Synaptics Inc (SYNA) 2007 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Synaptics first quarter fiscal 2007 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 conference is being recorded today, Thursday, October 19, 2006. I would like to turn the conference over to Alex Wellins of The Blue Shirt 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 website at Synaptics.com. With me on today's call are Francis Lee, president and chief executive officer 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 10-K for the fiscal year ended June 30, 2006 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'd like to turn the call over to Francis Lee. Francis?

Thanks, Alex, and thanks, everyone, for joining us on the call today. Following our solid performance in fiscal '06, we are off to a good start in the new fiscal year. Revenue of $54.8 million grew almost 25% over the preceding quarter and was at the high end of our guidance range.

Excluding the impact of noncash, share-based compensation, non-GAAP operating margin was 15.5% and non-GAAP net income was $6.4 million, or $0.23 per share.

Revenue from PC applications grew approximately 24% sequentially and accounted for 90% of total revenue. Our first quarter results reflect general seasonality in our target markets and, in particular, strong demand from the PC market including the rapid adoption of our multi-media controls.

As we discussed last quarter, this trend offers opportunities to generally increase revenue content per notebook and to the [unintelligible] example of how this shift towards digitalized style trends place in the Synaptics strengths.

Now I'd like to make a few comments about the progress we have made over the past three months. We continue to benefit from the success of our LightTouch buttons and now alternative TouchPad solutions within a number of products currently shipping within the market. These solutions provide controls for multimedia features on the books as well as PC peripherals and enable our customers to develop products that feature sleek and unique industrial designs.

Last quarter we talked about HPDV 2000 and Compaq 3000 notebook models integrating our LightTouch technology. As an expansion of this product, HP has introduced the XP 3000 docking station, which also includes LightTouch controls from Synaptics providing a similar user interface experience rather working from the notebook or parking station. Our LightTouch capacity buttons and scroll strip solutions will also soon appear on an LCD monitor being offered by a top-tier OEM and expected to ship within the November timeframe. This product contains two custom interface modules from Synaptics for controlling both the onscreen display and audio system.

As I mentioned last quarter, we have been working on Microsoft on these wireless keyboards. The wireless Entertainment 7000 and 8000 series desktops features keyboards that incorporate Synaptics' capacitive NavPoint and LightTouch solutions to provide cursor navigation and quick access to select applications and controls.

In addition, the wireless Entertainment Desktop 8000 employs Synaptics capacitive presence detection to enable the keyboard to intelligently adjust its standby and active settings depending on the proximity of the user. This product I expect it to be available in the coming months.

During the quarter, we announced an exclusive agreement validity for a notebook market to promote a fingerprint technology integrated with our TouchPad. Interest level has been high, and we are engaged in specific design activity. We are optimistic when we see notebooks incorporating this integrated biometric interface solution late next calendar year.

Lastly, in the PC market, we recently announced availability of one of the first drivers for the Windows Vista operating system. The driver will allow users to adjust the Synaptic TouchPad settings to enhance the user experience. Some of these features include virtual scrolling, sensitivity enhancements, tapSetting for selection, and dragging and a palm check feature, which eliminates cursor jumping during accidental brushes of the TouchPad.

Moving on to a discussion of the portable digital entertainment in the handheld market, we have a few new developments to highlight. The new Samsung YPK5 MP3 players features eight LightTouch buttons from Synaptics. The unique capacitive interface reaches from a vertical personal-use view to a horizontal shared-use view suitable for viewing photos or for activating the device viewing speaker.

Philips has also introduced the next edition to the GoGear MP3 player line -- the SA9100 and the SA9200. These devices incorporate Synaptics LightTouch solutions to provide intuitive controls with backlit, touch-sensitive buttons as growing for navigation.

We also continue to make progress in the mobile phone market. First is a design win for a platform that includes three models. These phones include ultra-thin, three-button mobile touch solution that gives the user quick access to media-on-demand functions in a slim design format. These phones are expected to be available in Korea shortly.

Second, we are pleased to announce that Motorola began shipping the MS800 with Synaptics custom designed mobile touch module with four capacitor buttons integrated LED lighting. The MS800 is a digital media broadcast clamshell phone and is available in Korea.

