Synaptics Inc (SYNA) 2014 Q2 法說會逐字稿

Welcome to the Synaptics second-quarter fiscal 2014 earnings conference call. During today's presentation, all parties will be in a listen-only mode.

(Operator Instructions)

This conference is being recorded today, January 23, 2014. 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' second-quarter fiscal 2014 conference call. This call is 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, President and CEO; and Kathy Bayless, the Company's CFO.

In addition to the Company's GAAP results, management will also provide supplementary results on a non-GAAP basis, which exclude share-based compensation charges and certain non-cash or nonrecurring items. Please refer to the press release issued after the market closed today for a detailed reconciliation of GAAP and non-GAAP results.

Additionally, we'd like to remind you that during the course of this conference call Synaptics will make forward-looking statements. Forward-looking statements give our current expectations and projections related to our financial condition, results of operation, plans, objectives, future performance, and business.

Although we believe that our estimates and assumptions to be reasonable, they are subject to a number of risks and uncertainties beyond our control, and may prove to be inaccurate. Synaptics cautions that actual results may differ materially from any future performance suggested in the Company's forward-looking statements.

We refer you to the Company's current and periodic reports filed with the SEC, including the Synaptics form 10-K for the fiscal year ended June 30, 2013, for important risk factors that could cause actual results to differ materially from those contained in any forward-looking statement. Synaptics expressly disclaims any obligation to update this forward-looking information.

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

I'd like to welcome everyone to today's call. I'm pleased to report another quarter of strong top-line growth, with revenue of approximately $206 million, up 44% year over year. Our guidance for the December quarter excluded any contribution from the acquisition of Validity, which subsequently closed on November 7. We delivered strong non-GAAP net income of $31.1 million, or $0.86 per diluted share. Excluding the impact from Validity, non-GAAP EPS would have been approximately $0.95, well above the midpoint of our guidance.

Synaptics' presence at the recent consumer electronics show drove a record number of booth tours, media briefings, and partner briefings. Our full product portfolio was on display, showcasing another year of firsts, such as the industry's first full high-definition in-cell touchscreen, ClickPad 2.0 with TypeGuard; the first ClearPad single layer on-cell shipment; the first ForcePad shipment; and of course, 3-D touch in the Samsung Galaxy S4.

The product demos were a strong reflection of the significant growth we have achieved across our business. Moving forward, we will continue to leverage our industry-leading ClearPad and TouchPad product portfolios, along with our fingerprint authentication solutions and new product innovations to further entrench ourselves as the number one human-interface Company.

I would like to start with a update on our core markets; then Kathy will review our second quarter results in more detail and provide our current outlook before opening up the call to your questions. Over the past year, Synaptics has proven to be the technology leader in mobile, with the broadest array of mobile touchscreen offerings in the industry, and earning key design wins at every major OEM across our global customer base.

Most recently, these include the LG G Flex and Samsung Galaxy Round smartphones which feature the only curved screens in production today. The LG Vu 3, with a 5.2-inch IPS display; the Nokia Lumia 1320 and 1520, which feature 6-inch displays; and the Nokia Asha 502 and 500, which is the first phone in the market with our face-detect technology.

Face detect makes it easier and more cost effective for the smartphone to detect large objects, such as human faces, to prevent false inputs during voice calls and to avoid unintentional pocket dialing.

We are also proud to acknowledge that our ClearPad solution drives the touch experience in the Sony Xperia Z1, which features a high-resolution, 5-inch full HD display and was voted best phone at CES by The Verge and the best smartphone by Laptop Magazine. In addition to our core ClearPad business, the continued adoption of our display-integration solution remains a significant trend for us, as our customers are implementing a range of on-cell, single layer on-cell, and in-cell solutions.

We continue to make significant investments in the evolution of our display-integration technology to meet the demand as our customer moves towards larger high-resolution displays. Examples of recent display-integrated design wins includes the Google Nexus 5, the industry's first full HD in-cell phone; and the Motorola Moto G, which uses a single layer on-cell solution.

China continues to be a significant growth opportunity for the smartphone market, representing a growing share of global units shipped. We have strengthened our relationships with the leading Chinese OEMs including Lenovo, Huawei, ZTE and Coolpad. In addition, we continue to expand our customer base with new OEMs such as Gionee, which recently shipped -- started shipping its Elife E7 phone, featuring a 5.5 inch full HD display.

