Synaptics Inc (SYNA) 2007 Q3 法說會逐字稿

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the Synaptics Third Quarter Fiscal 2007 Conference Call. During today's presentation, parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS) This conference call is being recorded today, Thursday April 26th of 2007. I would now like to turn the conference over to Alex Wellins of The Blueshirt Group. Please go ahead sir.

Good afternoon and thanks for joining us today on Synaptics' Third 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.

I'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.

With that said, I'll turn the call over to Francis Lee. Francis?

Thanks Alex and thanks everyone for joining us on the call today. Our third fiscal quarter performance was highlighted by the second highest quarterly revenue in our company's history and very solid operating results.

Revenue are $64.3 million grew 59% over the prior year period. Excluding the impact of non-cash, share-based compensation, non-GAAP operating margin was 15.1% and non-GAAP net income increase approximately 97% year over year to $8.1 million or $0.28 per share.

I'm also pleased to report that for the first nine months of the fiscal year, we have already exceeded total revenue and non-GAAP net income levels for all of fiscal '06.

Our third quarter sequential results reflect general seasonality but compared with the same period last year, we continue to see strong increased demand across all of our target markets. Specifically, revenue from PC applications grew at approximately 48% over the same period last year and accounted for 83% of total revenue. Revenue from non-PC applications was up 163% year over year and represented 17% of total revenue.

Now I'd like to make a few comments about the progress we have made over the past three months starting with the PC and PC peripheral space. Earlier this week we announced the use of our capacitive ScrollStrip technology in Newton Peripherals X54 mobile mouse. This is a Bluetooth-enabled wireless mouse unlike any other on the market, weighing only half an ounce. It folds flat and can easily be recharged via an ExpressCard/54 slot available on compatible notebooks. In cooperation of Synaptics capacitive ScrollStrip on the mouse, makes scrolling through documents and web content easy and comfortable for the user.

Last month two of Logitech's products, the diNovo Edge keyboard and the new look navigator device were honored for world-class product design with two Red Dot awards. Synaptics developed a ChiralMotion-enabled TouchPad for the diNovo Edge keyboard which combines standard cursor control and scrolling and allows [intuitus] reaching between the two. The new look of evolutionary peripheral device developed specifically to enhance the user design application on PC, utilize our touch screen interface that provides scrolling and shortcuts to design tools.

Turning to the mobile and handheld market, during the quarter we announced the development of a LightTouch solution for the MEDION GoPal S2310 GPS device, which will be available in Europe this quarter. This is our first entry into the personal navigation device category and is another example of the broad applicability of our technology and capacitive sensing functionality across multiple markets. Our LightTouch solution creates a stylish, streamlined interface for this GPS device, where design and ease of use are critical. It includes eight capacitive sensing buttons that control MP3 and picture viewer functions, providing a quick and easy way to navigate and stroll through and select digital content.

On our last earnings call, we announced that our ClearTouch technology is being used in a new LG KE850 PRADA mobile phone. This is the only capacitive touch screen solution currently shipping in the mobile market. And we are pleased to announce that it is now available in Europe.

Additional interest in our ClearPad technologies continues to be high for interactive user interfaces, supporting the next generation of revolutionary new mobile and handheld devices.

I'm also pleased to announce that our mobile touch solution is integrated into the new Huawei U550 mobile phone. Our back lit, three-button mobile touch interface solution provides media on-demand controls on the exterior of this flip phone, enables users to easily manipulate MP3 player controls on the run and enjoys multimedia experience. Huawei announced and displayed a U550 phone at the 3GSM conference in Barcelona in February. We have plans to sell through [Vodaphone] in Europe beginning this summer, followed by PCCW in Asia.

Finally, on our last earnings call, we announced availability of our OneTouch offering, which is a natural extension of the way we do business with our customers. I'm happy to report that this activity for this solution's already expanding within our existing customer base. And the first product developed by mobile customers utilizing OneTouch, I expect it to begin shipping within the current quarter.

As we enter the last quarter of our fiscal year, we feel very confident in both our near-term and long-term business outlook. Design activity and demand for our solutions continues to be very strong as we further broaden our footprint within the multiple markets we serve. As capacitive sensing technology becomes more and more common in today's popular consumer devices, our overall market opportunity continues to expand creating opportunities to further invest in our company and to grow the Synaptic teams as we continue to scale our business.

As Russ will detail in a few minutes, we further executed on our stock buyback program during the quarter. And I'm pleased to announce that the board has authorized an additional $80 million to be used to purchase the company's common stock. This is not only an effective way to leverage our strong cash position but also a reflection of our continued commitment to maximizing stockholder value and our underlying confidence in Synaptics' future prospects.