Finally, Pantech and Curitel extended their product line with PG2800, which incorporates Synaptics' FlexPad, an ultra-thin answer that is integrated into the mechanical keypad. The Synaptics' 2D solution enables finger writing across a flush mounted mechanical keypad allowing users to quickly and usually send text messages by writing alphanumeric characters using your finger rather than pressing keys. FlexPad offers an [hereto] intuitive efficient way to create text messages, navigate the menu structure and quickly access betas such as entries in a directory. The PG2800 is now available in Russia.

During the past quarter we also previewed Onyx, a concept phone platform developed jointly with Pilotfish, an industrial design firm in Germany. Onyx combines our clear capacitive sensitive technology and expertise in human factors and in the active design with Pilotfish industrial design and graphical user interface expertise. This concept phone was developed to illustrate how thoughtful design would drive innovation and next-generation mobile interfaces and is meant to foster discussion with existing and prospective customers. Onyx has received the red dot design award and has generated a great deal of discussion and enthusiasm about improve human interfaces for mobile phone design receiving coverage in over 85 publications worldwide including "PC Magazine," "Business Week," and "Computing News," and several broadcast outlets including ABC's "Nightline."

Now let me take a moment to discuss the general business environment. Our backlog entering the December quarter reached an all-time high of approximately $43.9 million up significantly from $28.7 million last quarter. Our momentum continues in the Q2 based on both seasonal chance and expansion of our solution in a variety of multimedia applications. Demand for our solution at unprecedented levels, we expect January record revenues in the second quarter with increased demand from all of our target markets in the current quarter including part of our digital entertainment devices.

At the same time, competitive pressures within some of these markets, particularly in consumer electronic markets, are increasing as we continue to evaluate ways to compete more effectively and to better serve our customers.

As I mentioned last quarter, part of this process was our decision to enhance our core competencies and customer care structure through design centers in our offices in Korea and Taiwan. These efforts are underway, and we expect to be actively providing product and during support to our customers in those regions during this fiscal year. Building on this foundation, we are proactively pursuing other ways to increase the flexibility we offer our customers.

To conclude my formal remarks, we are extremely proud of our accomplishments during Q1, and look forward to continuing the momentum generated over the past several months with record revenues in the second quarter. We continue to make solid headway in both PC and non-PC applications and design activity continues to be robust across all categories. By leveraging the trend of the digital consumer, we continue to work on our revenue diversification strategy and strengthening our competitive position within our target markets.

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

Thank you, Francis. In addition to our GAAP results, I will also provide supplementary results on a non-GAAP basis, which excludes noncash, share-based compensation expense and tax effects associated with FAS 123R.

Revenue for our first fiscal quarter of 2007 was 54.8 million, reflecting a 6% increase over the comparable period last year as demand for our PC solutions more than offset reduced revenue from our MP3 applications.

Sequentially, our PC-based revenue was responsible for 22% of our 25% revenue growth, as we benefited from stronger-than-normal seasonality and the rapid adoption of our multimedia controls in notebook computers.

Within the notebook market, consumer demand continues to outpace corporate demand as dual-pointing applications grew at a slower pace and represented approximately 15% of total revenue.

As anticipated, gross margins declined compared with the June quarter. GAAP gross margin, which includes noncash, share-based compensation charges, was 40.9% in the September quarter compared with 43% in the June quarter. Non-GAAP gross margin was 41.1% compared with 43.4% for the June quarter.

Based on our product mix, which included the substantial increase in multimedia-oriented products that contain a greater percentage of third-party content, gross margins were at the low end of our guidance.

Total operating expenses for the quarter were below our expectations at approximately $17 million essentially unchanged from the preceding quarter and included noncash, share-based compensation charges of $3 million versus 3.1 million in the June quarter. Excluding the impact of noncash, share-based compensation charges in the September quarter, non-GAAP operating expenses were approximately $14 million.

The timing of our recruiting efforts and less-than-expected project expenses related to our product development activities were primarily responsible for our lower-than-anticipated spending levels.

Total employee headcount at the end of September was 267, up from 254 in the June quarter. Based on our planned staffing initiatives, we expect our headcount to continue to grow as we fill positions required by our increased operating levels and add skill sets necessary to meet our business objectives.