Demos on display at CES also featured the new OPPO N1 phone, with an impressive 5.9 inch, full HD display and unique rotating 13-megapixel camera. Display integration is also a highly sought-after solution for this market, and for our single layer on-cell capability, is ideal for catering to the region as well as other emerging markets. Our PC presence at CES demonstrated our continued leadership in the notebook market, where we continue to push the envelope on product development.

The first ForcePad-enabled notebook, the HP Elite Folio 1040, is now shipping. Innovations such as ForcePad help Synaptics remain ahead of the competition by combining our deep systems engineering and human factors expertise, enabling device manufacturers to deliver a consistent high-quality user experience across a wide range of products. We are currently sampling the next-generation ForcePads at OEMs and are excited about the adoption of this new family of solutions, which will enable much thinner notebooks while adding a new dimension of pressure sensing.

Our innovations in the PC market were also recognized, as our ClickPad 2.0 solution won a CES Innovation Design and Engineering Award. ClickPad 2.0 with TypeGuard, which is now shipping in the HP Spectre 13 and the Fujitsu LIFEBOOK, is the most advanced capacitive-sensing TouchPad technology available, delivering best-in-class durability and the industry's most responsive and consistent click performance. TypeGuard software technology virtually eliminates false cursor movements, accidental taps, and false edge scrolls by differentiating between a finger and a palm, giving users a more accurate response during everyday use.

In close working relationship with Microsoft, Synaptics has also shipped the first Precision TouchPad product and the optional keyboard for the Venue 11 Pro from Dell. The Precision TouchPad Initiative is designed to deliver a more uniform TouchPad experience across all OEMs. Synaptics has secured the majority of designs featuring the Precision TouchPad for this generation. We look forward to continue to work with Microsoft in co-engineering the next-generation Precision TouchPad.

Moving to ThinTouch, since acquiring the technology, we have been working through the usability and manufacturability phases to ready the platform for markets later this calendar year. We've continued to develop exciting new keyboard-use case solutions and are currently sampling product with select customers.

ThinTouch Solutions featured at CES include prototypes with retractable keys and finger-presence detection driven by Synaptics' capacitive-sensing capabilities, which will help to drive down the thickness and add enhanced usage model in the keyboard for notebook and add-on tablet keyboard solutions.

Our approach enables flexible engagement models from OEMs, ranging from full functionality for the entire keyboard within a variety of form factors, to custom implementation, such as capacitive sensor under the space bar and other touch-space configurations that enrich the user experience.

Our large display area at CES showcased our recent momentum in the tablet and notebook market, featuring our recent design wins from Amazon, Dell, and Lenovo, as well as Acer in its recently launched Iconia W3 tablet. Our ClearPad Series 7 solution provided the most accurate finger and small-object detection on the market, along with the faster report rates and superior noise resistance with an active stylus tracking option.

The fine-tip active stylus option supports advanced features, such as hover detection and pressure reporting to the host application. As the solution does not require a separate digitizer, it enables very rich stylus usage models without adding cost, thickness, or manufacturing complexity to the device. We see sustainable growth opportunities ahead in large displays, based on accelerating design win traction with leading OEMs.

Turning to our biometrics group, Synaptics is uniquely positioned to deliver compelling benefits to OEMs and end users through optimized performance and usability, advanced integration and lowest systems cost. As a founding member of the FIDO Alliance, we are also helping to shape the standards for e-commerce authorization through fingerprint-based user identification, which will serve to simplify the user experience and drive adoption.

We are seeing very strong interest in our fingerprint solutions from not only our target markets: smartphone, tablets, and notebooks, but other markets as well. While it's difficult to gauge the full extent of the opportunity, we currently see the market growing from 30 million units last year to over 500 million in just two years.

From a product standpoint, we now essentially have full share in the market for enterprise notebooks incorporating fingerprint solutions. Recent new design wins include multiple notebook and tablet releases from top-three PC OEMs. Additionally, at CES, we showed the HTC One Max, Validity's first smartphone design win, which includes a swipe-based fingerprint sensor on the back. We are also sampling a small-area sensor with customers.

We expect to see a number of solutions in the market by the second half of the calendar-year 2014, which will be a combination of slide and small-area sensors, depending on the OEMs needs and time-to-market requirements. Future-generation offerings contemplated in our road map include integrated solutions such as TouchPad, as well as the inactive display area of mobile devices.

And finally, we see the technology moving into the active display, allowing the solution to be incorporated anywhere within the touchscreen. We believe no other company can better serve this market in delivering touch-based fingerprint ID solutions across all applicable devices.

