Synaptics Inc (SYNA) 2007 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Synaptics' Second Quarter 2007 Conference Call. During today's presentation, all parties will be in a listen-only mode. [OPERATOR INSTRUCTIONS]

The conference is being recorded Thursday, January 25, 2007.

I would now like to turn the conference over to [Al Clons] 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 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 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 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 very pleased to report record revenue and very strong operating performance in the second quarter.

Revenue of $76.1 million grew 39% over the preceding quarter. Excluding the impact of non-cash share-based compensation and a one-time restructuring charge, non-GAAP operating margin was 20% and non-GAAP net income was $13 million, or $0.44 per share.

Our second quarter result reflected increased demand across all of our target markets and the extra week of business during the 14-week quarter.

Specifically, revenue from PC applications grew approximately 22% sequentially, reflecting strong [inaudible] demand and continuous adoption of our LightTouch and multimedia controls in notebooks and PC peripherals.

Revenue from PC applications accounted for 79% of total revenue. Revenue from non-PC applications nearly tripled over the preceding quarter and represented 21% of total revenue, primarily reflecting a significant increase in demand from the portable music player market.

Now, I'd like to make a few comments about the progress we have made over the past three months.

I'm pleased with the continuing interest in our LightTouch button and other alternative TouchPad solutions which our customers are utilizing the developed end products that feature sleek and innovative industrial designs.

OEMs continue to adopt a multimedia controls as they opt to drive the demand in consumer-based markets by offering increased capacitive-sensing functionality over traditional mechanical approaches.

During the quarter, we announced that Synaptics has developed a ChiralMotion-enabled touchpad for the new Logitech diNovo Edge keyboard. We are very excited about this evolution of the traditional touchpad as its intelligent sensing provides a quick and easier way to navigate, scroll through, and select digital content. This solution combines standard cursor control and scrolling and allows intuitive switching between the two. Once the scrolling mode is initiated, the user can scroll continuously and is not confined in a specific location, a motion on a touchpad.

ChiralMotion also includes several unique features, such as speed-adjust scrolling based on the rate at which the finger moves across the touchpad and precision scrolling, which relates to scrolling distance on screens directly to the finger, motion on the touchpad, and allows user to accurately move both long and short distances. We're not only seeing interest in our ChiralMotion technology within the PC peripherals market but within other markets, such as notebook and portable digital entertainment devices.

We also have two more design wins for LCD monitors being offered by Gateway. Similar to the model we described last quarter, these monitors are larger in size and also feature our LightTouch capacitive buttons and ScrollStrip solutions, with two custom interface modules for controlling both the onscreen display and audio system. One of the monitors is currently shipping, and the other is expected to be available later this quarter.

We also continue to make steady progress in the mobile phone market. Earlier this week, we announced that Pentech & Curitel has added three more mobile phones incorporating Synaptics' mobile touch capacitive sensing technology, which are currently available in Korea. The PT-S280 and PD-K2800 models use a four-button solution on the exterior of the phones for quick accessibility and control of popular multimedia on-demand functions. LEDs illuminate the touch-sensitive buttons on the topside of the phone.

The third model, the IM-U160 phone, features a similar solution that allows the user to navigate quickly and easily through media-on-demand digital content and features such as broadcast television.

We're also very excited about our ClearPad touch screen technology is being used in a new LG KU850, a Prada mobile phone. This solution replaces most of the traditional mechanical buttons with a large display with onscreen controls that better respond to a light touch of movement of the user's finger.

In addition, the joint partnership of LG and Prada demonstrates a new level of mobile phone design and a growing trend among cell phone OEMs to use industrial design as the way to differentiate themselves within the marketplace. This phone is expected to be available in Europe next month and parts of Asia in March.

Meanwhile, our Onyx Concept phone, which leverages the same ClearPad technology, generated strong media buzz at the recent consumer electronics show and some additional interest from potential new customers.

Now, I'd like to take a few minutes to discuss our new Synaptics OneTouch offering, which we announced last week.

