Synaptics Inc (SYNA) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Synaptics Second Quarter 2013 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 24, 2013, and I would now like to turn the conference over to Jennifer Jarman of the Blueshirt Group. Please go ahead.

Thank you, operator. Good afternoon, and thank you for joining us today on Synaptics' Second Quarter Fiscal 2013 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 share-based compensation charges and certain non-cash or non-recurring 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 2013; anticipated growth in mobile product revenue for the third quarter; the Company's expectation of year-over-year top-line growth in the third quarter; the Company's expectations that a number of designs in its pipeline will launch over the course of calendar 2013, including a breadth of display integration solutions; expectations of design wins in market with ForcePad and ThinTouch later in calendar 2013; the Company's expectations of the ultrabook share of the notebook market in 2014; expectations that Windows 8 notebook touch screens using the Company's product solutions will begin shipping in key OEM products in the next few months; and the Company's belief that it has a very strong technology road map and market leadership in display integration that will be pivotal within the next generation of 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, 2012, for important risk factors that could cause actual results to differ materially from those contained in any forward-looking statements. We expressly disclaim any obligation to update this forward-looking information. I will now turn the call over to Rick Bergman. Rick?

Thanks, Jennifer. Synaptics delivered strong results for the December quarter, as revenue of $143 million exceeded the high end of the guidance range we provided last quarter. Our top-line results reflect better-than-anticipated revenue for mobile phone touch screen applications, partially offset by lower-than-expected PC revenue. As a result of the revenue mix, our gross margin performance exceeded our expectations, as non-GAAP gross margin was 48.4%. We delivered strong non-GAAP net income of $17.7 million, or $0.53 per diluted share, also above the high end of our guidance range.

Synaptics drew a strong audience at the recent Consumer Electronics Show, where we reinforced the progress we've made across our key goals for calendar year 2012, and demonstrated our vision for 2013 and beyond. During this past calendar year, we achieved growth across several of our key markets, furthered our technology leadership in differentiation, and continued our focus to remain the number one human interface company. As we move into 2013, our execution across our strategic road map positions us to continue to excel as the premiere touch provider in the industry. Top-line growth was set as a key priority for fiscal '13, and we look forward to an expected return to year-over-year growth in the fiscal third quarter. Today I'm going to update you on our core markets. I will then turn the call over to Kathy to review our second-quarter results in more detail, and to provide our current outlook before opening up the call to your questions.

Let's start with the mobile market, which continues to show incredible growth. The latest projection from IHS Research in November shows the smartphone market hitting 660 million units in 2012. Based on a 22% CAGR, the market is expected to achieve over 1 billion phones in two years. Synaptics is a clear technology leader in mobile, and we have garnered the latest flagship design in the market across our global customer base. These include the Google Nexus 4 from LG; new phones from HTC, including Verizon's Droid DNA; several new phones announced at CES from Huawei, including the Ascend with Magic Touch; the Nokia Lumia phones, with Super Sensitive Touch; the Sony Xperia T, featured in the new James Bond movie; and hot new phones from Lenovo and Sharp. In addition, we are pleased to have broadened our design win base within Samsung, with our first smartphone in several years, the Galaxy Music, which is available today. As I talked about last quarter, China is a major segment of the smartphone market, representing almost a third of all units. Domestic OEMs account for 60% of these units, and Synaptics continues to maintain a leadership position with the major domestic OEMs, including Lenovo, Huawei, ZTE, and Coolpad.

Moving to a discussion of display integration, we continue to be bullish on this trend. We have a number designed in the pipeline expected to launch over the course of calendar 2013, which includes a breadth of display integration solutions. The range of designs will not only deliver thinner phones with better optical clarity, as with the few in-cell models available today, but a range of solutions targeting the value, as well as premium segments of the market. We expect Synaptics will continue to be at the forefront of display integration, with innovative on-cell in-cell and our most advanced PDDI touch and display solutions in the market.

Turning to the PC market, vigorous design momentum continues for our touch pad and keyboard product lines. Our demos at CES include a prototype of our new ForcePad and ThinTouch keyboard solution. There is significant interest in both of these products with major OEMs, and we continue to expect to have design wins in market later in the calendar year. Innovations like ForcePad helped Synaptics remain ahead of the competition by combining the latest technologies, backed by our design tools and system-level engineering expertise. We are already sampling the next generation ForcePad to OEMs, which will enable much thinner notebooks. ThinTouch expands our market opportunity within the notebook bill of materials by providing an integrated keyboard deck solution with our TouchPad and ClearPad solutions. Additionally, a large portion of tablet buyers are demanding access to a superior keyboard experience to help with the content creation and productivity applications like Microsoft Office, other areas where we expect ThinTouch and large TouchPads will come into play.

