Synaptics Inc (SYNA) 2010 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Synaptics first-quarter fiscal 2010 earnings conference call.

During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). As a reminder, today's call is being recorded today, October 22, 2009.

I would now like to turn the conference over to Alex Wellins. Please go ahead, sir.

Good afternoon. Thanks for joining us today on Synaptics' first-quarter fiscal 2010 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 Tom Tiernan, the Company's President and CEO, and Kathy Bayless, Synaptics' CFO.

In addition the Company GAAP results, management will 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 the press release issued after market close today for a detailed reconciliation of GAAP and non-GAAP results.

Additionally, we would like to remind you that, during the course of his 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, 2009, 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.

Now, I would like to turn the call over to Tom Tiernan. Tom?

Thank you, Alex, and thank you, everyone, for joining us on the call today.

Today, we are reporting the highest September quarter revenue level in our Company's history. Revenue of $119.6 million was above the high end of our guidance range and grew 4% sequentially and 3% year-over-year. Non-GAAP net income per diluted share of $0.48 was also above our expected range.

We experienced strong sequential revenue growth in the PC market during the quarter, based on solid demand for consumer-oriented notebooks while, on a year-over-year basis, we saw decreased revenue contribution for multimedia controls, as expected.

On the non-PC side of the business, mobile revenue grew more than 60% over the prior-year period, driven by continued strong adoption of capacitive test screen, implementations among major handset manufacturers, and was down sequentially, as expected.

Synaptics continues to benefit as OEMs turn to us for ways to differentiate their products with advanced user interfaces and unique industrial designs.

Reflecting our continued commitment to enhancing shareholder value, we bought back 1 million shares of our common stock during the quarter. This is a strong indicator of our underlying confidence in Synaptics' long-term prospects.

It has been a pleasure meeting with many of our investors and analysts during my first quarter as Synaptics CEO. The markets we address are rapidly evolving and growing. We are the undisputed leader in delivering capacitive touch interface solutions to leading OEMs around the world, and we continue to bring new innovations to market.

I will turn the call over to Kathy for a detailed discussion regarding our first-quarter results and outlook. Kathy?

Thanks, Tom.

Revenue of $119.6 million represented a record level for our first fiscal quarter and an increase of 4% over the previous quarter. The revenue mix from non -- from PC and non-PC applications was approximately 62% and 38% respectively.

On a sequential basis, revenue from PC applications increased 14%, driven by the continuing strong adoption of our multi-finger gesture-enabled TouchPads and seasonal unit growth in the consumer notebook markets. On a year-over-year basis, revenue from PC applications declined 11%, as expected, due to the lower attach rate for multimedia control. The attach rate in notebooks for multimedia controls in the September quarter was approximately 3%, compared to 19% a year ago. Also compared to the prior year, our TouchPad unit volumes have increased commensurate with our notebook market share gain.

Revenue from non-PC applications declined 10% from the prior quarter, as expected. Strong demand from portable music players was offset by lower mobile phone revenue, primarily due to the timing of new program ramp schedules and product mix. Revenue from non-PC applications grew 39% over the comparable period a year ago, driven by a 64% increase in revenue from mobile phones, partially offset by a decline in revenue from portable music players.

Our non-GAAP gross margin was 40.8%, slightly above our gross margin of 40.6% in the prior quarter. The increase in gross margin was above our expectations and reflects our overall product mix for the quarter.

Total operating expenses were $33.7 million, compared to $31.9 million in the preceding quarter, including non-cash, share-based compensation charges of $6.6 million and $6.4 million, respectively. Excluding share-based compensation, our operating expenses increased by approximately 6%, as we anticipated, due to our annual merit adjustments and additional staff to support our expanding product and customer base.

Total headcount at the end of September was 534 compared with 524 at the end of June.

Interest expense was $1.4 million, unchanged from the prior quarter. Both periods reflect a non-cash interest charge of $1.2 million related to the adoption of the new convertible debt accounting standard referred to in our press release. Under this new accounting standard, we are required to include non-cash interest expense in our earnings on a retrospective and go-forward basis for the period December 2004 to December 2009.

