Synaptics Inc (SYNA) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Synaptics fourth-quarter and fiscal-year 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, August 2, 2012. I would now like to turn the conference over to Alex Wellins of The Blueshirt Group. Please go ahead, sir.

Good afternoon, and thanks for joining us today on Synaptics fourth-quarter and 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 synaptics.com. With me on today's call are Rick Bergman, the Company's 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 exclude noncash share-based compensation charges and certain other non-operational and noncash items. Please refer to the press release issued after the 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. These are including, but not limited to, statements regarding the Company's future financial performance and outlook, including expectations of modest growth year over year; financial guidance for the fiscal -- first quarter of fiscal 2013; anticipated sequential changes in PC and mobile product revenues for the first quarter; anticipated expenses and expense trends associated with the Company's recent acquisitions; the timing of ForcePad and ThinTouch product revenue; and the ramp and timing of when video product revenue will become accretive.

Also, the Company's expectations for above market unit growth within the mobile market, including the impact of a higher mix of lower-cost trip solutions; the Company's belief that it is laying the foundation to capitalize on its target markets as never before, to lock in new incremental opportunities for expanded long-term growth; expectations of the pipeline for large touchscreen solutions expanding throughout the year; and the acquisition of its new video display capabilities, further fueling future growth through touch and display integration opportunities.

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. With that said, I will turn the call over to Rick Bergman. Rick?

Thanks, Alex, and I would like to welcome everyone to today's call. As you may have seen from our announcements this afternoon, we have a lot to cover today, based on some really exciting new products and acquisitions that expand the market opportunity for Synaptics. So, let's dive right in.

We are very pleased with our fiscal 2012 performance, particularly against the backdrop of challenging marketing conditions. Fiscal 2012 revenue was $548 million, down 8% from the prior year, as the revenue impact from the module to chip transition for our mobile phone products more than offset strong unit growth. On the flip side, higher-margin mobile chip products lifted the overall gross margin percentage 550 basis points from the prior year, increasing gross margin dollars by 4% and adding operating leverage to our business model. Non-GAAP net income and earnings per share were $79 million and $2.28, respectively, reflecting our investment in research and development to enhance and broaden our product offering and technology portfolio.

In fiscal 2012, we further entrenched our leadership position in our key markets, broadened our solutions portfolio and our ability to scale to meet the opportunities in front of us, and continued to position the Company for long-term growth. We maintained our majority share in notebook PCs and drove favorable ASP trends with the transition to image-sensing TouchPads and ClickPads. In the smartphone market, we expanded our market share among a broader base of OEMs. We shipped the industry's first in-cell enabled smartphone with the launch of the Sony Xperia P. Additionally, we began sampling the world's first integrated touch and display driver in-cell solution with our ClearPad Series 4 In the large touchscreen market, we were the first to market with a single ASIC solution -- our ClearPad 7300, which is now shipping in the 10-inch Samsung Galaxy Tab 2 and has garnered design wins with other OEMs.

Having the broadest product portfolio in the industry enables us to apply our system-level engineering expertise to a wide number of solutions. This includes the recently announced ClearPad 2300 single-layer multitouch solution that drives down the smartphone bill of material cost and supports all combinations of sensors and lenses. Series 2 solutions can also be found the latest models from Huawei and DTE. Our Series 3 solutions have enabled us to build on our technology leadership position in the premier mobile touch market with our second in-cell solution, the HTC Evo Design; discrete sensor solutions, such as the well-received HTC One X; and on-cell solutions, such as the Sharp Aquos smartphone. Our ecosystem relationships are stronger than ever, as we continue to empower our partners with our industry-leading support tools, such as the recently announced SafeSense design tool, which drives design efficiency while lowering system design costs. ClearPad Series 4 in-cell solutions clearly represent the next evolution of capacitive touch solutions, as evidenced by the recent media and industry coverage the technology has received. At Qualcomm's partner event Uplinq, we demonstrated our TDDI solution on the Qualcomm DragonBoard, which is used as an evaluation platform for the Snapdragon reference design and received overwhelmingly positive feedback across our ecosystem partnerships.

