Synaptics Inc (SYNA) 2011 Q2 法說會逐字稿

Thank you for standing by. Welcome to the Synaptics second quarter fiscal 2011 earnings call. (Operator Instructions) Today's conferences January 20, 2011 and I would now like to turn the conference over to Mr. Alex Wellins of the Blue Shirt Group. Please go ahead, sir.

Good afternoon and thanks for joining us today on Synaptics second quarter fiscal year 2011 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 Russ Knittel, the Company's interim president and CEO and Kathy Bayless the Company's chief financial officer. In addition to the Company's GAAP results, management will also provide supplementary results on a non-GAAP basis which excludes non-cash share-based compensation charges and certain other non-operational and non-cash items. Please refer to the press release issued after the market closed today for detailed reconciliation of GAAP and non-GAAP results.

Additionally we would like to remind you that during the course of this conference call Synaptics management will make forward-looking statements including predictions and estimates that involve a number of risks and uncertainties including but not limited to statements regarding the Company's future financial performance and outlook including anticipated revenue growth for fiscal 2011 and financial guidance for the third quarter of fiscal 2011, current views regarding trends and opportunities in the Company's existing and adjacent markets including their size and anticipated growth, market share assumptions, the Company's design activities, design wins, timing of the anticipated revenue and market demand for its products and solutions and expected product mix.

Actual results may differ materially from any future performance suggested in the Company's forward-looking statements. We refer you to the Company's SEC filings including form 10K for the fiscal year ended June 30, 2010, for important risk factors that could cause actual results to differ materially from those contained in any forward-looking statement. We expressly disclaim any obligation to update this forward-looking information. With that said, I will turn the call over to Russ Knittel. Russ?

Thanks Alex. I 'd like to welcome everybody on today's call. I am pleased to report another record quarter of revenue. Revenues in our second quarter were $160 million , an increase of 20% over the prior year. GAAP net income grew 45%, approximately $18 million or $0.50 per diluted share. Our solid second-quarter performance caps off a strong first half of the fiscal year. Revenues for the first six months of fiscal 2011 grew 24% year over year.

This is primarily a result of very strong demand for mobile TouchScreen applications offsetting the general softness in consumer notebook demand our anticipated decline of portable digital entertainment revenue. GAAP net income for the first six months of fiscal 2011 increased 65% over the prior year. Underlying our confidence in Synaptics gross prospects we were active with our stock repurchase program during the quarter buying back 1.5 million shares representing approximately 4% of our outstanding shares.

I will now ask Kathy to review our financial results with you in detail and then I'll provide you with a closer look at product development and trends in our markets before taking your

Thanks Russ. As Russ mentioned fiscal Q2 marked another record quarter of revenue for the Company. Revenue of $160 million was towards the high end of our expectations and increased 20% year-over-year and 4% sequentially. Revenue from PC applications with less than anticipated down 4% from the prior year and down 10% from the September quarter, reflecting weaker than expected demand for consumer notebook-based products. Shipments of our multi-finger gesture enabled TouchPad continues to increase from 90% of our unit mix and the September quarters more than 95% in the December quarter. Shipments of our ClickPad solution were roughly 10% of our unit mix. Unchanged from the previous quarter reflecting the weakness in the consumer notebook demand.

Within the non-PC category revenue was up 48% from the prior year, and reflected minimal contribution from portable digital entertainment application, which accounted for 14% of our revenue mix in the year ago period. Revenue from mobile applications reached a higher level to date reflecting strong demand for TouchScreen solutions and mobile phone. Specifically, mobile revenue grew 110% year-over-year and 21% over the preceding quarter. The overall revenue mix for PC and non-PC application was approximately 45% and 55% respectively in the December quarter. Our non-GAAP gross margin in the December quarter was 41%, consistent with the prior year.

Gross margin was at the high end of our guidance range reflective of our overall product mix during the quarter. Non-GAAP operating expenses increased 7% from the prior quarter to $35.3 million reflecting product development and personnel expenses as we continued to broaden and expand our product offerings. Our product development activities have resulted in several new recently announced products that Russ will talk about in more detail. GAAP operating expenses were $45.6 million compared to $40.5 million in the preceding quarter.

The December quarter operating expenses included non-recurring cash-based cost of $1.2 million and non-cash share-based compensation of $1.4 million related to the departure of our former CEO. The share-based compensation charges in the December quarter and prior quarter were $7.7 million and $7.6 million, respectively. Our headcount at the end of December was 628, up 3% from the prior quarter. This increase primarily reflects planned hiring of engineering and go-to-market personnel to support our continued business growth.