In the September quarter, we received $700,000 from the redemption at par of certain auction-rate investments, and we recorded a $449,000 other-than-temporary write-down on certain other auction-rate investments. The total carrying value of the auction-rate investments was $28.9 million at the end of September and is included in long-term assets on our balance sheet.

Our GAAP and non-GAAP tax rates were 24.9% and 20.6%, respectively, compared to GAAP and non-GAAP tax rates of 9.4% and 20%, respectively, in the June quarter. Our GAAP tax rate for September included a one-time write-off of deferred tax assets in connection with long-term tax planning expected to reduce our effective tax rate. In addition, our GAAP tax rates for the June and September quarters reflect the adoption of the new accounting standard I discussed earlier.

Our non-GAAP net income for the September quarter was $17.2 million, or $0.48 per diluted share, compared with $17.2 million, or $0.47 per diluted share, in the prior quarter. Non-GAAP net income and earnings-per-share were above expectations, primarily due to our higher gross margin product mix.

Turning to our balance sheet, we ended September with total cash and short-term investments of $197.6 million, up from $192 million at the end of June. Cash flow from operations was $29.9 million for the quarter, and we used approximately $25.5 million to repurchase 1 million shares of our common stock. This stock repurchase represented close to 3% of our total outstanding shares. After the repurchase, shares outstanding are less than 34 million, which on a split-adjusted basis is less than the shares outstanding after our IPO in January of 2002.

Employee participation in our stock plan contributed $2.6 million for the quarter. Depreciation was $2 million, and capital expenditures were $2 million in the September quarter. Capital expenditures primarily included test equipment, tooling, and general infrastructure.

Receivables at the end of September were $91.1 million, compared to $84.7 million at the end of June. The increase in receivables was due to the timing of sales during the quarter, which resulted in an increase in Days' Sales Outstanding to 69 days from 66 days at the end of June. DSOs are within our target range of 65 to 70 days.

Inventories were $15.7 million, compared to $15 million at the end of June, and our inventory turns were 18, as in the prior quarter.

Looking ahead to the December quarter, based on our current visibility, expected product mix, customer order patterns and backlog of $71 million exiting the September quarter, we anticipate revenue will be in the range of $128 million to [$134 million](corrected by company after the call). Using our current backlog as a proxy, we expect our non-GAAP gross margins to be similar to the September quarter.

As we selectively enhance our engineering and technical capabilities, primarily at our local design centers around the world, we expect some increase in operating expense this quarter to meet the opportunities we see ahead. We anticipate that our non-GAAP tax rate for the second fiscal quarter and fiscal year to be in the range of 19% to 21%, down slightly from our prior guidance, reflecting the expected benefit from the tax planning that I previously highlighted.

We expect a FAS 123R charge to approximate $7.3 million, up $300,000 compared with the September quarter.

Non-GAAP net income per diluted share for the December quarter is expected to be in the range of $0.52 to $0.59 per share.

Our revenue outlook for the fiscal year of $495 million to $525 million has not changed. This outlook is based on current customer forecasts, design wins, and current visibility into our pipeline of new business opportunities.

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

Thanks, Kathy. I'd like to take the next few minutes to discuss our core markets, beginning with PCs.

In the notebook market, Synaptics' TouchPad technology has been broadly adopted throughout the industry. Our proven ability to innovate and deliver solutions has resulted in steady gains in market share. Our market share has grown over the past year and currently stands in the 65% to 70% range.

Drivers for our TouchPad business include the ongoing consumer migration from desktops to notebooks, a very strong presence in the growing netbook category, and the benefits of our industry-leading innovations, such as our multi-finger gesture-enabled TouchPads. The adoption of multi-finger gestures spans the entire notebook sector across all form factors, and approximately 50% of the TouchPads we shipped in the September quarter were multi-finger gesture-enabled.

