Synaptics Inc (SYNA) 2013 Q3 法說會逐字稿

Good day ladies and gentlemen and thank you for standing by. Welcome to Synaptics' third quarter 2013 earnings call. During today's presentation all participants 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, April 25, 2013. And I would now like to turn the conference over to Jennifer Jarman with The Blueshirt Group.

Thank you, operator. Good afternoon and thank you for joining us today on Synaptics' third 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 nonrecurring 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 fourth quarter of fiscal 2013. Anticipated growth in mobile product revenue for the fourth quarter. The Company's expectation of record revenue in the fourth quarter, including anticipated near-term out-performance driven by the aggressive ramp of the Galaxy S4, the success of other flagship phones, and the impact of a seasonally strong quarter. The Company's expectations that its first large touchscreen designs for notebooks will hit the market in the second half of the calendar year. The Company's expectations that ForcePad and ThinTouch solutions will begin generating revenue in conjunction with the next major PC cycle in calendar '14. The Company's belief that its Single-Layer On-Cell Multi-Touch offering will begin projection shipments by calendar Q4. And the Company's belief that it is well-positioned for long-term profitable growth.

Actual results may differ materially from any future performance suggested in the Company's forward-looking statements. We refer you to the Company's SEC filings including form 10K for the fiscal year ended June 30, 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. And with that I will now turn the call over to Rick Bergman. Rick?

Thanks, Jennifer and thanks everyone for joining us today. As you can see from our results, clearly Synaptics is back in a growth mode, reflected by a return to year-over-year top line growth as well as another consecutive quarter of sequential revenue growth. I'm excited to report that we achieved record revenue of $163 million during the third quarter, up 24% year-over-year. Our performance highlights our success in diversifying our business into faster growing markets with upside driven by mobile phone touchscreen applications, reflecting the breadth of our customer base and strength of our product portfolio across a broad array of flagship phones.

As a result of the revenue mix our gross margin performance exceeded our expectations, as non-GAAP gross margin was 49.8%. We delivered strong non-GAAP net income of $27 million or $0.79 per diluted share. Well above the high end of our guidance range. Today I'm going to update you on our core markets. I'll then turn the call over to Kathy to review our financial results in more detail and to provide our current outlook before opening up the call to your questions.

Before we dive in, I'm happy to finally confirm that Synaptics ClearPath technology is being implemented in the next generation Samsung Galaxy S4 flagship smartphone, as well as the new Samsung Note 8 tablet. I'll add some more color to these design wins in a few minutes, but first let me begin with a discussion of the PC market. The ongoing weakness in the PC market has been well-documented. That being said, we remain positive about our position based on our ability to provide leading-edge products and incremental content beyond the TouchPad. While overall demand for notebooks remains soft, the expanding opportunities for touch within an array of new form factors such as Ultrabooks, hybrids, and convertibles will drive higher penetration of touchscreen enabled notebooks. We expect our first large touchscreen designs for notebooks to hit the market in the second half of the calendar year. As I mentioned last quarter, 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 touchscreens in notebooks.

This is also evident based on our continued traction in the tablet market, where we have secured our next wave of design wins with an expanding base of top OEMs, including the Samsung Note 8 which is now shipping and features a 1.6 GHz Quad processor and an 8.1 inch bright, 1280 x 800 TFT screen. The Note 8 is thin and light and the perfect size to carry for videos, reading, and on the go productivity.

We continue to sample our next generation ClickPad and ForcePad solutions with customers. Which enables further advancements in notebook design such as increased thinness. There is also significant interest in our ThinTouch keyboard solutions and we remain actively engaged on designs with leading OEMs. Based on of the timing of design cycles we expect to begin generating revenue from our ForcePad and ThinTouch solutions in conjunction with the next major PC cycle in calendar '14. When combined with our large touchscreen offerings these products provide a clear path to expand our market opportunity as well as our share of the bill of materials within notebooks. In addition, our TouchPad and ThinTouch capabilities continue to garner interest for use in add-on peripherals such as external track pads and tablet oriented keyboards.

