Synaptics Inc (SYNA) 2009 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Synaptics fourth quarter fiscal 2009 conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for your questions. (Operator Instructions). This conference is being recorded today, Thursday, July 30 of 2009.

At this time, I'd like to turn the conference over to Alex Wellins of The Blueshirt Group. Please go ahead, sir.

Good afternoon, and thank you for joining us today on Synaptics fourth quarter and fiscal year 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 CEO of Synaptics; Tom Tiernan, the Company's President and Chief Operating Officer; Russ Knittel, Chief Financial Officer; and Kathy Bayless, the Company's Senior Vice President, Finance.

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

We refer you to the Company's SEC filings, including Form 10-K for the fiscal year ended June 30, 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, Alex, and thanks, everyone, for joining us on the call today. Before I provide an overview of our record end-year results, I'd like to make a few comments about this afternoon's announcement regarding my retirement.

As of today, I will be stepping down as CEO, and will be succeeded by President and COO, Tom Tiernan. Tom joined Synaptics in March of 2006, bringing a strong business background, general management capabilities, and a focus on execution, which have served the Company well. In the past three years, he has proven his ability to lead our [corporate] team, forge important customer relationships, and expand our technology into exciting new markets -- all while delivering record financial results despite dynamic market conditions.

Synaptics is stronger and better positioned than ever before; and for personal reasons, I feel the time is right for me to make this transition and dedicate more of my time to my family, my foundation and other charitable and civic endeavors. I will continue to serve as Chairman, and will remain involved with the Company as an advisor to the Synaptics management team.

Tom and I have worked very closely to spearhead Synaptics's growth and diversification over the past three years. And the Board and I have confidence in Tom's ability to lead the Company through its next stages of growth. This transition is occurring under the succession plan for the Company's Board of Directors established for executive management.

Now turning to our present results. I'm pleased to announce that the Synaptics team has delivered record financial results despite challenging economic conditions. I now would like to thank all of our employees for their tremendous contribution to our success over the past 12 months.

During fiscal '09, revenue grew to $473.3 million, an increase of approximately 31% over the prior fiscal year. Net income grew approximately 75% to $54.3 million, and diluted earnings per share increased 94% to $1.53.

During fiscal '09, we continued to execute on our goal of revenue and customer diversification by expanding our presence within the handheld markets. At the same time, we further entrenched our position in the notebook market, where we continue to drive innovation through new features such as our Gestures Suite and the recently announced ClickPad.

We also firmly established Synaptics as a leader in the rapidly growing netbook category. Following on our commitment to enhancing shareholder value, during the year, we opportunistically took advantage of market conditions to retire approximately 48% of our debt at a 7% discount to par. Using a similar approach with our stock repurchase program over time, we've been able to hold our diluted share count essentially flat compared to March ['02], our first reporting quarter following our IPO.

The adoption of capacitive technology across multiple markets is just beginning. And we are excited by the growing pipeline of opportunities ahead. Synaptics will continue to leverage its leadership position in the notebook and mobile phone market, while driving innovations to further enhance the user interface experience and next generation consumer electronic devices.

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

Thank you, Francis. In addition to our GAAP results, I'll also provide supplementary results on a non-GAAP basis, which excludes non-cash share-based compensation charges and certain other nonoperational and non-cash items. Please refer to our press release for the fourth quarter of fiscal 2009 for a detailed reconciliation of GAAP and non-GAAP results.

Revenue of $115.3 million was at the high end of our range, and represents a record level for our fourth fiscal quarter and an increase of 19.1% over the comparable period last year. The revenue mix from PC and non-PC applications was approximately 57% and 43%, respectively.

On a year-over-year basis, our revenue from PC applications was roughly flat. The attach rate and notebooks from multimedia controls in the fourth quarter was approximately 5%, down as expected from 8% last quarter, and compared to more than 37% in the comparable quarter last year, which, as we indicated at the time, represented a peak. This was offset by increased revenue from TouchPads and traditional notebooks as well as the emerging and growing netbook category.

Revenue from non-PC applications grew $18.6 million over the comparable period last year, representing an increase of approximately 59%. This strong growth was primarily driven by a 49% increase in revenue from mobile phone applications, which represented approximately 39% of total revenue for the quarter.

For fiscal year 2009, total revenue was $473.3 million, with 57% from PC applications and 43% from non-PC applications, which is represented primarily by mobile phones and portable digital entertainment devices. Our revenue growth of 31.1% for the year was solely attributable to revenue from mobile phone applications, which grew approximately 3.5 times and represented 35.1% of total revenue, compared to 13.2% last fiscal year.

Revenue from PC applications represented 57% of total revenue and was down approximately 1.2% compared to last year, primarily reflecting increased marketshare in notebook TouchPads, offset by a generally lower-priced product mix, the expected decline in the attach rate for multimedia control modules, and the impact of the weak economic environment.