OneTouch is a natural extension of the way we do business with our customers and is complementary to our end-to-end custom module business. OneTouch is a configurable solution that allows our customers to design their own capacitive interface solutions while taking advantage of Synaptics' industry-leading performance features and application-level functionality.

OneTouch is built in the same best-in-class capacitive-sensing technology that powers our [system] custom module solutions and offers the same reliability, quality, and performance that our customers have come to expect from us. By providing them with a complete solution that includes design tools, documentation, our family of capacitive-sensing ASICs and technical support, they can develop their own custom interface designs or capacitive buttons and scrolling applications in products such as mobile handsets, portable media players, and PC peripherals.

Through our expanded solutions portfolio, our customers now have a choice in determining the most optimal way to meet the emerging and growing needs, whether that's through one of our traditional custom module solutions or through OneTouch, which offers a flexible alternative when design integration and our quick design turns are important.

Compared to other solutions in the marketplace, we believe OneTouch is unique. Our family of proprietary mixed-signal ASICs is built specifically for capacitive sensing, and in conjunction with our easy-to-use [Roscoe] user interface-based design tools, our OneTouch solution doesn't require our customers to have expert knowledge of the technology or to use complicated software algorithms or code. In addition, our OneTouch target portfolio is optimized for functionality, features, performance, and cost.

Initially, we are rolling out OneTouch on a limited basis only with select customers in existing markets. We expect to gradually expand this offering over time, and based on the nature of our customer's development processes, anticipate that they may allow us to penetrate some of our target markets more quickly or to address additional vertical markets within a shorter time period. By increasing our customers' access to our technology, we believe we ultimately increased the variety of capacitive-sensing applications we serve while bolstering our ability to grow revenue more efficiently.

Given our fairly limited launch of OneTouch, I'm encouraged by the level of interest from our selected customers, and I'm pleased to announce that we expect to see our first revenue from OneTouch within the next six months.

To sum up this topic, we view OneTouch as complementary to our core business and expect our traditional end-to-end system-level solutions remain essential to a wide range of products and applications for a long time to come. Our custom module solutions and the OneTouch solutions are fundamentally optimal for different applications, [handsome] designs and feature sets, and together, give Synaptics the most compelling portfolio of capacitive interface solutions available in the market.

I look forward to updating you on the progress of our OneTouch initiative over the coming quarters.

Now, let me turn to a discussion of the general business environment.

Our backlog entering the March quarter was $35.5 million, a solid foundation going into the seasonally weaker March quarter. Based on current indicators, we expect sequential declines in demand across all of our target markets as typical for both PC and consumer electronics this time of year. We're on track to deliver record revenues in fiscal '07 as we continue to experience strong demand and increasing design activity from our target markets. And while our new OneTouch offering is not expected to be a major driver of our growth this fiscal year, we believe it further strengthens our position in an increasingly competitive environment. It should also enable us to more efficiently scale our businesses over the long term as we intend to address more and more new vertical markets.

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.

In addition to our GAAP results, I'll also provide supplementary results on a non-GAAP basis which excludes non-cash share-based compensation costs accounted for in accordance with FAS 123-R and the impact of one-time restructuring charge during the quarter. And, as Francis mentioned earlier, the second fiscal quarter was a 14-week period as fiscal 2007 will be a 53-week year.

Revenue for our second fiscal quarter of 2007 was $76.1 million, reflecting a 39% sequential increase and a 57% increase over the comparable period last year, with strong growth from both our PC and non-PC applications.

Sequentially, our PC-based revenue was responsible for 52% of our revenue growth as we experienced stronger-than-normal seasonality and the continued adoption of our multimedia controls in notebook computers, where the attach rate was above 14% during the quarter.

The remainder of our revenue was primarily driven by strong demand from the portable music player market, aided by increased revenue from mobile phone applications.

GAAP gross margin, which includes non-cash share-based compensation charges, was 39.9% in the December quarter, compared with 40.9% in the September quarter.

As anticipated, based on our expected product mix, our non-GAAP gross margin was down sequentially at 40.2%, compared with 41.1% in the September quarter.