Turning to the mobile market, our momentum within the smartphone category continues as a technology leader. Building on our support for the Samsung product portfolio with tablets and entry-level smartphones our ClearPad On-Cell display integration solution has been designed into the new Galaxy S4 flagship phone with full HD super analytic display and glove support. Samsung's Air View capabilities in this device take advantage of our next-generation ClearPad offering with patented 3-D touch which extends the user interface possibilities with proximity, groundbreaking finger hover, and air swipe functionality all industry firsts. Air View allows users to hover with their fingers to preview the content of an email, S Planner, image gallery or video without having to open the file. It also enables a magnified view on the Internet browser, or a phone number saved in the speed dial on the keypad. As the tech media outlet GigaOM put it -- this magic is thanks to the Synaptics' ClearPad and its 3-D touch feature.

As we ramp with the S4 in the coming quarters, it's important to note that our third quarter growth was largely driven by a strong slate of flagship phones shipping in the market and a continued adoption of our technology in new models launched around Mobile World Congress. Our ClearPad Series 3 solutions are now featured in the following flagship smartphones. The LG Optimus G Pro, which was named best phone at Mobile World Congress by Engadget, and the HTC One which was named best device design, the Nokia Lumia 720 and 520, the ZTE Grand Memo, the Lenovo K900, the water resistant Sony Xperia Z, and the BlackBerry Z10.

As we progress through calendar '13, we remain excited about the expanding level of display integration opportunities for touch, based on our next generation technologies which targets a range of solutions from the value to the premium segments of the market. In addition to the in-cell solution using the Samsung Galaxy S4 we are also pleased to see continued adoption of our in-cell technology in premium devices. Specifically we recently announced our second generation ClearPad 3250 in-cell offering, which is now available in the Huawei Ascend P2 phone delivering a thinner low-power device. The Ascend P2 has been dubbed the world's fastest 4G LTE smartphone and features a quad core processor and a 4.7 inch 720P display. It also takes advantage of our unique gloved finger technology, to enable performance without the need to remove gloves.

As we've discussed in the past our leadership position with China OEMs is an integral part of our mobile strategy and our advancements in touch display integration technology also provide a strong road map for continued success in rapidly expanding entry-level smartphone markets such as greater China. We're excited about the design activity around our recently released Single-Layer On-Cell Multi-Touch offering which provides a cost-effective a single-layer touch display for thinner, lighter, and more responsive entry-level smartphones. This solution completely eliminates the discreet sensor and has no need for side borders and delivers five finger support for a feature-rich experience. This offering is currently sampling with leading LCM's and we expect to begin production shipments by calendar Q4.

To conclude my formal remarks, as we've been saying for quite some time that our primary focus is on growth. As a market leader in capacitive touch we're clearly delivering on that promise, as the strength of our product lineup has led to meaningful design wins with top OEMs. The continued adoption of our technology by a broad base of key customers is a solid testament to the depth of our technology leadership and innovation. Near-term, we anticipate out-performance to be driven by the aggressive ramp of the Galaxy S4, the success of other flagship phones, and the impact of a seasonally strong quarter, partially offset by moderate growth in the PC market. These factors notwithstanding, we are well-positioned for long-term, profitable growth as we continue to execute across multiple meaningful opportunities including the penetration of flagship mobile device's display integration, tablets, large touchscreens, and expanding notebook content. With that, I'll turn it over to Kathy for a review of our financial results.

Thanks, Rick. As Rick shared, we are extremely pleased with our March quarter results. Achieving record revenue of $163 million, a 14% sequential increase exceeding our guidance range, the revenue mix from mobile and PC products was approximately 64% and 36%, respectively. Revenue for mobile products was better than anticipated, up 57% year-over-year and up 28% from the December quarter. Consisting predominantly of revenue from mobile phone applications with strong demand across a broad base of customers. We achieved strong mobile phone revenue and unit growth over both comparable periods and tablets continue to provide solid contribution. PC revenue was below our expectations down 10% from the prior quarter and 5% sequentially, primarily reflecting the widely reported continued softness in the PC market.

