Synaptics Inc (SYNA) 2009 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Synaptics Third Quarter Fiscal 2009 Conference Call. During today's presentation, all parties will be in a listen only mode. Following the presentation, there will be a question and answer session.

(Operating Instructions)

This conference is being recorded today, the 23rd of April, 2009. I would now like to turn the conference over to Alex Wellins of The Blueshirt Group. Please go ahead.

Good afternoon, and thanks for joining us today on Synaptics Third Quarter 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 synaptics.com.

With me on today's call are Francis Lee, Chairman and Chief Executive Officer of Synaptics, Tom Tiernan, the Company's President and COO, and Russ Knittel, the Company's Chief Financial Officer.

We'd like to remind you that during the course of this conference call Synaptics will make forward-looking statements, including predictions and estimates that involve a number of risks and uncertainties. Actual results may differ materially from any future performance suggested in the Company's forward-looking statements.

We refer you to the Company's SEC filings, including Form 10K 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. With that said, I'll turn the call over the Francis Lee. Francis?

Thanks, Alex. And thanks, everyone, for joining us on the call today. We are very pleased to report strong results for our third fiscal quarter. Revenue of $100.6 million represented robust growth of approximately 28% year over year and was an all time record high for our first fiscal quarter.

Net income totaled $6.1 million, up 102% year over year, and earnings per diluted share was $0.17, an increase of approximately 112% year over year.

The Synaptics team continued its track record of outstanding customer service, responding to changing all the patterns to meet our customer's need in the current challenging environment.

Our results also continue to reflect the positive impact of our revenue diversification strategies evidenced by our revenue breakdown for the quarter. Revenue from mobile phone applications were up five and a half times compared with the same period last year as we continue to capitalize on the early adoption of capacitive interface solutions with SmartPhones and other feature rich cell phones.

This tremendous revenue growth more than offset the 21% decline in revenue from PC applications year over year. The decline in PC revenue reflects the general softness within the notebook market as well as decreased contributions from multimedia control applications in notebooks.

Our strong overall results demonstrate Synaptics ongoing leadership within our key markets and ability to execute within extremely dynamic market conditions. We will continue to invest smartly to capitalize on the rapidly expanding opportunities ahead building on our momentum going into fiscal 2010 and beyond.

I will now turn the call over to Russ for a detailed discussion regarding our third quarter results and our outlook for the fourth quarter of fiscal '09.

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 third quarter of fiscal 2009 for a detailed reconciliation of GAAP and non-GAAP results.

As Francis indicated, revenue of $100.6 million was a record level for our third fiscal quarter, an increase of 28% over the comparable period last year and for the second consecutive quarter our revenue mix was roughly evenly split between PC and non-PC applications.

On a year over year basis, our revenue from PC applications declined approximately $13.5 million reflecting the general weakness in notebooks, the lower priced product mix, and a reduced attach rate for our multimedia control solutions.

The attach rate in notebooks for multimedia control in the third quarter was approximately eight percent, down as expected from 11% last quarter and compared to more than 25% in the comparable quarter last year. While below historical seasonal norms, notebook demand as widely reported was better than expected, and net books continue to be a sweet spot within the notebook category.

As the leader in the notebook market, we benefited from the general improvement in market demand. As such, revenue from notebooks exceeded our expected range and was the primary reason revenue for the quarter was above guidance.

Revenue from our non-PC applications grew approximately $35.2 million over the comparable period last year. This exceptional growth was primarily driven by a five and a half fold increase in revenue from mobile phone applications which represented approximately 42% of total revenue for the quarter.

The expanding interest in capacitive touch screen interfaces continues to drive adoption of our technology in the mobile phone market where customers see the benefits of our integrated engineering capabilities and time to market.

Our non-GAAP gross margin was 40.9% compared with 41.1% in the preceding quarter and 41.3% in the comparable period last year. This was in line with our expectations.

Headcount at the end of March was 502 compared with 460 at the end of December. We plan to continue to add staff as we selectively invest and further enhance our capabilities and position the company to meet the expanding market opportunities.

Total operating expenses were $30.1 million compared to $29.7 million in the preceding quarter, including non-cash share based compensation charges of $5.7 million and $5.3 million respectively. Excluding share based compensation, our operating expenses were essentially flat as anticipated as reduced legal fees and other expense control actions helped offset the impact of the headcount additions in the quarter.

