Synaptics Inc (SYNA) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you so much for standing by, and welcome to the Synaptics second quarter fiscal 2009 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today on Thursday, the 22nd of January, 2009.

I'll now turn the conference over to Ms. Jennifer Jarman of The Blueshirt Group. Please go ahead.

Thank you, Michael. Good afternoon, and thank you for joining us today on Synaptics second quarter fiscal 2009 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, Chairman and Chief Executive Officer of Synaptics; Tom Tiernan, President and Chief Operating Officer; 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, 2008, 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, Jennifer, and thanks, everyone, for joining us on the call today. We are extremely pleased to report the highest quarterly revenues and profits in our history, especially in the current macroeconomic environment.

Revenue of $141.5 million represent a robust growth of approximately 43% year-over-year. Non-GAAP net income totaled $29.5 million, up 73% year-over-year, and non-GAAP earnings per diluted share was $0.84, resulting in an increase of 110% year-over-year.

Our second quarter performance demonstrate the benefits of our diversification strategies. Our mobile phone revenue was up 14 times compared to the same period last year's; evidence of our successful execution and delivering intuitive capacitive interface solutions that enhance the user experience for these feature-rich devices.

Revenue from PC applications was down approximately 4% from the same period last year, reflecting a widely reported softness in the notebook market. However, we did see strong traction in the netbook category, which was the sweet spot within the notebooks during the quarter.

Revenue from non-PC applications grew roughly 178% from the prior-year period. This was driven by the production ramp of the new mobile phones we highlighted for you last quarter; in addition, strong recurring orders from earlier release models and the introduction of some new mobile phones I will discuss shortly. This is very clear validation that our strategy of selectively investing in additional high-growth markets is working, and we intend to further invest in calendar year 2009.

I will now turn the call over to Russ for a detailed discussion regarding our second quarter results.

Thanks, 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 charges and certain other non-operational and non-cash items. Please refer to our press release for the second quarter of fiscal 2009 for a detailed reconciliation of GAAP and non-GAAP results.

We achieved record quarterly revenue in the second fiscal quarter of $141.5 million, up 22% sequentially and 43% above the comparable period last year. And for the first time, our revenue mix was roughly evenly split between PC and non-PC applications.

On a year-over-year basis, our PC-based revenue declined approximately $2.9 million, reflecting the general weakness in notebooks, a lower-priced product mix, and reduced attached rate for our multimedia control solutions. The attach rate in notebooks for multimedia controls in the second quarter was approximately 11%, which was down, as expected, from 19% last quarter and 18% in the comparable period last year, reflecting the competitive dynamics we've discussed on prior calls.

Revenue from our non-PC applications grew approximately $45.7 million over the comparable period last year. The strong growth was driven by a 14-fold increase in mobile phone revenue, which represented roughly 40% of total revenue for the quarter, while revenue from portable digital entertainment applications was down as anticipated.

Our non-GAAP gross margin was 41.1% compared with 40.6% in the September quarter and 42% in the same period last year. This was in line with our expectations and was primarily a function of overall product mix.

We added 25 employees in the second quarter, bringing total headcount at the end of December to 460 compared with 435 at the end of September. We plan to continue to add staff, as we intend to selectively invest to further strengthen our market position.

Total operating expenses were approximately $29.7 million in the second fiscal quarter, compared to $30.4 million in the preceding quarter, including non-cash share-based compensation charges of $5.3 million and $5.5 million, respectively. Our operating expenses were lower than anticipated, primarily reflecting the timing of headcount additions, which occurred later in the quarter than expected; lower legal costs to wrap up patent litigation; and lower marketing and selling expenses as a result of specific actions we took in the quarter.

Net interest income was $653,000 compared with $809,000 in the prior quarter, primarily reflecting lower average invested balances resulting from the retirement of a portion of our outstanding convertible notes, which I will talk about shortly.

As we noted on our last call, we continue to monitor and evaluate our investments and auction rate securities on a quarterly basis. During the quarter, none of the failed auction rate securities defaulted and all of them paid interest at the contractual rates. Our valuation analysis for the quarter, which takes into consideration current market conditions and other factors that impact fair value, resulted in the recognition of a $6.5 million non-cash other-than-temporary impairment charge to our quarterly earnings, and a $611,000 net reduction of temporary impairment to our other comprehensive income in the Equity section of our balance sheet.

As of the end of the quarter, the par value of our investments and auction rate securities was $45.7 million, and the carrying value was $29.4 million, all of which is classified as long-term assets on our balance sheet. We believe our existing cash and other short-term investments and our expected future cash flow from operations will be sufficient to fund our growth initiatives.

During the quarter, we retired $59.7 million of our outstanding convertible notes at a discount of approximately 7%. After deducting the associated unamortized debt issuance costs for the retired notes, we realized a $3.6 million net gain on retirement of debt.

Our GAAP and non-GAAP tax rates for the quarter were 18.1% and 14.5%, respectively. Both our GAAP and non-GAAP tax rates benefited from the retroactive extension of the federal R&D tax credit, while our non-GAAP tax rate also benefited from the tax impact of non-recurring items.