Revenue from portable digital entertainment devices was down 7.6% year-over-year, also reflecting the general economic weakness and the unique OEM competitive dynamics in the digital music player market.

Our non-GAAP gross margin for the quarter was 40.6%, in line with our expectations, and compared with 40.9% in the preceding quarter and 40.2% in the comparable period last year. For fiscal 2009, our non-GAAP gross margin was 40.8% compared with 41.1% in fiscal 2008, a small change, primarily a reflection of overall product mix.

Headcount at the end of June was 524 compared with 502 at the end of March. During fiscal year 2009, we increased our headcount by approximately 25%, which follows a 35% increase in fiscal 2008. We will continue to add staff in fiscal 2010, as we invest to further enhance our engineering and technology capabilities, and to meet the opportunities ahead.

Total operating expenses were $31.9 million compared to $30.1 million in the preceding quarter, including non-cash share-based compensation charges of $6.4 million and $5.7 million, respectively. Excluding share-based compensation, our operating expenses increased by approximately 5% as anticipated, primarily reflecting our increased engineering staffing level in combination with the generally higher expenses related to our current business levels.

For fiscal 2009, non-GAAP operating expenses increased 21.4% to $99.3 million, but declined to 21% as a percent of sales, compared to 22.7% in fiscal 2008. Net interest income was $218,000 compared with $304,000 in the prior quarter, reflecting lower average interest rates, partially offset by higher average invested balances.

Regarding our investments in auction rate securities, during the quarter, we received $3.3 million on the redemption at par of certain auction rate investments, resulting in a $160,000 gain in other income. As of the end of the quarter, the par value of our auction rate investments was $42.5 million, and the carrying value was $28.8 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 11.9% and 20%, respectively. For fiscal 2009, our GAAP and non-GAAP tax rates were 17.4% and 18.8%, respectively, compared to 36.3% and 31.1% in fiscal 2008, primarily reflecting the full benefit of the tax structure we implemented in 2005.

Our non-GAAP net income in the quarter was $17.2 million or $0.47 per diluted share, compared with $10.7 million or $0.30 per diluted share in the comparable quarter last year, representing increases of 60% and 57%, respectively. The significant increase in profitability year-over-year reflects a combination of our revenue growth, strong operating performance, and our more efficient tax structure.

Now a few comments on our balance sheet. We ended the June fiscal year with total cash and short-term investments of $192 million, up from [$174.5 million] at the end of March quarter. Cash flow from operations was approximately $6.2 million for the quarter and $81.6 million for the year.

Employee participation in our stock plans and tax benefit from these plans contributed $7.3 million and $3.3 million, respectively, for the quarter, and $16.4 million and $9.4 million, respectively, for the year. In fiscal 2009, we used $55.6 million to retire $59.7 million of our outstanding convertible notes.

Capital expenditures were approximately $2 million in the quarter and $9.3 million for the year, primarily reflecting investments in test equipment, tooling and general infrastructure. Depreciation was $1.9 million for the quarter and $6.3 million for the year.

Receivables at the end of June were $84.7 million, compared to $69.2 million at the end of March. The increase in receivables primarily reflects the higher quarterly revenue and a more typical DSO of 66 days, which is up as expected from 62 days at the end of the prior quarter and within our target range of 65 to 70 days.

Inventories at the end of June were $15 million compared with $15.9 million at the end of March. Inventory turns this quarter were 18 times compared to 15 times during the March quarter. Given the macro environment, we took a very cautious approach to managing inventory levels during the June quarter, but anticipate increasing wafer starts to build our die back to more typical levels.

I'll now turn the call over to Kathy, who will comment on our business outlook.

Thanks, Russ. I am very pleased to be part of the Synaptics team, and I share our entire team's enthusiasm for our leading technology, innovative products, and the expanding market opportunities we see ahead in multiple growing markets.

Looking ahead to the first quarter and a new fiscal year, as has been Synaptics's consistent practice in the past, we consider a number of factors to develop a reasonable outlook for investors. These include global economic conditions; the dynamic nature of the markets in which we participate; our existing design wins; current design activities; and our identifying pipeline of opportunities.

Based on our current visibility, expected product mix, customer order patterns and backlog of $62.8 million exiting the June quarter, we anticipate revenue in the September quarter will be in the range of $113 million to $119 million. To provide a little more color on that range compared to the prior year, we expect solid growth from mobile phone applications, while PC-based revenue will decline, primarily reflecting our planned decrease in revenue from multimedia controls, as well as a generally lower-priced TouchPad product mix.

Using our current backlog as a proxy, we expect our non-GAAP gross margins to be around 40%. We expect our operating expenses to be up sequentially, reflecting the impact of our ongoing staffing initiatives, particularly related to our investments in R&D.

We currently anticipate our non-GAAP tax rate for both fiscal 2010 and the first fiscal quarter to be in the range of 20% to 22%. We expect our FAS 123R charge to be approximately $7 million, up $200,000 compared with the June quarter. Our non-GAAP net income per diluted share for the September quarter is expected to be in the range of $0.37 to $0.43 per share.

