and increased integration of our multimedia oriented products.

We expect these trends to continue into the year-end holiday season and anticipate that December quarter revenue will up 8 to 10% above our September quarter guidance levels. Any increase in demand from the digital entertainment market, where our visibility and predictability are more limited, would represent upside to our current outlook. Looking beyond the December quarter, taking into consideration our current design activities, identified opportunities, our preliminary view suggest that revenue for fiscal 2007 may exceed fiscal 2006 by approximately 20%.

We expect gross margins for the first quarter to decline reflecting anticipated product and exchanges and are forecasting non-GAAP gross margins to be in the range of 41 to 42%. This range is within our target model and reflects the combination of our backlog and the expected turns business during the quarter. We expect non-GAAP operating expenses in the September quarter to be up sequentially as we anticipate increased headcount from our ongoing staffing initiatives. Our headcount increased approximately 16% in fiscal 2006 and we anticipate adding approximately 20% in fiscal 2007. For the September quarter, we expect the impact of FAS 123R on our operating margins to be approximately 3.5 million compared to 3.2 million in the June quarter. Non-GAAP net income per diluted share for the September quarter is expected to be in the range of $0.18 to $0.21.

In closing, we executed extremely well during the year and in a year characterized by low visibility and uncertainty in some of our markets. We are very optimistic as we head into fiscal 2007, supported by our strong outlook for the first half of the year, increasing pipeline of design opportunities, and the adoption rate of our new LightTouch multimedia solutions. We continue to be focused on maintaining our competitive edge in the PC market and ensuring our ability to compete effectively in our expanding addressable markets. Our growth and diversification strategies are backed by an increasingly strong balance sheet, providing a very solid foundation for our continued long-term success. That concludes our formal remarks and we will now turn the call over to the operator to start the question-and-answer session.

[OPERATOR INSTRUCTIONS] Andrew Neff, please state your company name followed by your question, sir.

This is actually Ted Chung from Bear Stearns. Francis?

Hi, Ted.

Hi, Russ. Just wanted to clarify the backlog, is that mostly related to the PC activities?

It includes all of the markets that we serve today. But, yes, today it is weighted towards PC.

Okay. And can you break out in terms of the current quarter activities, in terms of the non-PC business, you briefly touched upon it, do you still expect seasonal increases for September as well as December quarter?

In the non-PC markets, yes, we do.

And in terms of looking out to your full fiscal year '07, are you -- that is based upon the current existing design activities or does that include any potential design wins?

Well, it includes both the design activities we are actually engaging in today plus the additional opportunities we believe we have during the year to engage in additional designs.

And just one lastly, what type of seasonality do you expect for the non-PC business for the December quarter?

Well, I think it's hard to a put a range on that, Ted. As you know, we are serving a number of markets in that segment. Just generally I can tell you we are expecting our non-PC applications to be up and again primarily based on just expected consumer seasonality as you enter into the second half of the year where you got grads and dads and Thanksgiving and the Christmas shopping season.

Okay. Just for clarification, can you breakdown the revenue from PC business versus non-PC for current quarter, from the just reported June quarter?

Yes, for the quarter, our PC revenues were about 91% of total revenues.

Okay. Great. Thank you.

Our next question comes from Jason Pflaum. Please state your company and your question sir.

Yes, good afternoon guys.

Hi, Jason.

Nice job in a tough notebook environment. Maybe just will go back again on the guidance in a couple of different angles. First, just to clarify again, the guidance into September and December does not include any meaningful incremental bump from the non-PC segment, is that the best way to figure that?

We are expecting seasonal growth in that segment. But any significant up tick in demand would represent upside to the guidance that we have given.

So, a lot of the MP3 player, other chip component manufacturers for example are expecting somewhere in the ballpark of 10%, maybe low teens growth in the September quarter, is that kind of a reasonable ballpark for you guys?

Again, we haven't [painted] a specific growth for that segment.

Okay. So, of the 20 to 25% sequential growth, can you give us a sense of the major drivers that I know mostly coming from the PC segment, but is a good portion of that coming from some of these new dual mode roll outs or perhaps some of the PC peripherals?

The overall projected increase sequentially is really a combination of just expected industry growth in the markets we serve and again particularly strong growth and demand from the PC segment, and the -- really increase in average revenue content in per unit in sell through boxes because of the addition of multimedia applications to our touch pad.

Okay. Maybe another approach on that. What do you think about your penetration of the dual mode technology? Can you give us a rough sense of a kind of the attach rate in your notebook business?