To support our ability to rapidly scale our business in response to market demand, we continue to work to aggressively expand our headcount, hiring staff on a worldwide basis. By the end of this fiscal year, we expect to have added more than 20% to our expanding roster of talented employees.

As part of this process, we have recently strengthened our senior leadership team with the appointment of two new vice presidents who will head our business lines. Mark Vena joins us as Vice President of the PC business. He brings over 20 years of sales and marketing experience with many of the technology industry's premiere companies including Alienware, Dell, Compact, Epson, and IBM. We believe Mark's broad general product management experience and contacts in the PC industry will serve Synaptic well as we continue our leadership role in providing innovation for our PC OEM and ODM customers.

Joe Virginia joins us as Vice President of Corporate Marketing and head of the handheld business. Joe brings more than 20 years of engineering, sales and marketing experience in the flat panel display industry at both Samsung and Fujitsu. We believe Joe's solid experience in marketing and selling LCD displays within many of the same market we serve will help leverage our efforts to further penetrate mobile phones and other handheld devices that can benefit from innovative interface solutions including our ClearPad solutions that enable interactive displays.

We are very pleased to welcome both Mark and Joe on board and look forward to their contributions to the company going forward.

Now let me turn to a discussion of the current business environment. Our backlog entering the June quarter was a healthy $32.3 million. And we expect our top line results to be up sequentially. I believe we are very well positioned in existing markets and poised to take advantage of the opportunities in new vertical markets. Combination of our end-to-end custom modules and our OneTouch offering effectively leverages a system level expertise we have developed over the past 12 years in bringing innovative capacitive sensing interface solutions to the market.

I'm very pleased by the market's early acceptance of our OneTouch solution where we have several cell phone designs ramping in production this quarter. We have invested significant engineering talent and resources in our mobile market and believe we are now on the verge of starting to realize its potential. You should expect to hear more about this on our next earnings call.

As we look towards the rest of the calendar year, we expect our business to remain robust, based on continuous strong demand and increasing design activity within our target markets. While competition remains a constant, particularly as we continue to cater to consumer-driven segments, we continue to focus on the many opportunities in front of us, leveraging our strong balance sheet with cash-generating ability, making investment in our company while also delivering solid operating results.

I would now turn the call over to Russ who will review our detailed financial results for the third 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 non-cash, share-based compensation costs accounted for in accordance with FAS 123(R). And as a reminder and for comparison purposes, the second quarter ended December 31, 2006, was a 14-week period.

Revenue for our third fiscal quarter of 2007 was $64.3 million representing our second highest revenue level to date and up 59% over the comparable period last year. Our revenue for the quarter reflects solid demand for both our PC and non-PC applications. On a year-over-year basis, our PC-based revenue increased by more than $17 million representing approximately 72% of our total revenue growth. We believe this robust growth reflects the continued migration from desktops to notebooks, driven primarily by consumers and aided by the adoption of our multimedia solutions in notebook computers where our attach rate for the quarter was approximately 15%.

Revenue from non-PC applications grew $6.7 million year over year, representing 28% of our total revenue growth and primarily reflecting increased demand for our multimedia control applications for portable digital music players and cell phones.

As anticipated, based on our expected product mix, our gross margin percent was down sequentially. GAAP gross margin, which includes non-cash, share-based compensation charges was 39.1% in the March quarter compared with 39.9% in the December quarter. Our non-GAAP gross margin was 39.4% compared with 40.2% in the December quarter.

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

Total operating expenses for our third fiscal quarter, which includes non-cash, share-based compensation charges of $3.2 million were $18.8 million. This compares with operating expenses of $19.8 million in the preceding 14-week quarter, which included non-cash, share-based compensation charges of $3.7 million and a one-time restructuring charge of $915,000 related to the closure of our UK office.

Excluding the impact of non-cash, share-based compensation in the March quarter, our non-GAAP operating expenses were approximately $15.6 million.

Total employee headcount at the end of March was 279 compared with 264 at the end of the December quarter, reflecting our on-going staffing plans. We expect our headcount to continue to increase going forward as we scale the organization to meet both our internal and external initiatives and to support our expanding operating levels.

Net interest income was $2.2 million compared with $2.5 million in the prior quarter. This decrease primarily reflects the impact of our stock repurchase activities during the quarter, which I will detail in a moment.