Looking out to the remainder of fiscal 2010, it's challenging, given the macro uncertainty, which is evident in the cautious order patterns we see from our OEM customers. Considering that, our current outlook suggests revenue of $495 million to $525 million for fiscal 2010, with the first half roughly flat year-over-year.

Fiscal 2010 outlook is more indicative of the existing general market conditions than the potential we see in our current pipeline of opportunities.

I will now turn the call over to Tom for a discussion of recent product development and an update on general market environment.

Thank you, Kathy. Last quarter, we noted increasing customer adoption of our multi-finger gesture-enabled TouchPads for notebooks, as well as strong growth in netbooks. Moreover, we recently announced high-profile phones that have hit the market featuring Synaptics's touchscreen solutions.

Our broad OEM customer base continues to grow, and now I'd like to highlight a sampling of some of the design wins within our markets over the past quarter.

In the notebook market, we introduced a ClickPad solution at COMPUTEX last month -- an innovative TouchPad for consumer and business users who desire larger, multi-finger, gesture-enabled TouchPads, particularly suited to smaller notebook designs. Our ClickPad eliminates the need for traditional physical buttons, enabling the entire TouchPad to act as a button that can be clicked to initiate a user action. We have many designs in development now utilizing ClickPad for OEMs throughout the world.

Synaptics's gesture-rich TouchPads are featured in the stylish Dell Adamo and Lenovo T400 notebooks, both of which incorporate our two-finger scroll, pinch and rotate gestures. These notebooks are being shipped in the US.

Within the netbook category, Synaptics has been designed into the next generation of ASUS Eee PCs. This quarter, the ASUS Eee PC 10.1 inch netbook and Disney-branded ASUS Netpal Netbook were announced, both using our TouchPad. They are currently shipping in the US.

Turning to the mobile phone market, we recently announced the expansion of our industry-leading, ClearPad touchscreen portfolio, with new solutions targeting both the high-end and mass market needs. Synaptics's ClearPad 1000 series brings high performance, single-touch capability to the mass market.

Synaptics's ClearPad 3000 series brings advanced multi-touch capabilities across larger screen sizes to the high end of the handset market, where new usage models demand the most innovative solutions. Both the 1000 and 3000 series solutions combine our existing patented ClearPad technology with our exclusive end-to-end solution stack. This makes it easy for designers of both mass market and high-end handsets to integrate advanced capacitive touchscreens into their products, bringing them to market faster and with less risk.

We are working with every major mobile handset vendor in the world, and have several new products to highlight this quarter, featuring ClearPad touchscreen solutions.

First, we're pleased to announce that Synaptics's ClearPad is being deployed in T-Mobile's second-generation Android phone, the myTouch 3G. This follows our design win in the original G1 phone. The myTouch 3G is based on the HTC Magic touchscreen phone, and has deep integration with Google and YouTube. The myTouch will ship in the US at the beginning of August.

The recently introduced LG GD900 crystal is a slider phone with a three-inch touchscreen and a transparent keypad that lights up when opened. Billed as the world's first transparent-designed phone, it features two Synaptics ClearPads. Additionally, LG's new GD910 watch phone features a Synaptics ClearPad touchscreen, and is scheduled to make its debut in the UK in August.

NEC's new N-06A Dual Mode phone, offered by NTT DOCOMO in Japan, features Synaptics's ClearPad. This is a WiFi-enabled smart phone that allows the consumer to connect a WiFi capable device to the Internet via the handset.

Finally, beyond our traditional markets, we have continued to see adoption of our touch technology in adjacent markets. This quarter, our OneTouch design studio has enabled our penetration into markets such as digital photoframes and advanced Bluetooth headsets. We also had our first touchscreen design win in the PND space with a major OEM.

This snapshot of a few of our new design wins reflects both the breadth of our product portfolio, as well as our flexible business model in helping our customers fulfill their design requirements and supply chain goals. With capacitive sensing technology becoming more and more prevalent in today's rapidly evolving digital devices, Synaptics is the only vendor providing a full range of products and business model options for capacitive solutions.

Stepping back for a moment, since going public seven years ago, Synaptics has grown from $100 million to $473 million in revenue, representing compounded annual growth of 25%. Fundamental to this growth is our ongoing commitment to investing in our business.

This includes putting in place unique assets, such as our flexible business model and local design centers right next to our customers; making our technology easy to implement; and establishing Synaptics as a top choice of leading OEMs throughout the world, based on our unmatched innovation and support capabilities.

As part of this commitment, we are investing heavily in value engineering and materials science, working with our partners to aggressively take costs out of capacitive touchscreens in order to bring prices down into fuel mass-market adoption. We experienced the same dynamics in the early days of our TouchPad business and we are managing through this dynamic today for capacitive touchscreens.