In the PC notebook space, products that began shipping during the quarter include the latest Ultrabook models from HP, Dell, Lenovo, Samsung, Sony, and Toshiba, with our latest ClickPads. A few noteworthy models in the market today include the HP Spectre XT and the Sony VAIO S, T, and E models. The VAIO S features the largest ClickPad on the market, as the first to align to Microsoft's modern TouchPad recommendations, and it has already received positive acclaim from the leading industry PC reviewers. With the imminent launch of the Touch First-based Windows 8 devices, Synaptics is well-positioned to deliver a comprehensive and intuitive touch solution.

We made a lot of news today. Now, let me give you some of the details. First, Synaptics launched ForcePad. This is the most significant development of the TouchPad since we introduced it 17 years ago. Due to the addition of pressure, ForcePad delivers industry-changing usage models that will revolutionize the human-computer interface in notebook PCs. ForcePad delivers everything today's best ClickPad offers, and much, much more. It provides consistency in performance across OEM models through its design intelligence and self-calibration. Ideal for thin and light Ultrabooks, it achieves a 40% thinner component advantage over today's conventional Ultrabook TouchPads. We expect notebooks incorporating ForcePad technology to begin shipping mid-calendar year 2013.

Next, we acquired Pacinian, giving Synaptics a ThinTouch keyboard technology that is 40% thinner than a conventional keyboard. With the addition of ThinTouch technology and the capabilities of our ClearPad Series 7, our partners can achieve a better together integrated experience that only Synaptics can deliver. ThinTouch keyboard samples are available today, and product revenue is targeted for early fiscal '14. Third, we expanded our ClearPad Series 7 portfolio, leveraging the single ASIC ClearPad 7300 solution that is designed to meet Microsoft Windows 8 and Windows RT touchscreen requirements up to 12 inches. The new lineup can now support up to 17-inch touchscreens. All of these ClearPad solutions are sampling to select OEMs today.

Lastly, I am very pleased to reveal that we recently acquired the Video Display Operation of Integrated Device Technology Incorporated, adding highly experienced analog and mixed-signal talent to our engineering team, and adding key technologies such as embedded display board and panel self-refresh to our portfolio. This acquisition underscores Synaptics's commitment to leadership in the emerging large-screen market for notebooks, Ultrabooks, and tablets, with an expanded technology platform for next-generation touch-enabled video and display applications. Several VDO display timing and interconnect products are currently available and in development. We expect revenue from these products to begin to ramp in the second half of fiscal '13, and anticipate they will become accretive towards the end of the fiscal year. We expect more meaningful revenue in fiscal 2014 and beyond. While some incremental expenditures will be required to leverage the full potential of these new products and technologies, we believe we are making the right investments at the right time. We are increasing our market opportunity by continuing our strategy of expanding our offerings and solutions, while broadening our share of the product real estate and capitalizing on the evolution of new and different form factors.

As we look ahead to fiscal '13, we expect a return to modest annual revenue growth, weighted towards the second half of the year, as we continue to navigate through near-term macro and product transition-based headwinds in our markets. While we remain optimistic regarding opportunities around the launch of Windows 8 and the ongoing shift to favorably priced large TouchPads and ClickPads, the broader near-term outlook for notebook PCs remains uncertain. In the mobile business, above-market unit growth is expected to be offset by a higher mix of lower-cost chip solutions for the rapidly growing lower-end segment of the smartphone markets, while additional high-end advanced solutions begin to ramp. And while we have done a great job expanding our customer base in fiscal '12, our growth remains tethered to the sellthrough levels of our mobile customers.

At the same time, and looking back on the year based on today's announcements, you can clearly see that we are strengthening our position as the world's number-one human interface Company. We are laying the foundation to capitalize on our target markets as never before, so we lock in new, incremental opportunities for expanded long-term growth. In the notebook market, we maintain our leadership position by a wide margin. The addition of ThinTouch and ForcePad will enable us to deliver a better together solution across the keyboard, touchscreen, and TouchPad, while continuing to leverage the trend towards thin and light. We see the pipeline for large touchscreen solutions expanding as we progress through the year, and the acquisition of our new video display capabilities will further fuel our future growth through touch and display integration opportunities. When all of these technologies are combined, Synaptics looks to own the human computer interface within the PC, delivering a superior, uniform user experience.