As we close out the calendar year, I would like to take a moment to revisit our key priorities. We remain focused on: continuing to drive strong, sustainable growth; executing across the expanding opportunities in our core markets; furthering our leading innovation within human interfaces; and building the scale necessary to continue our track record of success.

Synaptics has benefited from strong, organic growth over the years, starting with our original TouchPad offerings in the PC market, which is starting to show signs of stabilization and followed by our ClearPad solutions for mobile phones, where we have successfully expanded our customer base and established a strong position as the opportunity shifts from growth in the high end to the mid to low end of the market.

We continue to drive product innovation through new offerings such as ForcePad in the PC area and display integration and mobile. We've begun to establish a solid foothold within tablets and large touchscreens. And our road map for long-term growth includes additive inorganic growth through acquisitions we have made in biometrics, video-display interfaces and keyboards.

As we enter the second half of the fiscal year, our core markets are healthy and we have taken strategic steps to double our available market opportunity. We are the clear technology and market leader in human interfaces. Our innovation pipeline is strong, and we are starting to benefit as some of our new product growth engines begin to kick into gear. We're extremely optimistic about the road ahead and look forward to continuing strong progress in fiscal 2014.

With that, I will turn it over to Kathy for a review of our financial results.

Thanks, Rick. We are very pleased with our December quarter results, as revenue of $206 million represents record revenue for a second-quarter period and was above the midpoint of our guidance range. December quarter revenue increased 44% year over year and was down about 8 from the September quarter. The revenue mix from mobile and PC products was approximately 65% and 35% respectively in the December quarter.

Revenue from mobile products was up 64% year over year and down 18% from the September quarter, and consisted predominantly of revenue from mobile phone applications. We also achieved strong tablet revenue growth year over year.

Revenue from PC applications was up 17% from the prior year and 20% sequentially, above our expectations. Synaptics continues to lead the market for notebook touchpads and clickpads. In addition, we shipped our first ForcePad solution this quarter and added incremental revenue from our new fingerprint ID products.

Non-GAAP gross margin was down 130 basis points year over year, and 210 basis points sequentially at 47.1%. It was impacted by the higher-than-expected PC revenue, which generally carries lower margins. Non-GAAP operating expenses were $60.4 million, up $6.6 million from the prior quarter.

The 12% increase in non-GAAP operating expenses was driven by a 20% increase in headcount from our December quarter end, primarily related to the addition of over 120 employees from our acquisition of Validity sensors, which closed in early November. We intend to continue to invest in our new biometrics products group, expanding both R&D and in-field customer support headcount to accelerate market adoption of our new fingerprint solutions.

GAAP operating expenses were $72.5 million, including $7.4 million of share-based compensation in the December quarter; non-cash charges of approximately $3.8 million, or change to contingent consideration, intangible amortization, and deferred compensation; and $1 million of nonrecurring costs related to the closing of the Validity acquisition and post-acquisition integration and support services. The strong year-over-year increase in revenue and gross margin dollars in the December quarter drove a 54% increase in non-GAAP operating profit dollars.

Our non-GAAP tax rate was 15.5% in the December quarter, compared with 18% in the September quarter, primarily reflecting anticipated long-term cash tax benefits related to the Validity net operating losses. Our GAAP tax rate was 23.1%. Second quarter non-GAAP net income was $31.1 million, or $0.86 per diluted share.

As Rick mentioned, December quarter non-GAAP EPS, excluding the impact of the fingerprint operation and the increased weighted average share count related to the acquisition, was $0.95, above the midpoint of our guidance range. To provide a little more color on the impact of the acquisition on the December quarter non-GAAP results, revenue and operating loss were approximately $4 million and $3 million respectively, and the share issuance impact increased diluted shares by approximately 900,000.

Turning to our balance sheet, we ended the first quarter with $369 million of cash. During the quarter, cash flow from operations was very strong at $57 million. We used $20 million of cash for part of the Validity purchase consideration, and $20 million for share repurchases, bringing our year-to-date share repurchases to approximately 1.7 million shares, or almost 5% of our shares outstanding.

The remaining share repurchase authorization is $90 million, available through October 2015. Employee participation in our equity incentive programs provided net cash of $29.3 million for the quarter.

Capital expenditures for the quarter were $7.1 million, including final cash payments for the renovation of our headquarters campus in San Jose, California. In addition, we just purchased a building adjacent to our headquarters for $10 million to support our continuing business growth.