As you know, the notebook market continues to be weak, and industry analysts have scaled back projections for growth this year to mid-single digits following a disappointing 2012. Ultrabooks remain a bright spot, however, and we continue to expect ultrabooks to reach 35% of the notebook market in 2012. I am pleased to report that Synaptics TouchPad family of solutions is currently incorporated in seven of the top ten ultrabooks according to PC Magazine. Recently launched ultrabook models include Lenovo's Yoga 11-inch convertible for Windows RT, and the HP MVX 2, of which a Verge reviewer commented, Windows 8 focus on gestures has made the track pad even more important. Along these lines, we are working with major OEMs and peripheral manufacturers on external track pads. Synaptics now ships touch-capable mice and external clip pads from Logitech, HP, and Dell. We expect this segment to continue to grow, as touch-capable devices are required to deliver the full Windows 8 experience for desktop and all-in-one PCs.

I think it's important to point out that the market expectations for touchscreen-enabled notebooks have dramatically drifted upwards. IDC's projections for notebooks with touch is now 25% of the unit shipments by 2014. The fact is that Windows 8 demands touch, and more specifically touch screens, within an exploding array of new form factors, including ultrabooks, hybrids, convertibles, sliders, and detachables. Synaptics has an excellent product lineup. Our design pipeline is building, and we have established a firm pathway towards providing the right high-performance, cost-optimized solutions to drive the adoption of large touch screens in notebooks and even larger surface areas.

In looking more specifically at the tablet or large touch screen market, tablets grew past 100 million units last year, and combined with large touch screens and notebooks, is expected to exceed 200 million units in 2013, and close to 300 million units the following year. As I said in the past, this is a greenfield opportunity for us. We're taking our leadership in touch technology as well as our display integration knowledge, and are attacking this market. Following on our recent success with the Samsung Galaxy Tab 2, I am pleased to report we have added Windows 8-based Razer Edge 10.1-inch gaming tablet to our growing number of design wins. With a range of Best of CES awards, the Edge was reviewed by CNET, noting that it surprises and impresses more than we even expected. The Edge will be available in market this quarter. In addition, we expect Windows 8 notebook touch screens powered by Synaptics to begin shipping in key OEM products within the next few months.

To wrap up my remarks, two underlying factors remain fundamental to our industry. The first is that increasing end-user experiences are raising the bar in human interface solutions. The second is the demand for lower-power thinness and quality of the touch experience is unrelenting. Keeping these in mind, it's important to note that Synaptics clearly separated itself from competition in calendar 2012. No other supplier can demonstrate the technology portfolio, breadth of design wins, and future path of innovation and development of Synaptics. We believe this technology lead will become even more apparent in 2013. Not only do we have a great product lineup that is driving growth across our key markets today, but a very strong road map, including ongoing market leadership and display integration that we believe will be pivotal within the next generation of products. With that, I'll turn it over to Kathy for a review of our financial results.

Thanks, Rick. As Rick mentioned, revenue was $143 million for the December quarter, a 13% sequential increase, exceeding our guidance range. The revenue mix from mobile and PC products was approximately 57% and 43%, respectively. Revenue for mobile products was better than anticipated, up 4% year-over-year and up 26% from the September quarter, consisting predominantly of revenue from mobile phone applications. We achieved strong mobile phone unit growth over both comparable periods, and tablets were a solid contributor, reflective of our inclusion in the Samsung Galaxy Tab 2. PC revenue was below our expectations, down 8% from the prior year, and 2% sequentially, primarily reflecting the continued softness in the PC markets. Synaptics continues to lead the market for notebook TouchPads and ClickPads, and design activity remains very strong. With the continued momentum in ultrabooks this quarter, ClickPads were around 20% of our TouchPad unit shipment.

Our non-GAAP gross margin of 48.4% improved 100 basis points year-over-year, and 50 basis points from the September quarter, as a result of the beneficial mobile products mix exceeding our expectations and guidance range. Our non-GAAP operating expenses were $45.5 million, up $2 million from the prior quarter. The increase was primarily employee-related, and included a full quarter of employee and other costs associated with the acquisition of the video display operation of IDT completed in early August. As noted last quarter, the video display acquisition, combined with the acquisition related to our ThinTouch product, has added approximately $3 million to $4 million to quarterly operating expenses, beginning last quarter.