Finally, in the mobile market, our leadership in in-cell and TDDI capabilities gives us confidence in our technology roadmap, and we expect more activities surrounding these solutions in calendar '13. We look forward to a return to growth and another year of meaningful progress and execution, as we continue Synaptics's track record of innovation and market leadership. As we close out the year, I would like to thank our dedicated employees around the world, and also welcome the new employees joining us through our recent acquisitions. We look forward to seeing many of our analysts and investors at the upcoming Analyst Day next Tuesday, August 7, where we will provide more color regarding our markets, as well as further details on our new products and technologies. With that said, I will now turn the call over to Kathy.

Thanks, Rick. We are very pleased with our June quarter results, as revenue of $137.6 million was slightly above consensus and in line with our guidance. The revenue mix from PC and non-PC applications was approximately 56% and 44%, respectively, in the June quarter. As a reminder, revenue from large touchscreen products, including tablets, is included in revenue from non-PC applications, along with our other ClearPad solutions. Revenue from PC applications was down 1% from the prior year and up 18% sequentially, primarily reflecting seasonality and the timing of our sell-in versus sellthrough ahead of back-to-school season.

Synaptics continues to lead the market for notebook TouchPads and ClickPads, and design activity continues to be very strong. With new Ultrabook designs ramping this quarter, ClickPads were greater than 15% of our TouchPad unit shipment. Revenue from non-PC applications in the June quarter was down 8% year over year and 9% from the March quarter. Mobile unit shipments increased significantly from the same quarter last year and were up modestly sequentially, reflecting the macro environment, customer market share dynamics, and product mix. The mobile product mix was tails and chips this quarter, while higher-priced integrated module solutions represented over 30% of the mobile revenue in the year-ago quarter. As we have mentioned on prior calls, tail and chip solutions have lower average selling prices, but carries higher gross margin percentages than full module solutions.

Non-GAAP gross margin was down sequentially at 46.2%, but up 380 basis points year over year. The gross margin percentage drifted towards the lower end of our expectations as PC products, or a higher portion of the overall product mix than previously expected. Non-GAAP operating expenses were $39.8 million, up $1 million from the prior quarter. The increase was primarily due to expenses associated with the acquisition previously discussed and increased investment in chip design activity. GAAP operating expenses were $48.1 million, including $8.3 million of share-based compensation in the June quarter. Our non-GAAP tax rate was 22.7% in the June quarter compared with 25.5% in the March quarter, primarily reflecting our geographic profit mix. Our GAAP tax rate was 21.1%. Fourth-quarter non-GAAP net income was $18.6 million, or $0.54 per diluted share, near the high end of our guidance range.

Turning to our balance sheet, we ended the quarter with $305 million of cash. Cash flow from operations was $21.7 million. Overall cash was down $19 million from March, reflecting the repurchase of 1 million shares of stock for $28.2 million and $14.6 million for the purchase of Pacinian. For the fiscal year, cash flow from operations was very strong at $101.4 million, and we used $61.7 million to repurchase a total of 2.4 million shares of our stock, or over 7% of our shares outstanding. Employee participation on our equity incentive programs provided $34.9 million for the year. Capital expenditures and depreciation were each $10.4 million for the year. Receivables at the end of June were $104.1 million, reflecting 68 days of sales outstanding. Inventories at the end of June were $31.7 million, and inventory turns were nine.

As Rick mentioned earlier, we acquired Pacinian Corporation late in the fourth quarter. The purchase included the initial cash payment of $14.6 million, with up to $15 million of contingent consideration. The contingent consideration is reflected on our balance sheet in noncurrent other liabilities, at a discounted carrying amount of $11.9 million. We expect to incur additional costs associated with bringing this product to market over the next 12 months. In addition, as just announced, we acquired the Video Display Operation of IDT. Technology and IP were acquired for $5 million, and we hired the engineering team. Both of the acquisitions include purchased intangible assets, which will be charged to GAAP earnings over their economic lives as noncash amortization in our financial statements, but will be excluded from our non-GAAP results. In addition, non-GAAP results will exclude noncash interest expense associated with the contingent consideration.

As previously disclosed in a Form 8-K subsequent to the end of the year, we completed the purchase of land and buildings for $12 million in San Jose for the relocation of our corporate headquarters after renovation. We expect to market and sell our existing headquarters building in Santa Clara during fiscal 2013.