Our non-GAAP tax rate was 16.3% in the December quarter which was lower than our expectations primarily due to the retroactive extension of the research and development tax credit signed into law in mid-December. Our GAAP tax rate was 10.1%. Non-GAAP net income increased 17% to $25.4 million or $0.72 per diluted share. Compared with $21.7 million or $0.62 per diluted share in the December quarter a year ago. GAAP net income grew 45% to $17.7 million or $0.50 per diluted share from $12.2 million or $0.35 per diluted share in the year ago period. Turning to our balance sheet, we ended the quarter with $260 million in cash.

As Russ mentioned previously, we repurchased 1.5 million shares of our stock or approximately 4% of our shares outstanding for $40.2 million during the quarter. Cash flow from operations was $24.3 million and net cash provided by employees participation in our equity plan contributed $4.8 million. Capital expenditures were $3.1 million and depreciation was $2.8 million for the quarter. Receivables at the end of December were $126 million compared to $116 million at the end of September. Days sales outstanding of 71 days increased from 68 days in the prior quarter. Reflecting the timing of sales throughout the quarter. Inventory at the end of December was $23 million compared to $15 million at the end of September with inventory turns of 16 compared to 24 in the prior quarter. As expected, we increased our inventory to more appropriate levels based on our increased business activity.

Looking ahead to the March quarter, we continue to carefully monitor market dynamics relative to customer order patterns and consumer demands. Based on our backlog of approximately $92 million entering the quarter, our expected product mix success were forecast, we anticipate revenue will be in the range of $136 million to $146 million an increase of 17% to 26% compared to last year. Our outlook reflects some seasonality within our market. With the product mix again, more weighted towards mobile TouchScreen solutions. Using our current backlog as a proxy, we expect non-GAAP gross margins for the March quarter to be in the range of 40% to 41%. We continue to carefully manage operating expenses in line with our target model and expect non-GAAP operating expenses to increase in the March quarter, however at a slower rate than in the December quarter, as we continue to scale to meet the opportunities ahead.

We anticipate the FAS 123 R charge for fiscal Q3 to be in the range of $8.1 million to $8.3 million. We anticipate our non-GAAP tax rate for the March quarter and the fiscal year will be in the range of 18% to 20%. Non-GAAP net income per diluted share for the March quarter is expected to be in the range of $0.45 to $0.54 per share. I will now turn the call back over to Russ for an update on our business.

Thanks Kathy. I will pick up with a review of recent product developments, many of which were showcased at the consumer electronics show in Las Vegas. Starting with our notebook product line over the past quarter, our TouchPad solutions were featured in the range of leading OEM notebooks. They continue to drive TouchPad performance and have introduced the next generation of solutions incorporating our image sensing technology which enables more accurate finger recognition for use with multi-finger gestures.

Our ClearPad Series III, which is based on image sensing, also features our latest gesture suite and scribe gesture workflow technology in a new hingeless design that provides an enhanced user experience. These products have received favorable reviews from the media including In Gadget, PC World and C-net. We have secured several design wins featuring the newest click pad series. We continue to play a leadership role in enabling our customers to offer best in class interface solutions as evidenced by our recent press release highlighting a number of award-winning notebooks at CES featuring Synaptic touchpad and quick pad products. Synaptics is committed to supporting a wide range of operating systems and at CES we featured Synaptics ClickPads and Lennox, Google Chrome, Android, and Microsoft Windows platform.

As media rich internet cable televisions are finding their way into the living room, the need for more sophisticated but easier-to-use input devices is becoming more evident. Some of the digital home products we had on display at CES included Synaptics TouchPad incorporated into the Logitech review for Google TV and the Philips dual-mode, remote control and a remote control for the Iomega TV. Also on display was our Series VII large TouchScreen portfolio which offers 10 finger touch support.

Series VII is flexible and customizable to support a range of solutions from entry-level to high-performance multi-touch slates and tablets. It's fully compatible with Android Chrome and Micros Windows touch solutions. It offers best-in-class performance and the industry's lowest power requirements. We have designed lens and strong development activity underway with multiple OEMs, both hand set manufacturers MPC customers, and we are on track to begin generating revenue this fiscal year and driving meaningful revenue in fiscal 2012.

Turning to handsets. Our booth at CES featured our ClearPad Series II and Series III solutions from top-tier OEMs, including several new models from LG. The Huawei IDEOS X5, the Meizu M9 and the HTC HD7 which began shipping during the current quarter-- during the second quarter. Additionally, LG Optimus 2x , Optimus Black and Optimus Revolution phones containing Synaptics solution were on display in the LG booth and will begin shipping this quarter. We also demoed our new ClearPad Series I technology.

