Synaptics Inc (SYNA) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the Synaptics first quarter 2008 conference call. (Operator Instructions) The conference is being recorded today, Thursday, November 1, 2007. I'd now like to turn the conference over to Ms. Molly Plyler with the Blueshirt group. Please go ahead.

Good afternoon and thank you for joining us today on Synaptic's 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 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 would 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, 2007, 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, Molly. And thanks, everyone, for joining us on the call today. We are pleased to start off fiscal year '08 with record revenue in our first quarter of $86.7 million, up 58% year over year.

Non-GAAP net income, which excludes the impact of non-cash share-based compensation and specific one-time events, was up approximately 130% over the comparable '07 period, at $14.8 million, up to $0.54 per diluted share.

Our results were driven by healthy demand across all of our markets as revenue from PC and non-PC applications grew approximately 43% and 188%, respectively, compared with the same period last year. We continue to maintain our leadership position in the notebook market and are very pleased with the growing adoption of our solutions in handheld devices.

Now, I'd like to make a few comments about the specific progress we have made over the past three months. This past quarter, we were pleased to introduce the availability of our ChiralMotion technology, which provides an innovative alternative to conventional scrolling. Synaptics ChiralMotion allows the user, with one continuous circular motion, to initiate precise and fine-tuned scrolling on any of our two-dimensional sensors such as our TouchPad, MapPoint, or ClearPad solutions.

I'm also pleased to mention three additional design wins leveraging our configurable OneTouch solution that are shipping this quarter. The new LG Chocolate Slider phone announced earlier by Verizon wireless in the US is now available from NTT DoCoMo in Japan.

In addition, a Synaptics OneTouch ScrollScripts solution has been implemented on the outside of the LG fast-track flip phone. The track features a sleek, (inaudible) design, offering a 1.3 megapixel camera, MP3 player, high-speed video, streaming TV, and stereo support. The phone is currently available from AT&T in the US.

Also using the OneTouch solution is the Samsung t10, Samsung's thinnest and lightest-weight portable media player, with viewing Bluetooth technology. With the T-10, you can take your music, video, photos, and FM radio wherever you go.

We also had a win in an MP3 player incorporating innovative ClearPad and ChiralMotion technology. As you know, ClearPad is a high-resolution transparent capacity of touch solutions that provides the user with a compelling new experience in launching and controlling diverse applications. ClearPad replaces traditional mechanical buttons and sliders, enabling OEMs to offer hand-held devices with larger screen sizes and an easy-to-use interface for access to feature-rich applications and content through onscreen interaction.

Specifically, our ClearPad sensor and ChiralMotion technologies have been implemented in the Samsung yp p2 Media Player, which is now shipping. This slimmest, [lightish] multimedia player features a touch screen enabled by our ClearPad solutions. This win demonstrates that this technology is not limited to next-generation mobile phones, but rather for a broad array of digital lifestyle products.

Some of our OEM customers are also offering Synaptics solutions, incorporating our clear array technology within both PC and non-PC markets. ClearArray is an extension of Synaptic's core capacitive sensing technology that has been used in touch pads for notebook PCs over the past 12 years. It's a clear sensor that can be mounted under plastic, providing OEMs with easy integration and attractive design options for scrolling and buttons.

A member of the ClearTouch family, Synaptic's Clear Array, as well as LightTouch solutions, have been chosen by the Samsung E950 slider mobile phone. By touching a finger to the icons on the ClearArray sensors, users navigate smoothly through the phone's main menu. The navigation controls on the phone's LCD screen automatically adapt as required for each application that's open, making navigation and control easy for the user. The 950 also features four light-touch buttons placed around the ClearArray sensor, providing touch-sensitive illumination when activating the icon. The E950 is currently shipping in Europe.

On the corporate front, we bought back an additional 500,000 shares last quarter, bringing our [ineption] today total to approximately 4.1 million shares. This is another indicator of our continued commitment to building stockholder value and the underlying confidence in our long-term outlook.

Turning to a discussion of the general business environment, our backlog, entering the December quarter, reached an all-time high of approximately $56.7 million and compares to $46.9 million entering the September quarter. We feel the increase in our backlog is a very healthy indicator as we enter what is typically the seasonally strongest quarter of the year. While we continue to closely monitor the over-all concerns regarding the general macroeconomic conditions, we don't foresee any impact to our business at this point.