Net income for the December quarter was $21.2 million, an increase of approximately 49% compared to $14.2 million in the comparable period last year. Net income per diluted share was $0.60, representing roughly an 82% increase compared to $0.33 in the year-ago period, reflecting the combination of our strong operating performance, more efficient tax structure, and the impact of our stock repurchases.

Our non-GAAP net income in the December quarter was $29.5 million or $0.84 per diluted share compared with $17 million or $0.40 per diluted share in the comparable quarter last year, representing increases of 73% and 110%, respectively.

Now a few comments on our balance sheet. We ended the second fiscal quarter with total cash in short-term investments of $136.8 million compared with $152.5 million at the end of the September quarter. As I alluded to earlier, we used $55.6 million during the quarter to retire approximately 48% of our outstanding convertible notes -- the remainder of which, $65.3 million, has been reclassified from long-term to short-term on our balance sheet, in accordance with the terms of the note.

Taken into consideration the retirement of the notes, we increased our net cash position by $44 million during the quarter. Cash flow from operations in the quarter was approximately $39.4 million and stock options contributed $971,000. Capital expenditures were $2.9 million in the quarter, primarily for general infrastructure and test equipment. Capital depreciation was $1.5 million for the quarter.

Receivables at the end of December declined to $81.7 million compared to $86.6 million at the end of September. This was despite the 22% increase in sequential revenue, as we saw strong collections within the quarter benefiting from the timing of customer shipments.

DSOs at the end of the quarter were down sequentially at 52 days compared with 67 days at the end of the prior quarter, and our more typical range of 65 to 70 days, primarily reflecting the favorable timing of shipments I mentioned earlier. We anticipate DSOs will be closer to our typical range exiting the March quarter.

Inventories at the end of December were $22.1 million compared with $25.1 million at the end of September. Inventory turns this quarter increased to 15 times from 11 times last quarter, reflecting the combination of the lower inventory level and the higher shipping rates during the quarter.

Now I'd like to make a few comments regarding our business outlook. We ended the March quarter with a backlog of $50.6 million, reflective of the current macroenvironment, which will weigh on normal seasonality. Nonetheless, we are expecting solid year-over-year growth for the fiscal third quarter.

Based in our current backlog level and the visibility related to anticipated new orders, we believe revenue for our third fiscal quarter will be in the range of $88 million to $98 million, a 12% to 24% increase over the comparable period last year. As in the previous quarter, the growth is expected to come from mobile phone applications.

This relatively broad guidance range is a reflection of limited visibility and the resulting cautiousness we are seeing from our customers, given the current macro uncertainties and the impact on consumer spending.

Based on our backlog and anticipated product mix for the third quarter, we expect our non-GAAP gross margins to be around 41%. We expect operating expenses to be close to flat sequentially, as our anticipated increase in headcount will be offset by further reduction in legal costs and other actions we have taken to ensure discretionary spending is in line with current business levels.

We are also expecting the sequential decrease in our FAS 123R charge [for this], to approximately $5.3 million compared with $5.7 million in the December quarter. For the second half of fiscal 2009, we currently anticipate our non-GAAP tax rate will be in the range of 19% to 21%.

Our non-GAAP net income per diluted share for the March quarter is expected to be in the range of $0.27 to $0.37, representing an increase of 17% to 61% compared to the same period last year.

We continue to closely monitor the impact of the global economic downturn. At this time, considering our record results for the first half of the fiscal year and our current visibility looking into the remainder of fiscal 2009, we anticipate annual revenue growth to be at the low end of the 25% to 35% range we provided this last quarter. Given today's environment, we are very gratified to be forecasting this level of growth.

I will now turn the call back over to Francis.

Thanks, Russ. Our results show that as the marketshare leader for touch interface solutions in the PC market, Synaptics is not immune to the broader macroeconomic conditions affecting the notebook sector. However, our diversification strategy to penetrate new target markets is clearly working, differentiating us from other PC-driven companies within the current economic and business environment.

Turning to a discussion on recent product developments within our various markets. Last quarter, we touched on new design wins incorporating features from our Gesture Suite for notebook applications. Our developing traction in netbooks, our first design win for flat screen TVs, and our inclusion in two recently-launched, high-end touch screen phones. The current recession notwithstanding, design activities continues to be strong across our target markets.

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

At the Consumer Electronics Show earlier this month, we announced the general availability of four additional Gestures to our Gesture Suite for notebooks -- Two-Finger Scroll, Two-Finger Rotate, Two-Finger Pinch Zoom, and Three-Finger Flick. Synaptics has a broad and expanded portfolio of Gesture functionality, and we expect to see continued adoption of Gestures as Touch interfaces are implemented across various devices.

We are pleased to announce that our Dual Mode TouchPad solution has been chosen for Dell's new high-end Precision M6400 Mobile Workstation, which has been designed to make video editing and graphic design easier. Our Dual Mode solution easily transforms the TouchPad from a navigation device to a customized launch and control center. The M6400 is shipping worldwide.

Synaptics's TouchPad was chosen for the all-new EchoStar Dish Network VIP922 remote control, which is bundled with their DVR. Our interface solution for this remote includes scrolling regions on the right-hand side and along the bottom, allow the user to browse channels in an intuitive manner. This product was announced at CES and will be shipping in the US in the spring.