Now I will make a few comments regarding our quarterly outlook. Looking ahead to the September quarter, visibility and end demand in our markets continues to be impacted by the global macroeconomic environment. Backlogs -- based on our backlog of approximately $50 million entering the quarter, customer forecasts, and expected product mix, we anticipate revenue will be in the range of $120 million to $128 million. Specifically, we expect both PC and mobile revenues to be down on a sequential basis. This outlook reflects a soft PC environment and the timing difference between our sell-in and OEM sellthrough. On the mobile side, our outlook reflects the soft macro environment and customer market dynamics.

Taking into account our overall revenue mix, we expect non-GAAP gross margin for the September quarter to be in the range of 46% to 47%. We expect non-GAAP operating expenses in the September quarter to be up from the June quarter, primarily from engineering investments associated with the acquisitions and some incremental engineering and go-to-market headcount to support our expanded product portfolio. Non-GAAP operating expenses related to the two acquisitions is expected to be around $3 million to $4 million per quarter, starting at the lower end of the range and increasing over the next several quarters.

GAAP expenses will also include noncash purchased intangible amortization, as well as noncash interest expense of approximately $440,000 and $300,000 per quarter, respectively. We anticipate the FAS 123R charge in the first quarter to be in the range of $8.6 million to $8.8 million, inclusive of the recent acquisitions. We anticipate that our non-GAAP tax rate for the September quarter and for the year will be in the range of 24% to 25%, reflecting our expected geographic profit mix, combined with no assumed benefits from the expired R&D credit.

Non-GAAP net income per diluted share for the September quarter is anticipated to be in the range of $0.30 to $0.38 per share. Diluted shares outstanding for the September quarter is expected to be around 34 million shares, reflecting our stock purchase activity during the June quarter. In closing, I will note that as Rick mentioned previously, we anticipate modest top-line growth this year with Q1 the low, as our markets and our opportunities grow with our expanded leading edge product portfolio. With that, we will now turn the call over to the Operator to start the Q&A. Operator?

(Operator Instructions) John Vinh, Pacific Crest Securities.

First question on the full-year outlook, you talked about modest growth. Can you help us understand what sort of revenue contribution you are expecting from the recent acquisitions? And are you still expecting growth excluding those acquisitions?

Thanks, John, for the question. The answer is yes, we would still expect growth without the acquisitions, going forward. But we are not going to peg exactly how much the acquisitions are going to contribute in the latter part of the year.

Got it. Okay. And then, my follow-up is on in-cell. Can you talk a little bit about what your design pipeline and activity is for in-cell? And how do we think about the contribution from in-cell revenues in fiscal '13?

Sure. Let me, in some ways, talk about the calendar years first. So, think of calendar year '12 as when the innovators in the marketplace are bringing in-cell forward. And obviously, you saw the Sony phone, or I mentioned that earlier, and then the HTC phone are a couple of examples of those companies that are out there seeding the marketplace.

But we have seen a tremendous surge in activity in design and type of traction with in-cell technology. So, through calendar '12, you will continue to see just the innovators pop up. But we expect that fairly substantial shift and a large number of additional phones to come to market with in-cell technology in calendar '13.

Okay. And then, there has been a lot of concerns out there about where the yield rates stand on in-cell. Can you just give us your perspective on where you see it currently? And when do you expect to get to reasonably mature yield, where we can see much more -- much higher commercial volumes?

I have seen the press too, John. It's kind of interesting. I see the press, but when I talk to the manufacturers, especially there is one that is shipping millions of units right now, and they seem very comfortable with the yields of in-cell technology. And the others that are earlier stage of the ramp are comfortable with what in-cell would mean to their manufacturing process. So, we don't see any fundamental reasons why, at least a the approach that we are taking with in-cell technology would impact manufacturing yields.

Great, thank you.

Daniel Amir, Lazard Capital Markets.

This is actually Philip Lee on behalf of Daniel. Regarding the past year on acquisitions, this is slightly different than your existing markets. Are you able to leverage your current customer base? What are the revenue opportunities here, and what kind of margins do these products have versus your current corporate profile?

All right, so lots of questions, they are all great questions. They are the questions we ask ourselves when we look at the acquisition. It absolutely leverages our current customer base. All the PC OEMs that we currently sell, our touchpad solutions into our LTS solutions, all looking for the same thing right now, thinner, lighter solutions.