Net interest income was $304,000 compared to with $653,000 in the prior quarter primarily reflecting lower interest rates and lower average invested cash balances.

As we stated previously, we continue to monitor and evaluate our investments and auction rate securities on a quarterly basis. None of our failed auction rate securities have defaulted and all of them continue to pay interest at the contractual rates.

Our valuation analysis for the quarter resulted in the recognition of $2.9 million non-cash other than temporary impairment charge to our quarterly earnings. As of the end of the quarter the par value of our auction rate securities was unchanged at $45.7 million and the carrying value was $29.9 million all of which are classified as long term assets on our balance sheet.

Our GAAP and non-GAAP tax rates for the quarter were 24.4% and 21.5% respectively. Our significant improvement in profitability year over year primarily reflects the combination of our strong operating performance, more efficient tax structure, and the impact of our stock repurchase program.

Our non-GAAP net income in the March quarter was $13.4 million or $0.38 per diluted share compared with $8.8 million or $0.23 per diluted share in the comparable quarter last year representing increases of 51% and 65% respectively.

Now a few comments on our balance sheet. We ended the third fiscal quarter with total cash and short term investments of $174.5 million, up from $136.8 million at the end of the December quarter.

Cash flow from operations was approximately $33.5 million. Stock option exercises and the tax benefit from employee share based plans contributed $2.9 million and $3.2 million respectively.

Capital expenditures were approximately $1.5 million in the quarter primarily for test equipment, cooling, and general infrastructure. Appreciation was $1.7 million.

Receivables at the end of March declined to $69.2 million compared with $81.7 million at the end of December. This reflects the 29% decline in sequential revenue coupled with the timing of customer shipments during the quarter.

ESOs were 62 days, up as expected from 52 days at the end of the prior quarter and approaching our more typical range of 65 to 70 days.

Inventories at the end of March were $15.9 million compared with $22.1 million at the end of December. Inventory turns this quarter were unchanged from the December quarter at fifteen times.

Now I'd like to make a few comments regarding our business outlook. We entered the June quarter with a healthy backlog of $72.2 million, up approximately 43% compared to our backlog entry in the March quarter.

Based on our beginning backlog, current order patterns and the visibility related to anticipated new orders, we believe revenue for our fourth fiscal quarter will be in the range of $105 million to $115 million an 8% percent to 19% increase over the comparable period last year. As in the previous quarter, this relatively broad guidance range is a reflection of the current macro environment.

Using our current backlog as a proxy, we expect our non-GAAP gross margins to be in the range of 40% to 41%.

We expect our operating expenses to be up sequentially reflecting the full impact of our headcount increase in the prior quarter in combination with our staffing initiatives this quarter. We expect our FAS 123R charge to be approximately $6.1 million essentially flat compared with the March quarter.

For the fourth fiscal quarter, we currently anticipate that our non-GAAP tax rate will be in the range of 21% to 23%. The diluted share count in the March quarter was based on an average stock price of $22.34. Based on the current trading range, the diluted share count for the current quarter under the treasury method could increase more than $700,000 shares.

Our non-GAAP net income per diluted share for the June quarter is expected to be in the range of $0.37 to $0.47 representing an increase of 23% to 57% compared to the same period last year.

Based on our first nine months performance and our guidance for the fourth fiscal quarter, we expect fiscal 2009 will be a record year for revenue and profitability. We currently anticipate that our revenue for fiscal 2009 will be $463 million to $473 million, an increase of 28% to 31% over last year's record level. And our non-GAAP earnings per diluted share is expected to be in the range of $2.09 to $2.19, an increase of 59% to 67% over last year's record high. I'll now turn the call over to Tom to highlight some of our recent product and market developments.

Thank you, Russ.

Last quarter we touched on new design wins featuring our enhanced Gesture Recognition technology for both notebook and mobile phone applications, various products incorporating specialty TouchPads, and the expansion of our mobile OEM customer base in multiple geographic markets.

Now I'd like to give you an update on a small sampling of some of the design wins within our markets over the past quarter. In the PC market, we continue to see an increased trend toward incorporating Gesture functionality into TouchPads for notebooks.