This single layer capacity touch technology is designed for mass-market entry-level handsets or simple gestures such as pointing navigation, pinch and click, are the predominate usage models. Engineering a single layer solution has enabled a total cost comparable to resistive alternatives. This will allow OEMs to push capacity touch further down their product lineup and to more effectively target capacity touch solution for emerging markets. We have received strong customer interest for this offering and have multiple design engagements underway.

As mentioned earlier, mobile TouchScreen revenues reached another record level, more than doubling year-over-year as we benefited from the momentum of touch trend within smart phones. Our engagement with top-tier OEMs has resulted in expanding number of mobile phones shipping in the market with Synaptics ClearPad TouchScreen solutions reaching over 40 models in the second quarter. We continue to innovate our next phase of technology road map with the development of our In cell and on cell display integration as well as sensor (inaudible) solutions. We anticipate that adoption of these new technologies will begin during fiscal year 2012. With these developments, the sensor is incorporated into the LCD stack up or the lens eliminating the need for discrete sensor component within an integrated module.

While we're still shipping a mix of modules, chip and tail solutions today, we expect these advancements as well as large TouchScreen solutions to lend themselves more toward tail and/or chip engagement models which is reflected in the trends we are now seeing in our pipeline of mobile and large TouchScreen design opportunities. We view these trends is a net positive for the continued adoption of capacitive touch technology not only in the market for mobile handheld devices but within additional markets as well. The adoption of touch technology and consumer electronics is just beginning and a markets are evolving and expanding more rapidly than anticipated. We made the investments to position ourselves to continue to grow with market opportunities. We do not expect a material change to our operating model and will continue to manage the business within our targeted profitability ranges.

As we look to the second half of the fiscal year, we have made strong progress on our key initiatives to expand our capabilities within our target markets and are well positioned with the broadest portfolio offering and the most flexible engagement models in the industry. Innovation continues to set us apart as a leader in the notebook market with 65% to 70% share. We offer the most comprehensive and leading-edge solutions in the market ranging from TouchPads to ClickPads, which include all of the value added features and the performance we layer onto those solutions including best in class drivers, our rich gesture suite, scribe work load and support for new OS solutions such as Android and Chrome. In the handheld market touch trends are very positive and momentum is strong.

Market opportunity is growing faster than expected and Synaptics continues to enable many new designs with multiple key customers. We have strong interest and customer design engagements underway on all products including our recently announced ClearPad Series I for low-end phones and our ClearPad Series VII for large touchscreen applications within mobile communications and computing products. We remain at the forefront of innovation and are actively engage with customers on next-generation design including in cell and on cell implementations.

As we look into the second half of the fiscal year consistent with the overall industry view, notebook unit volumes are weaker than we expected entering the fiscal year primarily reflecting general softness in consumer demand. This is being offset by better-than-expected mobile market growth from the accelerated penetration of capacity TouchScreens and mobile phones. Based on our first half performance and our current view of the second half, we expect the overall revenue growth rate to be approximately 15% to 17% for fiscal 2011. With that, we will turn the call over to the operator to take any questions you may

Thank you. (Operator Instructions) Our first question comes from the line of Rajvindra Gill.

Thank you. Question on some of the commentary that Russ had mentioned that you are beginning to see a shift in the business model, the chip, and flex tail. This is a deviation from your prior commentary which is fine. I just wanted to get your thoughts on how do you foresee the pricing environment given that change in business model and do you see that impacting your mobile revenue growth rate at all?

Okay. As we said, part of the change in the model is being driven by new technology development. The incorporation of the sensor into the stack above the LCD whether it is in cell or on cell implementation. In those cases you no longer need a component discrete sensor. By definition, we would not be providing that, which were then results in either a tail or chip engagement. We are seeing that dynamic in the marketplace and that will drive a chip and tail solution by definition.

And as we have said before, our mix over the last eight quarters has been very much module chip and tail and we told you we saw trends developing that were moving that dynamic we'd let you know, and that is what we are signaling today. So, if we look at our pipeline of opportunities today, including opportunities related to in cell and on cell implementation, we are seeing the pipeline chill towards pipeline-- towards tail and chip solutions. As that relates to pricing, Series I solution that we demonstrated at CES, that is targeted at the low-end of the market so that will have price implications for us going forward. But when you look at the other TouchScreen implementations, even though it may be a tail or chip to get to the high-end you are looking at multiple chip solutions based on today's technology today.