Synaptics continues to lead the market for notebook, touch pads, and ClickPads. Our design activity continues to be strong and ClickPads were over 20% of our total TouchPad unit shipment. Our non-GAAP gross margin of 49.8% improved 240 basis points year-over-year and 140 basis points from the December quarter, as a result of the beneficial mobile product mix. Exceeding our expectations and guidance range. Non-GAAP operating expenses were $48.9 million up $3.5 million from the prior quarter. The increase was primarily employee related including payroll taxes, travel, and additional headcount to support our expanding product portfolio and customer base.

In the March quarter GAAP operating expenses were $57.4 million including $8 million of non-cash share-based compensation, as well as a non-cash charge of approximately $500,000 for intangible amortization and change to contingent consideration. The strong sequential increase in revenue and gross margin dollars in the March quarter drove a 36% increase in non-GAAP operating profit dollars and increased operating margins to 19.8% from 16.6% last quarter.

Our non-GAAP tax rate was 17.1% in the March quarter compared with 26.3% for the December quarter. As we discussed last quarter we expected the rate to be in the upper teens due to the retroactive reinstatement of the Federal Research Credit. Our GAAP tax rate reflects the benefit of $15.8 million of a nonrecurring, non-cash adjustment to our non-current tax liability as a result of wrapping up a multi-year tax audit. March quarter non-GAAP net income increased 53% over the prior quarter to $27 million or $0.79 per diluted share.

Turning to our balance sheet we ended the quarter with $316 million of cash, up $24 million from December. Contributing to the increase -- cash flow from operations provided $24.7 million and our employee equity compensation plans provided $6.6 million, partially offset by $9.1 million used for capital equipment and the ongoing renovation on our new corporate headquarters which we anticipate moving into late this quarter.

Depreciation was $2.3 million for the quarter. Receivables at the end of March were $107 million, reflecting 59 days of sales outstanding and we had one customer at approximately 12% of revenue in the March quarter. Inventories at the end of March were $44 million and inventory turns were seven, reflecting the planned increase of inventory to meet the anticipated record demand for our June quarter.

Now I will make a few comments regarding our quarterly outlook. Looking ahead to the June quarter, as Rick said, we expect to achieve near-term out-performance based on the steep ramp of the new Samsung products, the success of other flagship phones, as well as the impact of a seasonally strong quarter. With the continued soft market, expectations for notebooks are modest. Based on our backlog of approximately $124 million entering the quarter, customer forecasts, and expected product mix, we anticipate revenue will be in the range of $190 million to $205 million, representing record revenues and a 38% to 49% top line growth, year-over-year.

Our very strong June quarter backlog and outlook reflect a steep ramp of new designs across multiple mobile customers. Specifically in the June quarter, we expect mobile to be the primary growth driver as our solutions continue to ship into the many of the leading flagship smartphones in the market. Taking into account our overall product revenue mix, we expect non-GAAP gross margin for the June quarter to be in the range of 48% to 49%. We expect non-GAAP operating expenses in the June quarter to be up from the March quarter, primarily due to incremental engineering and in-field customer support as we continue to expand our product portfolio and customer base. We expect the FAS 120 3R charge in the June quarter to be in the range of $8.1 to $8.3 million. GAAP expenses will also include a non-cash charge of approximately $500,000 related to intangible amortization and change to contingent consideration.

In April, subsequent to quarter end, we completed the sale of our existing corporate headquarters building in Santa Clara for approximately $12.6 million, exclusive of closing costs. As a result, the June quarter GAAP financial results would include a gain on sale of the building of approximately $1.5 million. We are leasing back this facility until we complete the move to our new headquarters in San Jose in June. Also in connection with the move, we expect to incur a one-time charge of approximately $600,000 in either the June or September quarter GAAP results related to a leased facility which we will vacate.