Depreciation was $3.5 million for the quarter. Receivables at the end of the December quarter were $133 million, reflecting 58 days sales outstanding. And inventories were $51.7 million, while inventory turns were 8.

Before we dive in to the quarterly outlook, I would like to take a moment to review some of the details of the Validity acquisition. At the time of the acquisition in November, we paid approximately $90.3 million in a combination of cash and 1.6 million shares of common stock.

In addition, we may pay up to an additional $162.5 million in earn-out payments, primarily in cash. On Tuesday of this week, we filed a registration statement for the 1.6 million shares issued and the potential additional shares that could be issued as part of the earn-out.

We determined that the purchase price consideration value for GAAP accounting to be approximately $127.8 million, consisting of $70.3 million for the shares issued, $20 million for the cash paid, and $37 million of contingent consideration. The contingent consideration incorporates the stock and cash component, which have been accounted for as a liability.

Identified intangible assets were valued at $76.4 million, and goodwill was determined to be $39 million. We anticipate that changes to the fair value of the contingent consideration could result in volatility in our GAAP operating results as we go forward. Further, the amortization of the purchased intangibles is expected to increase in the future, in future periods as the IP R&D is completed.

Now I will take a few minutes to discuss our quarterly outlook. Based on our backlog of approximately $75 million entering the March quarter, which is typically a very back-end loaded quarter, customer forecasts and expected product mix, we anticipate revenue to be in the range of $180 million to $200 million.

Our expected revenue range reflects seasonality with some incremental contribution from our new fingerprint ID business. Taking into account our overall revenue mix, we expect non-GAAP gross margin for the March quarter to be similar to the December quarter, at around 47%.

We expect non-GAAP operating expenses in the March quarter to increase from the December quarter from the inclusion of a full quarter of investment in our biometrics product and technology, as well as ongoing investment in engineering and in-field customer support to expand our overall product portfolio and customer base.

We anticipate the FAS 123R charge in the March quarter to be in the range of $7.7 million to $7.9 million. GAAP expenses will also include a non-cash charge of approximately $5 million related to intangibles amortization and change to contingent consideration. However, the change in contingent consideration could vary, depending upon changes to assumption that drive the accounting fair value.

We anticipate our non-GAAP cash tax rate for the March quarter and for the year to be in the range of 16% to 18%. Weighted shares are expected to be $37 million to $38 million, reflecting a full quarter impact of the shares issued in the Validity acquisition, among other factors. Non-GAAP net income per diluted share for the March quarter is anticipated to be in the range of $0.44 to $64 per share.

In closing, we are very pleased with our financial results for the first half of FY14. We believe we are on track for record revenue in the fiscal year and believe the Validity acquisition will become accretive as early as the fourth quarter of FY14, sooner than previously expected. With that, we'll now turn the call over to the operator to start the Q and A.

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

(Operator Instructions)

Our first question is from the line of John Vinh with Pacific Crest Securities. Please go ahead.

Thanks for taking my question. First, a housekeeping question: Can you talk about what the Validity contribution was in the December quarter? And what the mix was of smartphone versus PCs? And then, how do we think about Validity's contribution in your March quarter guidance?

Well, John, as I mentioned on the call -- I gave out some of the information related to Validity for the December quarter. So, in the December quarter, the revenue impact from Validity was about $4 million, operating loss about $3 million, and the share impact was about 900,000 shares -- additional shares for the quarter.

As we talked about before on Validity, their primary business at the time of the acquisition was PC-based. So, the revenue, the majority of that, the $4 million was PC-based revenue.

And then, how do we think about the contribution of Validity? Or what assumptions are you making in terms of what that's contributing to your March quarter outlook?

As we've talked about before, we have a full quarter of Validity, obviously, for the first time. So, we do have the ongoing business from the PC standpoint. We have -- they shipped their first mobile phone. And there's additional designs in process. So there will be additional incremental revenue this quarter that's been factored into our guidance.

In terms of the mix -- my last follow-up -- do you think that, in the March quarter, you could have smartphone contributions outweigh PC contributions from the fingerprint-sensing side?

I don't think that we're going to get into that today, John.

Okay. Thank you.

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

Thanks for taking my questions. Your guidance for the March quarter on gross margin -- are you assuming the same mix of PCs to handsets?

For the March quarter, I would say that PCs will likely be not quite as strong. It will be more of a mobile touchscreen type of mix. As we've talked about before, from a market standpoint, a lot of the -- some of the unit growth is coming from mid-range and the lower end, so it's just the overall product mix of mobile and PC.