And then, overall, from our total product portfolio and all the markets that we serve, we have the adoption of the click pad technology. Click pad is generally our larger form factors which enhances and gives the user the ability to use a more feature-rich gesture suite and it also has got a mechanical component to the solution, all of which increases the overall selling price. So, as I'm sure you can appreciate, given all the market dynamics, and the broader product offering we have today, it is hard to predict how our overall average selling price from a Company perspective is going to look going forward and we will give you the best insight we can as we provide guidance for every quarter.

But there is no question that with the adoption of touch and consumer electronic products, growing faster than anybody anticipated, we now have the broadest and best product offering we've ever had. And, with our flexible engagement model, with our customers, we are very optimistic about our ability to compete effectively and take advantage of the expanding market opportunities that are there today.

I appreciate the color. For my followup, can you describe how the customer profile will change when you move to an in cell or on cell type of implementation?

I am sorry, Raj, what?

Could you describe how your customer profile will change when you move, when the industry moves to an on cell or in cell type of implementation?

That is a good question. To develop our in cell and on cell technology we've been working very closely with the key LCD manufacturers in the market today. And so going forward, they'll become another critical component of the ecosystem in supplying touch to smart phones, large-screen mobile and communication devices. So, they could become customers to us in the future. They could become partners, but without that we will be working with them one way or the other.

Thank you.

Our next question comes from the line of Charlie Anderson. Please state your company name and your question.

Dougherty & Company . Thanks for taking my question. As you talk about this transition to more chip and more chip and tail, I wonder the gross margin implications there and also, as I think about Series I and Series VII also wondered if those are more corporate average margins or if they are below

Generally speaking, if you look at the portfolio today, where we have integrated modules. Or a tail which excludes the sensor or chip, margins will be generally lower if we provide a full module because it has higher third-party content in it. The tail has less third-party content so you would see some expansion in gross margin and the chips obviously would be accretive to our overall margin because of the fact that it's really our proprietary chip with their own proprietary firmwork embedded so it would have a higher profile from a gross margin perspective.

And then in terms of Series I and Series VII, are those similar margins to what you already have?

Series I again is probably going to be a tail or a chip solution and it is destined for the low end of the handheld market because we are trying deeper adoption within the product line of our customers and if it was a single-chip solution would probably be -- a [sub a dollar].

But again from a margin perspective, it is a chip so I would expect margins to be accretive or overall blended target range of 40 to 45 and Series VII is going to be chip and tail implementation and multiple chip solutions are generally, we probably have a higher margin than a single-chip solution.

I am wondering on your 15% to 17% topline target, could you impact that between PC and non-PC?

We don't provide that level of granularity with our guidance.

All right. Thanks so much.

Our next question comes from the line of [Rob Cera]

It is Karas &Company. Two things I guess, one is, on your TouchPad inventory at OEM, I am curious how you feel about (inaudible) that, two quarters down so one would think they would be lean but then consumer notebooks have been weak. So maybe even harking back to the last question, does your guidance assume inventory drawdown does it assume improvement in PC and then I'll ask my follow-up right away, to save you time. On the single layer Series I, when do you think you would start seeing revenues from that product? Thanks.

Hi Rob, this is Kathy. Let me go back and talk about notebooks a little bit. If we look at the backlog at this point in time, it is more heavily weighted to TouchScreen and in general from a softest standpoint, it's been interesting, we had a very strong quarter in June of last year, but as we have gone through the year, the consumer has definitely been weak. Commercial has trended up, but as we go forward to the rest of the year, we are still looking at some seasonality within the March quarter and then the June quarter will be dependent upon the strength of consumer demand and the overall project.

Okay.

I figure a second question-- you are talking about single, or Series I. When we are looking at, we have a lot of very strong engagement activity on that and looking at the pipeline of the design opportunities, we should start seeing shipments toward the end of this fiscal year early fiscal 2012.

Great. Thank you very much.

Our next question comes from a line of Blayne Curtis. Please state your company name and your question.

Thanks. Jefferies. Just a couple of questions, first, just on the full year guidance implies pretty modest growth in June and typically, given the shift to module makers, it is usually a strong quarter for you in notebooks I was wondering if anything changed with seasonality that you see in notebooks?

Going back to notebook. One thing, if you go back a year ago in the June quarter was an exceptionally strong quarter and since June of last year, we haven't seen the same level of strength in the consumer market.

Do you think, that a reflection of demand or pricing or share or what is your best guess?