We anticipate that our non-GAAP tax rate for the June quarter will be in the low 20s reflecting our anticipated geographic profit mix and the benefit of the reinstated research credit. Non-GAAP net income per diluted share for the June quarter is anticipated to be in the range of $0.88 to $1.00 per share.

In closing, we are extremely pleased with our performance in the first nine months of the fiscal year as well as our expectations for another quarter of record revenue and record non-GAAP net income per share. We believe we continue to be 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?

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

(Operator Instructions)

Our first question comes from Rob stone with Cowen and Company.

Congratulations maybe doesn't quite get it.

Thank you very much.

I'm pleased to say I got my Galaxy S4 earlier today and it definitely has a much more accurate and responsive touch interface than the GS 3 I had before.

Well it's a fantastic product and we're proud to be part of it.

I wanted to ask Rick about the ThinTouch and ForcePad. You talked about specifically the PC product cycle, where I guess OEM design wins would hit in calendar 2014. Do you anticipate that you will have some revenue in calendar 2013 from accessory products or not?

Rob, if we do it will be fairly limited. That market isn't huge. We continue to work with the leading OEMs in that space but our expectation is more seen in the opportunity in the calendar 2014.

Okay. So I know you're not ready to give fiscal 2014 guidance yet, but just thinking sort of big picture about the PC notebook market, given that you will start shipping your first large touchscreen PC designs in the second half of the calendar year when do you think, in general the PC market may return to growth? The PC segment for you, I should say.

For this calendar year, unfortunately we don't have a crystal ball. I think everybody is kind of entered guesses for growth and a been wrong over the last couple of years, actually. Our expectation at this juncture is flattish to slight growth as we move into the second half of the year.

At some point replacement cycles will kick in. We all know that price points are coming down for the really interesting Ultrabooks and touch enabled platforms and I do think we'll see an uptick. It's just when is that nice uptick that's going to surprise everybody, and the positive is going to happen and at this point I think, us just like everybody else, isn't going to venture to guess on that.

Given the emphasis on more lower price points, are you seeing a change from historical trends as far as your own pricing?

Well the value of touch continues to go up. Windows 8, whether it's a touchpad or the touchscreen, you can really tell that the advantage is there. The touchpads are getting bigger and so on. So we aren't directly feeling it in ASP pressure, but as an industry certainly that's part of every OEM discussion on how they can hit the $499 price point, or even the $399 price point for notebooks.

Great. Thank you very much.

Our next question comes from Paul Coster of JPMorgan.

Yes, thank you. I'm wondering if you could just talk a little bit, Rick, about the ASP or the value of your sale into the PC end market. Through the end of this year and then into next year is you start to load up with the ForcePad and ThinTouch products.

Well let me take a crack and then I'll let Kathy add any color or detail to it. So, as the current either touchpads or ClickPads go in size, that gives us opportunities, certainly moving from a touchpad to a ClickPad, there is an ASP increase. Now, we're not going to give you kind of precise numbers, but a gradual hill, or percentage of our products being shipped to customers now are becoming ClickPad. And that certainly is helping the negative to flat growth that we've seen in the notebook marketplace.

And then certainly ForcePad type solutions is yet another notch above that. ThinTouch frankly is an entirely different ballpark given the nature of a keyboard is -- can be in entirely different price range than a touchpad. And at some point yes, that will actually give us a great opportunity to participate in more of the bottom of the notebook.

And then there's also the large touchscreen, as Rick talked about so we are -- from a product standpoint, it's primarily today right in a notebook. It's touchpads to ClickPad to ForcePad. And then the next wave is as we add touchscreens into the notebook bottom and other things and then further along then we get the keyboards.

So you are expecting revenue growth in the PC segment in the second half of this calendar year. Can you just confirm that please?