In the December quarter, GAAP operating expenses were $54.1 million, including $7.8 million of non-cash, share-based compensation, as well as a non-cash charge of $837,000 for intangible amortization and change to contingent consideration. The strong sequential increase in revenue and gross margin dollars in the December quarter drove a 37% increase in non-GAAP operating profit dollars, and increased our operating margin to 16.6% from 13.6% last quarter. Our non-GAAP tax rate was 26.3% in the December quarter, compared with 27.4% for the September quarter, primarily reflecting our geographic profit mix and no benefit of the research credit, which was reinstated after our quarter end. Our GAAP tax rate was 26.6%. December quarter non-GAAP net income increased 39% over the prior quarter to $17.7 million, or $0.53 per diluted share.

Turning to our balance sheet, we ended the quarter with $292 million of cash, down $21 million from September. Cash flow from operations was $15.3 million, offset by $28.7 million used for the repurchase of over 1.1 million shares of our common stock, or 3.5% of our shares outstanding, and $5 million used for a ThinTouch initial earn-out payment. Depreciation was $2.4 million for the quarter. Receivables at the end of the quarter were $99 million, reflecting 62 days of sales outstanding. Inventories at the end of December were $32 million, with inventory turns remaining at 9.

Now I will make a few comments regarding our quarterly outlook. Looking ahead to the March quarter, we continue to monitor market dynamics and the impact of sell-through levels during the recent holiday period. Based on our backlog of approximately $79 million entering the quarter, customer forecasts and expected product mix, we anticipate revenue will be in the range of $140 million to $148 million, representing a 6% to 12% top-line growth year-over-year. We expect mobile to be the primary growth driver, as our solutions continue to shift into many of the leading flagship smartphones in the market.

Taking into account our overall product revenue mix, we expect non-GAAP gross margins for the March quarter to be around 47% to 48%. We expect non-GAAP operating expenses in the March quarter to be up from the December quarter, primarily reflecting incremental in-field customer engineering support, and chip-design engineering to support our expanding product portfolio. We expect the FAS 123R charge in the March quarter to be in the range of $8.2 to $8.4 million. GAAP expenses will also include a non-cash charge of approximately $500,000 related to intangible amortization and change to contingent consideration.

We anticipate our non-GAAP tax rate for the March quarter will be in the high teens, down from the December quarter as a result of the retroactive reinstatement of the federal research credit. We expect our tax rate for the fiscal year to be in the mid 20%s, reflecting our anticipated geographic profit mix and a benefit of the reinstated research credit. Non-GAAP net income per diluted share for the March quarter is anticipated to be in the range of $0.50 to $0.58 per share.

In closing, we are pleased with our performance in the first half of fiscal 2013, as well as our expectation for a return to year-over-year top-line growth in fiscal Q3. Synaptics has paved the way to capitalize on significant incremental growth opportunities, and we believe we are very well-positioned within our markets, based upon our current product portfolio and expanding product innovations moving forward. With that, we'll turn the call over to the operator to start the Q&A. Operator?

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Please ask one question, and one follow-up, and re-queue for additional questions. Our first question comes from the line of Kevin Cassidy with Stifel Nicolaus.

Thank you very much for taking my question, and congratulations on the great results and great outlook.

Thank you.

When we're looking at the outlook, the mobile growth is -- it seems the first quarter is typically a weak quarter for mobile. Is it that your in new phones, or is it certain models that are selling better?

I would characterize it as both, Kevin. Obviously, you saw the array of new phones that we are in that were being launched at CES, and these higher-end smartphones are certainly selling really well. We enjoyed some great design wins, as well as being in the right phones.

Okay. The gross margin, it seems this is above your target range for your model. Do you think you will be updating that, or do you think as the PC market comes back, that gross margins will come back into your normal range?

Yes, our gross margin has been performing well, very well over the last -- especially over the last quarter or two. So, we have had a very nice mix of products amongst the entire product base. It's always based upon the actual number of SKUs and the different products shipping in the market. So, we do expect that the gross margin range would be in the 45% to 75% range, as we've talked about, over the near term. We think again next quarter, with the mobile mix, that 47% to 48% is quite reasonable still for that quarter.

Okay. Thank you.