I think it is just end demand. I think if I go back and look at the entire calendar year of 2010, as Russ mentioned, we are still 65%or 70% share, that fluctuates quarter to quarter but if I look at the entire calendar year in 2010 we definitely track the market from a unit and a revenue standpoint so we drew about 20% in the calendar year.

Right. And then secondly, on the tablet side as you look at the second-half design cycle here, there is a move to single-chip solutions and if you could maybe talk about your plans for a single-chip for the tablet market?

Okay Blayne. As I mentioned on the call, the Series VII portfolio that we have addresses both low-end and high-end so they have single-chip and multiple-chip solutions to offer there depending on what the customers requirements are from an actual receive response rate, legacy, capturing the finger movement closer to the edge of the screen. There's a lot of things that go into when somebody wants a single-chip versus a multiple chip solution. Generally, if you move up in screen size, it is going to take a multiple chip solution today, based on a technology that is available.

Maybe I should have clarified you two competitors are moving to a single-chip that could do a multi-touch for a tenant screen, that is what I was referring to.

We can do single-chip single touch single-chip multiple touch up to 10 inches too. I'm talking about 10 to 15 inches for multiple chip solution.

Okay. Doesn't exactly answer it but thank you.

Our next question comes from the line of Rob Stone. Please state your company name and your question.

Cowan & Company. A couple of questions if I may. The first one is, as you look at the PC market, I know there are various third-party forecasts out there. How do you think about unit growth rate. Someone said it is slowing down to low single digits and others have said it might even be down year over year so as you look at this year calendar 2011, any thoughts and your perspective on PC notebook unit growth?

Hi Rob. The latest numbers I saw were still in the mid teens to maybe lower double digit range. But again, those in the industry numbers. Definitely, from a quarter ago, the numbers have come down and just going off the recent industry notes I have seen, it 's 15 to maybe a little bit lower.

It seems like it was lower than that and the December quarter was more like single-digit numbers or would you disagree?

Yes, I think it was, single-digit, year-over-year and definitely. I was just looking at the full fiscal year, those the numbers, the full calendar year, 2011, those in the numbers I have seen from an industry standpoint. So my second question has to do with this concept of tablets either creating a new market segment or potentially cannibalizing notebook purchases.

Given the fact that your notebook content appears to steadily be some kind of module, click pad, Higher goal material, but the tablets are trending towards tails and chips, Do you see some sort of revenue cannibalization there where a tablet replaces a notebook but it nets out to less revenue?

I think we look at the multiple-chip or single-chip solution, from a large touchscreen environment they are definitely, from an ASP standpoint, similar to better than what we currently see in the notebook market. And, if we look at a growth rate combined growth rate for the PC market as well as-- and you put the new tablet growth rates on top of that, that is very strong combined growth rate so --

Did you talk about ASPs in the past, for your one touch chip, which are aimed at more simple touch interfaces. I don't think you have really spoken about where you see ASPs for higher end chip only applications. Any color you can provide there?

They would be single-chip solutions, what I am looking at, when I am looking at the design pipeline for large TouchScreen solutions whether they are single-chip solution and larger, they are typically, when I look at what the pricing is, they are at the above $2 ranch in even above the normal range that we have quoted in the past of $2 to $6 when you get a multiple chip solution.

Your notebook midpoint is below that now? What would you say the range is?

Notebooks trended, when you're looking at regular TouchPad, they trended to the lower end of that, $2 to $6 range and click pad-- we get a good premium on those, above that.

I next question comes from a line of Jeff Schreiner. Please state your company name and then your question.

CapStone Investments. Thank you for taking my question. Either Kathy or Russ I was wondering maybe looking at this another way. How the tablet market and whatever it may be, a new market or a competitive market but how that is affecting the netbook, notebook, bomb costs of your customers and are you seeing your customers starting to maybe look to reduce the end market price of their products in coming to each of the component vendors for some cost reductions. Can you give us any color on that?

There are notebooks in the market today, Jeff, as you know, that are as cheap or cheaper than some of the tablets offered. So it really just depends on where you are in a product lineup of our customer base. I think it net net for us.

I think there is no question that the tablets today, to some extent on the margin are eating into notebook units overall. But the way we view the combined market of notebooks and the new tablet or slate category, we think that offer is incrementally more units to us. And, as I said on our prepared remarks, we do have our first design wins now on the large touchscreen space as we have now entered that market with what I think are some pretty compelling solutions.