It depends upon market growth. And if the markets growing we expect that we would be growing pretty much with the market and then with incremental opportunity for growth with large touchscreen is the near-term.

Okay. The other thing I wanted to draw upon briefly was, you've gotten nearly $10 in cash per share. What are you going to do with this? I guess there's going to be some folks out there that would love to see some of this cash go back to shareholders in the form of a buyback, perhaps.

Sure. Paul, a couple comments there.

We have, over the prior quarter, obviously we did a pretty aggressive share buyback. This past quarter we didn't, we were putting in a new building, we were making other investments that Kathy detailed in her script. I'm still under the belief that our number one priority should be continuing to grow the top line for the Company. And we'll continue to look for opportunities there, as well.

But certainly if we still have opportunities to buy our own shares, but we're not announcing anything at this point. We have plenty of room left in the authorization at this juncture and will continue to look at that as an opportunity. Obviously, US cash versus overseas cash is always a question as well.

Okay. Thank you.

Our next question comes from John Vinh with Pacific Crest Securities.

Hi, thanks for taking my question and congratulations on the very strong results.

Thanks, John.

First question I had, was just on some of these kind of new advanced touch capabilities, you guys talked about 3-D touch, glove touch. How do we think about those in terms of a competitive and a pricing point of view? Is this something you think that your competitors will be able to replicate in a short period of time?

And then from a pricing point of view, are you getting a premium for these advanced capabilities in the marketplace? Or does this just help stabilize kind of your natural price declines going forward?

Okay, John, let me tackle the front end of that question and maybe Kathy can take the second half. In terms of the capabilities -- I'm really excited about it's either called hover or in the case of Samsung their brand name is Air View. In fact it was watching a video on the Street this morning and the editor who have done a review on the S4 took picked it out of a broad array of features that, of course Samsung puts into any new phone, as the number one feature. And that's really, once you start to play with the phone, it just makes it a lot easier to do. And in effect, that's what Synaptics role in the world is, is to make computing devices easier for humans to use.

So we're particularly proud about that particular innovation. And it is hard. We have -- we believe we have a time-to-market advantage. We believe we have a unique feature, working with Samsung. And it's not something that's 10% you do a little more of -- this is -- you really have to design from the ground up with this particular feature.

So we have no idea what our competitors are working on. We have a lot of tough competitors out there. I'm sure they're zeroing in on that feature, but we have a nice advantage right now. And we'll leverage that with additional phone manufacturers out there in the industry over time. On the ASPs?

On the ASP side, John, it is as we've always talked about, the leading features and functionalities we always are able to price those higher. As the overall -- the ASP on a particular feature, it would fall within the normal category of our high-end feature premium phone solution. The competitive -- the mobile market is always competitive from an ASP standpoint. Prices continued to go down and the more that we can do to deliver leading-edge functionality and features into the market, that helps mitigate those price reductions on an overall basis.

Great. Thanks. And then my follow-up question is on gross margins.

As you guys are indicating, you are going to see an acceleration in your mobile revenues as Samsung launches it's new flagship phone in the June quarter. Your gross margins, looks like at the midpoint they're slightly down or flattish. I would imagine that you would've gotten a mix up in terms of gross margins. Can you talk about what the dynamics going on there are?

Yes. If you look at June quarter, it's as we've talked about in any quarter -- we have a very wide range of gross margins within the entire product lineup, so the mobile side of the business is very strong. It's growing.

But then, yes, underneath that you have to look at the individual SKUs that are driving the unit volumes in any particular quarter. So there's always pluses and minuses depending upon the individual SKU mix.

Okay. Thank you.

Our next question comes from Raji Gill with Needham and Company.

Yes. Thank you and congratulations on excellent results.

Just a question on the OpEx, if I can. With the big ramp of the revenue and the gross margins, it seems like OpEx is going up a little bit more in the June quarter. Can you maybe talk about that or characterize that a little bit more?

