Synaptics Inc (SYNA) 2012 Q2 法說會逐字稿

Good day ladies and gentlemen. Thank you for standing by. Welcome to the Synaptics second-quarter 2012 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions.

(Operator Instructions)

This conference is being recorded today, Thursday, January 26, 2012. I will now like to turn the conference over to Miss Jennifer Jarman of the Blueshirt Group. Please go ahead, ma'am.

Thank you, Operator. Good afternoon and thank you for joining us today on Synaptics's second-quarter fiscal 2012 conference call. This call is also being broadcast live over the web and can be accessed from the Investor Relations section of the Company's website at www.synaptics.com. With me on today's call are Rick Bergman, President and CEO, and Kathy Bayless, CFO. 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 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 this conference call, Synaptics 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 financial guidance for the third quarter of fiscal 2012; anticipated year-over-year changes in PC and non-PC product revenue for fiscal 2012, and expectations for mobile touch screen units for fiscal 2012; the Company's expectation that it will broaden its mobile customer base this fiscal year and outpace industry unit growth; the Company's belief that it is leading the evolution of next-generation touch interfaces; the Company's expectation that it will ship its first [in-sell] solutions in the first half of calendar 2012; and the Company's expectations that it's newer technologies will drive even further market penetration and growth opportunities for it's touch screen products.

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, 2011, 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.

I will now turn the call over to Kathy Bayless. Kathy?

Thanks, Jennifer. We are very pleased with our results for this December quarter. Revenue for the second fiscal quarter of $145 million grew 9% sequentially and was slightly above consensus and in line with the guidance we provided last quarter. Our top line results reflect better-than-anticipated revenue from mobile phone touch screen applications offset by lower-than-expected PC revenue. Our gross margin performance was slightly above the high end of our expectation, primarily due to product mix, driving strong operating profit, net income, and EPS. As a result, non-GAAP net income was $23 million or $0.68 per diluted share, representing sequential increases of 20% and 19% respectively.

In the December quarter, the revenue mix from PC and non-PC applications was approximately 46% and 54% respectively. Revenue from PC applications was down 6% from the prior year and 3% sequentially, primarily reflecting lower PC peripheral revenue. In addition, the overall consumer notebook market has continued to be weaker than anticipated. Synaptics continues to lead the market for notebook touch pads with a market share of approximate 65%, and design activity continues to be very strong. Revenue for mobile touch screen applications in the December quarter was down 11% year-over-year but up 21% from the September quarter. Mobile unit shipments increased significantly from both comparable periods. As we discussed, the mobile product mix was predominantly [sale and ship] with integrated module solutions representing less than 5% of mobile revenue. Module solutions were approximately 10% of mobile revenue last quarter and close to 50% of mobile revenue a year ago.

As we mentioned on prior calls, sale and ship solutions have lower average selling prices but carry higher gross margin percentages than full module solutions. Non-GAAP gross margin grew to 47.4%, an increase of 640 basis points year-over-year and up 130 basis points from the September quarter. The gross margin percentage was slightly above our expectations due to the overall product mix and a higher-than-expected mix of revenue from mobile phone applications. Non-GAAP operating expenses where $39.3 million, up $2.2 million from the prior quarter. The increase was primarily due to an additional week of employee related expense. As discussed last quarter, the December quarter was a 14 week period, as fiscal 2012 will be a 53 week year. Headcount at the end of December was 692.

GAAP operating expenses were $47.6 million, including $8.5 million of share-based compensation in the December quarter. Our non-GAAP tax rate was 23% in the December quarter compared with 22.4% in the September quarter, reflecting our geographic profit mix. Our GAAP tax rate was 18.8%. As I mentioned previously, second-quarter non-GAAP net income was $23 million or $0.68 per diluted share. Turning to our balance sheet, we ended the quarter with $282 million of cash. Cash flow from operations was $29.2 million. Capital expenditures were $2.3 million, and depreciation was $2.7 million. Receivables at the end of December were $86.7 million, reflecting 54 days of sales outstanding. Inventories at the end of December were $29.2 million, and inventory turns were unchanged at 11.