Another example of our innovative leadership is our ClickPad. I'm pleased to report that notebook OEMs around the world are now taking advantage of its benefits. ClickPad eliminates the need for traditional mechanical buttons typically located below the TouchPad, maximizing the TouchPad real estate and together with our multi-finger Gesture Suite provides a richer user experience.

Now, I'd like to highlight just a few of our recent design wins featuring these innovations. Our ClickPad is shipping in the HP NV 13 and 15 notebooks, and our TouchPad solutions are shipping in the Dell Mini 10V netbook, the Lenovo IdeaPad S12 notebook, the Acer Timeline Tablet PC, and the Sony VAIO W notebook. All of these models include our multi-finger Gesture Suite.

In addition, to adoption of multi-finger gestures in TouchPads and ClickPads, we see other trends that could fuel incremental growth for the PC market and for Synaptics. First is the launch of Windows 7, which could potentially spur consumer and corporate upgrades. While we have not factored a meaningful uptick in corporate notebook demand into our current outlook, this would be a positive for Synaptics.

Additionally, we are well-positioned to compete with solutions capitalizing on Windows 7 support for mainstream touchscreens. While the various usage models that will drive consumer adoption both come sometime after the launch of Windows 7 devices, you should expect that our offerings will provide compelling value that will be exciting to our OEMs.

The first technology release for these larger touchscreens is targeted for calendar Q1 2010. We are excited about this opportunity, as we believe that main touchscreen adoption in notebook and slate form factors could increase to double-digit unit penetration over the next couple of years.

Turning to the mobile market, we continue to see very healthy design activity. We believe every major handset maker is now actively designing capacitive touchscreens into their product lines. While it seems that touchscreen phones are now everywhere, it is important to remember that this is still a very young and developing market and many of the existing touchscreens on the market are the older generation resistive technology.

We continue to show strong performance with the largest mobile handset makers in the world. A few of the recent mobile design wins we are at liberty to mention include LG's latest Black series Chocolate Touch; the LG BL 40; the HTC Hero Phone; and two new Huawei phones.

Additionally, we are pleased to report that we have been designed into two new Samsung phones to begin shipping this quarter. Notably, we have begun our first production shipments into a major European mobile provider.

Our vision of Synaptics' participation in the mobile market spans well beyond smartphones, where less than 10% of the entire 1 billion-plus cell phone market has adopted capacitive technology in touchscreen devices. We see significant opportunities to implement capacitive offerings within lower-end phones, allowing us to address a far greater share of the global cell phone market. These include solutions such as our FlexPad, which sit underneath key mats in Internet-enabled phones, enabling intuitive navigation, gesturing, and character recognition.

Every handset OEM is looking to differentiate their product lines through unique user interfaces, usage models, and industrial designs. With our reputation for constantly pushing the innovation envelope and our proven track record of supporting our customers' design cycles and production ramps, we have demonstrated our ability to help them achieve their goals.

We are the only company on the market providing solutions to customers in any way they want, whether the final solution we deliver is transacted as a fully integrated sensor module, a chip, or something in between. OEMs desire innovation, creativity and flexibility from their suppliers, and that's exactly what Synaptics is uniquely positioned to provide them.

This flexible approach to meeting our customers' needs does add complexity to our business model, evidenced by our wide range of average selling prices and gross margins, both of which are influenced by the amount of third-party content in the solutions we provide. I will note that the blended ASP for the handset side of our business is within the $2 to $6 range that Synaptics has historically seen for over 90% of its products.

As always happens in the technology world, as markets evolve, both costs and ASPs are coming down. Synaptics has a long track record of effectively managing and driving strong results in dynamic markets. While these dynamics add additional variables to the way we forecast our business, we believe our portfolio approach results in a competitive advantage that will enable us to further leverage our leadership in the mobile market.

As you would expect, our focus is on servicing the primary markets that are driving our revenue growth, namely notebooks and mobile phones. That said, there are other opportunities to deploy our solutions within the portable consumer electronics markets, including handheld gaming, digital still cameras, and remote controls, to name a few.

As we move forward, we will invest to take advantage of these new market opportunities to further our diversification strategy. Our long track record of market leadership, innovation, and ability to meet the needs of the top OEMs globally will continue to propel our business. We could not be more excited about our market position and future prospects.