It's something that's just starting to ramp now. We are seeing good traction there. Again, in terms of a tax rate, we haven't [paved] that number yet, but we are seeing increasingly number of designs that are shipping that will include both the TouchPad and multimedia controls, whether it's in dual mode form or whether it's a TouchPad in conjunction with separate multimedia controls.

Okay. But that application is still very small portion of the overall mix. Sometimes it's below 10% I assume?

Yes.

Okay. As far as the gross margin guidance, I guess it's a little bit lower than I would have expected. Maybe can you provide just a little more color on the drivers there and kind of the major leverage thinking about that going forward?

Well, again for us, the gross margins, really reflect the roll up of all the different designs that we are shipping at any point in time. Margins generally are a reflection of our ability to differentiate ourselves competitively and also reflect the amount of third-party content we may have in a particular design or particular segment. An example of that would be multimedia controls, where we add additional LEDs to that solution that we wouldn't typically have in TouchPad solution. So, all of those things kind of roll up in what you see as the aggregate effect of each design.

Okay. So generally speaking then the dual mode technologies generally have lower margins than corporate, is that a safe assumption then?

Again, those kinds of applications where the third-party content is higher, generally would have the impact of resulting in lower margins because of that higher non-proprietary content.

Okay. So, if we were to assume that dual mode, for example, increases as a percentage of mix and margins, probably would trend flat to perhaps down from current levels?

Based on the designs that we are shipping today, that's true.

[Rob Stone]

Hi, guys, congratulations on a nice outlook going into the new year.

Thanks, Rob.

I wonder if you could comment, Francis, on the uptick in dual mode, is that being driven do you think by more dual point in overall or is it just because you are in right part of that design in cycle?

A lot of the consumer has been buying a lot of laptop notebooks, number one. So, there is really a consumer segment in my mind. The other part of that is, this trend towards digital lifestyles, a lot of people now are using laptops now to really look at movies and stuff like that. And the latest enhancement of a number of those PCs that come out that you can even look at DVD movies and listen to music without booting the computer is an indication of that growing trend, the kind of lifestyle and the convergence of entertainment into mobile computing. So, I think the dual mode, which allows people to control in one mode, those media applications, and enables -- allow us to navigate really fits into that quite well, Rob. And I believe that's hopefully what drives it.

Francis, let me make sure that we are being clear about the terminology, because if I understood it right, the -- what we refer to as dual pointing in the past was a corporate oriented notepad that had both a pad and a stick.

Correct.

And dual mode, you are referring to the combination of navigation plus multimedia.

On the touch pad itself. Your understanding is correct.

In the commentary about an increase to 17% of dual pointing, that's the classic pad plus stick?

That's correct. That was in Russ' commentary.

[inaudible] ratio.

So that was -- my question really was, given the fact that most of the notebook buying or more of the notebook buying lately would seems to be coming from consumers, are you getting more mix of dual pointing as a result of some uptick in corporate buys or just more design wins for Synaptics?

You actually absolutely right, Rob. When I answered your question, you asked the question, I [believe] optic in dual mode. Okay. So, I answer it in a dual mode sense. But Russ also commented on his product discussion that the dual pointing did go up and we have always used that as a proxy for increased corporate buying activities. And I think in the near term run, I think it does represent actually a market share shift towards Synaptics in that particular segment of the notebook market, because these are new designs that we started shipping in the June month and they were designed into boxes that weren't shipping into in the predecessor box.

So, looking at how big a boost to your revenue growth versus industry unit growth the dual pointing trend was in some prior years, can you give us a sense of how dual mode, or pad plus separate multimedia control the new consumer oriented multimedia notebooks. How much does that influence your average revenue per box compared to just a regular pad solution?

Our single-point solutions generally are in that 3 to $6 range. When we are adding the additional functionality in either dual mode or adding multimedia controls into the same notebook, I would say generally we would be at the higher end of the single point range to slightly above that, depending on the number of controls or button that are in the multimedia application. The dual pointing segment. That's something we are just going to have to watch to see how that develops going forward. Again, I don't think this part -- I don't think this signals that there has been a swing in end-market demand between consumers and corporate. I think it is more reflection as I said earlier of us taking some market share in this particular segment, in that the new designs that we want these to be competitive take off that are now starting to ship in the marketplace. But in general I think as we move forward here that our revenue content, you can expect will increase to some extent across our total product mix with the addition of the dual pointing design wins and the increased functionality when we are providing our light touch solutions in combinations with our touch-pad.