In the mobile phone market, we are adding additional OEMs to our growing base of mobile phones customers. First, turning to the Japanese market, we have our first design win with NEC Mobile. NEC has integrated our ClearPad solution to enable intuitive and contextual controls in the NTT DoCoMo Prime Series N-01A Mobile Phone. This solution also supports our enhanced Gesture recognition technology, which enables Single-Finger Gestures as well as Multi-Finger Gestures such as Pinch. This product is now shipping in Japan.

We were also awarded our first design wins with UT Starcom, who has integrated our ClearPad-capacity Touch-Sensing module into the AT&T Quickfire phone, which is now selling in the US. This interface enables advanced Gesture-based controls, such as Flick, which allows for easier and more intuitive navigations.

In the China market, we were awarded our first design win with Meizu electronic technology. The Meizu M8 Mini One Phone uses our ClearPad solution enabled with Pinch and Flick Gestures. The M8 is shipping in China in the March quarter.

We're also pleased to announce several new design wins with existing accounts, namely, LG and Sharp. In early 2007, we launched the first ship in Clear capacity touch screen in a mobile phone with an LG product. Today, our ClearPad technology is also being featured in LG Prada 2, which also incorporates our enhanced Gesture recognition technology to provide effortless finger control in multi-touch Gestures. This phone is currently shipping in Europe.

Our ClearPad solution is also providing the touch screen interface for the LGL-01A, another Prime Series mobile phone with NTT DoCoMo. The ClearPad-enabled phone offers a sleek design, which allows interaction with media applications, including a music player, photo, and document viewer, broadcast television, and maps. It is now shipping in Japan.

[Due to our now] initial design with Sharp in 2008, our ClearPad-enabled touch screen solutions are shipping with two more mobile phones from NTT DoCoMo in Japan. The Prime Series, SX-03A, and a Pro Series, SX-048.

Finally, CompuLab has announced its enterprise digital assistant Exeda, which enables custom-built devices leveraging the end drawing and instrument Linux platforms. This device features a Synaptics net point solution, which is a very small form factor TouchPad that gives user very small intuitive input device without sacrificing usability. The Exeda will be shipping in March.

And of course, the other design wins that we cannot discuss due to NDAs and our policy of respecting the wishes of our customers.

With several of this quarter's design wins utilizing some of our more advanced features and functionalities, such as Dual Mode and our phone library of Gestures for both TouchPad and ClearPad, we continue to reinforce our position as a leading innovator in our market, helping our OEM customers deliver differentiated products through the marketplace.

Now I would like to make a few comments regarding the general business environment as we ended the second half of the fiscal year.

Clearly, the high degree of widespread economic uncertainty continues and shows few signs of subsiding in the near future. This has significantly affected visibility and near-term growth rates in the PC market.

I'd like to make it clear that the resulting impact of Synaptics core notebook business is purely reflective of the overall market environment. We do not believe that this quarter's results signify any major shift in the competitive landscape, where our win rate for new designs remains very consistent with historical patterns, as does our marketshare leadership.

While the market today has its challenges, looking to the five years out, the market for notebook is still projected to grow in mid to high double-digits, based on factors like the continued migration from desktop to notebooks; proliferation of wireless connectivity; and the adoption of portable computers in developing countries.

Netbooks, the bright spot in the notebook category during the holiday season, are merely an extension of these trends. Synaptics is very well-represented in the netbook arena with our design wins at key notebook OEMs, which include products currently shipping at HD, Dell, and Acer.

Turning to our newer markets. We remain less susceptible to fluctuating growth rates in the mobile phone market, as we are in the early stages of adoption and penetration. This initial leg of our diversification strategy is serving us very well in today's environment. The resulting shareholder returns are enabling us to continue to invest strategically and selectively in future market opportunities, so that we emerge from the economic downturn, from a better position in both our existing and target markets.

In summary, we are very proud of what we have achieved and are well-positioned to take advantage of the emerging and growing digital lifestyle trends. While we remain cautious about the macroenvironment, it's apparent from the product update I've just provided that our traction in the mobile phone market continues to build. We added new OEM customers; [moved] some of our existing accounts; and clearly demonstrate our momentum with new designs.

We continue to expect fiscal 2009 to be an outstanding year for Synaptics. We have said in the past the Company's fundamentals, including our design win rate and balance sheet, are extremely healthy. We remain internally focused on the long-term growth opportunities in front of us, and we'll continue to execute the strategies that have driven our success, even during this challenging time.

As is evident from our guidance, we expect our revenue mix to remain flat, continue growing contributions from mobile phone applications over the balance of the fiscal year, and are well on track to achieving a record year for both revenue and profits.

That concludes our formal remarks. And we'll now turn the call over to the Operator to start the Q&A sessions.

(Operator Instructions) Steven Fox, Bank of America, Merrill Lynch.

A couple questions. Just going back over some of the new win commentary, you mentioned there's wins that you can't discuss. I wasn't clear whether you were saying there were other wins in the quarter that will help revenues over the next couple of quarters. And if you can maybe generally talk about whether that was more handset-related or other areas.