And so, the Pacinian technology, which we now call ThinTouch, maps directly to that market requirement, and we are seeing tremendous interest. And it is a new market segment in some ways; but in other ways, as you heard working better together type of thing, if you think about it, there is a touchpad, and right next to it, of course, is the keyboard. So, there is lots of opportunity there for innovation on how we can get those different technologies to be combined together. And as you might have seen from our press release, using capacitive type of technology as well within the keyboard.

So, as you can tell, I'm really excited about this particular acquisition, because from the market side which is your last part of your question, it's literally a multibillion-dollar market. So, it really opens up opportunities for Synaptics -- not next year, as I said in the prepared remarks, but in fiscal '14 when we will have that in full production.

Great. Thanks, Rick. And as a follow-up, your annual guidance says modest revenue growth year-over-year. This implies accelerating growth for the December quarter, if we have normal seasonality in the back half of the fiscal year. So, assuming that there is a strong December quarter, what is driving the growth there?

Well, in the back part of the year, as we have talked about on the call, there is -- we have the expansion of our product opportunities. So, with this particular quarter as we move into October and beyond with Windows 8, there is the notebook opportunities there, large touchscreen pipeline is expanding, and we are also broadening our portfolio for our mobile customers. So, we have a lot of things that are going to be rolling in to expanding the product offering, as well as the new VDO operation products opportunity, as well.

And just to add a little bit on that, Philip, in our Q4, of course, you saw a strong PC business. And a lot of that is -- just call it almost a channel spill, because of the nature of our touchpad is it's one of the first things that is assembled, because it's right -- part of the notebook chassis. And you move into Q3, of course, you don't have that effect, plus of course Windows 8 is getting announced in the latter part of 2012. So, we would certainly expect a couple of those factors to move away as we go into Q4. We are very excited about Windows 8, of course, and all the possibilities which certainly can help our Business.

Yes, that is definitely a positive catalyst. Thanks for the color, Rick. Thanks, Kathy.

Rob Stone, Cowen and Company.

Lots of interesting stuff going on. Glad to see you deploy some cash for something other than buying back stock. (laughter)

Thanks, Rob.

I wanted to touch on the potential value opportunity of putting these things together, the ThinTouch and the ForcePad. And is the ForcePad in fact taking away the motion associated with the ClickPad and replacing that with Force? What does the Force do that is different?

Let me start off with your opening comment, there, Rob. Yes, I remember one of the first questions when I came on board was the question -- well, how are we going to deploy capital? And actually, I think we did multiple ways over the past, call it, 100 days. A couple acquisitions, obviously, and we did buy our shares, as I'm sure everybody saw, we bought it, some assets, a new building. So, we have a world-class headquarters for our world-class engineering team, and we continue to invest in some really compelling internal technology like in-cell and TDDI, because ultimately, we think for the smartphone market, we are very well-positioned there, as well. So, our three target markets, in effect, we made two external acquisitions to shore up the notebook space, and one for -- one of those was for the LTS space, and then internal investing for the smartphone base.

So sorry, I got so excited, what as the -- oh, the Force. Force space. And it was a very busy quarter for us. So, ForcePad we are finally bringing to light. We have been working on this for several years, but don't think of it instead of, think of it as in addition. It's really adding that third dimension to a ForcePad. Right now, if you click, it's a digital type of thing. It's either yes or no. With ForcePad, there is actually 256 levels of force, and it's very precise, very high precision.

So, just one example that you can think of, you probably go through a lot of long spreadsheets or documents. Today, you have to go find the page down button and click rapidly or toggle down with your mouse. In the future, you will just be able to push harder to move faster through that document.

So, it's one of these type of human interface things that is really hard to explain over a conference call, but I certainly hope you are here next week and we will set you in front of a notebook. And you will immediately get it and say, wow, this is just a much more natural experience that you would expect -- push harder to go faster, as an example.

So, in terms of the revenue opportunity, we know a basic touchpad these days is a couple of bucks, $2 or $3. The high-end ClickPads, of course, are worth more than that. But on a notebook, leaving inside for a moment the big increment, if it was a full touchscreen Series 7 or something. But if you get the thin keyboard plus ForcePad, can you put some rough range of revenue per box on that?

We consider it to be a premium solution over a ClickPad, but it's also a balance that we recognize; we are in the notebook PC space, and it is a space that although now highly valuing human error face technologies, I don't want to dismiss that, but we have to be competitive as well, so it adds, it certainly adds a bit of ASP.