Net interest income was 2.1 million compared with 1.9 million in the prior quarter, primarily reflecting the impact of higher average interest rates.

Our GAAP and non-GAAP tax rates for the quarter were 44.7% and 38.9%, respectively.

As we pointed out in prior conference calls in our SEC filings, we expect to continue to see substantial volatility in our GAAP-effective tax rates primarily due to the timing of when we recognize share-based compensation charges associated with our qualified stock options and when we recognize the related tax benefit, if any.

Net income for the quarter was 4.1 million, or $0.15 per diluted share compared with 1.8 million, or $0.07 per diluted share in the June quarter. Non-GAAP net income, which excludes 3.1 million of noncash, share-based compensation charges and the associated tax benefits of $781,000, was 6.4 million, or $0.23 per diluted share compared with 4.2 million, or $0.15 per diluted share in the June quarter.

Now a few comments on our balance sheet -- we ended the September quarter with total cash and short-term investments of 245.7 million compared with 245.2 million at the end of the June quarter. Cash flow from operations during the quarter was approximately 3.7 million, and stock option exercises contributed approximately 1.5 million.

During the quarter we used 4.6 million to buy back 215,000 shares, which leaves us with 35.4 million remaining under our board-authorized stock repurchase plan.

Capital expenditures in the quarter were $515,000, and capital depreciation was 454,000.

Receivables at the end of September were 41.8 million compared to 34 million at the end of June reflecting the higher revenue levels. DSOs at the end of the quarter were 69 days compared with 70 days at the end of the prior quarter. Our DSOs are still above our historical norms reflecting continued backend loading in the quarters.

Inventories at the end of September were 9 million compared to 10 million in the June quarter. Inventory turns for the quarter were 14 times compared with 10 times in the June quarter, as our inventory reflects more normal levels after working through the impact of some spot wafer purchases in the March 2006 quarter.

I'd like to make a few comments regarding our near-term business outlook but first I'd like to point out that the second fiscal quarter will span a period of 14 weeks rather than 13 weeks, as fiscal 2007 will be a 53-week year.

As Francis alluded to earlier, our backlog increased by 53% during the quarter to 43.9 million as our customers enter into what is typically the seasonally strongest quarter of the calendar year. Considering our backlog level and other current visibility, we are raising our outlook for the December quarter to sequential revenue growth of 25 to 35%. This outlook is predicated on the production ramp of new design wins and continued strong seasonal trends with increased demand coming from both PC and non-PC applications including an expected increase in demand from the portable music player market.

Looking beyond the December quarter, we expect revenue in the March quarter to approach September quarter levels. However, it will be largely dependent on sell-through in the holiday season and consumer demand relative to historical seasonal trends in the March quarter as we continue to have limited visibility regarding sustainable strong demand from the portable music player market.

Taking into consideration our current design activities, pipeline of identified opportunities, and the higher-than-expected revenue for the first six months of fiscal year, we are upwardly revising our outlook for the year. We now expect fiscal 2007 to exceed fiscal 2006 revenues by 25 to 30%, up from the 20% growth in indicated on last quarter's call.

We expect gross margins for the second quarter to again decline slightly reflecting our anticipated product mix including strong demand for our multimedia control solutions in notebooks and portable music players. Based on this, we are forecasting non-GAAP gross margins to be in the range of 40 to 41%. We expect non-GAAP operating expenses in December to be up sequentially primarily the result of anticipated increase in headcount from our ongoing recruiting efforts, higher expected product development-related costs, as well as the impact of the extra week in the quarter.

For the December quarter, we expect the impact of FAS 123R on our operating margins to be approximately 3.4 million compared to 3.1 million in the September quarter. For the year, we anticipate our GAAP tax rate to be approximately 38 to 40%.

Non-GAAP net income per diluted share for the December quarter is expected to be in the range of $0.30 to $0.35.

In closing, we're on track to deliver a strong first half, which positions us very well for the year and has prompted us to raise our revenue outlook for fiscal 2007. Design activity has never been higher, as our customers recognize the value of our technology in creating user-friendly experiences supporting the growing consumer digital lifestyle. We expect this trend to continue into the foreseeable. I look forward to updating you regarding our progress on our next quarterly call.