No, Steve, basically it is our general policy, okay, when every quarter when I'll talk about it, we'll respect our customer's wishes as well as our policy in adhering to NDAs that we don't talk about all the design wins that get covered in the quarter. And I was just trying to be very explicit with the audiences, this does not cover the universe of all the design wins that we have done or are shipping in the quarters. And this is not meant to sign anything that is peculiar at this particular quarter, Steve.

Okay. No, fair enough.

And by the way, that is our policy moving forward as well.

Understood. And then when you look at the revenue outlook you provided, is there any other color you can provide around sort of market expectations, besides the fact that you're cautious on the PC markets?

Well, I mean, as you know, Steve, the PC market continues, right, to be a concern of a lot of people. Certainly the fact that Intel, for example, has moved their earnings twice, right? Okay. That is an indication that, frankly, I don't know whether the bottom has flattened out or not. Okay. That is factored into our guidance in terms of how we do them -- much like how we have done the last quarters. Okay?

And we are participating very healthfully in the part of the notebook market that is growing and that's the netbooks. And frankly, that represent the leadership position that we have always had that we will maintain. And we'll continue to maintain it.

Hey, one more note, Steve, about your comment about the -- you may have misunderstood about what we said on not disclosing all the design wins, right? Okay. I mean, that they are new designs that we can yet disclose this quarter; that is a factual statement. So what I told you is a policy as well as indeed it did happen in this quarter.

Okay. That's what I was getting at. Okay, that's helpful. And then just lastly, looking at the operating expenses, maybe going out more than one quarter, as you look out and considering that you're still hiring design engineers, would it be reasonable to expect to see OpEx start to increase after this quarter, given that the legal expenses are coming down and are flattening out? Or how should we look at that beyond the March quarter?

That's correct, Steve. We are continuing to add to our staff. And as Francis said in his prepared remarks, we do intend to continue to selectively invest to enhance our market position coming out of the current downturn. So, once we get beyond the March quarter, it's a reasonable expectation that you will see our OpEx again start to trend up.

Okay. Very helpful. Thanks, guys.

Paul Coster, JPMorgan.

First of all, just can you give us some sense of how the pricing trend is happening in both major segments? You had great success in maintaining gross margins at this level. I know many investors are concerned that in time it will deteriorate. Can you just give us some sense on how you're able to sustain this kind of margin level?

Okay, Paul. There's no question that our overall average selling price did move down in the quarter, and it was one of the reasons that we saw a decline in year-over-year revenue contributions for PC, because we are selling into a lower-priced product mix -- one of those being the netbook category, which does have physically smaller product. And because our pricing reflects the amount of third party content, pricing follows with that.

So just because something is lower priced doesn't mean necessarily that it has lower gross margin profile associated with it.

The other part about it, Paul, is -- we have been at this thing for a long time. Like I said, the ASP in general of our consumer electronics continue to decline or either you expect more functionality, well, let's say, in dollars. Okay? So the competitive and the pricing dynamic has really not changed. And we focus on cost reductions continuously. So this is really through a combination of those two factors, right, that we continue to broadcast that 40% to 45% is still our target gross margin range on a blended basis.

Now, there's a lot of interest in the market on multi-touch on Clear phones -- ClearTouch phones at the moment. The Pinch capability that you're now bringing to market with ClearTouch -- is that a capability that you were able to offer, let's say, three months ago? Or is it a new capability? And how close is it to the Pinch capability that we're all familiar with on Apple iPhones?

Okay. So, first of all, Paul, I think I have said it a number of times, okay? The Gesture that we offer here frankly need to go hand-in-hand, working with OEM customers so they can work into their user interface part of the functionality. So, first of all, there is really no secret in the sense that we can -- our technologies, okay, can offer that kind of capabilities.

And we -- so, to answer your question, three months ago, if we were working hand-in-hand with OEM customers, their interest to manifest that way, then, of course, we were able to do that. There's really no reason why we cannot.

Now, the fact that we are announcing those kind of capability like the Gestures Suite, enhanced Gesture technology here is the same way how we kind of seed the market with concept prototypes, we use ability patterns. And that's the way of how we stem interest in terms of creating very unique, customizable features -- much like how we are continuing to do different kinds of dual mode technologies.

So, Paul, we are capable of doing that in a base technology; nothing that should -- could stop us. Obviously, we're not an end device company and we work with OEM partner to introduce those kind of features out in the marketplace.

Got it. I'll jump back in the queue at this point. Thank you.

Heidi Poon, Thomas Weisel Partners.

Congratulations, guys. So, I would like to ask about in terms of your design wins in terms of the complexity of the solutions that you are winning. It looks like your competition is winning the lower margin type stuff, which is the multimedia strip on a PC side. So, on the mobile side, would you say that this year, do you have confidence that you have most of the more dominant or flagship designs that are scheduled for launch this year?

Well, I mean, Heidi, innovation is our strength. So of course, a capacity of Navigation Clear technology is more complex than the opaque kind of Navigation. But to say that innovation stops just because you see the Clear capacity technology, is also not true.