During the quarter, the Lenovo IdeaPad Y650 began shipping with the Synaptics TouchPad featuring Synaptics Gesture Suite which includes our Two-Finger Pinch, ChiraMotion Scrolling, Flick, and Momentum Gestures. In addition, the newly announced Acer Timeline is currently shipping with the Synaptics gesturing rich TouchPad.

Within notebooks, the net book category continues to exhibit strong growth and we continue to lead in this segment. In addition to the Dell Inspiron 9, HP Mini-note 2133, and Aspire One announced in the first fiscal quarter, the Lenovo S10 is now shipping and incorporates Synaptics Gesture Suite.

We are also providing TouchPads for the HP Mini 1000 and the Dell Inspiron Mini 12. In addition, Synaptics TouchPad is integrated into the next generation of ASUS EeePCs which will begin shipping next quarter.

Within the desktop category, we have a design win in the new Gateway ZX 2300 all-in-one PC system where our touch buttons with proximity sensing which provide the controls for multimedia functionality while also enabling sleek industrial design.

In the PC peripheral segment, Synaptics touch buttons were chosen to control the various monitor settings in three new Acer H Series monitors -- the 2113H, the 233H, and the 223HQ. These products are currently shipping in the U.S. and Asia.

In the personal digital entertainment market, we have added Sony Entertainment to our growing base of handheld customers with the new Sony Walkman X Series Personal Media Player. The media player features an OLED Display driven by Synaptics ClearPad touchscreen solution allowing the user to navigate the media content and flick through different menus for songs or videos. The Sony Walkman X Series will begin shipping in Japan this quarter.

Turning to the mobile phone market, some high profile phones featuring Synaptics touchscreen solutions will also hit the market this quarter.

The recently introduced LG Arena features Synaptics ClearPad touchscreen solution and Gesture Suite to enable the user to easily and intuitively navigate and control the various menus and applications on this feature-rich phone. Our ClearPad's gesture recognition lends itself well to LG's innovative S-Class user interface which revolves a 3D cube to navigate four different home screens.

The LG GD900 Slider Phone which was announced at CTIA Wireless features two Synaptics ClearPad sensors to enable intuitive controls on both the touchscreen and the transparent key pad. The slide out key pad acts as an input device for key entry, text recognition, and gestures. LG used Synaptics enhanced gesture recognition technology to compliment the phone's new S-Class user interface.

The LG [View D] Smart is another new mobile phone incorporate Synaptics ClearPad touchscreen technology. The ClearPad sensor is mounted beneath the phone's plastic case to create the GC900 sleek design. With an 8 megapixel camera, the three inch touchscreen interface is an ideal feature for an optimal viewing area and gesture input.

Finally, on the mobile front, Synaptics collaborated with Texas Instruments to provide the ClearPad sensor for TI's Zoom Mobile Development Platform. This platform is built around TI's OMAPs 3430 applications processor which was announced at Mobile World Congress in Barcelona.

We believe this, in addition to the work we've been doing with other key chipset providers to mobile OEMs, can further promote the adoption of capacitive sensing within handheld devices while leveraging Synaptics capabilities within the market.

This quarter's design wins reflect our ongoing leadership within our target markets. Synaptics' intuitive interface solutions are well suited to a broad range of products and applications and we will continue to innovate to meet the needs of the next generation products that will serve the evolving and growing digital lifestyle trends.

Our customers continue to benefit from our innovation, systems engineering know-how, and portfolio approach which includes both our custom integrated modules as well as our OneTouch design studio. They also appreciate the high levels of flexibility and support we provide them from design through mass production. I will now turn the call back over to Francis for a business update and closing remarks.

Thank you, Tom. Now I would like to make a few comments regarding the general business environment as we head into the last quarter of fiscal '09.

Why would we experience better than expected demand in the notebook market during the third quarter? It's difficult to determine how much of that was driven by stronger end demand versus inventory restocking within the channel. The fact remains that the overall macro economic picture has not changed dramatically.

However, Synaptics is well positioned in our target markets and we continue to execute extremely well in this tough environment leveraging the prevailing market uncertainties into opportunities wherever possible. It is in times like this that our proven, long-term track record of execution, and our ability to help our customers design, and deliver cutting edge products really sets us apart in the competitive landscape.