Now we'll make a few comments regarding our quarterly outlook. But first, I'd like to remind you that the third fiscal quarter will revert back to a 13-week period rather than the 14-week quarter we just completed. Looking ahead to the March quarter, we continue to monitor ongoing uncertainty within the consumer spending environment and the impact on end demand. Based on our backlog of approximately $69 million entering the quarter, customer forecast and expected product mix, we anticipate revenue will be in the range of $128 million to $136 million. This outlook reflects seasonality and continued limited visibility further impacted by the timing of Chinese New Years.

We expect both mobile and PC revenue to be down sequentially. PC revenue is anticipated to be relatively flat year-on-year and, while we expect mobile phone touch screen units to be up, mobile revenue is expected to be down, reflecting the mix shift to lower price sale and ship solutions compared to the year ago period. Taking into account our overall revenue mix, including our module-based notebook business and product mix for mobile touch screens, all of which fluctuate on a quarterly basis, we expect non-GAAP gross margin for the March quarter to be in the range of 46% to 47%. We expect non-GAAP operating expenses in the March quarter to be down some from the December quarter, reflecting the normal 13-week quarter with increased engineering headcount to support our expanded product portfolio and technology road map.

We expect a FAS123R charge in the third quarter to be in the range of $8.2 million to $8.4 million. We anticipate that our non-GAAP tax rate for the March quarter and for the year will be in the range of 22% to 23%, reflecting our expected geographic profit mix. Non-GAAP net income for diluted share for the March quarter is anticipated to be in the range of $0.47 to $0.56 per share. I will now turn the call over to Rick for an update on our business.

Thank you, Kathy. Fiscal Q2 marks my first full quarter since joining Synaptics, and I'm very impressed with the team's performance. Despite the revenue headwinds from the transition away from modules in the mobile touch screen business, the Company continues to execute and delivered a sequential increase in revenue and further improvement in gross margin. Today, I'd like to touch on some of the exciting product announcements we made during CES as well as our continued progress on our advanced technology and our leadership position in the markets we serve. Then we will be happy to take your questions.

During the second quarter, we began shipping our first on-cell solution with our ClearPad 3200 and the Sharp DC250 smartphone. This phone features one of the most advanced touch screens on the market with a 4.5 inch 3D screen and a 12 megapixel HD camera. We also began shipping solutions into many of the first [ultrabooks], and we are now actively engaged in over 50 new designs expected to hit the market in the coming months. Several of these products were showcased at the recent Consumer Electronics Show in Las Vegas as well as our latest technology innovations. This year's show was all about thinner, lighter, and more energy-efficient devices. As devices continue to decrease in size, maximizing the functionality of the footprint is crucial to the performance of the end product.

New technology and form factors add levels of complexity that require in-depth system-level engineering support to provide ease of integration. This is evident in all of our key product markets for mobile phones to tablets to new form factors in the notebook PC market such as hybrid and ultrabooks. Our strong product line-up supports these trends, including our new high-performance ClearPad 7300 single-ASIC solution for touch screens up to 12 inches. Our solution enables OEMs to deliver highly differentiated tablet devices to market with the strongest performance, shortest development time and lowest cost. A single-ASIC solution simplifies design complexity and delivers higher performance versus competitive multi-chip solutions.

Multiple tablet programs based on this solution are in active development and are expected to reach the market by mid-2012. We also unveiled our Design Studio 4 tool set. This is an important differentiator for Synaptics based on our history as a full solution provider with a deep understanding of touch technology. This platform accelerates our ClearPad development cycle by enabling our customers to evaluate and optimize touch performance in their products. It's embedded with our patented signal clarity technology, which improves accuracy and finger separation and provides unmatched environmental and electrical noise immunity. With over 10 years of system-level design experience now incorporated at the software level, we are enabling our customers to provide compelling products that are high performing, robust and easy to integrate.