So, just like what Paul was asking a question about Gestures and how it works hand-in-hand with the device holds and how we save power, how we provide unique kind of -- the Gesture that fits certain OEMs' personalities and characteristics. So, I guess a summary of what I'm saying here is you can expect, Heidi, as we move forward here, how we keep on reinventing the TouchPad doing different functionalities; you should expect a similar kind of [up] on the ClearTouch solutions, Heidi.

Great. And in terms of the development or progress of the One-Touch, would you still say that most of the designs you're having right now are still module-based?

Correct. Most of the design is in the module base.

And usually these customized solutions would lead you to a sole source position, right?

Generally, that's correct.

In general, yes.

Great. So in terms of netbook, Intel has made comments that it represents more of an incremental market development for them. Do you see the similar trend?

And also could you comment on -- in this upcoming cycle, in terms of the competitive landscape of netbook designs, do you see any change there or more competition, especially after your cross-licensing agreement with Elan?

Yes, Heidi, this is Tom. Definitely we see netbooks overall as adding to the volume of the whole notebook space.

Okay. And then, Heidi, on the whole notion of -- you mentioned about Elantech there for a minute. And I think I have commented, even last quarter -- we don't expect an Elan settlement to be material in any way, shape, or form to Synaptics's business moving forward there. Because that the reason why we took on the Elantech settlement there is really to promote a strengthening of the IP position and put the lawsuit behind us. And much like how we have handled a settlement with ALPS in an earlier time there.

We remain very confident, as in my prepared remarks here, that we will be the market leader in the notebook space. Our design win rate, inclusive of the netbook, has not changed in terms of the market dynamics. And the reason why we continue to have high confidence level in it is because of all the other enabling factors that help our OEM and ODM partners to succeed, Heidi.

Great. And finally, given that you will continue to invest through this downturn, at what timeframe do you think you will be able to maybe make more -- allocate more resources to address growing consumer electronics or appliance trend of having more Touch solutions?

Well, I mean, the interesting things about Synaptics is we see a very long run rate here with capacitor-enabled solutions. And we are one of the few pure play capacitor solution provider out there. The fact that this general economic downturn is impacting a lot of our competitors is because they play in more of a portfolio play, and then when that hit, it really hit them bad.

So we are taking news when other people maybe pausing, hiring or maybe shutting down the operations and stuff like that. We are not skipping a beat here. So, we'll continue to invest and that will include other capacitive opportunities. But frankly, Heidi, the space that we are playing in, there is still tremendous room to grow. So where you see us invest in is continue to grow in the target market as we have done, and then, we have to invest in technologies and innovation capability that will make us even stronger in that space.

So, our whole goal, Heidi, is to take this horizontal capable technology and by further investing in it, extend it to reach and expand the capabilities of that as we address new opportunities in the future.

Great. All right, thanks.

Anthony Stoss, Craig-Hallum.

If you wouldn't mind give us a sense of your $50 million in backlog -- is that skewed more towards mobile phones? Or maybe just a sense of what that entails.

It is skewed towards mobile phones.

Okay. Also, Russ, if you wouldn't mind commenting about leadtimes, how they've changed over the last quarter or so and if they've changed.

Well, our manufacturing leadtimes are still relatively consistent what they've been historically -- four to six-week range is what's required for us to process and order from a customer and deliver, assemble, and test the product.

Okay. Also, can you give us a sense is -- or maybe this is better off for Francis -- is your capabilities on the mobile handset side, is that what's winning you the deals? Is that becoming more price-competitive on some of these designs that you're bidding on?

Well, I mean, Anthony, we are one of the only pure capacitive manufacturing; we claim we have shipped half a billion of interface solutions. And really our value proposition to our customers is we know how the capacitive solutions into the host devices better than anybody else. That includes ideas; it includes our challenges related sometime not even to the core technologies.

What sometimes you in the general public see here is patterns in the area of disclosable intellectual property, is a lot of trade secret know-how's in terms of doing consistent yields, consistent performance. Like people say, the devil is in the details. And we have plenty of experience in those details. And we believe that's why we're recognized as the leader out there.

As far as pricing is concerned, it's always challenging; always challenging. I mean, we play in the part of the market in the consumer electronics -- nothing has changed in that particular area, Anthony. And you have to be in a ballpark figure to play. If you're not in a ballpark figure to play, you cannot win on technology alone.

Okay. Another tough question, I guess for you, Francis -- if you could look out into the future, at what point do your capacitive Touch phones start to bypass resistive Touch in your opinion?

Well, that's hard for me to say, but I can certainly tell you that -- let me just give you an analogy there. If you look at the notebook market -- I mean PC market, there's -- I mean, I talk about it when we went IPO in 2002, that I expect, by the end of the decade, that there will be more notebooks and PC than laptops. Now, is that going to happen in the Smartphone category, in the mobile phone category? It will take about X number of years similar to notebook computers? I don't know.

But I'll tell you the single biggest thing that is going to enable that in my mind is applications that OEMs and operators is going to dictate on what kind of a cell phone that is going to come out. For example, Anthony, you noticed that I said a lot of our phone designs has been released in Japan. In Japan, they use the cell phones quite a bit differently than we do in the US. I mean, they use it for all kinds of applications beyond voice calling. And as long as operators all over the world and in the major markets, then you're going to see that.