Our overall design pipeline remains very healthy but we must continue to be selective about which design we choose to pursue. As evidenced by the number of new hires in the third quarter, we continue to invest in organization on a global basis with an emphasis on expanding our development capabilities to better support our customers at a local level.

Along these lines, innovations to continue to be a pivotal part of our growth strategy. As an example, we expect the impending release of Microsoft's Windows 7 operating system to create additional opportunities for Synaptics. We are actively developing our technology to take advantage of this platform and -- as with everything we do -- we will drive innovative solutions that offer the highest customer value.

In summary, I'm grateful to the worldwide Synaptics team whose dedication, diligence and solid execution enabled the company to deliver exceptional operating results given the challenging market conditions. With the general economic climate still very much in flux, we will continue to take a prudent approach to us managing our business. It's safe to say that we expect to finish the fiscal year on a very positive note with record revenue and net income.

The product update that Tom provided points to continuous strong progress and activities in our target markets and our ongoing staffing initiative is a clear indicator of the abundant opportunities available to us. As such, we continue to take the necessary steps to scale our business for future growth. We expect this momentum to carry over into fiscal 2010 and look forward to providing you with an update on our fourth quarter's earnings call.

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. (Operating Instructions) Our first question comes from the line of John Vinh with Collins Stewart. Please go ahead.

Hi, good afternoon. First question is on margins. It looks like margins are coming down a tad. Can you maybe just talk about what are the drivers for your -- for gross margin guidance?

John, this is Russ. The primary driver there is just our expected product mix for the quarter. As you know we have a fairly broad gross margin range among the different custom solutions that we provide to the market and this is just our current expectation. Again using the backlog as a proxy for gross margins we'll end up in the quarter.

Is this due to the fact that you expect a higher mix of handsets versus PCs going forward?

No, again gross margins are relatively independent of the vertical markets that our solutions sell into. It's a function of the specific unique designs and the mix of those that we ship within the quarter.

Okay. On notebooks, you guys said that you saw a pick up in notebooks in the quarter. Can you also maybe give us a little bit of color in terms of kind of the demand that you saw on notebooks versus net books in the quarter? Were they both equally strong? Were net books stronger than notebooks?

Well generally we saw an increased demand for both traditional notebooks and net books as we moved through the quarter, both of which were above our expectations in the range that we had guided to.

Okay. And then --.

Growth rates, John -- clearly the net book is the darling of the notebook category.

Got it. Got it. Okay. I was just wondering if there were any difference there as we did hear that there was a little bit of net book inventory in Q1 but that there obviously was a strong kind of replenishment cycle there.

The other thing, John, is that of course we're in a number of net books designs that are ramping as well, so we have the benefit of that.

Okay. On the handset side, some of your competitors have you know obviously Cypress has been talking up quite a bit in terms of their kind of traction and what their PSoC solution. Obviously they take a fundamentally different approach to the handset market than you do. You guys seem to focus more on fully integrated modules and Cypress they're focused on the chip.

Can you maybe just comment on how you kind of the chip versus the module kind of approach, what you kind of plan on going forward? Do you still -- and obviously you guys also have a OneTouch chip solution. Can you maybe comment on that?

Sure, John. Well first of all you know as we have said a number of times before the capacitive adoptions in the interface solution in the mobile market is in its infancy. So we're very excited about the (inaudible) continuing to grow.

Second of all, in this I would call it you know quote/unquote new markets like touchscreens and stuff like that there's a tremendous amount of innovation besides market expansions. Synaptics prides ourselves in our ability to help our OEM customers in time to market, in terms of giving them a solution that works.

And we are very flexible with business models. You know whatever will work to help our customers to win in end market we will do so and as such we don't really emphasize on modules or chips or solution although we certainly have the capabilities to do all of the above.

And by looking at the discussions that Tom talks about on the design activities and design wins, we are very comfortable to let you know that we continue to win our fair share of our designs and we are comfortable in terms of moving forward. You'll continue to see us as the leader in this space.

Thank you. Our next question comes from the line of Daniel Amir with Lazard Capital Markets. Please go ahead.

Thanks a lot, and congratulations on a good quarter.