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

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). Raj Gill.

This is Raj Gill from Needham & Co. Congrats on the good quarter. Just a question on the December outlook -- any sense of what you could provide for the rev mix between the mobile phone and the PC business? Any sense of what the traction is going question-over-quarter? If you could also comment on some of the competitive dynamics. Clearly, you've probably been hearing a lot of noise out of your other major competitor. I wanted to talk about market share relative to the overall growth of the market.

This is Kathy. I will start with the first part of that question.

In looking at the December guidance, what we're looking at is really solid growth from the mobile side of the business within the entire non-PC segment of the business, and also then looking at the PC side of the business with our leading share we expect to track with market trends.

Just to add to that, Raj, and to give a bit more color on market share, in notebooks, let me start there. As I mentioned in the prepared remarks, our share has grown over the past number of quarters and we now are hovering in the 65% to 70% range. We obviously are going to track the market at that level of share and have modeled that into our December guidance and beyond.

In terms of the handset category and the competitors you are mentioning and all the noise out there, frankly we don't see a major shift in the business models. Our strategy has been and continues to be to offer a portfolio of ways of engaging with us in terms of how we fulfill product. We have accommodated that and build that into the guidance, both in December quarter and into our second-half outlook.

Okay, excellent. Just one quick question on the pricing -- any comments on what you saw pricing, quarter-over-quarter, or what pricing was, say, six months ago on the modules? Was there any mix shift to chip-only in this quarter and what you're seeing in kind of the next couple of quarters?

Sure. Well, let me start with notebooks. I would characterize pricing there as very moderate and irrational, so no real change in the pricing landscape there.

In handsets, remember, when you rewind in time to five or six quarters ago when we first broke out in this category, most of what we did ship were modules at that point in time. Over the past number of quarters, we have been offering our customers different ways of engaging with us and doing business. So our mix has shifted. We have a healthy balance between chips, between modules and what we call tail solutions. That is factored into the numbers that we have talked about today.

Okay, thank you.

Rob Cihra, Caris & Co.

You had mentioned, Tom, you got into the large screen -- actually, sorry, you didn't get into it. You have been talking about the large-screen entry for Synaptics. I think you said that you actually thought you would start in calendar Q1 of 2010.

Is that the type of market where you think that you guys could actually see material revenue anytime soon? For example, would there really be anything in that fiscal '10 revenue guidance that you had given from large-screen, or is it still kind of a just dip your toe in the water type market? Thank you.

Yes, thanks, Rob. So first of all, in terms of the outlook that we had put together previously, there is no material large test screen revenue comprehended in that. What we are -- in the first calendar quarter of the year is releasing our technology to the OEMs. That's for sampling purposes. We fundamentally believe that it is going to be a while before the applications and the usage models develop, until it becomes a large, larger, highly adopting market. So we are not comprehending that in our current outlook. We see that as into FY '11 and beyond.

All right, great. Thank you very much.

Yair Reiner.

Yes, Yair Reiner from Oppenheimer & Company. So on the guidance for December, I think it's maybe a little bit short of what you had been forecasting three months ago. I'm wondering what pieces of business may have fallen off the table or gotten pushed out that were perhaps previously in your forecast.

Well, again, Yair, when we had commented on our first-half outlook, the half we are in now, we had said roughly flat a quarter ago. And you look, we over-delivered in Q1 coming in at close to $120 million. You take the midpoint of our numbers now and we are showing just a minor shrinkage for the year. Fundamentally, it is a function of the mix that we are shipping of products across both categories and the forecast that we've got from our customers about what is ramping when and aggregate volumes.

Okay, fair enough. In terms of ASPs on the mobile side, clearly those are going down for you for a number of reasons. When do you think that ASP shrinkage stops being a significant headwind in terms of year-on-year comparisons?