Thank you. Our next question comes from the line of Rob Stone with Cowen & Company.

Let me add my congratulations, very impressive results and strong outlook. My first question is on the PC segment, which was below your expectation, and seemed a bit weaker than the industry trend. Do you think that that was a function of mix, ASPs, market share? Can you give us any color on what may have been the weaker part?

Rob, I would actually characterize it as we were consistent with the market. When we gave our outlook in October, the analysts were a bit more bullish about what Q4 would land in the notebook area. Obviously, it's been disappointing to us, and as you heard over the last week or so, a few other suppliers in the notebook supply chain. We didn't really give up any ground at all in Q4. And some of the ASP and other trends that we have anticipated played out as expected. Really, the one variable was the market wasn't as big as we expected.

Okay, so related to that on the handset strength, that seemed to be better than the market, based on what we could measure. Do you think that that was a function of share gains, or what would you say about your mix from September to December?

We certainly benefited from a few SKUs that were higher volume than we expected, in that case. The market was a little bit bigger, but not -- it's a huge market, so a little bit bigger is a lot of units. But from our perspective, it was really -- there were a couple SKUs that we were in that just did really well, and that allowed for the higher growth. And just the breadth of the solutions that we're in. As the market grows, we are well covered in that high-end smartphone segment. We get to enjoy that growth.

Okay, but you had spoken for several quarters previously about growth in low-end phones in emerging markets like China and so forth. I'm just wondering if, in this very strong December quarter, what you actually saw is more of a rebound in the high-end part of your market?

That's correct. Maybe I didn't quite say that clearly. But yes, clearly there was a rebound in the higher end of the smartphone market. (multiple speakers)

Awesome, thank you.

By a number of suppliers.

Thanks very much.

Thank you. Our next question comes from the line of John Vinh with Pacific Crest Securities.

Hi. Congratulations on the strong results and guidance.

Thanks.

My question is -- when you said that some of the incremental growth that you're seeing in the March quarter is due to new and existing smartphone programs, can you help us handicap? Is most of that growth coming from new programs that you're ramping, or is some of that coming mostly from existing smartphone programs that you are currently in today?

John, I just wanted to characterize a little bit. If you go back and look at the backlog, the backlog is $79 million entering the quarter. We've got a pretty strong backlog for the quarter, at least as strong as we've seen for several quarters, and that's across the board. As Rick was talking before, if you go back and look at it, it's really the strong lineup of phones that we're currently in. We also broadened our customer base, and so we're shipping into many other premium flagship phones into the market, as well as, there are some new phones that are coming.

Just look at CES as kind of characterizing our answer. The LG phones have certainly been announced and are kind of hot, so that's kind of the first category that you characterize. But then Huawei had a lot of interest at CES, and there are three phones that we are in with the Huawei phone. It's kind of that both answer that Kevin asked earlier.

Okay. Then my follow up is -- if you look at your design win activity, and your design win backlog for the first half of 2013, do you feel that you've got pretty good visibility there, or are you also still waiting to hear back on some certain design decisions that are out there in the market?

I presume in this case you're talking about smartphones?

Yes.

Well, there's roughly 10, call it, large smartphone manufacturers out there that have their own pace in decision making. Clearly, there's some peaks in the industry. We have just a continuing set of design wins that happen literally every week and every month of the year. Our overall technology breadth and leadership right now, our design win pace is clearly picking up, which is allowing for us to grow. But that's how I would characterize it.

Okay. Last question from me and I'll jump back in the queue. On some of these new wins in 2013, are you seeing some instances where there is dual sourcing on the touch controller side, or are most of the SKUs that you're designed into primarily sole-source?

Actually, I think we talked a little bit about this at CES, John, and my answer continues to be the same. We don't really see dual sourcing. There is a little bit of that where a couple of our smaller competitors have matched our [pin out]. But even in that case, it's entirely different firmware and so on. We don't see where there's a single phone or you can swap one controller for another controller. There's just too much customization that occurs from an OEM or a supplier perspective to be able to do that. At this juncture, we don't see that trend.

Great, thank you.

Thank you. Our next question comes from the line of Anthony Stoss with Craig-Hallum Capital Group. Please go ahead.

Hi, guys. My congrats also. Rick, how important has in-cell or display integration been for you guys in terms of designs entering 2013? Also, if you wouldn't mind talking about display integration and the effect that you believe it's going to have on gross margins. Same question on the ThinTouch side in terms of design wins and what impact that may have to gross margins? Thanks.