Sure, Raji -- eally the operating expenses, if you look at from a Company standpoint -- we're in a growth mode. And so if you look at supporting more customers, a broader range of product solutions -- we're bringing in new solutions for display integration into the market, new solutions for larger touchscreens. So we are continuing to invest. And then also we got a broader customer base where we need to continue -- where we need to add resource to support those customers around the world.

So that level of OpEx in the June quarter is something that we should be kind of increasing based on that compared to that base going forward. Is that a fair kind of assumption to make?

Yes. You should assume that there would be some increase quarter-to-quarter, because we've got new things rolling out over the future quarters. And we're continuing to build our support structure and bring new solutions into the market.

And a question on the technology. You're obviously very familiar with other different types of sensor technology that's coming out from smaller companies. I was wondering if you could maybe comment on alternative to the ITO sensor, such as copper metal mesh, and if you have a view on that. And if that something you are considering? Or are you focusing on other ways to deliver the product to the market?

Hey, Raji. As kind of number one supplier in touch, we have to look at multiple technologies across the board because it can really depend by the OEM, the application, and so on. So as OGS approaches, it seems to be primarily you're talking about the larger touchscreens. That is the clear market leader at this point which uses ITO, obviously.

But we are seeing a lot of interesting metal mesh as well. And then other things -- metal and glass and future concepts. We support the ecosystem. So in the case of metal mesh, there's Unipixel, there's O Film, J Touch, Fuji, et cetera. That's actually a fairly long list of potential suppliers there and we work with the ones that ultimately the OEMs want us to work with.

One last question for me. On in-cell -- you show good traction on in-cell with the Huawei. That's a big program.

Can you talk a little bit about how in-cell is being adopted now, since it's kind of been about a year or so? Where do you see that adoption going in the second half and into 2014? And do you expect kind of additional OEMs to start to migrate over to in-cell? And just on that -- on the Galaxy S4 that's an on-cell device, is that correct?

Yes, on the latter question the answer is, yes. It's on-cell capability.

On in-cell (inaudible) we characterized it, at the beginning of our fiscal year we expect calendar 2013 to be a steady cadence of in-cell announcements over the course of the year. So the Huawei one was the first, and you should expect, as we move through the balance of the year to see multiple other in-cell design wins that are announced to the marketplace.

Okay, great. Thank you.

Our next question comes from Kevin Cassidy with Stifel.

Thanks and congratulations on the great quarter. Nice outlook. On the S4, I think there is some confusion in the market about whether you are in every version of the S4. Can you just clarify that?

Kevin, as I mentioned earlier in one of the other questions the ERB or the hover capability is a pretty tough capability to implement and involves close interaction with the applications and the display. And so on. Obviously that the question more for Samsung than it is for us. But to my knowledge we're the only solution for the S4.

Okay great. And I guess, as far as the order ramp goes that you beat your guidance by so much was it a surprise to you, how much the order rate was?

Yes, as Rick talked about in his script, in the March quarter we saw very, very strong pull across the a broad range of the customer base. And I think we started talking a couple quarters ago, at the phone -- the flagship phones that we announced and talked about, even in the December quarter have carried over into the March quarter. There's new phones that were launched around Mobile World Congress.

The strong slate out there, so we've seen strong demand throughout the March quarter for, not only the ones that have been shipping on a continuing basis, but launch of the next wave of the new flagship phones. So we're very excited about the overall trends out there.

Kevin, if you look at some of the phones we're in, it was really about a broad ramp of these various phones. And the strength of the market has been very good, but look at the reviews and some of the results we're seeing from some of the phone manufacturers. Nokia talking about the impact of the 720 and 520. BlackBerry, LG and so forth.

So we're fortunate that are OEMs have just put out just fantastic smart phones that are taking the market by storm. And of course we're in the biggest one, which is S4, as well.

Great. So looks like revenue run rate and maybe what you're suggesting is the PC side will contribute more in the second half too.