Synaptic's design activity and the over-all demand continue to be very robust across all of our target markets. We continue to add staff both domestically and abroad in order to rapidly scale our business based on the increasing opportunities for our solutions with a variety of portable and digital lifestyle applications.

While the broad adoption of capacitive-sensing technology results in an increasingly competitive environment, we continue to execute on our strategy of revenue diversification and technology innovation.

While it's important for investors to remember that we win and lose designs during the normal course of business, we believe that Synaptics offers the most compelling portfolio of human interface solutions available. Our customers can choose either our custom modules or our one-touch solutions, depending on which meets their design cycle and product development requirements for incorporating intuitive, easy-to-use human interfaces into their product lineup. We've gotten off to a strong start for fiscal '08 and we expect to deliver both record revenues and profits for the year.

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

Thanks, Francis. In addition to our GAAP results, I will also provide supplementary results on a non-GAAP basis, which excludes noncash share-based compensation costs accounted for in accordance with FAS 123R and certain nonrecurring items which occurred in the September quarter.

Revenue for the first fiscal quarter of 2008 was $86.7 million, up 21% sequentially and 58% over the comparable period last year, reflecting solid demand for both our PC and non-PC applications, which represented 81% and 19% of total revenue, respectively.

On a year-over-year basis, our PC-based revenue increased by more than $21 million, representing approximately 66% of our total revenue growth. This robust growth reflects the combination of continued strong demand for notebook computers, driven by the ongoing migration from desktops to notebooks; the adoption of our multimedia solution to notebook computers, which increases our revenue content; and the adoption of our solutions in PC peripherals, including wireless mice, keyboards, and monitors.

Revenue from our non-PC applications grew $11 million year over year, representing approximately 34% of our total revenue growth, primarily reflecting increased demand for our multimedia control applications in portable digital music players and cell phones.

GAAP gross margin, which includes noncash share-based compensation charges, was 40.9% in the September quarter, compared with 39% in the June quarter. Our non-GAAP gross margin was 41.2%, compared with 39.4% in the June quarter. The sequential quarter improvement in gross margin is attributable to a more favorable product mix, including increased shipments of our OneTouch solutions and better production yields.

Total operating expenses were approximately $21.2 million in the first fiscal quarter, which includes noncash share-based compensation charges of $3.1 million. This compares with operating expenses of $20.9 million in the preceding quarter, including noncash, share-based compensation charges of $3.6 million.

Excluding the impact of non-share-based compensation in the September quarter, non-GAAP operating expenses were approximately $18.1 million, a sequential increase of approximately $800,000. The sequential increase in non-GAAP operating expenses primarily reflects the combination of higher compensation costs related to our ongoing recruiting initiatives, although the headcount increase was less than forecasted.

We added 15 employees in the first quarter, bringing our total headcount at the end of September to 327, compared to 312 at the end of the June quarter. As Francis mentioned earlier, we expect our global headcount to continue to increase going forward as we add skill sets necessary to meet our business objectives, scale the organization to meet both our internal and external initiatives, and support our expanding operating levels.

Net interest income was $2.5 million, compared with $2.3 million in the prior quarter, primarily reflecting higher average interest rates.

Our GAAP and non-GAAP tax rates for the quarter were 27.4% and 26.5%, respectively. Our GAAP tax rate benefited from qualified stock option activity during the quarter. And as we pointed out in our SEC filings, we expect to see continued volatility in our GAAP-effective tax rate in connection with qualified stock option activity.

Our non-GAAP tax rate for the September quarter benefited primarily from the tax impact of nonrecurring items. Taking the 26.5% rate in this past quarter, which was influenced by the one-time items, into consideration, we currently anticipate that our non-GAAP tax rate for all of fiscal 2008 will be in the 32.5% to 33.5% range. And, as we've mentioned in our prior call, we anticipate that our non-GAAP tax rate after fiscal 2008 will be in the low 20% range.

Net income for the September quarter was $11.3 million, or $0.41 per diluted share, compared with $7.4 million, or $0.27 per diluted share, in the June quarter.

Net income in the September quarter included a net charge of $1.3 million related to our minority investment in a spin-out company in 1997. When that company was first formed, we borrowed $1.5 million under a 10-year note to invest in the company's stock, for which the collateral was the shares purchased with the principal amount borrowed. The note matured in August 2007 and we elected to settle the principal and accrued interest of the note with the collateralized shares. Those shares did not have any carrying value, resulting in a settlement gain of $2.7 million.