Okay. Let's touch on in-cell first. As we've mentioned in calendar-year '12, we saw the first in-cell phones come out, and then in '13 our expectation is over the course of the year you would see a number of announcements. As the technology continues to hold the promise that we've talked about, allowing thinner phones with better optical characteristics, ultimately it's -- longer-term it's a better supply chain. That's clearly appealing to a number of the OEMs out there, and that certainly gives us an entry to have those discussions because we're the clear leader in that particular space.

What can it mean for gross margins? It's not going to be a light switch event. I'd also caution that. It will be a steady ramp over multiple years. Impacting in the coming quarters' margins in a major way, it won't have an impact. But being a leader in a technology always puts you in a very interesting place, and certainly allows us to play in a little higher-end portion of the marketplace. From an overall perspective, in the mid-term it certainly helps margins.

On ThinTouch, again, we are just entering that market. We acquired Pacinian back in June, and at that juncture it was just a handful of individuals with a fantastic idea and some IP. We've gone, and as you saw, we now have samples that are getting to better and better quality, but we expect it to be more of a fiscal-year '14 impact. Keyboards are not chips, and hence, they will be at a lower margin model than our existing margin we announced today, clearly. But in terms of how that impacts us, we're not prepared to talk with any specific numbers at this point.

Okay. Great, thanks.

Thank you. Our next question comes from the line of Daniel Amir with Lazard Capital Markets.

Yes. Thanks a lot, and congrats on the good quarter. A couple questions here. First of all, on the China market, you mentioned that today, by your estimates, China is responsible for about one-third of the smartphone units worldwide. Does that reflect your business as well, in terms of exposure to China?

Daniel, I guess the way that I look at it is, we've been talking about how much of China is in our revenue base. We have had several questions about that over the last several quarters. As we've talked about, our base is expanding, the unit volumes are expanding. We are well-positioned at the top OEMs. We're making a lot of progress at the second level of OEMs, as we talked about today, with new phones from Lenovo -- also OPO, Coolpad. So, we're continuing to see increasing volumes there. And as we look at from an overall portion of the business, it's been running around 10% of our overall revenue.

The caution is we don't track sales out numbers. For example, the Samsung phone that I mentioned, the Galaxy Music -- we sell to Samsung, and then they sell that phone worldwide. How many end up in China in that market, we actually don't really know. There's researchers out there that can sometimes shed some light on that, but in terms of really definitive data, it's really hard to track that.

So, there's the domestic suppliers, as well as Samsung is a big player in that market, as well as Nokia.

So, your 10% revenue comment is related to domestic China handsets basically?

Yes, domestic.

Okay. The other question is, just in terms of the margin guidance here for the March quarter, it looks like what benefited you here in December was higher mobile mix. And it looks like that's happening in March, as well. In a way, why wouldn't margins even be potentially higher than what you guided for, just because of the mobile mix being better?

Yes, Q2 was really good from a gross margin standpoint. Again, it's a combination of the mobile mix that we had in Q2, but also just across the board with the mix of products that are actually shipping. We have a wide range of margins within the product portfolio that we sell. And when we look at the Q3 mix, and the forecast, 47%, 48% seems to be right about the right range.

I mean, is the mobile mix still the biggest impact on your gross margins, or is it some of it is also your other product mixes here?

No, it's still mobile. Again, mobile includes -- the definition around mobile includes the tablets, and as well as some of the video products.

Okay. All right, thanks a lot. I'll get back in the queue. Thanks.

Thank you. Our next question comes from the line of Raji Gill with Needham and Company.

Thanks, and congrats as well. A question on the mobile side. The business grew at 26% sequentially, and kind of represents a peak in the mobile revenue. You haven't really hit that number in quite some time. Just trying to get a better understanding of kind of the units and the ASPs in the mobile business. Obviously, you have gone through the module to chip-only transition. Can you maybe talk a little bit about pricing? What really drove the revenue growth sequentially? Was it more just overwhelming number of units, or did pricing kind of abate a bit, and that helped the revenue growth in Q4?

Most of the growth really is driven by the units. As we've talked about, the launch around the flagship product across a wide range of the customer base. Again, the majority of the volume is chip-based. We still have some fairly steady smaller volume of the sale mix in the unit volume, so it's primarily unit mix. SKU by SKU, we still see normal price erosion; but overall, with the blend of the products that we're shipping in the market, it was a nice mix and very strong unit growth.