Our GAAP and non-GAAP tax rates for the quarter were 34.1% and 31.9% respectively and benefited primarily from the true up of the research tax credits as claimed in our recently filed U.S.-based tax returns. The GAAP tax rate also reflected the recognition of the tax benefit from the disqualifying disposition of stock options during the quarter. As we've pointed out in our SEC filings, we expect to continue to see volatility in our effective tax rate.

Net income for the March quarter was $5.6 million or $0.20 per diluted share compared with $9.3 million or $0.32 per diluted share in the December quarter, which included one-time restructuring charges of $915,000.

Non-GAAP net income, which excludes $3.4 million of non-cash, share-based compensation charges and the associated tax benefit of $900,000 was $8.1 million or $0.28 per diluted share compared with $13 million or $0.44 per diluted share in the December quarter, excluding non-cash compensation and the one-time restructuring charges.

We ended the March quarter with total cash and short-term investments of $245.2 million compared with $253.6 million at the end of the December quarter. Cash flow from operations during the quarter was approximately $14 million and stock option exercises contributed approximately $4.2 million.

During the quarter we used $27.7 million to buy back approximately 1.1 million shares of our common stock. Fiscal year to date, our share repurchases have totaled $32.3 million representing approximately 1.3 million shares. And since the program's inception, we have bought back close to 3.6 millions shares totaling approximately $72.3 million.

In addition to authorizing an additional $80 million under our stock repurchase program, the board also elected to settle in cash any conversions of the $125 million principal portion of our convertible senior subordinated notes. As a result, the share dilution from our convertible debt will occur only in the debt that our average closing stock price exceeds the current effective conversion price of $50.53 per share.

In that case, the premium above $50.53 per share would be settled by issuing additional shares equivalent to the premium value. We believe these actions further demonstrate our ongoing commitment to enhancing shareholder value while also maintaining a capital structure that allows us to continue investing in the growth of our company.

Capital expenditures in the quarter were $1.1 million and capital depreciation was $666,000. Capital expenditures this quarter were primarily related to our ERP implementation and other IT infrastructure.

Receivables at the end of March were $49.1 million compared to $52.8 million at the end of December, reflecting our lower revenue level.

DSOs at the end of the quarter were 69 days compared with 62 days at the end of the prior quarter, primarily reflecting the general timing of pay practices in China.

Inventories at the end of March were $9.1 million compared with $8.2 million at the end of December. Inventory turns for the quarter were 17 times compared with 22 times in the December quarter. We anticipate increasing our inventory and building our [dye] bank in order to match our anticipated higher operating levels.

And I'd like to make a few comments regarding our near-term business outlook. Based on our $32.3 million backlog entering the June quarter and our current visibility, we are expecting revenue to be up 6 to 10% sequentially. This represents an increase of 55 to 61% compared with the same period last year.

Looking out to the September quarter, current data points and general seasonal trends lead us to believe that revenue will increase on a similar percentage basis sequentially as compared to our June quarter expectations.

Using our current backlog as a proxy coupled with our current forecast for anticipated new orders during the remainder of the quarter, we again expect to see a product mix weighted towards low-end notebooks and lower margin multimedia applications. Based on this, we are expecting our non-GAAP gross margin for the third quarter to be approximately 39%.

Taking into consideration our staffing plans and anticipated increase in product development expenses related to our growing pipeline of design opportunities, we fully expect that our operating expenses will continue to grow moving forward.

For the June quarter, we expect the impact of FAS 123(R) on our operating margins to be approximately $4.1 million compared with $3.4 million in the March quarter. And we anticipate our non-GAAP tax rate will be approximately 32 to 33% for the quarter. Non-GAAP net income per diluted share for the June quarter is expected to be in the range of $0.28 to $0.30.

In closing, we're very pleased with our third quarter results and the continued strong demand we see for our products looking out. The opportunities for our technology and capabilities are clearly expanding. And we are reengineering and building our organizational structure to enable us to take advantage of those expanding opportunities.

Our solid operating results, significant traction in new markets, our strong balance sheet, and our steadfast belief in the long-term prospects for our company give us confidence in our growth strategy. The markets we serve and compete in are dynamic and challenging and we are positioning the company to meet those challenges.

We look forward to a strong finish to fiscal 2007 where we are anticipating record annual revenue and expect to carry that momentum into fiscal year 2008.

That concludes our formal remarks and we'll now turn the call over the call to the operator to start the question and answer session.

Thank you. (OPERATOR INSTRUCTIONS) And our first question comes from Jason Pflaum with Thomas Weisel. Please go ahead.

Yes, good afternoon guys. Nice job.

Thank you Jason.