Thank you, Dan.

A couple of question. First of all on -- can you give any clarity with regards to the backlog here -- how much of it is mobile phone, how much of it is PC?

Well the backlog is up 43% quarter over quarter so it's at a very healthy level and we have seen increases in both segments -- both the PC and handheld segment. So they're both well represented.

But is one significantly more than the other?

No.

Okay. And in terms of the commentary on the Windows 7 providing an opportunity and it looks like that the touchscreen monitors has kind of been something that's in infancy only a couple of PC companies actually have that. What is your opportunity there, and is it something that you're focusing on this year or is it something that you're waiting until the market starts adopting this?

Hey, Daniel, this is Tom. So a couple comments I'd make on that. One is we do think that Win 7 with its focus particularly on finger input for consumer -- more consumer-oriented applications is going to result in a much larger chunk of the classic consumer notebook market adopting capacitive test screen technology.

You know so far it's been very much niche oriented in tablet PCs or vertical industry oriented, so we do definitely see an opportunity there over the coming quarters and years. And we as you know are not participating in that market today, but will be over the coming couple quarter.

Thank you. And once again, ladies and gentlemen, we ask that you kindly limit your questions to one per person to allow time for everyone to ask a question.

Our next question comes from the line of Anthony Stoss with Craig-Hallum. Please go ahead.

Good job in the quarter.

Thanks, Anthony.

Francis, will you give us a sense of how many models -- handset models that are currently shipping in the quarter?

Well, you know frankly, Tony, we kind of stopped counting here because a great number of products have been going out. But I'm pretty comfortable to tell you that similar to last quarter we expect to have between 15 to 20 unit designs in production.

15 to 20?

Yes. In production.

Okay. Also if you won't mind commenting on your view of the current June quarter? Do you expect it to be linear, front end loaded perhaps? Any thoughts there?

Well, I mean you can tell that we have a healthier backlog going into this quarter versus previous quarters, so clearly our ability in that part of it is a lot better. Then having said it, you know it's really depending on the number of turns business that comes in, right, so it's hard for me to predict it although I would say that it's probably going to be better than last quarter.

Thank you. Our next question comes from the line of Paul Coster with JPMorgan. Please go ahead.

The design win activity that you are currently experiencing, does it give you any visibility into the 2009 holiday season as it relates to handsets? Would you expect to have more designs in production? And what kind of features are going to be on those mobile phones this holiday season?

Well I mean obviously it's tough, Paul, for me to project here you know six months from now what is going to be, but I'm pretty comfortable to tell you that the adoption of the capacitive technology in the mobile phone market will continue to go up. Now as you know, Paul, in difficult markets, I will continue to fragment it along the line of designs for industrial designs and functionality.

So you can expect, okay, that it's going to be a wide range of -- interface designs are going to come in the subsequent months and quarters ahead. So I cannot predict which one is going to win out. You should expect that the number of capacitive interface solutions will increase and the number of people in designs is going to increase from what you see today.

And my follow up --.

In closing I'd add to that would be that I think from an end user perspective you'll continue to see more and more multi-finger and functionality adopted into handsets on a go forward basis. And you know the UIs are being written to take advantage of that additional innovation that's now available in the technology.

On that point, what is your latest thinking regarding the importance of your patent portfolio in the concepts of the ongoing debate around potential patent infringements?

Yes, we feel very strongly in our patent position and our IP and our know-how, and all of the customers and accounts who evaluate our line up -- our patent line up independently we believe also come to that conclusion.

Thank you. Our next question comes from the line of Yair Reiner with Oppenheimer. Please go ahead.

Yes, thank you. Just a question on the PC front. First, can you tell us how many of the ASUS EeePC models you have won?

And then just quickly on the Windows 7 opportunity -- do you see that as a module opportunity? Do you see that as a chip opportunity? And recognizing that it's in its early days still, how big do you think that opportunity could be for you over time?

Well first all, Yair, you know we really do not have a good insight in terms of EeePC -- how many of the different OEM branded models go out there and how many that's got our solution -- our competitive solution (inaudible) was to developer. But one thing is clear in Tom's prepared remarks there we are in the mix generations of the EeePCs.