Well, the ASP, from our perspective, is primarily a function of the mix of what we are shipping across those different models. We've also commented before that, particularly on the module side with the sensors, that the cost, the fundamental costs, of the sensors are coming down in the plastic and glass substrates; that continues to come down. We have been passing those cost savings along to our customers. We think that is a good thing for the market, a good thing for us, in terms of stoking adoption.

I do not expect the same rate of decrease in sensor costs on a go-forward basis. There will still be reductions but not at the same level that we've been seeing over the past 12 months, as more suppliers have come online and the yields and volumes have increased.

Great. Then if I can just throw in one more? Clearly, you are seeing an uptick in year-on-year growth for the first half of the calendar year. I am wondering if you can give us some insights into what you might have brewing in the pipeline. I will get back in the queue.

Sure. So, again, we haven't given a quarterly breakout of the categories for the second half of the fiscal year but, fundamentally, we expect a good chunk of the growth to come from the handset category, the mobile category. It's a function of the designs we are in today, the designs we've already locked and loaded that are forecasted to ramp next quarter. That's the bulk of the growth.

Then on top of that, most of the analyst reports that we see in the present forecast a pretty reasonably good growth rate for the basic notebook business next year, so the combination of that results in the range that we've given you.

Thank you.

Blayne Curtis.

Jefferies. Good afternoon, guys. Tom, you indicated that you are shipping chip solutions today. I just want to, one, clarify. You've been shipping OneTouch for a while. Are you now shipping chips for touchscreen applications? Then as you go forward, it seems like some of your new wins, your European win you referenced -- there's one in Canada -- seem to be chips. So can you talk about the mix in Q4 and then how you expect that to progress through the fiscal year?

So, good clarification, so yes, we were talking about OneTouch. We are talking about the simpler button application, scrolling applications, and our plastic applications, which as you know we've been shipping for many quarters now.

In the context of chips for touch screens, yes, we are shipping chips for touch screens. We have been doing that over the past couple of quarters. That part of the business, with some of our accounts, has increased and that is reflected in the numbers that we've given.

I can't comment in any more detail on the specific accounts, but we are seeing a good mix within our model between chips, what we call tail solutions and modules. Sometimes the modules even include lens and lamination, which is an additional service that we provide to our customers.

Right. I know there's a lot of different permutations, but as you progress, if you look into the back half of next year, is it possible you would be shipping more chips than modules?

Well, we are not seeing a major shift in the market, including in the present, between the different ways of fulfilling products. So, again, we expect to have a healthy balance of shipments across the three forms of fulfillment.

John Vinh.

Yes, Collins Stewart.

Tom, one thing I was wondering if you could comment on is what are you seeing? Obviously with the yields improving pretty significantly on the touch sensors, and you've gotten some more meaningful costs [down] there -- what are you seeing in terms of design opportunities on capacitive versus resistive? Can you give us a little bit more color? Are you seeing some of your customers wanting to push these designs down to more kind of mainstream models? What do you think the mix of in terms of design opportunities between resistive versus capacitive is? What do you see that going forward looking like?

Yes, a great question, John. So there's no doubt that as volumes, yields have increased, costs have come down of the total solution for capacitive that we are now getting into price ranges from an OEM perspective where it is economically viable to switch out the more legacy-resistive oriented technology.

I think, if you look at the screens that are being shipped today in the market, the dominant share is still shipped with resistive technology. That has been going down of course over the past six quarters or so, and we expect it to continue that downward trend with capacitive making up more than the difference because, in addition to replacing resistive technology, we are also just seeing more net new phones, particularly at the high end with these new user interfaces adopting capacitive technology. So it is an evolving game, there's a lot of puts and takes out there but, in general, we see customers with plans to replace resistive over time as costs continue to come down.

Can you help us quantify that a little bit? Do you have a sense of what that mix is, roughly, between resistive versus capacitive is?

Well, it's hard to judge it right now because there's really no third-party data to go from. But overall, we think capacitive today is roughly 10% to 15% of the touchscreen market and growing from there.

Then just one other question on the guidance -- I just wanted to follow up with a previous question. So kind of year-over-year, you had originally guided to flat for the first half. It looks like you are maybe softer than that by about $7 million. And then on the full --

We said roughly flat, yes.