Let me ask my follow-up, keep you right there Russ. Kind of on the attraction, you said you had your first design wins and they are shipping. Do you have a tablet that is shipping and should we see some tablet-based revenue in the March quarter? And what can the magnitude of tablets really be, given kind of this initial wave of tablets-- the designs have already been done? So any help you can give us they are would be much appreciated.

I indicated we have design wins. I did not say we were shipping yet. From a revenue perspective, whether we see, depending on the launch schedule, we could see some minimum revenue as early as this quarter but without question, we will see revenue from large TouchScreens in the June quarter. And again, based on the design wins we have today and the engagements we have today, with customers in both mobile space and PC space, I am very confident that large TouchScreen applications will drive meaningful revenue for us as we move into fiscal year 2012.

Our next question comes from the line of Shaw Wu. Please state your company name and then your question.

Okay thanks. Kaufman Brothers. This question is for Russ. You talked about how you are in over 40 models for mobile phone this quarter and shipping. What was the number in the September quarter? Thanks.

We said the September quarter. Shaw, was greater than 35 so this quarter we upped it to greater than 40.

Okay. And then, in terms of going forward, is the-- can we expect to see that trend continue where there could be another five or 10 miles in the next quarter or two?

Well, our view going forward, now that we have introduced our Series I offering which again is targeted towards the lower end handsets, I would expect that we will continue to see an expansion in the number of models that we are shipping into the market.

The timing of those obviously will depend on the design wins and the OEM Alexa wants those specific SKUs but yes, I would expect the number of models on the market with touch is going to continue to trend up.

Okay. And can you help us just a little bit. In terms of the concentration of the business there, is it fairly spread out with these models or is it, fairly concentrated among a few, in terms of the revenue contribution?

Well, as I am sure you are aware, when you look at the handset space, you have some phones that are targeted for specific geographic areas and you have some phones that are targeted for global geographic distribution and obviously, the ones that are targeted for global distribution drive more units than any other so the answer is, the number of units that each one of these SKUs can drive is a very wide range.

Our next question comes from the line of Daniel Amir Please state your company name and your question.

Thank you. Daniel from Lazard. A couple of questions here. First of all, on the competitive landscape, has anything changed in the last couple of quarters as we have seen a bit of chips and tablets of course, what is going on in the PC space on the weakness on the consumer side and if we have seen a change, what type of ASP changes are we seeing on a year over year basis per chip?

I would say generally the competitive landscape and the dynamics have not changed overall in the last three months. We fully expect that with the broader-based adoption of touching consumer electronics it is going to attract more competitors going forward and we are aware of that, we are preparing for that, I think we are making the investments that we need to make sure we continue to drive a leadership position in our target markets. So we expect more competition.

We have seen the chip, we have seen the chip players promoting products within the PC space. We've seen that in the past and we have seen it again recently, but that is just a dynamic we expect. As it relates to competitive dynamics to pricing, I think the good news here is that as I've said before, the market is expanding at a rate that's much faster than anybody anticipated. So the overall market opportunity today is such that none of the competitors in the market today are trying to buy market share by getting really bullish on price. So I think we have a fairly rational pricing environment because of the rate at which the market is growing.

Okay. Second question, can you give us a bit of guidelines on the op ed side You said there was a slight increase in March compared to December but not the same magnitude. Should we expect something similar into June? Should we look at your investments schedule here?

I think that would be a fair statement to make. We definitely, we did increase for several quarters. We are expanding the product lineup. We talked about all the new products we're introducing, so we are going to continue to support that activity but on absolute basis, the percentage increases will be less. Over the next quarter or so

We have a question from the line of Yair Reiner. Please state your company name and then your question.

Yes, Yair Reiner from Oppenheimer. So, first, congrats on Series VII. Was there anything in the development of Series VII in terms of the new product that you might be able to introduce back into your high end handset product, I think the click pad 3000 has been out in the market-- it will be a year pretty soon, I think.

Series VII is a different product it really targeted for large TouchScreen. We are always in the process of updating and advancing all of our products, so the mobile products that are out there right now we are actively working on the next generation products there as well.

Our Series III product today, you can comfortably take that up to four plus inches and maybe up as much as five, but anything above that you have to go to our Series VII solution.

Got it. Backlog going into March is a very strong coverage of 65% which is the high end of where you typically are. What is it about the products mix that gives you such high coverage?

The product mix in the backlog is as I said previously, it is more weighted towards mobile and it has been somewhat typical over the last several quarters due to the growth in the mobile business and also the fact that there are longer lead times as far as shipping out the mobile products. And it is a very strong load going into the quarters so we are very pleased with that.