So just to conclude the remark, I think the revolution already has started. If you count the number of new designs to serve the capability that we have, I will argue, well, let's say that has already happened. There will be more new designs on the capacity of feature-rich phones, use the capacitive technology and resistant technologies.

Okay, that's very helpful.

And the actual volume is picking up very, very fast. So when you look at the gradient of the capacitive Touch phone adoption in my mind, it already exceeded the gradient on the resistant screen.

Okay, last question, I promise. On the concept of touch monitors, there seems to be a bunch of new models coming out, none of them appear to be capacitive. Just my final question is your thoughts on if capacitive has a role to play in touch monitors?

Absolutely. As a matter of fact, we have been reporting in a wide range of capacitive buttons and stuff like that on monitors. So that's already a way -- that's already happening. And I will continue to see that migrate into things like televisions and stuff like that, which is one of the side benefit of our monitors.

As far as PC and notebook monitor is concerned, there's widespread discussions about like Win 7 and stuff like that that's going to enable the notebooks to be touch-sensitive. And I would say that there will be certain applications that people are going to want on the computer too that will be touch-sensitive, especially on the ones that is this late type of notebook computers.

I see a clamshell kind of notebook computers, the touch sensitive parts, so there will be less of an adoption rate, and that's purely because of economic and not anything else. But lastly, I mean, when you put touch in the notebook computers, it's not free. So for a user, they want to spend the kind of money on there, that's got to be a reason behind it.

So in general, I'm very excited about touch, moving the monitors as well as specific in the notebook space. I'm just less sure about the adoption rate in terms of what the market can bear or will bear.

Perfect. Thanks for taking my questions.

John Vinh, Collins Stewart.

First question is, can you give us a sense of what the mix between netbooks and notebooks were in the quarter?

John, as we have said, we really see the netbook as the extension of notebook and certainly at the consumer sector, and we don't break it out.

Okay.

It was a meaningful portion of our overall mix.

Great. Okay. And then obviously you kind of talked about kind of an ASP differential between TouchPads for netbooks versus I guess, net tops, if you will. Can you give us a better sense of what that ASP differential are?

Again, we're not really comfortable talking about specific pricing on products. But they fit within that $2 to $5 range that we've mentioned before, for 95% of our total design mix.

Great. Okay. And then obviously, netbooks continues to be a growth sector for you guys. Obviously, you talked about some challenges on the notebook side. Can you give us a sense in terms of what you guys are seeing in '09 in terms of market growth expectations for notebooks and netbooks?

Well, John, frankly, I mean, typically we will look at industry data like the IDC, we talk to our OEM and ODM customers. I think the issue we're talking about the expectation here is visibilities are very poor. And as long as the people do not sense that we have reached a bottom and arguably, whether we have reached a bottom, nobody really knows -- there are some sentiments in here that the US remains to be pretty robust and Europe is not doing as well, and Asia is kind of flat to maybe still looking for the bottom.

So I don't think that you're going to find a good consensus in terms of what the growth rate for the balance of fiscal year 2009 is concerned. So as a company, what we have to do is focus on the areas that are doing well. And that's the netbooks. And we have to be responsive to our customers in case they come in with upside orders and so on and so forth.

I guess the good news there is we don't really at least see severe inventory issues in the channels anywhere on the notebook computers.

Okay. Fair enough. Do you at least see growth in the overall notebook market on a year-over-year basis in '09?

Well, my personal feeling is that there probably will be; but on the other hand, I don't have a crystal ball in the general macroeconomic situations. So it depends on how much of a doomsday deliverer that you are by the end of this calendar year, whether December quarter is going to be worse between '09 and '08.

Great. Okay. And then obviously, you gave us an update in terms of your full year expectations. If you look at kind of -- if we think about your full year expectations, and obviously you've talked about kind of slowdown in PCs, can you give us a sense of how much of your revised expectations for the full year reflects a slowdown versus PCs versus handsets?

Well, as we said on the call, the guidance does contemplate the fact that the growth is going to come from mobile phone applications. So in our full year outlook, we have contemplated the current softness in the notebook market.

Okay. And then your revised guidance versus a quarter ago, are you seeing any sort of downward revisions in your handset expectations? Or your handset expectations in terms of '09 growth the same as it was previously?

Handset revenues have been very strong, as you can see from our December quarter results. And based on the designs that are currently shipping, some of the new designs Francis mentioned on the call, we continue to feel that, for the remainder of this fiscal year, that that cell phone applications are going to be the net growth driver for us.

So what that means going forward for the second half of the year, greater than 50% of our revenue is going to be coming from the cell phone market.

Got it. Okay. And the last question from me is -- from a technology point of view, one of your competitors has recently kind of demo'ed the ability to support up to 10 simultaneous touch points on a capacitive touch screen. Can you maybe just comment on that? Are you seeing RPs and interest from some of your customers for increasing simultaneously points of touch on a touch screen?

Both pen-based solutions has been obviously on ramp for like tablet PCs, as an example. Certainly both pen and touch interface solutions has also been demonstrated in notebook computers using resistant type technologies. So in terms of different implementation of doing touch and pen has been around.

Excuse me -- I meant 10 as in the number 10.

Oh. Say that again?