I don't think we are going to give an exact figure how much ASP. But it certainly adds more opportunity. And of course, it also involves a larger ClickPad technology that we have talked about in the past, because of if you add Force, it's such a fun experience to use, you want to do it with a larger surface area. So, the combination of that allows us a nice upside over our current ASPs.

Okay. And my follow-up question, if you will, is on the December quarter. This is an odd-year prior transition-wise with Win 8. Do design wins at this point shed some light on what would be typical seasonality for December? Do you expect to see the countervailing factor as competition with tablets and economic headwinds? So, how do you feel, just broadly, about December quarter seasonality this year?

Rob, that is kind of the $64,000 question. We know what design wins we have for Windows 8 and Ultrabooks; and yes, they are very strong and we are very optimistic. But ultimately, it's -- what are consumers going to buy to create that sellthrough? And I don't know if we have any great more insight than we have heard over the past month. A little disappointing calendar Q2 in terms of PC or notebooks sales in general. And there is a bit of a hope we will go through a slower period in Q3, but then Q4 will pick up nicely, after a (multiple speakers) Excuse me?

Your fiscal Q2.

Our fiscal Q2, correct.

Yes. Okay, great. Thank you.

Kevin Cassidy, Stifel Nicolaus.

This is Dean Grumlose calling in for Kevin. I have a question and a follow-up. A number of touch suppliers have been optimistic about their potential share gains with Windows 8 coming out. I was wondering if you could give us your view on whether you feel the Windows 8 cycle is increasing your market share, decreasing, or neutral?

Well, the great part about Synaptics is we participate in a couple pieces of the Windows 8. One is certainly the touchpad, and there we are very comfortable that we are holding our share in that particular area. And then, as you move to the LTS, large touchscreen portion of it, I think everybody is still waiting -- well, how much attach rate will we see with notebooks? And then, we picked up some share there, but it's -- that is a big greenfield for us.

We do very little LTS revenue. You heard about our Samsung design win, and that is it at this point. But now we have the technology, we are taking the leadership technology we developed for the smartphone and taking it into the channels that we have with the PC OEM. And it's really going to open up some great possibilities towards the end of this calendar year, and certainly through calendar '14 to participate in that marketplace.

Okay, thank you. That is very helpful. And as a follow-up, what is your view on the potential for industrial or automotive markets? I believe you have not focused on those in the past. But going forward with a somewhat more, I guess, scalable technology, are these markets now attractive to you? And how may you view them?

It's certainly an attractive alternative market. But as I have mentioned, we are very focused on the notebook, the tablet/LTS market, and smartphones. Those are our three core markets, and we see -- still see a ton of opportunity there. I will actually talk through this next week at the analyst meeting to really give you a picture of how big that market can be with Synaptics, especially, and in light of these two acquisitions that we just made, which really, as I mentioned a little bit earlier, really opened the door to a much bigger pie for us to play in.

That being said, we are looking at these other markets, and touch is going everywhere. And ultimately, we talk about display integration with our in-cell and TDDI. That is one key area how we are going to leverage into those marketplaces. We win the design at the LCD manufacturers, they actually will bring it into those markets themselves. And we benefit, of course.

Okay. Thank you very much. Very good.

Rajiv Gill, Needham & Company.

On the guidance for the Mobile business in the third quarter, you are guiding it to be down. Your competitors at Mount Cypress are seeing some sequential growth, primarily driven by the non-Apple tablet build. Can you describe what is happening in the smartphone market a little bit more? Are you -- is there a share loss situation?

You were very broad about it, saying general customer dynamics. Is there share loss? Has the average dollar per unit gone down? What are your thoughts for Mobile in third quarter?

Rajiv, I will start off, and then Kathy will add some additional comments. Overall, we believe we are the best-positioned Company for smartphones. The breadth of our solution, whether it uses discrete sensors or integrated displays, in-cell and TDDI, nobody else has that breadth of solutions. And nobody has the type of technology that we have. And again, the OEMs out there will say -- hey, Synaptics has the best stuff for smartphones.