Our next question comes from the line of [Brett Carson]. Please state your company name and your question.

Brett Carson with [Dart Research.] Russ and Kathy, can you talk about what in cell and on cell implementation means from an IP competitive standpoint? Is your work with LCD manufacturers proprietary and unique?

As it relates to our solution, yes, it is proprietary and it is unique. On cell in cell just means you're taking the sensor component of what is typically, what are typical touch solutions would be and you are embedding that sensor into the LCD stack up itself and the difference between in cell and on cell is where you would embed the sensor is all. But, in order to implement those solutions you do have to work directly with the LCD manufacturers to develop their capability to enable the touch. And that is what we have done.

Okay. Now what your competitors be privy to the same kind of process?

Our competitors can certainly try to do the same thing. Right.

Okay. What kind of total cost reductions could this produce for customers due to current solutions?

I don't know what the overall cost production opportunity is but it is clear that you can embed the sensor element into the LCD stack up, it is going to be a cheaper solution because you don't have that discrete sensor component that you have to deal with and you don't have the deal with the assembly applications and everything else. It will be a cheaper solution which again we do as a very positive trend because anything this point that continues to drive the broader and deeper penetration of touch technology is a net positive.

Our next question comes from a line of John Vinh Please state your company name and then your question.

Collins Stewart. Just a follow-up question on tablets. Russ you alluded to multiple design wins on tablets, Can you give us a sense of how many design wins you expect to be shipping into exiting the fiscal year?

We do have multiple design wins at this point. The production ramps, while currently there are target schedules, it is hard to-- these guys do move these things around. So I am not going to guess on number of designs that they actually will be shipping by the end of this fiscal year, but there will be multiple designs. And as I said, it is not going to be terribly meaningful revenue for us in fiscal year 2011 but is setting us up for a very meaningful participation in that new category for fiscal 2012.

Great. And then just a follow-up question on Intel on cell. I think you talked about meaningful shipments in fiscal 2012 can you be more specific on that? Is that going to be more first-half for second half weighted?

It will probably be more second half weighted, but I think we will see the introduction of it in the first half. But from a waiting viewpoint, and impact viewpoint, it will probably be more second half. Second-half fiscal year 2012.

From a modeling point of view, you have tablets starting to ramp, exiting the fiscal year for more meaningful fiscal 2012 and you start ramping in salon (inaudible) which is also going to be chips and tails, I assume that we should think about modeling a gross margin profile in fiscal year 2012 going forward?

Again, when you look at, as we discussed on the call, when you look at our gross margin range for the different solutions gross margins would trend up as you went from module to tail to chip based on today's pricing. It is hard to predict, obviously, where the product mix is going to be at any point in time but it wouldn't be atypical to expect to see at least some gross margin expansion as we did more chip business.

Our next question comes from Ian Ing. Please state your company name and then your question.

Thanks. Gleacher & Company Question for Kathy, You talked about an op ex target of 20% to 24% of sales. Now with seasonality I understand you're going to go above that range. So, could you give us a sense of how long you can be outside that range given your spending plans? And, also the December outback, how much of that is recurring head counts or one-time charges, mass cost for the increase?

I would say, there might be some one-time charges that were in the December quarter related to demo's and getting the product ready for the shows but it wouldn't be significant. On an ongoing basis, again, over the next couple of quarters, we are looking at slower growth as a percentage cue on cue as we have seen before.

You're right, in a seasonally lower quarter, we're probably going to run up the outside of the normal range which is the 20% to 24% for opex, but again, that is our target range and so we would expect we go back and move back down into that range where the revenue starts to move up again.

Thanks. You talked about fulfillment leaning more towards the chip and tail model, is there anyone we left on modules in terms of new adopters of handset touch, China OEM, second and third tier or is it all chips and tails at this point?

We don't expect modules to go away completely but our pipeline certainly is tilted in the direction towards tails and chips. Again, for us, we make this engagement model available to all of our customers and we let them select the way they want to engage with us. So I still view it as a competitive advantage in the way we service our customers today.

Again, I would guess, going forward, with the development of some of the newer technologies we have talked about, in cell on cell sensor on lens capabilities, by definition, with those types of implementations, you don't need the discrete sensor component so doing an integrated module solution is not really an option there. So with the newer technologies, that will definitely be tail and chip based.

Our next question comes from the line of Paul Coster. Please state your company name and your question.

JPMorgan. First of all when you start to ship the solutions for the tablet market, into which category will the revenues go? Is it going to be in mobile or in a notebook PC segment?