Yes. There's one of your competitors that has said that they have a capability to support up to 10, as in the number 10, so simultaneous (multiple speakers) --

Oh, I'm sorry. I thought you meant -- Okay, I've got it now. Okay. So I guess those kind of claims is interesting. At the end of the day, I think we cannot get carried away with technologies versus applications.

And I guess what I'm saying is, I can talk a lot about technologies in terms of doing a lot of things. At the end of the day, it doesn't matter. And I don't think you can do 10 fingers matters. I mean, it may be interesting, in terms of a technical research papers and stuff like that; I mean, I cannot think of usability that people will buy, to buy that kind of stuff.

So as far as I'm concerned, I just take it as a scientific research paper. But I don't think it's got any commercial relevance, John.

Okay, thank you very much.

Daniel Amir, Lazard Capital Markets.

Thanks a lot and congratulations on a good quarter. A couple of questions here. First of all, on the mobile phones front, can you comment about how skewed the business is to maybe one or two models? Or is it pretty much well-diversified among the different models that you guys are designing to?

Last quarter, we had -- it was somewhere between 15 and 20 different models that were shipping.

And were the revenues skewed to just two or three models? Or was it pretty well-diversified in terms of revenues?

Well, just like in the notebook market, you do have some models that ship more volumes than others.

Okay. All right. So, on terms of the mobile phone opportunity, I guess, going forward here, do you expect it to surpass, I guess, PCs by middle of the year maybe in terms of revenues for the Company?

I think it will surpass PC revenue in the March quarter.

And going forward, it should -- it would stay at that level then? I mean, it should stay higher than in the (multiple speakers) [future] --?

Well, part of that is a function of how both markets develop for the remainder of the year. If notebooks and the PC market come back in a very strong fashion in the second half of the year, we're very well-positioned as a competitor to take advantage of that growth.

If it doesn't manifest that way, then, again, we're very well-positioned in the mobile phone market to continue the ongoing trend that we've shown in the December quarter and are forecasting for the remainder of the current fiscal year.

Okay. And Francis, in terms of strategically -- I mean, about new applications that we should look at, I mean, it looks like that calendar year '09, you're obviously largely focusing on the mobile phone opportunity. But as we look into 2010, what's kind of in the drawing boards, I guess, as big applications that could be using capacitive touch that you think that could be another growth driver for the Company going forward?

Well, I mean, I have said it -- our approach to growing some of those other vertical markets is through the deployment of One-Touch. And I will say that it will continue to be true. So the One-Touch, the beauty of our One-Touch is we're going to deploy it into a number of vertical markets with our dedicated go-to-market and sales and marketing resources.

So that is our way of trying to penetrate other vertical markets without influencing the focusing -- the focus market that we have at. Now, the beauty about the strategy there is -- when you add up all the other potential vertical markets out there, it's actually a huge opportunity sitting out there for us without diluting our resources.

And then while we are thinking about that, is we already now today are situated very close to some of our key customers. So if I take LG and Samsung and HP and so on and so forth -- I mean, those companies sell more than our focus -- our target market. There's really no reason when our go-to-market resources are sitting over there, we couldn't encroach on some of the other products that they have. And that will be our focus moving forward around those two fronts.

Okay, thanks a lot.

(Operator Instructions). Vijay Rakesh.

A good quarter here in December. Just talking about the macro here -- when you look at your backlog coverage for the March quarter, it looks like your backlog coverage is like 50-person versus your December quarter, you had almost 75-person backlog coverage. So I was wondering how comfortable you are with the guidance, given the macro?

Well, our typical turns business is in the 40% to 60% range and based on our backlog coverage at the end of the quarter and what we guided to, we would be in a range of 40% to 50%. So, not quite as conservative as we were in the prior quarter, but still well within what our typical range is for turns.

Okay. And it looks like looking at the notebook market, overall, it looks like notebooks are down about 20% going into the March quarter. But assuming your backlog is more skewed here -- or the $50 million is more skewed towards handsets, it looks like notebooks are coming down quite a bit more into the March quarter, down probably like 35 percent-ish kind of. Is that more -- is that inventory or can you give a little bit more color on that share of --?

Sure. PC revenue for us was down 4% year-over-year, some of which of that was guided, as I mentioned on the call, by a lower-priced mix, just the general state of the notebook market, and lower attached rates on multimedia as vis-a-vis our TouchPads. For the current quarter, the range we've given you contemplates declines in notebook revenues year-over-year.

Okay, got it. And on the Smartphone side, I know you've said you're going to focus on that. What's the Company landscape like as you see new phones coming out from -- the next generation phones coming out on Google and Palm and Nokia and all those -- what I see are people moving more to chip solutions. What's happening there?

So, first of all, Vijay, I hope that I have been very clear, between Russ and I, that when we tell you design activities are strong, those are a general result in revenue six to nine months out. So when Russ and I mentioned about in the March quarter, that remains to be strong, those are design wins. That has happened some months ago. And we are basically broadcasting as well that design activity continues to be strong.

And I know there's a lot of market chatter today about ship solution and module play solution. And I just want to remind you that Synaptics is not saying that we have to have one kind of a business model to sell devices. At the end of the day, we have to make sure our OEM partners are successful in terms of introducing a capacity of touch solutions.