Our gross margin continues to reflect strong growth in low-end notebooks and the generally higher third-party content in our multimedia-oriented applications in addition to the increased competition for those applications, as we have previously discussed.

Total operating expenses for our 14-week second fiscal quarter were $19.8 million, compared with $17 million in the preceding quarter, including non-cash share-based compensation charges of $3.7 million and $3 million, respectively.

Also included in our December quarter operating expenses is a one-time restructuring charge of $915,000 related to the closure of our U.K. office. This action was part of our overall strategy to realign our engineering resources to better meet our customer requirements as we continue to build our design capabilities in Asia.

Excluding the impact of non-cash share-based compensation and restructuring charges in the December quarter, non-GAAP operating expenses were approximately $15.2 million.

Total employee headcount at the end of December was 264, compared to 267 at the end of the September quarter, reflecting the net impact of our realignment activities. We expect our headcount to continue to grow as we go forward to meet the internal and external initiatives and to support our increased operating levels.

Net interest income was $2.5 million, compared with $2.1 million in the prior quarter, primarily reflecting the impact of higher average invested cash balances and the additional week during the December quarter.

Our GAAP and non-GAAP tax rates for the quarter were essentially the same at 28.6% and 28.5%, respectively, benefiting from the retroactive extension of the Federal Research credit signed into law on December 2006, the filing of amended returns based on results of prior-year audits, and the reevaluation of certain tax reserves. The GAAP tax rate for the quarter also reflected the recognition of the tax benefit from disqualifying dispositions of qualified stock options. And as we've pointed out in our SEC filings, we expect to continue to see volatility in our effective tax rates.

Net income for the December quarter, including the one-time restructuring costs, was $9.3 million, or $0.32 per diluted share, compared with $4.1 million, or $0.15 per diluted share in the September quarter. Non-GAAP net income, which excludes $890,000 of restructuring costs net of tax benefit and $3.9 million of non-cash share-based compensation charges and the associated tax benefit of $1.1 million, was $13 million, or $0.44 per diluted share, compared with $6.4 million, or $0.23 per diluted share in the September quarter.

Turning to our balance sheet, we ended the December quarter with total cash and short-term investments of $253.6 million, compared with $245.7 million at the end of the September quarter.

We used $3 million of cash in operations during the quarter, primarily due to the $11 million increase in our receivables and $8 million of tax payments made during the quarter.

Stock option exercises contributed $7.9 million during the quarter.

Capital expenditures in the quarter were $2.3 million, and capital depreciation was $517,000. Capital expenditures this quarter were primarily related to manufacturing test equipment needed to process our significantly increased volumes and the implementation of our ERP project.

Receivables at the end of December were $52.8 million, compared with $41.8 million at the end of September, primarily reflecting the higher revenue level.

DSOs at the end of the quarter were 62 days, compared with 69 days at the end of the prior quarter, reflecting improved revenue linearity in conjunction with the overall higher shipment levels.

Inventories at the end of December were $8.2 million, compared with $9 million at the end of September. Inventory turns for the quarter were 22 times, compared with 14 times in the September quarter, reflecting the combination of higher shipments and below-target die bank and ASIC inventory levels. We have increased our wafer starts and expect to rebuild inventory levels closer to our targeted six-month forward supply.

Now, I'd like to make a few comments regarding our near-term business outlook.

Our $35.5 million backlog is a historically strong level entering the typically slower March quarter. Based on our backlog, current visibility, and general seasonal trends, we are expecting revenue of approximately $58 million to $61 million for the third fiscal quarter. This represents an increase of 44% to 51% over the comparable period last year.

Looking beyond the March quarter, current indicators suggest revenue may be flat to moderately up in the June quarter.

Based on our current backlog and anticipated new orders during the remainder of the quarter, we expect to see a product mix weighted toward low-end notebooks and lower-margin multimedia applications. Consequently, we expect non-GAAP gross margin for the third quarter to be approximately 39%.

Turning to OpEx, we expect non-GAAP operating expenses in the quarter to be up slightly relative to the non-GAAP operating expenses in the December quarter, excluding the restructuring charges.