Regarding the comment on the Win 7, you're absolutely right. You know I think it's still too early for anybody to tell and frankly the reason why is that the applications and the usability and the user model still remains to be proven in terms of how well adopted it's going to be. Having said that, we're very excited about it because it gives us additional opportunities -- touch opportunities to get increased revenue content per box.

Thank you. Our next question comes from the line of Rob Cihra with Caris & Co. Please go ahead.

Hi, thanks very much. A couple of things if I could even though we're supposed to one question each I guess. But Russell or Francis, I guess, on the multimedia tax rate it's down to eight percent in the quarter.

Is that something that I know you had said it would come down and it obviously has been with second sourcing and that sort of thing, but I mean is that a type of thing where you think it goes back up ever? Or is it -- you know is this where it comes down to? Or does it literally go away at one point? And I have one more question concerning.

Well I think there's a couple dynamics at work there. You know we did -- we have been stating now for the past several quarters that we do expect to see the attach rate to continue to climb and it's really a function of a couple of dynamics. One is -- one is the competitive dynamics where OEMs do want alternative sources and as you recall we've essentially owned that market for more a year.

The other dynamic as we move into the net book category there's less of a need for those kind of solutions going forward. And as you know when you look at multimedia controls it's been more of a design driven application than a functional driven application because you can get there equivalently with mechanical buttons and with our new dual mode TouchPad you can actually build those multimedia controls into the same real estate as the TouchPad itself.

So going forward, I think that's a part of the market where everybody is going to see things slow down a little bit, but I think the trend going forward is going to reflect that.

But the only thing I'd add to that, Rob, is that you know obviously when you look at net book there's no space for a discrete MMB. There's no real estate. And so what we're driving there with our accounts is how to incorporate that functionality into the TouchPad itself.

Right, okay. And then one more question if I could and that's just you had if you go back to your last quarterly call and I know things have changed in the notebook side for the better, but I think Francis maybe at the time had made the comment that you though mobile phone as a percentage of revenue would go up in each of the approaching quarters. It was up in the March quarter. Were you still sticking with that being up in the June quarter or should we just disregard that -- that you said at the time?

Well if you looked at the way the March quarter developed, we did see stronger than expected demand from notebooks and the mobile segment actually was a little weaker than we had expected in the quarter.

But as we said before, given we're kind of new in that market and we have less design wins there in terms of overall mix, you can't expect it to be more spotty for us in any one period of time. You know the current guidance that we've provided for the June quarter -- if you look again on a year over year basis on the growth rates we've projected here -- we still would expect the bulk of that year over year growth to come from the handheld category.

Thank you. Our next question comes from the line of Jeff Schreiner with Capstone Investments. Please go ahead.

Hey, gentlemen. Thanks for taking my question. Great quarter. I was wondering, Russ, if you could help us out a little bit given a wide spread of guidance again. I'm just -- maybe some put and takes into the guidance?

Well again it's -- we use the -- we kind of use our backlog as a foundation for that and we look at the customer forecasts that we have and the anticipated new orders during the quarter and construct a number of scenarios and then the guidance reflects a reasonable range that we're comfortable with in terms of being able to achieve. It's a function of both markets.

And, Jeff, you know when the knowledge in terms of how we come up with the guidance hasn't changed since we went public, so we actually are consistent with the mechanics of how we come up with those numbers and we feel pretty comfortable that the methodology has proven itself for many, many quarters now.

Thank you. Our next question comes from the line of Vijay Rakesh with Equity Partners. Please go ahead.

Hi, guys. Good numbers here. Just a couple of questions. One, I was wondering when you look at your -- on the handset side for the March quarter at least looks like the numbers are down at least 25% it looks like quarter and quarter sequentially.

But it looks like the like the [rim], Storm, so all numbers are up pretty significantly quarter on quarter and also you have some new LG phones ramping. So it's wondering what the dynamics of that were -- how the Storm did [extra].

Well, Vijay, I mean as you know our policy is we don't comment on specific products all the time, right? So the point that Russ made earlier about the bulk of the growth you know this fiscal year is going to come by cell phone -- it's the truth, okay?

You know you're going to continue to see good momentum from our design activities moving forward in the particular sector. And you're going to see our ability to leverage the increasing (inaudible), you know capacitive solution on the mobile phone to play to the strength of Synaptics and growing our revenues.