And you're going to continue to see us, some products, we may sell chips and some products we may sell modules -- depending on the kind of business arrangement that we make with each of the OEMs. At the end of the day, like I said, our strength, we believe, is in terms of integrating capacitive solution onto the host devices. You're going to continue to see us focus on that. And we will succeed whether it's chip or module.

Rob Stone, Cowen and Company.

Congratulations on such a strong quarter, considering the environment. On that note, I know you guys don't specifically forecast segments going forward, but looking back at the December quarter, I was quite surprised to see how well you came into your revenue range, given the big fall-off in PC notebooks and PCs reported by others in the quarter.

As the quarter came in, was that because handsets were much stronger than you had anticipated? Or did the quarter come together more or less the way you were thinking at the time you gave the guidance?

Well, generally, things were within the range in the different scenarios that we had contemplated when we put the guidance range together. But there's no question that as we got into the quarter, December, and we got to mid-quarter, order rates for notebooks dropped off dramatically.

And by the way, I think during the quarter, both Russ and I, we have reiterated that Synaptics is not immune from the macroeconomic situation. And therefore, we have given a wider than normally what we would do in terms of the ranges, because there is the lack of visibility. And unfortunately, the lack of visibility, it did come out in the sense that the notebooks were weaker than were expected, as we moved through a quarter. But we had already factored that into our guidance.

Yair Reiner, Oppenheimer.

Yes. I'll add my congratulations to the nice results. Just a quick housekeeping question. Any 10% customers this quarter? And are there any new ones this quarter?

We did have a couple of 10% customers in the quarter, yes.

And are you able to comment on whether any of them are new?

Well, again, generally, we're selling to the ODMs directly. So -- and the ODMs, as you know, manufacture products for multiple OEMs.

Okay. So I guess this wouldn't (multiple speakers) --

The dynamics has not changed in years, is what Russ is trying to say, I'll tell you. The names can shuffle between the rarest ODMs by that, but the dynamic is the same.

Got it. When we look out into 2009, there seems to be two kind of trends on the notebook side on the one hand, lower ASPs from netbooks on the other hand, maybe higher ASPs from larger TouchPads like you see on PCs that try to -- or notebooks that try to emulate the MacBooks. When you weigh those two factors out net-net, do you think that your ASPs in notebooks are going to be down, flat, or up for the balance of the fiscal year?

Well, first of all, when you look at the macrotrends, four or five years ago, there's no doubt that the TouchPad, as the vanilla flavor TouchPad, will continue to decline in terms of ASP. That's just because of the nature of the consumer market as well as we're getting further and further penetration in the various segments. And I don't think that's going to be different in any way moving forward here.

So what Synaptics has consistently been able to do here is we keep on trying to create more value in one after the next one -- obviously, the last one was MMB, which is the multimedia buttons, and this one is the larger TouchPad.

We would not know that the adoption rate of the speed of some of those things; but in general, yes, you should factor in that ASP of the entire notebook sector. When you aggregate the summary of it over time, the ASP will continue to decline.

Jeff Schreiner, CapStone Investments.

Thank you, gentlemen, for taking my call. The one question I want to get in just real quick -- there's been talk about the notebooks slowing, the macro issues, the netbooks, and you guys obviously securing some design wins there. But how does this macroeconomic issue change the buying habits of the end user of notebooks, and quite possibly, create maybe a sub-500 netbook market that becomes very strong? And you either buy a netbook or you buy a notebook. And the pricing of a notebook may be only $750, $800.

How is the pricing and the strong demand for these lower priced notebooks really driving things for Synaptics at this time?

Well, first of all, I don't have a crystal ball about the market, but I'll share with you what I'm thinking about it.

I know the netbook now is getting a lot of visibility, because in today's tough economic environment there, in general, the lower price points probably get their share of discussion. And also, a lot of the netbook goes to second or third -- notebooks in the family for younger children and stuff like that. So there's no doubt in my mind they'll continue to grow.

However, I do not expect the netbooks to be the dominant form factor of the notebook sector. That there are lots of reasons why individuals want to have -- for lack of a better word, more of a traditional notebooks. The fact that there is all this economic, macroeconomic uncertainty to me is no different than why a lot of the retail stores are suffering and all that stuff is going on, and people are trying to look for better deals before they buy clothing, before they buy shoes, before any of this stuff. To me, it's no difference.

So as far as I'm concerned, I do believe the notebook-rich will continue to expand and I do believe the lower part of the notebook is as good in a sense expand the pie. I do not believe the netbook is going to be the dominating form factor that's moving forward here.

All right. Thank you. And management, please continue with any closing comments.

Well, you know, thank you for being in on the call today. And we look forward to update you again next quarter. Thank you.

All right. Thank you. And ladies and gentlemen, this does conclude the Synaptics second quarter fiscal 2009 earnings conference call. If you would like to listen to a replay of today's conference, you can do so by dialing 303-590-3000 or 800-405-2236 and put the access code 11124754. Those numbers again -- 303-590-3000 and 800-405-2236, and put the access code 11124754.

AST would like to thank you very much for your participation today. You may now disconnect. Have a very pleasant rest of your day.