Okay. On the guidance, mobile being the primary driver, that would imply mobile to be up 7%, 8%, something like that, sequentially in a seasonally soft quarter, which is March. Could you describe -- why is there a deviation in that quarter, in terms of seasonality?

A deviation in seasonality? Again, it just goes back -- I think we've tried to cover this a few different times on the calls, that it's really the breadth of the customer base that we're in. We've broadened our customer base. The flagship phones that we're in right now, they're shipping very well. Within the customer base, there's also new phones that are ramping all the time.

The short answer, Raji, is we're gang share, right? Because the market isn't suddenly getting stronger in Q1 versus Q4. It's a share gain.

Okay. On the PC side of it, it looks like you're not going to probably grow the PC business in fiscal-year '13, so that marks probably three fiscal years in which the PC business hasn't grown. When should we start to see some sort of inflection point, or is this really due to all -- being driven off just touch-enabled notebooks, which will help save that business for you?

That's correct. It's been a flat business. Unfortunately, the notebook business during those same three fiscal years has also been flat. So, our performance has been very consistent with the notebook business. It's not a surprise, given our relative share of that particular business.

Where we could see a nice inflection point, of course, is when the ThinTouch solutions come into play. We're just as excited about those today as when he announced it back in August. It got great reception at CES. We just got to continue to do our homework, and get the product ready to take to production, and get the design wins and so on. But it will be a ramp, as I discussed, which will tick in, in fiscal '14.

Thank you.

Our next question comes from Paul Coster with JPMorgan.

Yes, thanks very much. R&D is pretty elevated as a percentage of revenue. I think it's about 24%. How do you see that changing over time? And what kind of operating model are you focused on ultimately, Rick?

Well, I'll take a crack at it, and then let Kathy add in some words. As you well know, since the day I started here, I've talked about top-line growth, and that was the number-one priority. Finally starting to see the fruits of that here 15 months after I started, with our guidance for Q3. Ultimately, that's the way you make the percentages better on R&D is to continue to have that top line grow.

We are investing in a lot of different areas right now. With the prior question, I mentioned ThinTouch is one big investment; certainly, what we're doing on large-screen displays, the display integration. All of those relatively low revenues at this point, but pretty high R&D. As 2013, 2014 march forward, we expect some of those revenues to start kicking in, and obviously offset the percent of R&D.

I will let Kathy comment on the model we're striving for.

Hi, Paul. Yes, the operating profit -- what we've talked about for operating profit model is, we started this year, we had the two acquisitions with the ThinTouch keyboard acquisition and the video products acquisition. Both of those acquisitions started to add -- I mean, they added $3 million to $4 million on a combined basis to our quarterly R&D run rate. That started in the September quarter. We had a full quarter of that expense in this quarter. On a go-forward basis, the rates of increase is probably not quite as much on a quarter-on-quarter basis. But as Rick said, we've got this mini-initiative going on.

From an operating margin standpoint, again, really strong operating margin improvement quarter on quarter, as a result of the revenue increase, as well as gross-margin dollar increase. We started -- what we talked about this year was starting at the lower-teens, and as revenue grew, moving back to mid-teens and little -- as revenue continues to grow, moving a little farther up the horizon to upper-teens.

Okay. Regarding the ThinTouch and ForcePad products, what impact do they have on ASPs, and are they going to match the corporate average gross margin? Do you think both or either of those products can be a material contributor in this fiscal year, or this calendar year at least?

Yes, both of those are targeted for fiscal 2014. From a contribution standpoint, we'll start seeing that kick in next year. We do think one or both, basically, would be material to the business. Right now, we're looking at those as they'd have a little bit higher ASP than what the traditional TouchPad, ClickPads are running. The margin profile is more in the module arena, which is the low 40%s, maybe even lower than that. It's below the corporate average right now, but strong, good ASP, good gross-margin dollars contribution.

Thank you.

Thank you. Our next question comes from the line of Darice Liu with National Securities. Please go ahead.

Good afternoon, nice quarter. I had two questions regarding the in-cell technology. This morning, LG Display reported the quarter, and on its conference call the company talked about increased customer interest for touch products, but that in-cell technology was currently limited to the maximum size of about 7 to 8 inches. Can you comment on advancing that technology beyond their current size limitations to address the larger tablet market?