For the March quarter, we expect the impact of FAS 123R on our operating margins to be approximately 3.6 million, compared to 3.9 million in the December quarter, and we anticipate our non-GAAP tax rate to be approximately 34 to 35%.

Non-GAAP net income per diluted share for the March quarter is expected to be in the range of $0.21 to $0.24.

In closing, our second quarter fiscal results were outstanding, highlighted by record revenue and the continued diversification of our business within a variety of consumer-driven applications.

The interest in capacitive-sensing interface solutions continues to expand, providing us with significant opportunities going forward. While expanding markets bring increased competition, we believe the combination of our custom modules and our new OneTouch interface solutions gives us the most compelling capacitive touch-sensing portfolio in the market today and will enable us to take advantage of these emerging and growing opportunities.

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. We will now begin the question-and-answer session. [OPERATOR INSTRUCTIONS]

Our first question is from Jason Pflaum with Thomas Weisel Partners. Please go ahead.

Yes, good afternoon, guys.

Hi, Jason.

Hi, Jason.

Maybe we could start on the gross margin coming down a little bit here. I understand the drivers, but if you look out over the next couple of quarters, do you think we'll remain below your historic target range? Is there anything in the mix that you see today that could drive you back into that range, or should we kind of think of a go-forward rate below the 40% level?

Well, the approximate 39% gross margin that we guided to for the current quarter is based on the mix that we see today, and as we've discussed, it is geared towards lower-end products, and we do see in the multimedia applications the additional competition that we've also talked about in the past. So for multimedia applications, whether it's in PC peripherals, phones, or MP3 players, there is increased competition there and certainly some price pressure.

Now, having said that, we also have ongoing cost improvement programs in place, and with the recent announcement of our OneTouch offering, we do expect on the margin that that will be favorable going forward, but we're very early with the launch. It's been a fairly limited launch. So I think it's a little too early at this point, Jason, for us to conclude that the target range that we operate to today is not achievable going forward. But, again, based on the mix we see today in the marketplace, which is a function of the backlog and the orders we've seen since the end of the prior quarter, it suggests to us that for this quarter we will be below that range. For conservatism, assuming that we would be at or around these levels for the next quarter or two is probably not out of the realm, but again, there's a lot of moving pieces right now, and while we are seeing pressure, we're also doing some things to counteract that pressure, and it will be the timing of those things and the mix going forward that will ultimately determine where we end up.

Okay. Maybe you can talk a little bit about the LightTouch technology. I guess the attach rate that you suggested was 14% this quarter. Given the visibility into the next couple of quarters, where do you see that trending?

I think that still has room to trend up. You know, will it trend up sequentially in each quarter going forward? Potentially, but I think as we move forward here, you will see more and more adoption of our LightTouch solutions for multimedia applications within the notebook segment.

So north of 20% over the next couple of quarters would be --

Again, we're not projecting out beyond the current quarter, and we're not providing specific guidance for LightTouch.

Okay. And then just the last question on the handset opportunity. I know you had a nice win with the Prada phone. iPhone has now been announced. Have you seen any pick-up in design activity or design discussions on the adaptive user interface solution?

Well, I mean, Jason, clearly, our Onyx phone concept also has created a lot of buzz in terms of what it could be, okay? And we have discussed in the past the adoption of this kind of interface takes a -- reasonable cycles through the ecosystems. The fact that the Prada phone has been released and then there is obviously an indication what iPhone could look like, it's [talking] up interest, so if nothing anything else, certainly, it's gathering momentum.

And just as far as trying to size the opportunity, can you give us an idea of what the dollar content could be in an adaptive user interface type solution?

Well, again, as we've talked in the past, Jason, generally, the price range for our products are going to be in that $3 to $6 range. Earlier introduction of a technology like this could be above that, but generally, I think going forward you ought to assume that we're in that range.

And we should assume that you're supplying the whole module to this type of solution, at least upfront?

Upfront, certainly, we would be providing the total module, yes.

Okay. Thanks, guys.