In addition to the Sharp On-Cell mobile phone I mentioned previously, we are shipping our ClearPad solutions into a number of new mobile phones with Hua Wei, LG, RIM, Sony Ericsson, Sharp and GTE. We continue to expect to broaden our mobile customer base this fiscal year and to outpace industry unit growth. Synaptics is leading the evolution of next-generation touch interfaces that deliver lower overall costs and tight integration with multiple display types. We began shipping solutions for mobile center online implementation a couple of quarters ago. Our on-cell technology is in the market today, and our in-cell solutions are not far behind.

Our development work continues with the top six display OEMs with the first in-cell solutions expected to ship in the first half of calendar 2012. While the touch interface is rapidly becoming a must-have solution, there's still a long runway for penetration of capacitive touch within the broader mobile market. By 2014, 50% of the mobile phones are forecasted to remain unserved by capacitive touch solutions. We expect these newer technologies to drive even further market penetration and gross opportunity for our touch screen products.

Moving to the PC market, Synaptics is uniquely positioned to provide the innovation, performance and sleek design characteristics that are necessary to drive the new wave of ultrabook PCs. We are the clear leader in the first wave of ultrabooks including -- the HP Folio 13; the HP [MB] Spectra, which garnered a Best of CES Award; the Lenovo U300s; the Acer Aspire S3; the Toshiba Portege Z830; and the Toshiba Satellite. Our solutions leverage our industry-leading Quickpad with image sensing technology that detects multiple fingers and supports large touch pad surface areas, ideal for precise navigation and sophisticated gesture recognition. The majority of these designs are also enhanced by our inter-touch technology, providing high-speed connectivity to the motherboard for heightened touch pad performance.

As a Microsoft co-engineering partner, we are working closely to develop solutions that maximize TouchFirst experience for Windows 8. Our longtime leadership in the touch pad space puts us in the unique position of pursuing two touch interfaces in the notebook form factor, with both touch pad and the touch screen devices. The stringent certification requirements in Windows 8 raises the bar on touch screen performance and are supported by our new single-ASIC ClearPad 7300, while the touch pad specification promotes a premium user experience. These include larger touch pads and click pads with high-speed interfaces and fast and fluid multi-touch gesture capabilities. During his key note address at CES, Intel's CEO demonstrated a hybrid convertible PC that had Synaptics's technology in both the touch pad and on the 12.5-inch touch screen. This demonstrates -- demonstration underscores our advanced reference design work with Intel over the past six months in both the touch screen and touch pad areas.

Our work with Microsoft and Intel are examples of our broad set of global ecosystem partnerships to drive solution adoption within our market. In addition, Synaptics is in the reference design for Nvidia's recently announced Tegra processor direct touch solution. And as we push ahead with our on-cell, in-cell, and integrated display drive road map, we have the opportunity to expand our strategic positioning across not only OEMs, but with center and display manufacturers and processor companies.

We believe our strong partnerships provided and will continue to provide increased opportunities for our touch solutions. As we move forward, we couldn't be more excited about our business. Synaptics is extremely well positioned to capitalize on the rapidly growing markets we serve. And focusing primarily on touch, we are investing in the right areas and have created a broad set of advanced solutions tailored for multiple products and markets that drive our future growth. We are in the leadership position with our in-cell and integrated display driver efforts for mobile touch screens, our system engineering-based design tool, our support of the growing Ultrabook market and our ClearPad 7300 single-ASIC offering for the tablet market. With our top-tier engineering team and a complete knowledge of the solutions environment, combined with our global technical design centers, we expect to accelerate our competitive edge as the opportunities for our technology continue to expand.

With that we will now turn the call over to the operator to start the Q&A session. Operator?

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session.

(Operator Instructions)

Rob Stone, Cowen and Company.

I wanted to touch base on the PC trends for a minute. Do you attribute the atypical sequential performance to cannibalization by tablets or people waiting to get these new Ultrabooks? I understand the year-over-year delta had more to do with peripherals being down, but if you can comment on sequentially -- and then with respect to the Ultrabook design, do you see those ramping more substantially in the second half of calendar year?

In terms of the seasonality, the numbers we're projecting are typically in line with the seasonality. Obviously Q4, we'd all have liked to have seen higher notebook growth rate than we did. And certainly some of that can be attributed to the hard disk drive issue in Thailand that has generally slowed the market overall.