And to nearly pushing the innovation envelope, coupled with strong value engineering efforts and a flexible business model, is what attracts customers to Synaptics and is what keeps them coming back.

With the adoption of capacitive technology in mobile phones still in its nascent stages, we expect the competitive landscape to remain dynamic in fiscal 2010. We believe that with the increasing convergence of applications and more sophisticated user interfaces in mobile devices, unique customized interface solutions will remain vital to OEM's abilities to differentiate their products. Our global customers, who include virtually all of the leading PC and major mobile handset makers in the world, trust Synaptics to deliver the most advanced technology and innovative designs.

With close to 40% of our employees located outside of the US, our engineering capabilities are closely aligned with our customers' design cycle and time-to-market requirements. Combined with our system engineering know-how, history of innovation, and proven track record of over 600 million [unit] solutions shipped to date, we believe this approach continues to be our key competitive advantage.

Looking ahead, we plan to continue to add staff and invest in the Company to support our long-term growth objectives, and lay groundwork to capitalize on additional opportunities beyond the markets we serve today. The fact that we continue growing our team is a good indicator that our design activity remains robust, and is indicative of the leading position we hold in both markets we serve today.

In closing, I'd like to thank Francis and the Board for their confidence in me as Synaptics' CEO. I'd like to personally thank Francis for the guidance and support he has given me, and on behalf of the rest of the Synaptics family, thank him for his leadership and invaluable contributions to the Company's outstanding growth and success over the years.

It has been an honor working with Frances over the past three years, as we have scaled the Company into what it is today. I look forward to continue to work closely with him in his advisory role.

Those of you who know me, know the passion I have for this Company and for the businesses we're in. Capacitive touch technology has just begun to revolutionize the way we interact with intelligent devices. What we see in the market today represents just the beginning of what will continue to develop into a major opportunity for the Company.

As I look ahead, Synaptics's prospects have never been brighter. My team and I are highly motivated to continue advancing Synaptics's mission of innovating and deploying intuitive touch interface solutions across multiple markets. Our goal is to build on the solid growth and profitability that Synaptics has achieved since its IPO, and we will maintain a strong focus on enhancing shareholder value as we move forward.

Kathy and I have had the opportunity to speak with many of you over the past several months, and we look forward to continuing to connect with our investors in the near future. We will be presenting at a number of financial conferences and investor events over the coming weeks, and we intend to remain as engaged with the investment community as Francis and Russ have been in the past.

I'd like to conclude by thanking our employees, partners, customers, and investors for their steadfast support over the past 12 months. We look forward to updating you on our progress during the coming year.

With that said, let's turn the call over to the Operator to start the Q&A session. Operator?

Thank you, sir. (Operator Instructions). John Vinh. Please state your company name, followed by your question.

It's John with Collins Stewart. First question I have for you guys is -- you talk about the first half of 2010 being flat. I would anticipate that with the significant growth in the smartphone market that you would still see growth there despite some macro headwinds. I was wondering if you could maybe comment on what your assumptions there and maybe reconcile the flat growth with the strong growth in smartphones.

Are there some product pushouts, share loss that's impacting your guidance there in the first half?

Yes, John. Actually, in that space, in smartphones and mobile, we remain quite bullish. In the context of the first quarter, as was mentioned in the prepared remarks, we expect continued good growth on a year-to-year basis there.

We do have a bit of a tough compare in the second quarter, fiscal quarter of the year, given some very, very strong ramps that we had in the previous year. But the numbers that we're projecting overall for the entire fiscal year, with a lot of growth coming in the second half, reflect a very strong adoption -- continued adoption of capacitive touchscreen technologies and Synaptics solutions in these customer accounts.

And then your -- just to follow up on your outlook, was slightly kind of below consensus. Is there any sort of impacts from maybe customer product delays or any sort of share loss that's impacting that?

Well, what we see is the competitive landscape really hasn't changed. You see our market position remaining quite strong and we continue to win more than our fair share of designs.

In terms of the profile of our revenue associated with that category over the coming four quarters, we are taking into account, of course, all the design wins that we do have, and the current schedules and forecasts that our OEM customers are providing to us. And overall, when you look at the numbers we've put together for the year, we're still being a bit cautious, given all the macroeconomic uncertainty. That does exist still out there across both categories -- both notebooks and handsets.

Okay. And then just one more question, if I may. If I look at your fiscal '10 guidance, you normally, in the past, have given some EPS guidance. Maybe help us with that a little bit. If I look at the midpoint of your fiscal '10 guidance, you're up 8%. You're indicating that you plan on growing OpEx next year and continuing to investing in R&D, so it doesn't seem like to me that maybe EPS is pretty much going to stay flat.

Maybe also just help us with some of the other moving parts there, like gross margin assumptions, product mix, things like that. That would be great.

Well, John, as consistent with past guidance that we've given, we've never given an annual guidance for gross margin or EPS, and nor are we this year.