Well right now, we are working with handheld customers as well as notebook PC customers so I think when we get, we start developing the revenue and if it is going to be material, as Russ talked about moving forward, we will probably just start breaking that out.

Okay. My follow-up, basically what I am seeing here, Russ, is the makeshift towards a chip in tail means that your revenue is going to be a little bit lighter perhaps but some of us were expecting come the tail end of this year. But unit volumes are probably taking off particularly as you move into the Series I clear pad product starts to ship and it will take us two or three quarters before we annualized that we start to grow off of this new mix of business, year on year, is that a fair statement?

Well, generally if you're comparing a module to a single chip solution, that would be true. Remember in the large TouchScreen market today, we will certainly see multiple chip engagement there, for a solution. Obviously a solution that has more than one chip in it so the price point there will be higher than what we would typically see for, as Kathy said earlier, for just a plain vanilla TouchPad..

And if you look at our overall product mix, if we can get broad-based adoption of the quick pad solutions, which we are certainly promoting and there is a lot of interest here because it does enhance the usability of the TouchPad with the larger area and then would be, as I said earlier, the mechanical components that are part of the click pad that we don't typically have on a traditional TouchPad that would also lead to incremental revenue on a per unit basis.

So it is just going to depend on what our overall mix is going forward, but you are thinking about the right way. If our business was going to go to all chips, generally the selling prices would be lower. But, again, if you have solutions that require multiple chips, that's a counter balance for that and when you throw in the click pad solutions, that is also something that is a counterbalance to continue price erosion within the PC category. So yes, Paul. As you think about our selling prices going forward, we will have to wait and see how that mix develops.

Our next question comes from the line of Kevin Cassidy, please state your company name and your question.

Thanks for taking my question. It is Stifel Nicolaus . We are talking about the LCD with the sensor included, and maybe you're saying this with all of your discussions of slower op ex increases, is that because you won't be hiring as many engineers to support

Well, we have been on a hiring quite a few engineers to support the new products and also to take on more design work at the design centers. It is just some of the basic work that has been done, we have gone through that we are just going to be fully monitoring our operating expenses within our target model but in general, the opportunities are expanding and there is plenty of design activity out there in our design centers are full.

Okay. Even with chip in tail and just chip, you need the same engineering support?

Well, that will evolve over time as far as how the solutions develop and so it is not exactly the same, but still definite engineering work involved.

Okay. If I can just ask him if you have an update on the CEO replacement?

All I can tell you there is the search is ongoing and we continue to be very confident that the board will have the opportunity to select from a very qualified slate of candidates given the opportunity that Synaptics represents today and what is arguably one of the stronger secular trends of industry.

Our last question comes from the line of [Jason Smith]. Please state your company name and your question.

Craig-Hallum , thanks for taking my question. I was wondering if you could talk a little bit about why you guys are waiting in the handset space is it price, is it a certain performance aspects like response time? Battery efficiency? If you could just comment briefly

Jason, I think it is always hard to say that you went for any one particular reason. Clearly, we have a very compelling technology. We have very solid system engineering expertise. We have a track record of great execution great service, excellent quality. I think it is all of the above.

The other part of it is, I think based on our historical participation in the touch market, we have, I think, deeper system-level understanding of knowledge than our competitors do today. And we are continuing to drive new technology as I said earlier, with this latest augmentation to our product offerings we have the broadest and best product offering that we have ever had, and we are continuing to make the necessary investments, I think, to continue to move the needle with new innovation moving forward. Okay.

As a follow-up, granted, December was impacted by PC weakness, would it be fair to say, looking out for fiscal 2012, that mobile handset revenue is probably going to comprise the majority of your overall revenue?

Well there is no question that market is growing faster than the overall notebook market is today. But when you layer on top the new category of tablets, and if you have seen what kind of buzz that has created in the market if you put tablets and notebooks together in the same category or whether you want to keep it as a separate category or if you want to add it to handset, I think the way to look at the market is, again the adoption of touch and consumer electronics is just beginning and you're going to see it spread, I think, pretty broadly.

And so net net we just think the overall unit opportunity is going to expand at a very quick rate and we are again, I think very well-positioned today competitively to participate in those markets in a very meaningful way and continue to lead innovation that will drive adoption across more and more markets.

Ladies and gentlemen, that concludes the question-and-answer session. Management, please continue.

Thanks everyone for joining us on the call today and we look forward to giving an update on our next call. Thank you.

Ladies and gentlemen, that concludes our call for today. Thank you for your participation. You may now disconnect.