Now that being said, it depends on our customer and OEM sellthrough. And obviously, some of those results have varied wildly from expectations, if you look back 6 or 12 months. So, we are being cautious there, to wait to see what happens in the different markets and where the OEMs where we are really strong. And then, obviously, we need to add a couple additional OEMs, as well, to our roster, and we are looking -- working really hard. Obviously, the Samsung tablet is a good indication that we are back in at that OEM, and we can expand from there.

Yes, I was just going to say, I think the key for us is looking at the customer base. And so, one of the big objectives this year was to broaden the customer base. And we have set about really doing that. As Rick mentioned, we have the Samsung Galaxy Tab now, and we are also moving -- making more progress in that particular space. So, as the -- as we have seen in the market, there has been some concentrations among the top two guys, which has put pressure on some of the other guys. And just overall, from a market standpoint, the smartphones have -- they just seem to be a little bit softer right now than what we have seen before.

And just one other comment to add there, Rajiv. The other interesting dynamic, maybe specifically to Synaptics is, as you know, we sell tails and chips. And there is a mix there of what we have. And if you look at the lower-end smartphone marketplace, that tends to be just chips. And obviously, that is the place that is growing rapidly now, where some of the mid-range phone growth has flowed. So, in effect, that has impacted our ASP. Because we are pretty happy with the unit growth we have enjoyed the last couple of years and what we can see going forward in fiscal '13.

Right. So, you will have about five quarters in which Mobile revenue has been down on a year-over-year basis, and December might reach the inflection point, but who knows? But the transition from module to chip and tail has happened, now you are saying there could be another transition from chip and tail just to chip. So, are we -- should we be looking at more ASP pressure going forward? And can you give us any insight of where your ASPs are now and where they should be trending?

Yes, I think just following up on what Rick was talking about, if you really drill down -- I talked about this before. If you look at the market growth for smartphones, the biggest areas for growth are really in the lower-end segment. And so, as we talked about adding new customers and the growth in that particular market, those are lower-cost, lower-ASP chip solutions. So, as we continue to move forward, that is -- we will continue to have some ASP pressure. But units continue to grow rapidly and we are extremely well-positioned in the market, and we are really excited about where we are going from here.

And just the last question for me on the OpEx. Your competitors are implementing big restructuring efforts, Cyprus and Atmel, in light of a very -- what they see as a tough or more challenging environment, you are adding a whole bunch of expenses, going from $3 million to $4 million. And then, you have said it's going to increase even more.

I guess if you could talk a little bit about the rationale for that. Where do you see -- what is the rationale for that? Is it more a defense mechanism on the PC side with the ForcePad acquisition that you have to do this? I can understand the investments on the in-cell, that makes a lot of sense, but the other stuff is -- I'm a little bit struggling with.

Rajiv, let me be real clear. So, obviously, we went through the thought processes that you talked about. What strategies should we adopt in terms of managing the overall finances of the Company? As I mentioned, for example, at CES, when I addressed a lot of the crowd on the phone is, we are really focused on growth. Because we think we are in the right markets, we have the right technologies, we are well-positioned.

So, certainly there is a little bit of turbulence in this current quarter, whether it's the notebook dynamics that I talked about with Windows 8 or a bit of transition issues with several of the smartphone manufacturers, and as we wait for some of our premium technologies like in-cell ramp next year. So, it's not the right time to now cut back on investment. We want to make sure that that growth happens, and it happens aggressively.

The one clarifying point I did want to make, ForcePad was internally developed. We didn't acquire ForcePad. We have been working on that for several years. Certainly, ThinTouch is a fantastic synergy with our current products and it really gives us a base to offer a complete solution to our OEMs in the Ultrabook space. And then, likewise, with the VDO acquisition, it is right in the direction we are heading with the same customers and so on. It really strengthens our hand. And [it certains] the growth that we are talking about through the course of this year and subsequent fiscal years.

So, both of those from the acquisition standpoint, those are totally both incremental expansions of our TAM opportunity within our target market. And also, we will continue to develop those into the next generation of products serving those markets.

I appreciate that. Thanks for that.

Charlie Anderson, Dougherty & Company.

I want to start off with the acquisition out of IDT, this Video Display Operation. It sounds like that is targeted toward the large touch, using the display port channels. So, I wondered if you could talk about -- are you going to integrate that with your own chip set? Will it run on its own? And is it ready to ship now? Just your outlook for that and the market that it's going to find.