Independent of that decision, we also conducted an impairment analysis pursuant to applicable accounting literature on our May 2005 equity investment in the spin-out company. That analysis resulted in our decision to book an other-than-temporary impairment charge of $4 million, representing 100% of the book value, in the September quarter.

Excluding $3.3 million of noncash share-based compensation charges and the associated tax benefit of $1.7 million, and the $1.3 million net nonrecurring charge I detailed previously, our non-GAAP net income in the September quarter was $14.8 million, or $0.54 per diluted share. Non-GAAP net income for the June quarter, which excludes $3.9 million of non-cash compensation charges and the associated tax benefit of $1.4 million, was $10 million, or $0.36 per diluted share.

Now, a few comments on our balance sheet. We ended the September quarter with total cash and short-term investments of $261.2 million, compared with $265 million at the end of the June quarter. Cash flow from operations during the quarter was approximately $5 million and stock option exercises contributed approximately $13 million.

During the quarter, we used approximately $19 million to repurchase 0.5 million shares of our common stock.

Capital expenditures were $1.5 million and capital depreciation was approximately $900,000 for the quarter.

Receivables at the end of September were $65.7 million, compared $56.7 million at the end of June, primarily reflecting the impact of the increased revenue level.

DSOs at the end of the quarter were 68 days, compared with 71 days at the end of the prior quarter.

Inventories at the end of September were approximately $19.5 million, compared with $12 million at the end of June, reflecting increases in our die bank and additional finished goods related to timing of delivery and some hub inventory related to specific customers. As a result, our inventory turns in the quarter declined to 11 times, compared with 15 times in the June quarter.

Now, I'd like to make a few comments regarding our business outlook. Our backlog increased by approximately 21% during the quarter to $56.7 million, reflecting our customers' expectations for strong seasonal demand. Based on our current backlog level and the visibility related to expected new orders, we believe revenue for our second fiscal quarter will be in the range of $96 million to $99 million. This represents an increase of 26% to 30% compared to the same period last year. This outlook is predicated on continued strong seasonal trends, with expected increased demand from both PC and non-PC applications.

Looking out to the March quarter, our current visibility suggests that revenue may be up 29 to 38% over the same period last year. This is largely dependent on end product sell-through in the holiday season and consumer demand relative to historical seasonal trends in the March quarter.

Considering our backlog and anticipated additional orders during the remainder of the quarter, we expect non-GAAP gross margins for the second quarter to be in the 41 to 42% range. We expect our operating expenses to continue to increase based on our staffing initiatives and the growing pipeline of design opportunities.

For the December quarter, we expect the impact of FAS 123R on our operating margins to be approximately $3.8 million, compared with $3.3 million in the September quarter.

Non-GAAP net income per diluted share for the December quarter is expected to be in the range of $0.55 to $0.58.

In closing, our first quarter fiscal results were outstanding, highlighted by record quarterly revenue, which was up 58% year over year; while net income, including nonrecurring charges of $1.3 million, still increased 173% over the same period last year. We experienced healthy demand from all of our target markets and continue to see expanding interest in our capacitive-sensing technology.

We believe the emerging digital lifestyle trends will provide growing opportunities for the application of our technology and systems-level know-how for developing innovative and easy-to-use interface solutions for next-generation mobile devices.

That concludes our formal remarks and we will now turn the call over to the operator to start the Q&A session.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from the line of Andrew Neff with Bear Stearns. Please go ahead.

Thank you. Nice results. I just want to go through a few things. If you could, Russ, just go over again the impairment -- was that related to Foveon? I just was trying to clarify what you said; was there something else? Was that also the gain on the debt?

Second, the tax rate -- right now we're assuming-- I guess we expect the tax rate to drop next year; is that still your expectation?

And third, can you talk about competitive trends; maybe you can talk about some of the competitive trends that you see.

Yeah. The investment loss and the gain on the note that I talked about, settlement of the note, both related to our investment in Foveon, which was a company, as you know, spun out in 1997 to do some digital imaging technology.

The tax rate for the year -- based on what we experienced in the first quarter, we're expecting fiscal year, the current fiscal year, fiscal year '08, the tax rate for the year to be in the 32.5 to 33.5% range. And again, going-- as we look out into fiscal year '09 and beyond, we are expecting our tax rate to be in the low 20% range.