A couple questions here. Maybe just to start I guess on the gross margin. It was a little bit better this quarter than you expected and looking forward, I guess you're seeing just modest erosion. Maybe you could just talk generally about how you see that trending over the next couple quarters?

Well we're not providing guidance beyond the June quarter. We had guided to approximately 39% for the current quarter, the March quarter and we're guiding to approximately that same range for the June quarter. So based on the product mix, March to June, we're expecting it to come in relatively at the same levels. And again it's just based on the design mix that we expect to be shipping in the current period.

Last quarter you mentioned a little bit of competitive pressure. Is the modest decline you're expecting here purely mix driven or is there some competitive dynamics as well?

To approximately 39% gross margin Jason which is the same as our guidance for last quarter. It's really too close to call the margins within a few tenths of a percentage point.

Understand.

So I think the way you should look at the two quarters is that on a relative basis, we believe the product mix is going to be fairly similar.

Okay, fair enough. On the LightTouch technology, I think you suggested that the attach rate was about 15% this quarter. Maybe you could just give us a sense for where you see that moving forward in the current quarter, if you're seeing any up tick there?

Well we do have more design activity with multimedia controls in notebooks. So I would expect moving forward that we'll see some level of additional business from that category. You know as a percent of the total notebooks we ship though it's really hard to predict how the end units will actually sell through in the marketplace. But there is additional increased interest from new OEMs for that application within the notebook segment.

Okay. Last quarter you indicated that you were shipping into two separate OEMs. How many will you be shipping into this quarter with the LightTouch technology?

We shipped-- I think we've shipped multimedia controls into three OEMs to date.

And does that number go up next quarter?

We haven't predicted any additional growth in customers there. But there's certainly the potential for that.

Okay, just last question on the handset side. Maybe you can give us a little better flavor for the design activity there. Francis I think you mentioned that you've-- if I heard this correctly, you've got a OneTouch customer in the handset side. Maybe you can provide a little bit more color there as well.

Sure. I mean the couple things on (inaudible) as you know Jason, we have been invest in that particular area that it's really exciting for us to see the acceptance of the OneTouch solution in that segment. And I alluded to the fact that we expect a number of models. They're using a OneTouch methodology in our total end-to-end solution approach to bringing this-- our product, our technology into a [proper arena] that's going to happen this particular quarter.

And certainly Jason I think we're beginning to see the momentum and getting traction there. And we'll be happy to talk more about it in the next quarter's earnings call. But I'm very pleased with the activities in both design as well as production that's coming on line right now.

Okay, fair enough. Thanks guys. Good job.

Thank you.

Thank you. Our next question comes from Andrew Neff with Bear Stearns. Please go ahead.

Sure, thanks. Nice quarter. Just one-- when you look at your backlog and you look at the activity out, can you talk about any particular in terms of growth of the backlog that your (inaudible) isn't going forward. Any particular product segments or customers that are driving that as you look at the-- in the second half?

Andrew, you mean the second half of the fiscal year or the second half of the calendar year Andy?

Second half of the calendar year?

The calendar year-- well as you know Andy, we gave a guidance based on the June quarter and directionally for the September quarter. So I'm just going to give you some very qualitative view of the world there Andy.

First of all as you know, the second calendar-- half of the calendar year traditionally from a revenue split perspective it's a stronger part of Synaptics mainly because of basically seasonality's.

The second part about it is I mentioned about the mobile sector and specifically the acceptance of a OneTouch methodology designing into our existing markets, beginning tractions. So I would expect that the traction in terms of that particular segment as well-- as a OneTouch is going to help in our revenue growth.

So design activities that we have-- that we have visibility they'll lead to the second half remains to be very strong Andy. So barring some unforeseen economic downturns or events or I would see that Synaptics second calendar-- the second half of this calendar year to be a pretty good revenue as well as earning growth for us.

Besides that Andy I want to emphasize the fact that we're investing quite a bit in the company to scale the company and a number of those activities regarding scaling the company is really investing in resources close to the customers. And we've been doing that for a number of quarters. And frankly a lot of our performance resulted in the fact that-- reflecting those investment now is coming back to-- into fruition.

I guess a different way of asking that, as you-- you talked in the past market opportunities so, I mean you're now in phones obviously and mice and to other things. Are there other new markets that you see emerging (inaudible) design activities? Do you look at applications of your technology--?

Well certainly Andy we talk about our first entry in the GPS devise through MEDION. We see a lot of similarity in terms of the handheld market, independent of applications. They were similar to the mobile phone market.