On the second part of your question around Ultrabooks, we certainly we expect to see sales beginning now. There are a number of them are already in the marketplace, but that should accelerate through the end of the year. As kind of high point, of course, we've all seen Intel's projection of 40%, which does seem to be in the high range, but there's no doubt it is a very exciting category that gives us great opportunity.

Any comment, if you're willing to, on how much tablets contributed either to Q2 or to your outlook for the second half?

It is always tough to put a finger on it, and there's various estimates on how much the tablet market might be cannibalizing a bit of the notebook market. Mostly that's around the refresh rate. We haven't seen -- no other feedback from our OEM, so that's a huge impact and obviously it's impacted their tablet plan more so than directly their notebook plan.

Let me add a little bit to that, Rob. As far as our tablet business, we've been shipping into a couple of tablets, and as Rick said on the call, we've announced our 7300 solution and we have active designs underway that we expect to hit the market by mid-2012. We do expect to see some more tablet revenue over the next couple of quarters as far as how fast that develops, we will just have to see how that market develops overall.

With Ultrabooks and also with Win 8 coming along and the focus on touch, we think there's going to be additional avenues beyond just tablets as other form factors come into play and also support of touch screens even in clam shells. So we are very excited about the larger touch screen opportunities going forward.

Can you comment on how much tablets contributed to Q2?

Still very little.

Charlie Anderson, Dougherty & Company.

I wondered if you could touch on PC in terms of your market share. I think you hovered around 65%, and I wonder where you stand today and where Ultrabook maybe takes that. Also, you've got a competitor who started to talk a bit more about entering the market who has been a traditional competitor on the smartphone side, so I wondered if you could address that as well?

Our market share is roughly where it is been in the mid-60s% area. As we move forward, particularly the Ultrabook category gives us an opportunity certainly to go above that, but as we look forward and try to balance all the different notebooks segment categories, mid-60s% is the general area where we plan. Certainly we have another competitor out there that's talking about plans in this area. That's nothing new for Synaptics.

We continue to have the best solutions in the marketplace. We are seen as the top solution. So as OEMs do look at things like Ultrabooks and so on that are addressing the premium segment, they want the best supplier. And that's Synaptics and that's the technology statement, it is an operational statement, that's a support statement, a driver statement and so on. We really think we have a clear differentiated project in this case and we plan to hold that share.

Great, and then quick question for Kathy on the OpEx. You said it would be down a little bit -- I know you were going from a 14-week to a 13-week. If I do conversion, I think you're still up a little bit and I wonder if you can talk about is it R&D? Where you're driving the extra cost and then how you're thinking about operating margins in terms of how you're planning your OpEx going forward?

As far as what we are looking at for next quarter on operating expense, I said operating expense we expected it to be down a little bit quarter-on-quarter. We get back to the 13 weeks so the expense comes down for that, but we've also continue to hire, so we've been hiring consistently, Q1, Q2, Q3 and from an investment standpoint, we are continuing to hire in engineering within our core business, systems engineers, architects to support our expanded product line up and our technology road map.

From a model standpoint, the operating expense this quarter with $145 million in revenue, R&D was around 18% and SG&A was around nine or 27%. The target is -- we are still transitioning with the revenue from modules to chips and tails, we're targeting R&D to continue to be in the upper teens and the range of SG&A of 7% to 9%. So operating profit, that results and operating profit target of still mid-to upper teens for the near-term.

John Vinh, Collins Stewart.

First question is on mobile. You mentioned that you expect to continue to broaden your customer base and gain market share. I was wondering if you could clarify -- does that mean you expect to ship into additional tier-one customers this fiscal year that you have not previously shipped to in the prior fiscal year? Does that comment apply tier-one customers is basically my question?

Yes. We expect to add to our tier-one customer base.

And my follow-up is on the share gains that you've gotten in the mobile market. Sounds like you have been pretty consistently confident and have some good visibility there. Can you talk about what has allowed you to regain market share within the mobile market?