And, Andy, on the competitive trend-- I mean, one thing that is consistent here is the market continues to expand and as the market expands, obviously, I think you're going to see a lot more activities and interested parties to compete in this space. And it's really not any more than what we have expected. And I think what we just have to do is focus on offering both custom modules as well as our OneTouch solution, utilizing our solutions back-- and the end solutions to really offer the most compelling flexibilities to people who want to do what they need to do.

So I think the exciting thing for me here, Andy, is to make sure to continue to act on what we are good at here and continue to make progress. And we don't see anything out of the ordinary in the competitive front that's significantly different than what we have seen in the earlier quarters, Andy.

Thank you.

Thank you. Our next question comes from the line of Jeff Schreiner with American Technology Research. Please go ahead.

Good afternoon, gentlemen. I was wondering, Russ, if you could talk a little bit about the gross margin and what's really changed. You highlighted OneTouch and some production yields, but would these production yields continue on through the December quarter into the March quarter? And what gives you the confidence to really take gross margins up to the 41 to 42% range?

Well, as we've discussed in the past, our gross margins primarily reflect the net cumulative impact of the product mix that we ship in any one quarter. And also as we've discussed, in any one quarter 15 to 25% of our revenue can be coming from designs that weren't shipping in the prior quarter.

So this quarter, we've benefited from a more favorable product mix -- and that included additional higher shipments of our OneTouch solution, which is a chip sale. And as we've indicated previously, we expect margins from OneTouch offering to be accretive to our blended range of 40 to 45%.

And the production yields this quarter, that was a one-time event. It isn't something I would plan on going forward. But again, when we look at our backlog going into the December quarter, use that as a proxy in addition to the expected additional turns business for the current quarter, that's what-- that is what has resulted in us guiding to 41 to 42% in the current quarter.

And possibly, Francis, if you could take this question -- where is the visibility that's strongest across your product lines right now? And where do you see business being driven at the customer levels when you look across all three of your product lines?

Well, I mean-- let me answer the question in two ways, okay? So in terms of visibility, the leading indicator for us is really design activity, okay? And design activity is really-- continues to be strong in the notebook area and the PC peripheral area as well as the handheld, which is the mobile phone sector.

Now, what is interesting here is since we have embarked on the OneTouch design methodology, we really have given-- our handheld customers, specifically probably benefit more on that than the other sectors, right? So we reported, like for example, three designs wins shipping this particular quarter. But Jeff, we really see design activity to be pretty evenly spread out from all over the place on all the focused markets that we have.

From a shipment perspective, the upcoming quarter certainly is the largest quarter in terms of the seasonality history; it's really driven by consumer demand, right? So we actually see that in a very seasonal pattern across the products we end up going to. And to a large extent, a lot of that really goes into the notebook and the PC peripheral area.

Okay; thank you very much, gentlemen.

Thank you. Our next question comes from the line of Rob Stone of Cowan and Company; please go ahead.

Hi, guys. Nice quarter.

Thank you, Rob.

I missed, Francis, when you were running through the design wins -- whose phone that was that uses the Clear Array?

I believe it's a Samsung phone, Rob; the one that you're talking about.

Okay. How much-- a little more color on OneTouch, if you can. I know it's still early days because you've only been shipping it for a couple of quarters now, but could you comment on, for example, how many OneTouch designs in total are shipping, how much it may have influenced gross margins this quarter?

I think to date, we've talked about five or six different design wins with OneTouch. Certainly we saw some good growth quarter over quarter. We are early in this and, while it's encouraging, it's still not something today that I would consider to be terribly meaningful in over-all revenue content because, as you know, you're selling a chip as opposed to modules. But we are seeing some good traction there, Rob.

Are there OneTouch wins that are scheduled to ship in the December quarter that are not announced or you haven't been able to comment on yet?

Well, we do expect to see additional OneTouch wins in the marketplace; haven't made any comments about when those things would potentially ship. But going forward, we will see more OneTouch revenue contribution.

Okay, so there is more in the pipeline.

Yes.

One housekeeping item -- I noticed that there was a not-quite $13 million other long-term liability on the balance sheet this time? What is that for?

Hold on a second, Rob. (Shuffling papers) That's primarily related to [FEN] 48 disclosure and this is our first quarter of implementing that, Rob.

Okay; thank you.