Jason, just a complementary remark. So when we talk about the OneTouch complementary to our modular solution, and basically what we are saying here is the worlds move to a different kind of user interface, we really see a more complicated, higher interface solution will most likely continue to be modules. While there's more simpler, more configurable type, you know, where we lend itself more to OneTouch, that's another way for you to kind of think about how the world we see as it evolves over time.

Great. Thanks, guys.

Our next question comes from Rob Stone with Cowen and Company. Please go ahead.

Hi. Wanted to spend another minute on the adaptive user interface, particularly something like the [Prada] phone, where it's ClearPad over a much larger display. How does that come together? Do you work to specify a particular display module supplier and then it's your ASIC in the overlay? Or does your contract manufacturing partner actually integrate the capacitive interface on the display modules and supply that to the OEM?

Okay, so, first, how did that come about? You know, Rob, I mean it's really the fundamental strength of the Company in terms of how we introduce product concepts to OEMs and ODMs. So one way, again, I'll talk about the Onyx phone. That's a concept, okay? And another example of that is how we introduce lux pad it turns into [indiscernible]. And this particular case with the Prada, LG is not in any different in terms of the overall cycles and the process of how it takes, okay? And because it's a product -- I would call it more of a revolution [in] a display on a product, it takes a lot more interactions and discussion and design. And as you know, Rob, one of Synaptics' strength is able to work with our customers, the ability to [define] those kinds of specifications.

So depending on the specification of the product, then the supply chain kicks in, you know, and there are a number of ways to produce products like that, okay? Without going into the specific of what it looks like, it is a module solution that we provide, okay, and it is indeed -- there are nuances in terms of how you produce the solution that's different than a TouchPad module on the notebook computers.

Yes, I would think in particular -- the reason why I'm focusing on the display part of it, I guess, is because the display on a handset is a pretty critical feature, and I was thinking in terms of any influence on the brightness, the daytime readability and stuff like that. It would seem to imply a pretty close collaboration with the LCD module vendor, as well. Am I thinking correctly there?

Well, I mean, they're all in the ecosystem, you know? And it's not just on the LCD vendor and is also in the assembly process, you know, of how you get the sensors, you know, on and into a -- in a manner that is easy to install with high reliability, okay? So you're singling out one aspect of the ecosystem, which is the LCD, and actually does not stop or start or end at that particular component.

And so what stage of the process do you guys wave the magic cool wand over it?

Well, there's nothing magic about that, Rob, a lot of hard work, a lot of perspiration, the only thing I can tell you. I mean every time we move on to like a touchpad on the [plastic], there was a learning curve. We just have to labor through it. And, hopefully, through a collective wisdom and collaboration with our partners, you know, we're able to do it consistently.

No, I was really referring to the look of it. These things are "fashion meets technology," but good luck with that.

Thank you.

[OPERATOR INSTRUCTIONS]

The next question comes from Ted Chung with Bear Stearns. Please go ahead.

Yes, hi. I have a quick question regarding the tax rates, and historically, you were guiding to -- towards non-GAAP tax rate of 40%. Is that [30] -- the new guidance sustainable, or what is leading to that?

Well, again, it's a function of a lot of moving parts there, too. I mean as we indicated on the call, the tax rate for the current quarter reflects the relief of some prior reserves associated with prior-year audits we had that, based on the visibility of those audits, it impacts and allowed us to file amended returns for subsequent years. And then we did have the extension of the R&D federal tax credit that impacted the current quarter.

Our current view for this year, I think, is that we'll be in the 34 to 35% range. I don't know that that's sustainable going into fiscal year '08. I think you will see our tax rates tick back up, but as we've discussed previously, Ted, once we get into fiscal year '09, I think you'll see a dramatic change in our tax rate, where we'll be in the low 20s to high teens.

Great. Thank you.

At this time, I'm showing no additional questions in the queue. Please continue with your presentation.

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

Ladies and gentlemen, this does conclude the Synaptics' Second Quarter 2006 --2007 Conference Call. You may now disconnect, and thank you for using AT&T Teleconferencing.