We are intending to continue our investment, primarily in R&D and engineering, that would both in design centers around the world, which we are expanding over the coming four quarters, as well as in our fundamental technologies -- our chips, our software, our algorithms, the materials that we use. And that's a direct reflection of the design funnel that we have, the opportunities we see.

And at the end of the day, it's a direct reflection of the optimism we have in this business, as adoption of this type of technology in these massive markets, like handsets, which today, are between 1% and 2%, growing much, much higher than that over time.

Great. Anything that you're seeing in your pipeline that would suggest that gross margins would track either to the upside or slightly below your long-term gross margin targets of 40% to 45%?

Well, yes, and our long-term target is still the same. It's 40% to 45%; that's not changing. As you know, over the last couple of years or so, we've been hovering toward the low end of that range, between 40%, 41%, slightly north of that.

We don't expect any change to that. The key for us, of course, is managing the entire mix within our portfolio, and driving our business in a way that drives that kind of value. And we see no reason at this stage to change that.

Paul Coster. (Operator Instructions).

JPMorgan. I guess a number of us are going to be asking the same question in different ways, but you've experienced 25% CAGR growth for several years; and here we are facing a sort of flat to slightly up year. Is that purely cyclical -- once we're through the cyclical headwind, do you expect growth to return to double digits?

Yes, Paul, we see no reason to change our growth trajectory. We're still highly confident in maintaining that growth rate over time, that 25% CAGR that you're talking about.

In notebooks, I mean, if you listen to most of the market analysts out there, like IDC and Gartner and those guys, they're projecting roughly a 14% or so increase calendar year '10 in units. Our share in notebooks, frankly, has been increasing over the past quarter, quarter and a half. We expect that to continue. That's mainly driven out of the innovation we'll be bringing to market with the multi-finger gestures and that type of product.

We do have a tough compare this half in the notebook category because of the much lower connect rate of [MMBs], which this time last year, contributed non-trivial revenue. But we're still very optimistic about that.

In terms of mobile, as I mentioned before, adoption in the market is 1%, 1.5%, maybe 2% at best right now; it's been growing incredibly rapidly. We're engaged with all the customers out there. And we're able to engage with these guys in all different kinds of business models, based on how they want to get designed in to this technology and how they want that technology to be fulfilled.

So for us, we're still consumed and over-subscribed, frankly, in servicing all the designs out there, which is one of the reasons we're continuing to make the investments. And that's all reflected in our outlook. If you run the profile, of course, of the numbers, you'll see that we're getting back to the growth rates that have been historical for this Company in the second half of the fiscal year.

Maybe another sort of frustration that's expressed in the fact the stocks down about 20% in the aftermarket is that you are increasing your operating expenses at a time when you've hit a slowdown; and many companies out there are using this slowdown as an opportunity to really ratchet down on expenses.

Could you not [account] the growth whilst also pulling down on expenses aggressively, and thus -- at least deliver to investors EPS upside to expectations in the first half?

Well, let me respond to that in a couple of ways. One is we're investing for the future. We see very large growth opportunities out there in this market. And we think the future is bright -- not just in the primary markets we compete in today, but in many other adjacency and brand-new markets that we haven't even scratched the surface of today.

So our view is throttling back on the engineering investment, which is where we have the primary plans for increasing our headcount would be the wrong thing to do.

Fair enough.

And again, Paul, the near-term outlook in the context of this quarter and the following, we're taking into account the kind of cautious macroeconomic environment. We see that in our accounts and our customers. And we've all lived through the world last year, and we're setting ourselves up for continued growth in the out months.

Daniel Amir. (Operator Instructions).

Yes, Lazard Capital Markets. First of all, good luck, Francis, in your next life, I guess.

Thank you, Dan.

Thanks. So, a few questions. I hate to beat this guidance question, but I feel that in your commentary, there's somewhat of a disconnect between how bullish you are on the end markets and the opportunities, and how fast the mobile phone market is growing, and the notebook/netbook segment as well. But your guidance doesn't really reflect much growth here.

I mean, is there a shift here in terms of the breakdown of your module versus chips in your mobile phones? Are you actually getting more design wins but they're actually more chip-related and not module? So maybe you can help us -- give us a little more clarity on kind of the guidance here.

Sure, Dan. A couple of things. One is our near-term outlook, as I mentioned, is more a reflection of the macroeconomic concerns out there. We see that in the cautious order patterns of our customers' fluctuating forecasts and what-have-you.

And as you pointed out in the prepared remarks, the growth for the year, we don't think is fully indicative of the potential we see in our pipeline.

Mobile is going to continue to grow and continue to be a big contributor to this Company, as is notebooks, as we get out of this tough compare period. And we think the strength of our business model and the Company of being a portfolio player in the market, able to fulfill not just touch screen designs, but any kind of implementation of capacitive technology, in the way that our customers want to procure and the way they want to incorporate in their unique supply chains, is a critical and unique asset for this Company and something that differentiates us from the competition.