There is certainly opportunity, but at this point, along with what we've already talked about, our opportunity is there to expand our footprint or our content in each notebook. The market factor is there, so we're all waiting for that up-turn to occur.

Okay great. Thank you.

Our next question comes from Charlie Anderson with Dougherty and Company.

Good afternoon. Also my congrats, great to see the operational improvements manifest themselves on the top line. So congrats on that.

I wanted to ask about the relative contribution of tablet. You mentioned some design wins there. And then also the touchscreen Ultrabook. If you could just kind of size those for us in terms of what's the relative contribution that we're going to see in the guidance and then moving forward.

Hi, Charlie. As far as the tablets go, we talked about the pipeline isn't expanding for the tablets. We've been very pleased with the Galaxy tab 2 from Samsung, as it's been shipping in the market. We just talked about this in the call script and now we've added -- we've followed on that with the Galaxy Note 8 inch solution.

And there are other OEMs where we have designs that we'll start seeing become additive over the next several quarters. So very excited about the tablet market. From a market standpoint, it's got a very, very strong growth trajectory and we've got the right solutions to continue to grow in the tablet space.

And the only other comment I would add there, I think everybody in the industry has been somewhat surprised by the success of the 7 inch to 8 inch tablets. At one point it was kind of a belief that was a 'tweener and other than you e-readers you wouldn't see a lot of opportunity there. But obviously there's the iPad Mini, and then a bunch of other tablets that are going out there. We're in the Note 8, which is fantastic. The other interesting thing is, our display integration technologies are also coming into play. There's on-cell and in-cell, which presents another opportunity for us, further down the line in calendar 2013 and 2014.

And then your expectations around the Ultrabooks?

So Ultrabooks -- as far as the market goes, we've seen -- for Windows 8 and Ultrabook, what we've seen for the market overall is the consumers really want to have touchscreens in those devices. So, from a market standpoint we've seen numbers -- penetration rate going up, over the last several months. The latest ones that I looked at were by 2014 there should be, I don't know -- 25%, 30% of all notebooks with large touchscreens and that it continues to grow after that. And from our perspective, the thing that we're really focused on is delivering high-performance, cost-optimized solutions so we can really push the penetration of large touchscreen.

Then I hate to have to be the one to ask the question, but the last two suppliers of the Galaxy S2, S3 lost their socket the next year. If you can just kind of talk to us maybe about the lessons you saw from that and what is going to allow you to keep it going forward here.

Okay, there for a moment, Charlie, we talked about how we, up to this date we've got about 500 versions of the same question which is are you in the Galaxy S4. You get the award for being the first one to ask about the next generation. Certainly one of the key things, and to me again it's not about a single customer.

It's about the DNA of our team here. And I haven't really mentioned the tremendous effort. And that, ultimately is the underlying strength of why we've been successful today and why this is a great day for Synaptics, is actually the team that we have at Synaptics.

So unrelenting support of customers -- kind of across the board. We'd love to do better at every customer, but I think across the board our OEM customers can see how much that we put into supporting them and showing up every day -- off and on the weekends not unusual to be there at midnight or whatever.

And with that, whether Samsung or the other customers, we've been able to really build close partnerships and help them with not just the chip but with the solution. And as we move forward through 2013 we're going to have to earn every design win. But we are prepared, as a team to earn those design wins.

So obviously I'm not going to project whether we win or lose S4 you saw -- or the next generation -- until today of course we didn't confirm or deny that the current platform. So set expectations appropriately. You won't get any answers on the next generation platform either until our customer announces. So with that I hope I addressed your question.

Thanks so much.

(Operator Instructions)

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

Yes. Thanks for taking the question today. Great results, no doubt. The S4 is a big win for Synaptics.

Rick, Kathy, one thing I would like to understand is where you recognizing the Note 8. If it's a tablet, it would seem to be that would be in PCs. Is that how you are still looking at the Note 8 design?