Ultimately it starts with world-class products. With our 3200 product line, that's really allowed us a strong entry back into the mobile space. We are now viewed as the leader with technology there. And we were first with some of the leading edge technology.

Of course it is some of the other things I mentioned as well with our design center support around the world and how we support our customers world-wide, that set of services, the tools that we bring. I mentioned DS 4, signal clarity, those type of technologies all put us in a leading position. Now we've secured those design wins to allow us to grow faster than the industry.

And then my last question is on in-cell. I was wondering if you could just give us a sense of how you are looking at the in-cell market. What sort of confidence you have about beginning shipments in the first half of 2012 here, and then also is -- how do we think about the ASPs on in-cell versus your current chip and tails business?

I will take the first half and then I will let Kathy talk to the second half. In terms of our view on in-cell, it is unchanged. We still believe it is the ultimate solution for cell phone and brings the attributes of thinner, lighter solutions and ultimately lower cost as well. As I mentioned in the prepared remarks, we expect very soon to see the first cell phone that utilizes our in-cell technology. And that's just the beginning of a significant trend in the market.

We're not going to peg an exact percentage, but the growth rate will be very high over the next couple of years as virtually every OEM and LTM are very interested in this technology.

John, as far as the ASPs go, the in-cell solution, they are higher-end solutions, the more advanced technology, so we look at the product line up, they carry a premium to the rest of our products. We haven't talked about general ranges or anything.

Li-Wen Zhang, Pacific Crest.

First one I would like to clarify, Rick, you mentioned over 50 new design wins (inaudible) -- are those for the touch chip solution or for the click pad?

At this juncture, all the introduced Ultrabooks have the click pad solution.

Okay thanks. And if you don't mind, can we get an ASP range for the notebook click pad?

An ASP range for notebook click pad?

Yes.

Li-Wen, what I said in the past is when we look at our touch pad business, typically a regular touch pad could be in the $2 range, and if you're looking at a click pad, it could be a nice premium over that range.

And also I think a couple quarters ago, Russell mentioned about the typical year outlook for the top line is down 1% to 6% and also he commented on the second half of this calendar year to grow double digits. Are they still hold? And also what kind of range is double-digit growth range for the second calendar half this year -- half of this calendar year?

Okay, let me see if I can address that. We are not updating our guidance for the full fiscal year. If you look at the third quarter and you look at the midpoint of the range with the visibility that we have right now, that's about $132 million, so our current view would be towards the lower end of the range that we previously discussed.

Raji Gill, Needham & Company.

Thanks, and congratulations on good results. In the notebook market, Rick, you had talked about potentially two touch interfaces in the notebook as Microsoft pushes more touch-enabled notebooks.

Just wondering, based on your conversations with the PC OEMs, are touch-enabled Ultrabooks at a right level of price in terms of there's enough cost that has been brought down to some of the components and materials where you will see more of a surge in touch-enabled notebooks in the future? Or have an additional dollar content per device you could get from?

Raji, interesting question and it is a question we ask all the OEMs, what is the opportunity because obviously it presents the great growth opportunity for Synaptics if we participate on the on-screen touch. And the momentum's certainly growing in that area. So in some ways it is a bit of a surprise.

It is hard to peg a figure on how many notebooks will ship in the Windows 8 time frame with a touch-enabled screen including the OEMs are interested and a lot of it is supported by some end-user data that we've been and they have been looking at.

And I mentioned the Intel demo at CES where it showed a great example where touch make sense if you have one of those hybrids with the screen that can move around. Suddenly you can see -- aha, now I can see a mode where you would want both indirect and direct touch going forward.

You're also asking -- what about the cost? The cost does need to come down on touch to enable broad deployment of that technology because with the larger screen sizes of course the sensor itself becomes quite an expensive proposition, and in the retail market we all know that there's price elasticity.

But there's smart people working on that cost, and as volumes go up I'm convinced the cost of the larger sensors will also come down to enable that experience to a broader set of customers. I think are all going to start demanding to have touch as broadly as we can. So again, I'm not going to get pinned down on a figure. It can be a very compelling opportunity a year from now.