So, on the chip versus module, I mean, is your mix actually -- or you expect that mix to change, compared to what it is right now?

Well, the -- Synaptics continues to win a lot of designs. And as I said, there's some designs we can't even go after right now because we're just oversubscribed. Right now, our chip, if you look at our total business, the mix of chips contributing to our total business is around 5% or so. We see our flexible business model as a strength. And as we've been saying for many quarters now, for us, it's a game of chips and modules, and we will service the accounts, our customers in the way they want to be serviced.

Adam Benjamin. (Operator Instructions).

Jefferies. Thanks, guys. Just want to talk about the confidence level in the December quarter. That's a pretty decent sized snapback after a flat September quarter, so want to understand what's baked in there.

And then if you can talk a little bit more -- people have asked this already, but clearly, you're a little bit of a canary in the coal mine here, with the fact that everyone is seeing significant snapback in PC orders as well as netbooks. So can you talk about -- did some of your end customers have inventory? Is there something to explain why you're such an outlier here, specifically with PCs? Thanks.

Sure. So, again, in the notebook space, there's two things going on. One -- and this is a near-term phenomena -- we have the multimedia attach rate going quite a bit down last year to this year, in this quarter and next. So we can have that headwind that we're managing through right now.

I got it.

And that's just a function of what OEMs are doing in their new product mixes, where some of them are not moving forward with continuing the multimedia control lineup. They're either incorporating them into the TouchPad or into the function keys on the notebook itself. So that actual market there itself and that attach rate itself, is going down.

The second thing is, is that, as we've said before and we continue (multiple speakers) --

Tom, can I interrupt for one second? I mean, you indicated that it was 8% the prior quarter and 5% this quarter. I mean, that's a very small percent. So I'm having trouble understanding how that's a headwind.

Well, I was comparing the year-on-year. The year-on-year this time last year with something like close to 20%.

Okay. And the second comment I'd make is that netbooks as a percent of our mix have been increasing fairly substantially over the past couple of quarters. And netbooks is definitely still a growing part of the market within the overall notebook segment. And as we've said before, TouchPads that are smaller generally are lower ASPs. So that's a factor we've incorporated into our guidance as well.

Vijay Rakesh. (Operator Instructions).

From ThinkEquity. Hi, guys. Just a couple of questions. I was wondering how Synaptics -- I know you mentioned all the feature sets on the handset side that you have -- just wondering how you guys are planning to differentiate yourself going forward with a lot of competition coming in from Cipher and Advel, and [SLAB] and [Edan] and all the guys?

Well, on a number of levels, Vijay -- and thanks for asking that question -- first of all, Synaptics' history and our current reality in our R&D pipeline is one of always pushing the technology envelope, always pushing innovation. And fundamentally, at the core, what we see in the market across -- not just the handset space, but all of our customers, is an intense desire for those customers to differentiate their products with compelling user interfaces, different usage models, interesting industrial designs and such. And we play right into that nexus of what they're trying to do to differentiate their products.

In terms of other elements of our value proposition in this market, our view is that being able to offer a designing engagement and a supply engagement that fits into the business models of these customers, is actually a competitive advantage. And we continue to drive our local design centers based on that, and our supply capabilities and our partnering capabilities to drive this technology in a way that will get mass adoption in the market.

Our recent product announcements that we made a week or two ago, with our ClearPad touchscreens -- the Series 1000 is focused on the mass market, the mid-range of the market. To date, most of the adoption has been at the very high-end feature phone, smartphone area. There's a huge other market out there, which we're driving to capitalize on.

Got it. My second question was, smartphones is almost 40% of your revenues here and you have the lead obviously in that market. But smartphone market is anything but cyclical now. It's very strong growth and it's probably growing 100% year-on-year, as you look at next year. And if that's 40% of your revenues, why are you guiding so conservatively, like, 8% year-on-year when -- and that's subpar based on past growth too. And you're just in the cusp of the handset market. So what am I missing there?

Well, a couple of things there. First of all, if you look at the number of designs that we have shipping in any particular quarter in the handset category, it's still in the range of 15, 20, low 20s. And so these typically are very high-volume designs. They're very fast ramps; sometimes very short lifecycles.

The impact on the category's overall results can be influenced, either very on the up side and the down side on these ramps of these products, because a few of these products drive a lot of revenue.

In terms of the adoption rate in smartphones, you're absolutely right; there's very strong adoption. There are more and more accounts are expanding their lineups. With our portfolio approach to our business model, there is a large and wide ASP range. We have, for example, some accounts that ask us to -- not just deliver an entire module, with the substrate and chips and flex and firmware and software and all that, but they also ask us to deliver a module with a lens -- laminated to a lens or attached to an LCD.

And then we have other accounts who ask us to deliver some portions of a module, whether it be our tail solutions or our chip solutions into parts of their supply chain. So a wide ASP range and that's what we are taking into account in the guidance that we have issued.

Jeff Schreiner. (Operator Instructions).