As those applications gains traction and as you know Andy I've talked often about a lot of time when those application comes on line it really, in my mind, drives the adoption rate of the hardwares. And to the extent that GPS for example is going to go into a mainstream consumer devices, in a sense that is going to really also enhance Synaptics penetration in those areas. So the GPS being a prime example of how we're going to focus on that.

Now, having said that opportunities in existing markets, mobile phones, the PC peripherals, and notebook computers, and part of digital entertainment continue to be very strong Andy. Now, the beauty about our OneTouch even though we are road now on a very limited basis, it really is a (inaudible) where we can serve a number of vertical markets. Now Synaptics today have not aggressively moved that into a number of other markets yet. And it's our strategic review in terms of how we leverage the capability in a number of those other vertical markets currently.

Thank you. Thanks very much.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS) And our next question comes from Rob Stone with Cowen & Co. Please go ahead

Hi guys.

Hi Rob.

It sounds like a lot of good stuff going on.

Thank you.

I wonder just a housekeeping question Russ. Could you say what you expect the share count to be that underlies your guidance for the June quarter? I'm assuming if I read the press release correctly that the share equivalence for the convert will not be in there and there may be some impact of the buyback you just did as well?

Right. The underlying shares to the convertible are 2,474,000 shares. And those have been in our diluted share count since issuing the convert back in December of 2004. With our recent election to settle the principal portion of the notes in cash, going forward as of the decision which occurred in April, we'll no longer be including those shares in our diluted share count for calculating diluted EPS.

So for the current quarter, you would back out two-thirds of those shares roughly. And then in the forward quarter, all of those shares would come out.

Looking at our stock repurchase activity in the March quarter, we bought back about 1.1 million shares and from a weighted average viewpoint, we probably saw the impact of approximately half of those shares in the March quarter. And then we'll see the remaining impact of the total repurchase in the June quarter.

Okay, so just to cut to the chase, what does that get you to for a number that you're assuming underlying the non-GAAP per share number that you guided to?

Well based on what we just talked about it would take about 2.2 million shares out of the diluted share count.

Okay, so with respect to the as-converted method where it's for part of a quarter, does that-- how does that work with the interest add back part of the-- of the calculation where the 266,000 gets added back to the net income?

We would add back one-third of that in the current quarter?

That's added back ratably as well.

Right.

How much is-- between the prior authorization and the recent increase, what's the total amount that's now authorized to buy back stock?

In the prior authorizations, we had about $7.3 million remaining and we've added $80 million on top of that. So the current authorization would allow us to buy back 87.3 million of additional shares-- $87.3 million worth of additional shares.

Right. Looking at the product mix, you mentioned the consumer notebooks and attachment of the multimedia controls in about 15%. Back in the day, we used to track the penetration of dual point quite a bit in terms of how that was affecting overall revenue per platform. Can you comment on what the dual point mix looks like lately?

Dual pointing for us is kind of been running in the $7 to $9 million range for a while now. And it does go up and down from one quarter to the next. But we're not really seeing a lot of sustained growth in that sector. It kind of ebbs and flows.

So in terms of the-- a mixed shift towards corporate-type notebooks or non-consumer high end, do you think that that would potentially drive the dual point back up or what other impacts might it have on the mix, either revenue or margin?

Well if we saw an increased demand from the corporate segment of the market, I mean generally I would expect to see higher priced solutions for us, for just the navigational capability.

Potentially it could move up the component of our overall mix that would include dual pointing solutions. But more and more I think it's very clear that the TouchPad is winning the battle as-- of being the preferred navigation device on notebooks. And as we move forward, you are seeing fewer and fewer notebooks available with just the stick on it as the sole solution. And I think you'll start seeing that same preference reflected in dual pointing too.

So I'm not sure that dual pointing going forward is going to be the same sort of growth driver it was for us when we initially introduced the solution back in 2001.

Okay. Two follow-up questions related to the OneTouch solution, I assume at this stage it's probably too early to characterize how much of that is in revenue. I guess was there any OneTouch revenue in the March quarter?

No there were-- there was no revenue in the March quarter from OneTouch solutions.

Okay. And care to comment on what it might be proportionally in June?

Well we don't provide guidance by segment or application, but we will update you on the next call.

Okay. Is it reasonable to assume that because that is a chip and FDK without the pass through ancillary bill of materials that that would-- as that begins to increase contribution to revenue that that's higher than your average margin?

It would be accretive I believe to our 40 to 45% target.

Okay, great. Thank you very much

Thank you.

Thank you. And management I'm showing there are no further questions. I'll turn it back to you for any closing comments you may have.

Well thank you everyone 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 will conclude today's teleconference. We do thank you again for your participation and at this time you may disconnect.