Thank you. Our next question comes from the line of [Steven Fox] with COFA. Please go ahead.

Hi, good afternoon. Just getting back to the design trends, I was just curious. You mentioned that you're having a lot of success in designs that are going to ramp into production this quarter. Has the economy at all impacted the production schedules or the design activity or is the design activity going on and the production schedules are getting delayed? Can you just talk about how -- what's happened with it?

Steve, you know to say that the general macro economic condition has no impact on any of this being obviously first as that's probably not true in a high level sense, right? Having said that, okay the SmartPhone and especially multi-touch functionality -- the way that Tom describes it -- is indeed a trend that is getting more and more adopted.

And it's really true by the fact that the functionality of those phones now is to the point where you have to have some creative, innovative user interface, right? And I also believe that's part of the fact that a mobile phone has got higher margins on it.

So with that as a caveat there, I expect, okay, moving into everything else being equal -- you know the SmartPhones and frankly multi touch SmartPhones will continue to get higher adoption rates compared to the other designs.

Thank you. (Operating Instructions) Our next question comes from the line of Brian Blair with Wedge Partners. Please go ahead.

Thank you. A great quarter. Can you just comment on whether or not you're seeing -- you know during Q1 if you saw any irrational pricing by any of your competitors.

As somebody mentioned earlier on the call, Cypress has been talking up their game and there are a lot of other guys that are starting to talk about having product out there. But I just want to get your sense of if you're seeing anything irrational in terms of what they're trying to do with the OEMs and regarding pricing.

We would characterize the current competitive dynamic from a pricing viewpoint as being rational based on historical trends.

Okay. And is there any -- is there any indication as you kind of look out into the quarter -- the June quarter that there could be any -- anything irrational or are any of your competitors doing anything to try and gain market share through pricing moves?

Well obviously it's hard for us to predict what any competitor is going to do with in the future, but I can only tell you based on the design activity today and the business we're competing for today everybody in the market is acting rationally.

I think, Brian, the other thing that we talked about in our prepared remarks last quarter and is true in this quarter as well, we don't believe the competitive landscape has changed much at all, okay? We participate in the consumer product area which pricing is always very challenging, very competitive.

But also keep in mind, Brian, the solution we offer to our OEM partners really is -- you know requires a lot of good engineering, innovative solutions. So it believes have got at the values to our OEM customers.

So but we play in the part of the market that's very challenging and let's not fool ourselves that in any given day -- you know that's something we've got to be very careful about.

Thank you. Our next question comes from the line of Kevin Cassidy with Thomas Weisel and Partners. Please go ahead.

Hi, thank you for taking my question. I was just wondering about inventory. It seemed to come down quite a bit in the quarter. Is that a good level or I guess how comfortable are you with this level of inventory?

No, that was something we actually worked on during the quarter to keep turns the same for -- on an annual basis and it actually worked out as planned.

And I guess that as you have a higher percentage of business in handsets, do you expect it to need to change or I guess what are your thoughts going forward?

We have to remember that when you look at the inventory balance that we report, you know more than 70% of that is our proprietary silicon in either raw, dye or packaged form. And we're generally using the same silicon across all market sectors so servicing one vertical market versus another I don't think will have a big impact in the way we manage our inventory levels going forward.

Okay, thank you very much.

Thank you. Our next question is a follow up question from the line of Yair Reiner with Oppenheimer. Please go ahead.

Yes, a question on the backlog. Your coverage ratio has fluctuated a lot over the last three or four quarters between 43% to 73% over just I think since March. Can you tell us some of the things going through your thinking in this quarter given the really high backlog coverage?

As Francis mentioned earlier, I mean we haven't changed the way we put together the scenarios we construct for guidance and again based on the backlog coming into the quarter, forecasts from our customers which include new design ramps during the quarter has led us to the current range of 105% to 115%.

Thank you. And there are no further questions in the queue.

Okay, you know thanks for attending this quarter's earning call and we look forward to updating you again next quarter. Bye, bye.

Ladies and gentlemen, this concludes the Synaptics Third Quarter Fiscal 2009 Conference Call. Thank you for using [AECP] teleconferencing. You may now disconnect.