And on the handsets, any change in terms of the competitive landscape from your existing competitors in terms of aggressive pricing? Are you seeing any aggressive pricing from the existing competitors? And along those lines, Silicone Laboratories have gained a little bit of share on Samsung's lower-end platforms. Are you seeing Silicone Laboratories or any potential new competitive threats in the marketplace?

Certainly in the low-end part of the marketplace, we are seeing several potential new competitors. It is a couple of the big names and then a couple of the smaller Asian-based companies out there, but it is a pretty furious pace on new technologies and so on. We have a very close engagement with the OEMs. They are looking towards the suppliers that have a broad set of solutions and are in this for the long term. We feel Synaptics fits into that category and there's a couple of the other large players that fit in that category as well.

And the last question for me, the gross margins have moved up very nicely, like 600 basis points from the last few quarters. Are you expecting any more margin expansion as you get into the first half of fiscal year '13, or do you think we are peaked out at these 47% gross margins? In other words, do you also think you get gross margin improvement on the PC side with these click pads on the Ultrabooks? Maybe you can get help from that segment?

Raji, let me see if I can address the question. For gross margin, the way that I look at it is the PC portion of the business, that still carries the historical lower gross margins unit and the clear solutions, the mobile part of the business and also large touch screens they carry higher gross margins. I talked last quarter and I'm going to stick with that, the nearer-term range that I'm looking for on gross margin is 45% to 47%.

That's assuming roughly a 50/50 mix of traditional touch pad click pad solutions plus or minus a few points versus the clear solution. So it is really dependent upon whatever that mix of the business between the touch pad, click pad and then the clear solution.

As we go forward I do think there -- we've got great opportunity from a positioning standpoint with Ultrabooks and also Win 8 with our click pads, because if you look at the specifications for all of those devices, they're specifying the larger touch pad, a lot more click pads, so we view that as positive definitely from an ASP statement as we go forward.

Shaw Wu, Sterne Agee.

Congratulations, strong quarter. My question's a clarification on the question earlier. Kathy, you talked about your fiscal '12 guidance, you're sticking with the range. I think you guided down 1% to 6%, you said the lower end of that. I'm just wondering -- that would imply a pretty steep ramp in the June quarter sequentially. Any color you can share there in terms of what would drive that?

Let me see if I can clarify any more. We're not providing an update, and when I look at what our guidance that we gave previously and the midpoint of our Q3, that's our current view -- that we would be at the lower end of the range. As we go forward with the product positioning, moving out into the first half of calendar '12, there's additional opportunities with tablets and also some additional products positioning as we move it further along into the year. That's where we are today, that's our current view.

And then just to expand on that, will this include -- I guess you talk about the design activity particularly in the mobile space. What do you anticipate -- I guess the start of the ramp of those programs like in the June quarter?

In the mobile space, as Rick said and we said before, we expect to grow faster than market in this fiscal year. Broadening in the customer base, we expect to see that this fiscal year.

Daniel Amir, Lazard Capital.

A couple questions. First of all, can you comment a bit on the fact of what's going on with Nvidia's Tegra processor and the fact that they are using the reference design. What is exactly the opportunity there for Synaptics? Is it something that we should take notice or is this something that is not going to move the needle that much for you?

We see it as a great opportunity for us. As you can see, we are in the reference platform with Nvidia and that was a tablet platform, which today as we noted earlier in the call, we don't have a huge market share position in there so the timing is really good.

Moving in with the tablet, we have a brand-new 7300 ASIC, so working with Nvidia that's obviously done pretty well in the tablet marketplace, so we see a lot of opportunity. In terms of the technical implementation and similar things, it has [protasms], strengths and weaknesses. We are working through those with Nvidia and we will approach the right customers with the right system configurations to take advantage of that approach.

With regards to the gross margin commentary from before, is it fair to say that if your mix is higher in the PC side towards Ultrabooks/Win 8 and then your margins would be higher in the PC space?