So, the multimedia dual solution is not as big as an increase in revenue per box as [the pad plus styk] solution. But it sounds where we are in the adoption curve, penetration on that could go meaningfully higher.

That's correct Rob, in terms of both your observations.

Great. Thanks very much.

And again, ladies and gentlemen, 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 speaker equipment you will need to lift the handset before pressing the numbers. And we got a follow up question from [Andrew Knott]. Please go up with your follow up question sir.

The question that Ted asked before. In terms of the backlog figure you gave, does that include -- you also made the comment about this doesn't included any MP3 -- I am sorry -- digital entertainment to be outside. Does the backlog figures include digital entertainment in there at this point or would that be outside in terms to our backlog.

Andy, the backlog that we have provided to you has been constantly the same way how we have present the backlogs. Okay? They are basically shippable buyback blocks within this fiscal quarters. Mix of the backlog obviously is depending on how the orders comes in. And we project quarter ranges based on what the estimation of the backlog in the turns business and since this quarter, the way how we forecasted is driven mostly by PC-centric applications, that is why Russ' comment reflected the way he commented. But, we have really have not changed the way of how we report backlog all through these quarters.

I guess one of the reasons we are asking these question is, 20, 25% is a pretty big jump for the notebook market. It seems like a very, what I am trying to say is, was there anything else in that, that is driving that?

I mean there are really three things there, Andy. Certainly, we are trying to increase our revenue per box and we are trying to increase our penetration of our revenues, our shares into the other -- from the other competitors, and thirdly we all know there is a seasonality, right? So, it is really the combination of those three things.

And then, just the comment you had in the press release that would sit along the lines of -- that this guidance is not anything in digital entertainment could provide upside. When we have a sense of that and is there anyway to bracket it at this point or when it was, when you will know?

The visibility and predictability as we said in that segment, Andy, just is not as good. We don't feel as the PC market. As you know, there are some unique dynamics in that particular segment of the market because of the competitive mix within the OEMs there and specific customer relationship. So, it is really hard for us to try to bracket that and that is why we provided guidance in the way we did, which is we have given you the best visibility we can today and said that there is the opportunity here to see some upside, but it is just not something today that has a lot -- high level of predictability to it.

Okay. Thank you for that.

And we have a follow-up question from Rob Stone. Please go ahead with your question sir.

Two things actually if I may. Russ, one on the expense trends in Q1, can you give us a sense, a rough percentage increase in expenses quarter-on-quarter and since most of the headcount increase has been coming in R&D? And the second question is, as you set up those two new design centers, do you anticipate -- can you comment on CapEx requirements or any unusual expenses that might be associated with that expansion?

Rob, related to our OpEx increase sequentially, we do expect it to be up. I guess, I would refer you to what our prior increases have been as we move from the June to September quarter. It is a period where we do go through our annual performance review cycle at this point in time. So, you do see an increase in expenses from that. As you can could last quarter, we did have some real success in adding to our staff in some needed areas and we have got our recruiting machine, I think, ramped up to a point now where we actually have some momentum there. So, you are going to see some increased staffing in this particular quarter. As it relates to CapEx for the design centers that we have talked about, I do not anticipate any extraordinary capital expenditures required for that itself. We are, though, looking at putting in additional infrastructure this year in the form of a more corporate integrated ERP system and we have made the decision to do that, in fact we are in the early selection phase of that now in terms of vendors. So, I would guess that this year we'll probably spend somewhere around $1.5 million on just a bad initiative alone. But the design centers themselves will not be capital intensive. It will be a question of adding to our staffing resources to provide the necessary functionality and the multitude of engineering disciplines it takes to support our products for our customers.

But, is it fair to say that at some level you are going to be shifting staff growth to those locations, not necessarily reducing heads in California, but building up a presence over there, just thinking about substitute versus duplicative expenses as a concept?

No. In fact, that's right. A lot of the headcount growth, even from last quarter those hires were occurring in the greater China region.

And gentlemen there are no further questions. Please continue.

I would like to take this opportunity to thank our employees, partners, customers, Board members, and you our investors for your support over the past year and in the future. I look forward to update you on progress during the coming years. Thank you for being on the call with us today.

And ladies and gentlemen that does conclude today's Synaptics fourth quarter 2006 conference call. If you like to listen to a replay of today's conference, please dial 1-800-405-2236 or 303-590-3000, access code 1106-5235. Those numbers again are 1-800-405-2236 or 303-590-3000, access code 1106-5235. You may now disconnect. Thank you for using ACT teleconferencing. Have a great day.