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. Ladies and gentlemen, at this time we will begin the question-and-answer session. [OPERATOR INSTRUCTIONS] Jason Pflaum.

Hi, guys, nice job. A couple of quick questions. Maybe to start out with on the outlook -- clearly bumped up the range pretty substantially. I was hoping you could just flesh it out a little bit more and talk about where you're seeing more of the upside revisions -- that's the first question.

Well, Jason, we're seeing increased demand across all of the verticals that we're serving today.

Okay, I may need another angle on that. If you look at your current mix today between PC and non-PC, where would you expect that to trend next quarter?

Well, if we look at the backlog going into the quarter, again, there is increased backlog from all the vertical segments we serve. It's still weighted towards the PC marketplace, but generally I think I would expect non-PC applications to grow as a percent of total revenue for the December quarter.

Okay. Maybe -- can you help us understand the opportunity from the multimedia control areas? What portion of your mix today [unintelligible] the attach rate of this type of technology and maybe you can give a sense for where that goes if you look out six to 12 months.

Okay. Well, not all of our multimedia control solutions are attached to notebook, so we do sell into peripherals. We all sell multiview controls in MP3 players, as you know. But within the notebook market itself, I would say the attach rate today is somewhere around 10%. Based on current demand, I would expect that to trend up, but it's hard to say what level it could reach.

Okay, and I guess based on your current visibility, you mentioned HP -- are there other top-tier vendors that have signed on? And, if so, what type of timing should we expect there? Is that an early '07 event?

We do have other OEMs that have adopted the solution, and some of those will be shipping in the December quarter.

Andrew Neff.

Bear Stearns. Two questions -- one, if you could just talk about the -- if you look at the non-PC side of the market, do you see -- is some of the growth coming from new customers to you? Customers that you haven't been shipping to before, or is it coming from existing customers?

Well, Andy, you know, just like Russ said, right, you know, our growth comes from order -- from the non -- also grows in all the verticals. So in both the handheld and also in the PD, portable desktop entertainment of the market, we continue to believe in proliferation of our technologies in a number of existing as well as not new OEMs, and that part of the strategy has not changed.

I think a big part of it comes from the seasonality of the December quarter. So you would expect us to see it from both current and new customers as well.

A second question is just -- as you look at what's going on in the digital entertainment area, are you -- are there any particular customers that are driving the growth there?

It is -- the December quarter is a larger consumer sales quarter, so you can surmise that order OEM customers that we are buying product with are having increased revenue and unit sales on an individual basis, Andy.

Okay. And then, lastly, as you look at the past, you've had major OEM accounts for a large percent of your sales. Any that you can talk about what's going on with any of your large OEMs at this point?

Well, Andy, as you know, typically, we don't comment on an individual basis, and certainly will not do so at this time.

Rob Stone.

It's Cowen & Company. Congratulations, guys, it sounds like you're going to have a busy holiday season.

Thank you, Rob.

I wonder, Francis, if you can elaborate a little bit more on your comments about seeing increased competitive pressures in your markets. In particular, is that coming from new competitors? Is it coming from greater demand for price concession from your customers? Or are they asking for something else from you -- more service -- something else that you have to respond to?

Well, Rob, as we always talk about, I think as there are additional functionalities being integrated into a whole host of electronic devices and the trends to digital lifestyles and moving content anywhere and transferring information everywhere, you're going to see the proliferation of the touch requirements everywhere. And in many cases, you are actually moving in the devices. Our [unintelligible] cell phone is the example in that category and also portable digital entertainment as they evolve to different applications in that category.

So, as you may surmise, as opportunity comes up, you can expect to see increased competition. So to answer your question about from existing players or new players, well, first of all, we are seeing a lot of noises and activities from sometimes places that we have not even seen before. That doesn't mean that they are real or they are serious, it's just the fact that when there are opportunities you hear more noises.

So my comments were reflecting, a, that the market has continued to serve us well in the sense that it is expanding in both volume, sizes, as well as in terms of opportunity to innovate. At the same time, we are a company of less than 300 people. We have a certain -- we have to focus on certain particular areas, and the way we deal with that is making sure that we're localized, we respond to customers' activities, and also making our technology easier to innovate.