It goes back to the solution. So again, in the Ultrabook space as we go forward, if we get into the situation where we've got touch pads and then we start seeing touch screens and your going to have -- we would have some clear solution as well as opaque solutions in the same type of form factor.

My statement relative to gross margin is when we look at the types of business, the chips and tails for the clear solutions, they have higher gross margin percentages than the traditional touch pad click pad business. So really, you have to look at a combination of those types of solutions and what that mix is quarter to quarter.

Okay, and then my last question is what's your assumption on the notebook unit growth this year that you're working off of?

At this juncture, we are more or less just sticking with the IDC number which for the year I believe is about 9% with expectations of the first half being a little tighter because of the drive shortageand then the second half opening up quite a bit not only because of the supply chain differences but also because Windows 8 rolling in in the latter part of the year.

Jeff Schreiner, Capstone Investments.

Rick, can you we follow up with your last comment there? 9% growth with first half being weaker due to HDD. I don't find any commentary in the press release about HDD being any impact to the PC or hearing any commentary of that today. And 65% share in the touch pad market where people's like -- or even lesser share -- are making commentary regarding how much it impacted their guidance.

I was wondering if you can tell us on a percentage basis how much did Thailand HDD hurt you in December, how much is it maybe headwind in March and does it carry on into June quarter?

Those are great questions, John, and we've been trying to ferret out answers ourselves and it is a bit of a challenge because our answer is a bit dependent on another part of the supply chain. And to a certain degree it sounds like a simple question, but it is complex because where does the hard drive allocation go, do they favor notebooks -- which is obviously good for us and that's a theme that I'm hearing.

To a certain degree, we go out and talk to our OEMs and look at their forecast and so on and let that guide our direction. I think in general the entire industry is being a little bit cautious right now 'til that visibility gets better. And we are in the middle of Chinese new year break right now, part of that visibility is -- clouds might start to lift here in a few weeks as people get a handle on what's going on.

Certainly there's an opportunity, the channel is pretty low. At some point when the drive supply comes back, they will be a channel activity to resell that, but at this juncture our Q4 doesn't -- Q2 didn't seem that much impact and we try to comprehend that impact in guidance we've given for Q3.

And in Q3, you guided to where it would be sequentially down about 8% where over from fiscal year '04 to fiscal year '11, the average sequential decline was around 13%. So you're down less -- you're doing better than seasonal and -- What's driving that in terms of the guidance into March if there's no real impact from HDDs in Thailand at this point and juncture?

Keep in mind I mentioned earlier that our Q2 and of course the industry calendar Q4 -- it is hard to say how much some of that impact was built into a lower Q4 number as people went down to historically lower channel rates and inventory rates either because of the hard disk drive or anticipation of pending shortages in Q1. So the seasonal pattern could be a bit different in that regard.

And I know some of the processor vendors and obviously the place where I came from voiced bigger concerns about that particular issue. But they are at a little bit different place in the food chain in terms of processors tend to be socketed devices and they can get plugged in at the last minute and so on, where we are more assembled as part of the notebook.

Again, it is a tricky situation, and we are playing the best as we can and I hear your question and it is a very good question and a lot of people are asking us because of our footprint in the notebook industry. But at this juncture this is the best guidance we can give you.

Okay, and one last question for me. What was the actual growth rate of the touch pad market in calendar year '11, and outside the notebook units, what type of gross would be using that 9% on top of what we expected the calendar year '11 touch pad market would be? And I guess if you look at that, you've got competitors that are forecasting -- you're saying maybe we will be in line or a little better -- but you've got competitors forecasting something four times that for their notebook touch pad growth.

Are we starting to see where, now that Alps has been removed from the business model, there's two new competitors that are moving up the can actually start to maybe dink the armor a little bit of that 65% share you've enjoyed for a long time?

I'm sure the other competitors have ambitious plans in this marketplace, and Synaptics has always had to fight off two, three, four players at any one time, and the names change over that time period, but the battles stay similar. I cannot comment on what their plans are or what they're projecting, I can only look at the design wins that we are securing in the majority of those are now in hand for the next wave of notebooks which will come with Windows 8, and we feel good about our mid-60s% projection.