Yes, and on the full year, you've got -- your range is about $30 million, so obviously you are still within the range there. So are you still kind of tracking to the midpoint there, do you think, or are we still kind of within the range, maybe at the slightly lower end of the full-year range, or what's your sense of that?

Well, we are still putting that range out there as the range that best represents what we are going to deliver next year. I will leave it at that.

Daniel Amir.

Daniel Amir from Lazard.

So a couple of questions here -- first of all, with relates to the chip and module mix -- I mean last year it was kind of in the single-digit range. What's the best guess here in kind of fiscal year '10, what that mix might be in terms of chip and module?

Well, you know, it's hard to predict, frankly, with all of the puts and takes of the designs, but again, we think our strength is our ability to service all of those opportunities out there. When we model our business, we are basically assuming a balanced mix over time across the different fulfillment models.

We don't see a big change in what we are seeing in the market today. We think that a portfolio approach really differentiates us in the market, and we think we are going to be able to continue to lead the market, like we are today, with that ability to address all of those different approaches out there.

Okay. Related to -- in your previous call back in July, you spoke about that some of the guidance was impacted by product push-outs by some of your mobile phone customers, etc. I mean, is that pretty much resolved at this point, kind of how you give guidance of December, that you feel comfortable that, by March, your visibility has actually improved on the smartphone side compared to what it was three months ago?

Good question. We still see puts and takes, push-outs, sometimes pull-ins across the total SKU base in that category, so I would never say that it is fixed and will never change. But what I will say is that the number of SKUs that we've got in production right now is increasing. I think, in previous calls the last couple of quarters, we have said we've been shipping somewhere between 15 and 20 SKUs, depending on the quarter, into the handset market. Now, it's between 20 and 25, so we are seeing a good take-up there and we expect that trend to continue.

So our view is the mobile market itself is a pretty dynamic market. What will help the Company over time is just continuing to increase the number of designs that we are in, the number of SKUs that we are shipping so, over the whole mix, we are better able to manage the peaks and valleys of the business.

Jeff Schreiner.

Yes, CapStone Investments.

Tom, I was wondering if you could help us out a little bit, just understand maybe what you guys are expecting right now on a year-over-year growth basis, maybe in the netbook/notebook sector, on a calendar year '10 basis, and can Synaptics really remain in line or grow above the rate you provide?

Yes, well, when you look at the notebook market overall, inclusive of netbooks, at our share level, Jeff, we expect essentially to track whatever the market does.

I think that, from an overall revenue point of view, as I think I mentioned in the prepared remarks, we have not factored in a great corporate upgrade in our numbers, so if that were to happen just in the industry, that would be an assist for us. But I think we are basically going to grow with where the market is, subject to the designs that we are in and the end sell-through of those products. I think our offering in that TouchPad space truly is best in class in the industry, and we think that's what's going to keep the share levels that we have on a go-forward basis.

Okay, thank you very much for that.

I was also just wondering kind of when we look at the last two quarters roughly, when you look at the percentage of the forward quarter revenues that are booked in backlog, it's roughly been around somewhere around in the 50% range versus when you looked at last year, heading into last December, you were around 70%. I am just trying to maybe wonder what are some of the changes that maybe have occurred year-over-year that are driving that?

Yes, you're right. Normally, we -- our backlog going into a quarter is 40% to 60% on average, meaning that the flip side is true on the turns business within the quarter. That is our typical range. Of course, entering into this quarter, I think we had $71 million going into there, so we are well within that range.

Last comparable quarter a year ago, you may recall that notebook -- expectations for notebook markets were quite strong. The market fell through I think we saw it in mid-November. Frankly, we were running -- ramping a couple of very high volume handset designs during that point in time, which we were loaded for going into the quarter. So we are not worried about the difference in relative loadings quarter-to-quarter. A lot of things have changed; the markets are different now and the mix is as it is.

Stephen Fox.

Good afternoon, CLSA.