And then, secondly, I was wondering if you could talk about the Chinese market right now for smartphones? You have historically been pretty dominant there; and just the competitive backdrop right now would be helpful. Thanks.

Sure. So, let's talk about the acquisition of the VDO group first. So, one thing, we didn't put a whole lot in the press releases or my comment, but they actually had a leadership position in the technology called embedded display port. So, think about a notebook platform, and you have the keyboard or where the actual system is, and then there is an interconnection between that system and the panel.

And the bigger technology that we have is on the other side of that connection or inside of that panel. And one of the key inflection points that is now beginning to occur in the notebook or PC space is we are moving from a technology called LVDS to an embedded display port at a fairly rapid rate, as folks like Intel and AMD drop support for LVDS in their chip sets. And in fact, you don't really have much choice to move to it. So, fortunately, this group has a great leadership position.

So, now you think about that, well, we have that chip on the other side of the -- inside of the panel, and we have a touch controller. And what you are alluding to is, are there opportunities to do some interesting technology in combination and so on? Yes, absolutely. What that is will be a discussion, future product launches, and so on. But immediately no, it's just the interface device that is just there.

And the other nice benefit is, it has another feature called panel self-refresh, which basically means you can shut off that system that I talked about it. And because of the self-refresh, the screen continues to maintain the same image and dramatically saves power -- obviously, pretty important in today's marketplace. Actually, very similar to what we can do with our TDDI implementation, as well. Second part of the question. Sorry.

That's all right.

China markets. Competitive market, we are well-aligned with a couple of the great players there, with Huawei and ZTE. We continue to do well with both of them, and they are certainly continuing to put out interesting solutions. What is happening, though, is there is a growth of a number of other players in the China marketplace, and we are working with them.

You heard me talk about the Qualcomm reference design. We are doing those type of activities to support now a suddenly broader customer base out there, but we have a strong China team, we feel pretty comfortable where we are.

Great, thanks so much.

Shaw Wu, Sterne Agee.

I have a couple questions tied to margins, also the guidance. First question, just on gross margin, you guided to 46% to 47%, and that is despite a pretty sizable sequential decline in revenue. So, just wanted to understand why is the reason for that? Is it because of greater mix towards chips? That is the first question.

As far as the gross margin goes, it is a strong gross margin. This quarter, as you noted or as I mentioned, gross margin was down, around 46.2%, and that was because the PC mix was a little bit higher. As we go on to next quarter, there is a stronger chip mix, and also the PC side of the equation with the -- with some newer products in there. We just have a better product mix overall. So, it should be a very good gross margin quarter.

Okay. And then, tied to that, with the two acquisitions, where do you see that heading? Is it kind of -- is it -- any color you would share there?

Yes, in the -- in both of those areas, we are looking at something that is similar to the range where we are today. That is our best view is, we talked about before the -- a 45% to 47% range; and I think over the next several quarters and with those acquisitions, that is probably still the right way to look at it.

Okay. And then, the last question tied to margins -- just on the operating margin. Taking your guidance for this current quarter, I guess the midpoint in terms of top line and also the earnings, it looks like your operating margins will be around -- roughly around 13% and with the increased expenses et cetera. And that is down a bit from the -- I have 18.6% for your fiscal year just ended. That is down quite a bit.

I think that we -- with the increased investments, where do you see that going? Can you go back to those high teens levels sometime in fiscal '14, or how should we think of that? Or should it stay at these lower levels over the next couple quarters as you best?

Yes, that is a good question, Shaw. Because of the revenue profile this quarter, the operating profit will be lower than it has been, especially considering the additional investments with the acquisitions this quarter, and the range of expense that I talked about. As we move through the year and then into the next year, we are not changing our target model. So, the target model will be to continue to improve that -- the operating margin as we go forward and get back to the upper mid to high teens, upper that range.

Do you think that is something that you can accomplish in the fiscal '13, or is that probably more further out?

Again, we expect to make progress towards those levels, and exactly where we end up by the end of the year we will see.

Okay, thanks for the clarifications.

Thank you. There are no further questions at this time. I will turn it back over to Management for any closing remarks.

All right. Thank you for joining us on the call today. And I look forward to seeing many of you on Tuesday, or if not, updating you next quarter. Thanks very much.

Ladies and gentlemen, this does conclude the conference call. You may now disconnect, and thank you for your participation.