The second part of my question is regarding OLED displays. Considering that OLED is pretty thin already because of its one-panel structure, I was wondering if there's any activity or interest in terms of moving OLED from an on-cell technology to an in-cell technology?

Okay. I didn't quite get the very beginning of your first question. I think you said somebody discussed the -- if you could just fill that in?

Oh, sorry. This morning LG Display reported its quarter, and management talked about touch technology on their conference call. They talked about how customer interest was increasing, but that in-cell technology had size limitations to about 7 to 8 inches. I was wondering whether or not if you can comment on advancing that technology beyond the current size limitation to address the larger tablet market?

Okay, and then you talked about OLED with in-cell. So, I'll take those in order. Part of the first question is it's a timing question. There is no doubt the immediate interest in in-cell is in the hand-held to smaller tablet space as we look this year and even next year. But beyond that, there is a lot of interest, and there is really no limitations on in-cell that wouldn't apply to the larger displays. Now you're talking about much bigger pieces of glass, later-generation fabs, and yield certainly comes into play there. Those are all factors, but that's like any other manufacturing technology. They get worked over time, and solutions are found, and yields go up, and so on. So, the short answer is, no, we expect in-cell to ultimately prevail in large panels, as well.

On the OLED side, yes, you're right, it's a fairly thin technology. There's on-cell technology that are used with OLED today that are quite competitive, and so on. Again, there is opportunities to innovate with in-cell there, as well. I think everybody's trying to ramp OLED. There's one major supplier in OLED today, but there's certainly others beginning their ramp. Over time, they'll look at in-cell and other display integration technology that could apply.

Is there any type of technology obstacles for moving OLED from on-cell to in-cell?

I'm just thinking for a moment if there's any fundamental changes. Nothing off the top of my head that would prevent moving to in-cell.

Are you seeing any type of activity right now in the market for manufacturers to move from on-cell to in-cell for OLED?

I have to be a little bit cautious, because as I said, there is one major supplier. I don't want to disclose anything that might impact their business or their own technology run. That's up to them to talk about it.

I'll just say we are engaged in a variety of different display types. There's three major display types in the industry. We are having discussions with all of the manufacturers with in-cell, on-cell, TDDI, and so on. Again, as I said in the earlier -- with the earlier question, it's not going to be a light switch. None of these -- or it's not like boom, the whole market is going to switch over. It takes time to take this type of innovation and technology into the manufacturing line.

Okay, fair enough. Thank you.

Thanks.

Our next question comes from Jeff Schreiner with Feltl and Company.

Congratulations on the quarter, and beating seasonal December and March quarter, very nice there. I just wanted to circle back on something. I have been bouncing between two calls, and I didn't get to hear all the information. China is certainly the growth driver in the smartphone industry at this point, at least to many industry analysts. I was just trying to understand what expectations in terms of your overall units or revenue will be coming from China this year. Also, what expectations for fiscal-year '13, in terms of those that may ship, are coming from maybe new engagements?

Well, as we talked about, we did talk about China a little bit in one of the other Q&As, Jeff. China is -- when you look at China, you've got the domestic phone carriers, as well as a couple of the other larger OEMs that also sell into the China market. When we look at what we're doing right now, we're very well positioned with the top-tier domestic phone companies within China. Also, we're expanding our presence, shipping additional SKUs into Lenovo, OPO, Coolpad, the second-tier guys. And then looking at other strategies for even the third. Beyond that, there's a lot of China volume and other emerging-country volume that's also filled by -- with Nokia and also with Samsung. We're basically engaged in all of those areas. Units are increasing. We feel really good about progress in China.

Earlier today, a competitor suggested that in six quarters the touch market will be commoditized in their eyes, where ASP declines may begin to slow, but it becomes really a market-share grab. How does Synaptics view the market at this point?

We have a several-year roadmap, and as I go visit our customers, we have no shortages of ideas to either enhance the capabilities of our touch controllers, or innovate around the total system cost, and so on. I don't see a commoditization -- certainly part of the market will. The very low end, yes, price is everything. Even there, we try to find value in other ways. I'm actually excited about the growing possibilities that we have. I don't see this turning into a pure price play in that timeframe.

I believe there were some comments -- and again, I apologize, bouncing back and forth between calls. But when should we expect Windows 8 touch screens shipping with Synaptics inside? Will the Company do the same as its competitors, who are qualified in shipping at this time -- will the Company provide us who follow the Company and others, how many devices you are qualified upon?