Can you just go back? You mentioned that some of your material costs for modules were going down. I was curious. Was that a meaningful headwind on the revenue side? Also concurrently, was it a meaningful tailwind on the margins? How much did that impact reported numbers?

Steve, thanks for the question. So as we said before, it's really the sensor cost which is part of the module that has been coming down over the past, frankly, year or more. So that does, on a module-to-module basis, create definitely a headwind for us. The rate of decrease we think in the present is less and go-forward is less than what it has been.

But you are right. The flipside is true, generally speaking, that the higher the third-party content that we have, or the lower the third-party content, the better our gross margin percentages would typically be. So across the mix, we are still managing it to the target model for the Company and are able to drive the operating leverage based on that.

But, Tom, would you describe it as tens of basis points of an issue or -- because I guess you also have the issue that modules as a percentage of total is going down, so I am just trying to understand if this is something meaningful that we should pay more attention to or (multiple speakers).

You know, Steve, I wouldn't pay too much attention to it at that level because, at the end of the day, the margin we are going -- performance we are going to post on any given quarter truly will be a function primarily of the mix of products we are shipping across all the categories that quarter.

[Ian Ing].

[Broad Finantech]. Could you comment more on the priorities of the near-term goals of chip solutions in the pipeline, you know, goals such as maybe cost reduction, power reduction, feature enhancements, process migration?

Given that you are competing against some MCU road maps from your competitors, would you ever move to communicating more of a silicon road map of currents and announced upcoming products?

Good question, Ian, and thanks for asking. So our Company focuses on the entire human interface solution, which is made up of chips, sensors, firmware, software and everything in between, usage models, usability. So when we present ourselves to our customers, it is as a total solution provider. That's with the services we offer through our designs.

We do our own chips. We seek to have the best fit-for-purpose chips that enables, fundamentally, the best performance in the technology and the application. We continue to invest in our chip road map, but it is just one element of our value offering to our customers.

Great, thanks. Maybe a little more color on this healthy balance between chips sales and modules. Is it possible to say that each one is over 10% or less than 50%? I'm no last quarter you gave chip revenue.

No, I would just stick with the comments I had made earlier.

Okay, so healthy balance and a stable mix, okay, sure.

You mentioned that material costs for modules are going down. Is there any impact on LCD component pricing and supply, given this power outage at Corning Glass?

We have not seen that.

Just one thing I would add, though, is that just, relative to glass, we do believe that there is going to be more sources of supplies, glass sensors coming online, of the ITO pattern glass sensors, which we think is favorable for the industry for availability and then ultimately more competition and price reduction and cost reduction in that part of the bomb.

Paul Coster.

JPMorgan.

So, Tom, you have the solutions. Approach, you are still recruiting apparently people to service your customers. Can you talk a little bit about, as this market develops and the handset market in particular, what the value proposition is for companies with a very large range of SKUs versus those with a more narrow focus for the larger companies versus the smaller handset companies and what those relative value propositions are there?

So, Paul, you're asking from an accounts level there?

Yes, I am trying to -- clearly, those companies that have a narrow number of SKUs seem more ready to go to a chip-based solution, maybe even sort of doing much of it themselves, whereas the companies with a large number of SKUs seem to be ready to adopt modules. I am just trying to get an understanding of how that dynamic is playing out.

Well, you know, I wish I could communicate to you guys a pattern or a trend because we don't see it yet. At the end of the day, what goes incorporated into a phone, into a phone assembly, is a module which includes the sensor, the chip and everything in between. That's what gets designed in independent of who is -- of which competitor in the market you are dealing with. We truly believe that this portfolio approach that we are offering does cover the market and covers all the needs in the market across the account base that we have.

We even see, Paul, in the same accounts, different phones, different design-in engagements resulting in different engagements for the Company. So it is not one-size-fits-all; it is a mix. I think a lot of it is dependent on the economics of the phone and the supply chain of the companies that we are dealing with. We are just being as flexible as we can to manage that across that business to position ourselves to win more than our fair share of designs.

Okay. Kathy, from a repurchase program perspective, how much are you authorized to repurchase moving forward? Do you intend to continue doing so?