Yes, it's Jeff Schreiner, CapStone Investments. Thank you very much for taking my questions.

Tom, could you kind of help us -- you've talked a lot about the multimedia kind of attach and some of the impact and headwinds it's been causing the Company, at least in the near-term with the September guidance. Could you help reconcile for us, though, if we look back at prior-year September, wasn't there some incremental benefit on the notebook side of the TouchPad side, with the growth explosion in netbooks, which at the time, allowed for more of a sole source opportunity as other competitors didn't have a solution?

And is that now changed when we look year-over-year going into the September? And maybe is that causing some of the headwinds that we're seeing in the guidance that you provided for the September quarter?

Yes. Netbooks, as you know, has been a growing part of the market; it's definitely been the sweet spot. That was true last year. It's true in the present, as well.

Our view of our market position in netbooks is that it has started out strong and is actually even growing. So we think we continue to be in an incredibly strong position over there.

Relative to the September quarter last year, what the market went through in September and in December is very well documented. It was a very strong overall September quarter for us last year, particularly in the notebook side. And so you could argue that there is a bit of a tough compare there as well, but it has nothing to do with any change in share position.

Okay. And just to follow up kind of -- I think people have touched on this a lot of different ways, but I'd like to ask it because -- you referenced macro and that being -- causing you to be a little bit more cautious here in the near-term, cautious with your guidance; yet some of your competitors have come out and been very, very bullish with what they're seeing in the market, what they're seeing with design win traction. That includes the TouchPad space as well as the handsets.

Can you help us understand why other competitors who are now entering the market and seeing some traction are feeling that there is no real macro concern for them in this particular market? And that you guys are referencing macro as a concern for maybe the more conservative guidance at this point. Thank you.

Well, again, Jeff, we don't see the competitive landscape as changing. The dynamics we're dealing with now are the same dynamics we dealt with last year and will continue to deal with.

We're still very, very bullish on the prospects for both these markets and others. Our final -- our design pipeline is still overflowing. We're very bullish on the prospects here going forward. And we think that the way we engage with our customers, the system engineering capabilities we bring with them and our ability to engage them in their supply chains, to guarantee rock-solid products ramping quickly in volume with good quality, and all the know-how that's behind that, continues to separate us from the competition.

I'm not going to comment on the accuracy of our competitions' messaging over the past many quarters. But what I will say is that the market itself is at the very early stage of adoption. The number of opportunities are expanding. No one company is going to be able to capture every single design.

So I'm not surprised if other companies do win a design here or there; but to us, it's all about pushing the envelope and the technology, getting the prices, the cost right, and driving adoption. And we think with the assets we've got in place and the model we've got, that we'll do more than our fair share of business in this market as we go forward.

Yair Reiner. (Operator Instructions).

Yes. Yair Reiner with Oppenheimer & Co. First, congrats, Tom, on the promotion. And Francis, we'll obviously miss you and you've done a great job for the Company over the years.

Thank you, Yair.

So, my first question here is in terms of the R&D investment, obviously, very big both on the year-on-year and on a quarter-on-quarter basis, looking out to next quarter. Can you just give us a little more of a deep dive about where that's focused on? Is it more in the supply chain of trying to drive the cost down? And what's the context for that? Or is it more about focusing on potentially new applications, like MID or other devices?

Well, good question, Yair. It's -- I'd say, loosely, there's three main buckets that our R&D investment is going into -- all three of which, frankly, are growing in terms of our increased investments.

One is we're still overflowing in the number of design opportunities that we see. And so we continue to put local assets, local headcount in place around the world to service the customer needs in time zone, in language, and so on. And that's something we think is mandatory for us to truly entrench ourselves in these markets as we go forward.

The second big area, and it is a big area, is our capability in platform development. That means the chips, the ASICs, the algorithms, the software, the materials that we use to design what we think are best-in-class, highly-innovative solutions.

And as this market continues to evolve, as this market grows, a single offering isn't enough. There's a big difference if you're an OEM, if you're selling a smartphone for a couple hundred bucks end-user price point, versus a $50 price point phone. So they require different types of engineered solution. And we're making sure our portfolio of products enables that type of investment.

The third big area is in value engineering; it's related, but there's a lot of partners in this market that are delivering different pieces of the solution. We've commented before that if you look at the BOM for particularly touchscreens, whether you're using glass substrates, plastic substrates or any other kind of substrate, there's lots of opportunities there to drive costs out, prices down, and of course, adoption up.

And that's where we're spending our energy. That's where we're spending our investment. We think that's the right thing to do for the Company, both in the short and the long-term.

And then the follow-up is, when do you expect to see the real return from that? And when do you think we might expect to see operating margins come back to what you've cited as your long-term target of about 20%?

Hi Yair, this is Kathy. As far as long-term target models for operating income, we typically have said that our long-term target model for operating income is in the mid to upper teens. And we have been operating above that, but we've typically never said that we would model up at the 20% range.