Kevin Cassidy, Stifel Nicolaus.

With all these different growth sectors that have, if you look at next year, what do you think your mix would be? If last quarter it was 46/54, how do you think it would be PC versus non-PC?

We haven't necessarily broken that out. I think that we do see -- since we have limited participation in tablet market, we see that as an upward trend. If you look at the notebook market, we do expect to grow with market from a unit standpoint. I think from an ASP standpoint, and the traditional touch pad, click pad area, we see a richer mix of the larger touch pads and click pads, so I would say that bodes to maybe some slight favorable ASPs there. And in the mobile market, we do expect to grow faster than market and we will just see how the mix ends up.

Great and you're working with the top six glass suppliers you said. Do you expect anyone of them to be a top 10 or 10% customer?

Too early to tell. It is from a timing standpoint. Over time we do expect in-cell to really become a big part of the market. And if you look at how we sell our solutions, we will be selling -- we do sell our in-cell solution into the LCD manufacturers.

Maybe just one other question. Going on the reference designs you mentioned working with Intel and also with Nvidia. Will there be other reference designs that you're working with, other processor manufacturers?

Certainly. Our goal is to work with all of them. From an efficiency perspective, you can get a reference platform and they actually distribute it out to the customer base. It is much easier than going out to the broader customer base and trying to win those battles one at a time against somebody that's already in the reference design. It provides a starting point. I'm certainly not implying that's how you get to win, the OEMs play a major role there, but it's better to be in than not.

Joanna Makris, Mizuho Securities.

Can you comment about how you see the gross margin impact from in-cell over time and how that may work into the model?

The gross margin impact, in-cell solutions, they are more -- they're reflective of the current solution types that we're shipping today for our clear solutions in mobile. So we would see gross margin similar to what we are selling today in the mobile side of the business.

Okay, but not incremental?

Again, we will see how it goes. Early on, they're premium solutions, the advanced solutions that carry higher ASPs and typically better margins, but in general, the way that I would look at it today is if we are reflective of our clear solution for the mobile business.

Brett Simpson, Arete Research.

Just a couple questions and first off, I think in the past you talked about 2012 being -- [No audio]

Brett?

One moment please. Mr. Simpson, please go ahead.

Yes, can you hear me?

I think you're going to have to start over. There was a little bit of a cut out there.

Can you hear me now?

Yes.

Okay, great. My question is looking at some of the market share changes at the OEM level in smart phones. The last couple of quarters, we've seen enormous gains from like Apple and Samsung, and those are not traditional customers for Synaptics. Going forward, you've talked about market share gains for Synaptics in 2012, and given the share changes at the OEM level, are you still confident that's the case this year?

Brett, we try to look at the landscape of our OEMs when we make these projections and yes, we are still confident. Think about certainly a couple of the big OEMs have made some nice gains. We also play a major role for some of the fast-growing although today smaller, but not too small anymore, right, such as [DP] and Wah Wai have really made large gains in 2011 and they have great momentum rolling into 2012 with the markets that they serve.

And so when it comes to in-cell, you mentioned that there's a lot of OEM interest and a lot of display makers are looking to run product in this category. How do you see the acceptance of the technology through the course of this year and to what extent are we likely to see issues like manufacturing yield get in the way of the ramp up?

Certainly from the perspective of the OEMs and the LTMs, in-cell is the right direction to go because they do see the thinner, lighter and ultimately lower- cost solution that in-cell promises. But with any high-volume manufacturing and complex processes, there is a yield curve.

Initially this year you will see a number of different introductions and the technology will ramp through the course of the year and then of course, calendar '13 will be much bigger. And what is really tricky to guess right now is how steep that ramp is, but there's no doubt that the in-cell ramp is on its way very soon.

Thank you. That does conclude our question-and-answer session. I would now like to turn the call back over to management for closing remarks.

All right, thank you very much for joining us for the call today. And we look forward to updating you next quarter.

Ladies and gentlemen, this concludes the Synaptics' second-quarter 2012 earnings conference call. Thank you for your participation. You may now disconnect