So one can expect that as the market continues to grow, competition can really heat up, and I don't think that is necessarily bad as long as we execute better than anybody else out there.

On that note, can you talk about things that you might do for the balance of the year that would influence either the value add or the mix or the costs in such a way that you could reverse the recent trend in gross margin, as you're now flirting with the absolute bottom end of your 40 to 45% target range?

Okay. First of all, Rob, we are one company out there that has millions and millions of proven track record shipping user interface solution using capacitive technology. Nobody else can claim to do that. A lot of people will claim they know how to do that, and I hope that the trend and the track record will speak a lot in terms of execution, our capabilities, and have demonstrated a consistency over the years.

Where we excel is innovation, you know, and, like I said, the market is far from being a standardized commodity market, okay, which means you have to continue to learn how to develop new solutions and new ways of letting user interact with the appliances -- with good experience, okay? And what you will find, Rob, we'll continue to pioneer things like the LightTouch button solutions, the dual model, you know, products like that, okay, that you have seen that we are leading the parade.

But you can also expect that there are those in the mainstream, there will be individuals, okay, who are going to -- like to play the second fiddle and try to copy. In some cases, what they do is they drop the price as the weight end in the market. We have had that experience, certainly, in [unintelligible] arena for years, okay, and this is no different.

There is a reason why we keep our gross margin model to be at 40 or 45% because we believe that is really the sweet spot in terms of how we run our businesses. And as Russ alluded to, okay, a number of disk products do use third-party in the contents like LEDs, for example, which drives the margin percent lower, and if I will remind you, you know, several years ago when there was a rapid adoption of dual pointing, we also see a rapid decline of the gross margins, okay?

So I think this is just part of the market dynamics, you know, and we are still operating within a model, we believe in that model, and when there is opportunities to upgrade it or change it or modify it, we'll be signaling it to you.

So, going back to the dual point experience, one of the things that you did do was re-spin the design after a certain level of volume was achieved, and that brought the margins back up based on the way the LightTouch and multimedia interface type products are made. Do you see opportunities to do that in the multimedia controls as well?

Well, cost reduction is always a very big part of our business and, certainly, we are working very hard to improve the efficiency in every aspect of it. Now, I would say the difference between this case and the other case that I alluded to before there is I think there's a lot more competitive pressure in the market space. The market now is a lot bigger than what it used to, okay, and so clearly you can surmise, okay, the market dynamic is not the same as before, and we are cognizant of that, Rob, okay? So there will be continuous, there will be significant cost reduction effort in our side of the company as well as continue to increase our value contributions, okay, to the marketplace.

You know, one of the reason, for example, why we do products like the SecurePad, you know, in concert with validity is try to offer, you know, products to the marketplace that will be just different because multimedia opens and controls. Another example of that is dual mode products around.

[OPERATOR INSTRUCTIONS] Hugh Mai.

I just have a quick question regarding the market share within a notebook. Did you feel that you guys gained market share this past quarter?

Well, it's always hard to really measure market share on a quarter-to-quarter basis, Hugh, because there's a lag time between when we ship product and when a final assembled notebook is actually in distribution. We do look at it quarterly and just on that basis, we did grow units, I think, around 30% this quarter. But if you looked at it on a rolling four-quarter basis, which is probably more representative, I think we have continued to pick up one or two points of share over the last 12 months.

Another question -- in terms of, given the competitive dynamics as well as the attach rate of your multimedia solutions, did your ASE increase or decline or at least directionally? I mean, how should we think about that? Both for the notebook segment.

Well, clearly, when we're selling multiple functionality into the same box, generally, the content -- the revenue content will increase but then you have to look at the overall expansion within that segment on a relative basis. I would say the pricing probably didn't change a whole lot on an overall average basis quarter-to-quarter. If it did, it probably moved down slightly.

Thank you. Management, there are no further questions. I'll turn the conference back to you for any closing comments you may have.

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

Thank you. Ladies and gentlemen, that does conclude today's teleconference. We thank you again for your participation and at this time you may disconnect.