Thank you. (Operator Instructions) Our next question comes from the line of Heidi Poon with Thomas Weisel. Please go ahead.

Hi, guys. Congratulations on a good quarter.

Hi, Heidi.

Hi, Francis. I guess when I look at your March outlook, especially on the notebook side, there's been some concerns that earlier in the year there's been some double-ordering because of the stronger-than-seasonal trend in the industry. So do you think that, given that you're projecting continued strength in the December quarter, what do you think-- or, what are your customers sharing with you about March quarter notebook demand here?

Well, Heidi, we have heard those rumors about double-ordering. I can tell you that we, specifically, haven't experienced any double orders as it relates to our products.

But are you concerned, or have you taken into account in your outlook, that-- could we be looking at some inventory situation in the channel?

Well, as we indicated, our outlook is predicated on continue strong sell-through in the December quarter and consumer seasonal trends relative to historical norms for the March quarter.

Okay, so you think-- your assumption is that it would be sort of a normal seasonality kind of thing?

Currently, that's our view.

I think, Heidi, the other part about it, as our experience has demonstrated, is to a certain extent, everybody has got to look at, what is the resale rate and what's the inventory situation coming out of the December quarter, okay?

So what Russ and I have forecasted is that-- a normal kind of inventory turn. We don't expect that the product will have shortages, nor do we expect that there is a tremendous amount of a problem in terms of inventory in the channel. From all the data that we have seen on the products we've got, we're certainly not expecting that to be abnormal. And the March quarter is forecasted based on that.

Got it. Could you give us an update on the penetration rate, or attach rate, of LightTouch at this stage?

And also, since you mentioned the contribution of peripherals, can you discuss how fast that's been growing? Like maybe what portion of the PC sales they account for?

Multimedia control attach rate for us for notebooks in this last quarter was around 17%, which was similar, I think, to the June quarter. And so again, that's been an interesting piece of business for us as it continues to allow us to drive revenue content in notebooks.

And your second question, Heidi, related to--?

Can you discuss the peripherals -- how much they account for within the PC revenues? And also how fast they've been growing in the last quarters?

Well, we've seen some pretty rapid growth there. Again, not terribly meaningful from an over-all revenue viewpoint, but it is an interesting piece of new incremental revenue growth for us year over year and even quarter over quarter. And it's something that we expect to continue to grow moving forward.

Great. And my last question is, regarding the non-PC area, have you been experiencing maybe more intense pricing pressure as this part of the business is growing? Not that pricing pressure from the PC business is any less, but are you concerned about any trends of discussions with customers or where things are going in that area?

So Heidi, is your comment related to pricing pressure?

Yes -- the non-PC area -- like the handset and the PMPs.

And can you repeat the question again, Heidi?

Are you experiencing more-than-normal pricing pressure in your non-PC area?

No, not really.

Okay. That's it; thanks.

Thank you.

Thank you. Our next question comes form the line of Hugh Mai with Broadpoint Capital. Please go ahead.

Congratulations, guys.

Hi, Hugh.

Hi, Francis. Just a quick question on the R&D line. I guess, given your blockbuster growth rate-- I guess I don't understand how come your R&D is not increasing at all this past quarter. Was it driven by the OneTouch solution?

Well, that certainly factors into the top-line portion. The other part is that we do have a fairly aggressive recruiting initiative in place today, as I indicated in my prepared remarks. The new hires we had this quarter was less than what we had forecasted going into the quarter. And we have I don't know how many open recs today, but we have a bunch of open recs today, and based on that, we expect our OpEx to grow moving forward, and that-- it's really across all functional areas, but I think you will see broader expansion in the R&D category for us this year relative to what you saw last year.

Okay, got it. And just a random question -- do you have any OneTouch solutions within the music player segment?

Yeah; I think we announced one in the earlier text.

Besides that one, I guess.

Well, as you know, Hugh, we only talk about products that we either announce in our--

Okay, got it. Okay, thank you, guys.

Thank you.

Thank you. Management, there are no further questions at this time. I'll turn it back to you for any closing remarks.

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

Ladies and gentlemen that does conclude our conference for today -- Synaptic's first quarter 2008. If you'd like to listen to a replay of today's conference, please dial 1-800-405-2236 or 303-590-3000 using the access code of 11099256 flowed by the # key. ACT would like thank you for your participation. You may now disconnect.