Certainly. As we said in the prepared remarks, expect to see some OEM announcements over the coming months. We also mentioned it's an evergreen -- excuse me, a greenfield opportunity for us to -- in terms of growth and so on as we look forward. From a technology perspective, we feel very well positioned, Jeff. Certainly there's no secrets about who is past qualification. There's actually a web page on the Microsoft certification process that you can look up any system. So, we'll shed light as soon as the OEMs kind of pass that process or their systems are fully announced in the marketplace.

Thank you. Our next question comes from the line of Liwen Zhang with Blaylock Robert Van LLC. Please go ahead.

Thank you, and congratulations as well. My first question is based on your mix in your backlog, can you give us some picture about a mix for this quarter?

Hi, Liwen. As far as the backlog goes, it was a very strong backlog -- $79 million. The 55% coverage at the mid-point of the guidance range. If I drill down in there, it's well represented between PC, mobile side of the business. It's nicely made up.

Yes, but my question is actually -- is the mix will be, like mobile will go higher. How high it will likely to be, given the --?

As we said in the guidance, we expect that most of the growth will be driven by the mobile business. If you think about the backlog, typically the PC business put books in earlier than the mobile side of the business. So, the lead times are a little bit longer for TouchPads and for the chip business. So, there's a little more in the backlog right now in the PC side of the business than the mobile side of the business, just based on lead times, and that's normal.

Okay, thank you. My next one is -- given your strong footprint at OEMs and smartphones and handsets from overall market growth, can you give us your mobile revenue outlook for this calendar year?

No, unfortunately, we are not going to break that out at this point because that would, in effect, give a pretty good idea where Q4 would land. The only thing at this point is we are just reaffirming the guidance we gave for the fiscal year, which was modest growth, 1% to 9% over fiscal '12. You can kind of do the math and figure out where we are with that.

Okay, thank you.

Thank you. Our next question comes from the line of Shaw Wu with Sterne Agee. Please go ahead.

Thanks. All my questions have been answered. Thanks.

Thanks, Shaw.

Thanks, Shaw.

(Operator Instructions)

Our next question is a follow-up question from the line of Kevin Cassidy with Stifel Nicolaus. Please go ahead.

Yes, thanks for taking my follow-up. In your press release you say you paid a $5 million earn-out for the ThinTouch, and I think that was based on customer acceptance. Can you define what customer acceptance was, and how many customers there were that accepted?

Sure. Kevin, actually it was related to customer acceptance, and it was basically specifically around the quality of a deliverable that we made to a single customer, indicating -- as a good indication of progress from taking, at the time of the acquisition, a technology and turning it into a product. You saw the samples at CES, and you can see it's now a prototype, right? It's not a technology idea. That was really the spirit of the earn-out.

Okay, so was this sooner than expected, or about in line with what you were expecting?

It was pretty much right on target.

Okay, great. Thank you.

Thank you. Our next question is a follow-up question from the line of Rob Stone with Cowen & Company. Please go ahead.

Hi, Kathy, a couple of minor data points, if you are willing to share them with us. One is, within the Other category, you said it was mostly smartphones, handsets. Can you give us a sense of how much of that business was other products?

Well, we've talked about the category in and of itself, right? It's primarily the mobile phones. There's also tablets, and the video products are incorporated into it right now. So, from a tablet standpoint, tablets grew nicely. I mean, it's still not material, so we're not breaking it out.

For the video products, last quarter we said it was a small contributor. From a revenue standpoint, it continues to be small. As we look at that business, really the primary activity there for the acquisition was incorporating that technology into our long-term roadmap for large touch screen, but there is a small amount of revenue there.

So, you're still looking for -- and I know you won't give a specific breakdown, but I'm just trying to get sort of qualitative sense. The March quarter is driven then by handsets, primarily? You're not looking for a materially bigger contribution from those non-handset items -- tablets and video chips in the March quarter?

Yes, it's primarily mobile phones. Tablets look good, so they may go up some, too.

Okay. Thank you.

Thank you. There are no further questions in the queue at this time. I would like to turn the conference back to management for any closing remarks.

Okay, well, thank you very much. It was an exciting quarter for us, and we are certainly looking forward to the 2013 calendar year, as well. Look forward to talking to the rest of you either next quarter or over the course of the next several months. Thank you very much.

Thank you. Ladies and gentlemen, that concludes the Synaptics Second-Quarter 2013 Earnings Conference call. We thank you for your participation. You may now disconnect.