Hi, Paul. Yes, you are referring to the stock repurchase?

Yes.

Okay. Yes, we still have available about $57 million under our authorized stock buyback program. As we've done in the past, we would continue to look at repurchasing our stock as opportunities present themselves to us.

Shaw Wu.

Kaufman Brothers.

First, great quarter, great guidance. So just a question, I think it is more for Kathy. On the expense side, kind of excluding the one-ton items, it looks like your R&D spending was kind of -- the rate was kind of a bit more than usual. Kind of what can we expect of expenses going forward? should we kind of expect it to grow at this rate, or can we expect that to moderate?

Yes, as I said in the script basically, we continue to do some selective enhancement of our engineering capabilities and particularly at the local design centers that we've set up around the world. We think this is really a key advantage for the business.

If we're looking at headcount as far as numbers of people, in the fiscal year 2009, we added headcount of around I think it was 25%. For the current year, we are definitely not looking to add at that same rate.

We do look at what we need to do to invest for the long term because we are very excited about the opportunities that we have, but as you can see from our past history and also our Q1 results, we do manage our operating expenses very prudently. As in Q1, we delivered another strong quarter of very strong operating profit, above 18%.

The only thing I would add to that, Shaw, is that, overall for the Company, we are managing an R&D reinvestment of about 12 to 14 points and an SG&A 8 to 10. That's not to say that every single quarter will be exactly and precisely in that range, because most of the investment we make is in people. You hire people as you find the right people for the Company. But on an overall basis, that's what we are managing to.

Okay. If I could squeeze in an extra one just a question for you, Tom. Can you talk about kind of the new market opportunities out there? Obviously, you have the PC business and you have the smartphone business. What about the newer areas like monitors, printers, you know?

Yes, it's a great question. There are many opportunities out there, and I don't think I mentioned it in the script but we, believe it or not, continue to be design-constrained on a design-in basis, which obviously is one of the reasons we are continuing to make those selective investments there.

As I think I've mentioned before, beyond the two main categories that we are in now, we see big opportunities in handheld gaming, we see them in digital still cameras, remote controls. We think that's going to be, over time, a good growth engine for the Company, both, by the way, in ClearPads and TouchPads. We are in various stages of market development there.

Beyond that, you are right. There are other, many other consumer electronic device categories that are ripe for adopting some form of capacitive technology. As we are able to scale the Company and meet the needs of our customer base in the markets we are in and move on to the next, we will do that.

Kevin Cassidy.

Thomas Weisel Partners.

When you mentioned that you may not be adding as many engineers I guess as you did in fiscal year '09, can you give a little more description of that? Does it take less engineers with chip designs, or maybe if you could -- or are you moving engineers from one project to another?

Yes, sure. So, Kevin, thanks for the question.

Let's put this in perspective first. So in '09, we roughly hired 25% of our headcount into the Company, a huge, huge investments we made primarily in our engineering teams around the world. Of course, over that period of time, as those people have been trained and become familiar with the Company, our customer base, the technology, of course the effectiveness and efficiency has definitely gone up. That said, even with that and the continued selective hiring, we are still constrained, especially relative to the markets that we had talked about in the previous question.

In every case, Kevin, of our design-in engagements, it is pretty much independent of the fulfillment model. That is we work with our customers to design the full solution. It is a technical solution, independent of how it is fulfilled, that cuts across the sensor, the chip, the firmware and the unique touchscreen of the unique phone. So we provide that service and price for that service with every design engagement that we've got.

Okay, great. I guess, of the people you're hiring, can you say the locations?

Generally, it is overseas. And generally speaking there, it's in Asia.

Okay, understood. Thank you.

Thank you. At this time, I would like to turn the call back to management for any closing comments.

Yes. Thank you. So thank you, everybody, for being on the call with us today. We look forward to seeing you on the road and updating you again on our next quarterly call. Thanks.

Ladies and gentlemen, this concludes the Synaptics first-quarter fiscal 2010 earnings conference call. Thank you for your participation. You may now disconnect.