Jeff, actually we are breaking out solutions based upon whether they're a touchscreen solution or whether they're more of the touchpad, ClickPad, ForcePad type solution. So anything that's a touchscreen we're categorizing it when what we call mobile. So that would include, whether it's a phone, whether the tablet, whether it's a small tablet, a large tablet and even moving into larger touchscreen.

Okay that's very helpful. Thank you. I guess I'd also like to understand, you talked about continuing to win further mobile designs and that's kind of helping the June's guidance.

Should we assume that there's been some additional wins within Samsung besides the S4? Did you have a couple flagships products? Or at least one more that is scheduled to be out in the summer. How should we be thinking about the Samsung revenue at this point? Is it really kind of what you have got today, or is there may be more to come?

Well, as you well know, Jeff, Samsung has a number of design platforms and wins available. So it's ongoing and to a certain degree it's tough to predict. But as I was saying as we built a strong relationship.

We put in a strong team in Korea to support Samsung. And just like I said a year ago, our expectation is we'll continue to grow our footprint -- that customer has been very successful in the marketplace. So we're eager to work with them and we know that have got to be in the top of our game, because they're very tough customer.

Okay, thank you.

Our next question comes from line of Li Wen Zhang with Blaylock Robert Van.

Thank you and congratulations as well. My first question, just to clarify regarding on the touch solution for the notebook touchscreen and with the mesh. Will the shipments be starting in the second half this year?

Yes, Li Wen, that is what we talked about. We talked about our initial -- if you look at our SKUs and pipeline of opportunities and designs that we should start seeing them in the holiday season.

Okay. Got it. And my second question is -- mobile solution by mix -- by application towards the end of year, can you give us some mix on by application? For the mobile solution?

Not exactly sure what you're asking for. Can you provide us more information?

I'm sorry. Just the mobile segment towards the exiting 2013, and what would the mix be by the application like smartphone, tablet, and notebook.

Okay the mobile -- the whole mobile portion of the business that we talked about, it includes all of those screen types and its high percentage of it is mobile phone applications. Tablets contributing nicely, but it's not 10% yet. It did grow over quarter-on-quarter and as we talked about our large touchscreen solutions are targeted for holiday season.

Thank you. That's all I have.

Our next question comes from the line of Anthony Stoss of Craig-Hallum.

Hi. My congratulations to the entire Synaptics employee base.

Twofold, Kathy, on your inventory builds in the March quarter ahead of these launches, is there anything that has you nervous at all in terms of production or getting enough raw materials to support your growth? And then the second part is, Rick on the in-cell side, when should we expect to see some of your in-cell design wins move to either tablets or even notebook screens or any kind of larger screens? Thanks.

Okay, Tony. As far as the inventory goes -- we have a great supply chain and good relationships with all of our partners in the supply chain, so we're very positive and comfortable working with that supply chain and feel good about the growth that we're seeing. And the having the right supply chain in place to continue to feel the growth opportunity out there for us.

And then in terms of it display integration solutions -- you specifically said in-cell. And long-term, I actually continue to believe for all screen sizes in-cell makes sense. But we have also said it's not going to be a light switch type of event. We'd expect this year more and more announcement on the smaller screens, or smart phones.

And then over time probably a couple of years before you'll see it really move into, what I would typify as a large touchscreen -- a 13 to 15 inches. And then of course the tablet size -- 7 inch, 8 inch, 9 inch sizes will be somewhere in that timeframe.

On on-cell, however I would expect the timing to be more consistent with what we talked about in my prepared remarks. Were you will actually see tablet on-cell solutions towards the latter part of this calendar year.

Great. Thanks guys. Good job.

Thank you.

There are no further questions in the queue. I'd like to turn the conference over to Mr. Bergman for closing remarks.

Thank you again for everyone. Obviously it was a quite exciting quarter for Synaptics and appreciate everybody joining our call. And I certainly look forward to updating you next quarter.

Ladies and gentlemen, this does conclude our conference for today. Thank you for your participation. You may now disconnect.