Steven Fox. (Operator Instructions).

Steve Fox with CLSA. First of all, just a clarification, when you look out to the December quarter and you say that's a tough comparison, are you only speaking about the PCs? Or when we look at the handset comparison, that looks tough to you too now?

Well, when we look at the December quarter, we actually are, in our overall guidance, modeling back to, hopefully, normal industry seasonality patterns as it relates to notebooks. So we are not expecting the same weirdness that we had in the market last year, as all of you know about.

But what we really see as headwinds in Q2, fiscal Q2, is actually more related to our mobile space and making sure that our -- a year ago, our revenue profile there was highly, highly oriented toward high-end plastic-based modules that we were shipping in several designs. And between then and now, we have driven costs down, prices down. And that's more the dynamic that we've got going on in the second fiscal quarter.

Okay. And then secondly, can you just discuss the potential that some of your customers that maybe acquiring or developing some of the skill sets that you've been providing with them and bringing certain of design capabilities in-house? Is that potential still out there or would you discount that, and why?

Well, we haven't seen any evidence of it. We see all the same reports you guys probably see. But we haven't seen evidence of that in any way, frankly. We're still engaged with all the accounts across the board in design activity, for soon-to-be launching products as well as longer-term roadmap products.

I think what all customers are interested in and everybody is participating in this eco system is interested in, is how to get costs down. Because from the OEM, from the customer point of view, they'd love to be able to deploy this technology across a much broader cross-section of their product line; but just with the costs and the prices the way they are today, it's not financially viable for them to do that.

So you will see across the supply chain experimentation, particularly with new substrate technologies and to try to get costs out, so that this technology can be implemented in many more products as we go forward.

Rob Cihra. (Operator Instructions).

Thanks very much. From Caris & Company. I guess I'll -- I don't know, try and ask the same guidance question about a 4 millionth way here. But I wonder -- you gave, on a year-over-year basis of the September quarter, you said, obviously, that PC would be down and mobile phone would be up pretty substantially on both accounts, probably.

On a sequential basis, are you -- do you feel as though one PC versus mobile phone is going to be dramatically different going June quarter to September quarter on a sequential basis, in terms of revenue, up, down?

And then my follow-on, which I could ask now, if possible, is just I'm curious -- with the multimedia and you've talked about the multimedia attach rate, particularly with things like netbook obviously coming down, and obviously there's more competition now too; but now down to 5% of attach rate, I mean, is that basically going away? Or does it actually go back up one day, do you think? Or is it almost just down to next to nothing, it was great while we had it, but it really just isn't much of a market any more? Thanks.

Well, let me start with that last question first. What we see is the markets moving away from discrete MMBs. When I say discrete, I mean the legacy pattern of putting the MMBs up on the spines, below the keyboard. And we see the market moving to other ways of implementing that functionality in lower cost ways. And one of those is through the TouchPad itself, through what we call dual mode technology.

So, as discrete solutions, we do see a general trend and don't expect it to change of reduced discrete MMBs.

And in terms of your earlier question, your first question about sequential growth, we do see sequential growth in both categories -- both handhelds and notebooks, with mobile being a bit higher than notebooks.

Thank you. And we have time for one final question, and that comes from the line of Kevin Cassidy. Please state your company name, followed by your question.

Thomas Weisel Partners. On the gross margin line, you're up 40% now but the range is between 40% and 45%. Can you tell us what dynamics will help you get back up into the higher part of that range?

Yes, great question. As you know, we haven't changed the range, 40% to 45% is it. Really what's going to swing at higher is the mix.

As we continue to build out our funnel and continue to increase the number of designs, particularly that we've got on the handset side, and you look at the ways we're delivering that product, you'll have delivery of full-blown modules, high ASPs, very good gross margin dollars, probably a bit lower gross margin percent, offset by very strong shipments of what we would call tail solutions or chip solutions with the firmware and software, which will have very favorable and very, very strong gross margin contributions.

Okay. And as a follow-up, just as the market trends from, I guess, smartphone to a smartbook, somewhere in between a netbook and a smartphone, do you think that would be higher gross margins?

Well, that's one of the areas somebody asked earlier about where we're investing our engineering dollars. You know, we see the promise and the opportunity of larger form factor test screens in the notebook category and larger handsets as well.

And our view is that, as we continue to push innovation in areas like that, the way customers will buy, the way customers will engage with us, will probably not be very different from what it is today -- which means that we will continue to supply them these solutions in the way they want to buy it. And we'll manage our own portfolio accordingly.

Thank you. And sir, at this time, I'd like to turn the conference back over to you for any closing remarks.

It was another remarkable year for Synaptics, with record revenues and profits. We continue to have a promising future ahead of us, as opportunities to leverage our capacitive technology continue to expand. Thank you for being on the call with us today. Bye bye.

Thank you, sir. Ladies and gentlemen, that does conclude our conference for today. Thank you very much for your participation and for using ACT conferencing. You may now disconnect.