Okay. That was going to be my next question is: Within the handsets, whether you're seeing the -- more of a pull for the low-end to mid-range phones, and is that a drag on gross margins?

Well, again, from an overall market standpoint, it's the high-end part of the -- most of the growth now in the market -- the market is still growing great. But the most -- the biggest portion of the growth is in the mid-range and the lower-end type solution.

So as we continue to grow -- we have a broad product portfolio where we're addressing the wide range of market opportunities out there. But as we go forward, the whole mix of the portfolio is not -- is heavily weighted to premium, as it has been over the last several quarters.

Okay. Maybe I'll ask the one obvious question that someone else might ask. You had once said that you expected year-over-year growth -- fiscal year over fiscal year -- to be over 20%. Is that still confident? Are you still confident with that?

Sure, Kevin. Actually, I addressed this question at CES during my presentation there. So we're still confident that we'll have similar growth as to last year on our core business. And then the acquisition of Validity will be additive on top of that. And as you well know, last year's growth was 20%.

Okay. Thank you very much.

Our next question is from the line of Osten Bernardez with Cross Research. Please go ahead.

Good afternoon, and thank you for taking my questions. Again, with respect to your comment on the Validity accretion taking place earlier, wanted to know: What are you seeing now that you have closed the deal, from an integration standpoint? And what are your plans for OpEx for that business going forward? Why move up the accretion expectations? Thank you.

I'll address the first half of that question, and I'll let Kathy talk about the OpEx expectation. As we mentioned when we announced the acquisition that we had -- when we went out as part of our due diligence and talked to OEMs, there was already strong pull for the fingerprint-sensing function. So no real surprise there. The message we heard is: We want a big, credible supplier that can actually support us and help us with the integration that occurs with the fingerprint sensing and the security and everything else involved with it.

And now actually what was, call it, strong suggestion or push, we're seeing design wins come to fruition on a lot of these opportunities. And hence, that will certainly help our growth in this marketplace.

During -- again, to repeat a little bit of my CES presentation, we talked about the market growing from 30 million units last fiscal year up to 500 million units within a couple of years. So very robust, strong adoption of fingerprint-sensing solutions.

Kathy, you want to address the OpEx side of that?

Sure. From the operating expense, again, I go back a little bit to what we've talked about when we did the Validity acquisition and subsequent to that. At the time of the acquisition, Validity was running around $7 million a quarter from an operating expense standpoint. So since the acquisition, we said that we expect basically to continue to invest in the business. That's what I've mentioned on the script.

So what we saw in last quarter, in the December quarter, was a partial quarter of that investment, so a little beyond a partial quarter of above $7 million. And as we go forward, then we'll have a full quarter, as in the March quarter, of that investment.

Thank you very much.

Thank you. Our next question is from the line of Jeff Schreiner with Feltl and Company. Please go ahead.

Thank you for taking my call. I was just wondering: You're not breaking biometric out at this point. Are you going to be breaking biometric out in the future, so that we can have a better understanding of how the core business is performing?

At this point in time, what we've decided to do is we're going to -- we have -- biometrics really fits within the existing customer base. And so, what we're going to do is we're going to -- if it's mobile -- if it's related to a mobile-based customer, the revenue will be in that category. And if it's related to a PC-based customer, then it will be in the other category.

If it becomes a big, big portion of the business, then we'll provide some additional color beyond that.

Obviously, there was some strength in the PC segment, even on the core side of the business. Was that due to better pricing environment or better units?

So, Jeff, our PC business obviously grew nicely, and it was, call it, a grab-bag of different reasons. There wasn't one consistent theme. Obviously, we had the fingerprint revenue coming in there that Kathy mentioned.

There was also stronger units in the market. We think we gained a couple of percentages of market share there as well. Our ASP is holding nicely in that business, as things like ForcePad and ClickPad 2.0 kick into play.

Okay. I'll step out. Thank you very much for your time.

Our next question is from the line of Rob Stone with Cowen and Company. Please go ahead.

Hello, Rick and Kathy. A couple more questions related to Validity, please. One is with respect to the orders ramping up sooner and getting to accretion in the June quarter. I know you're probably not going to break that out by end segments, but just proportionally, is that coming more from PC or smartphones, for the moment?

Well, as we've mentioned, we expected the big growth in the market data that we have shown to come first -- or eventually from smartphones and tablets. And the notebook or PC segment is actually smaller in both of those segments now. So your question is: Well, how quickly do those other segments kick in to take over notebook?

I can't give out specifics, but that's certainly, as you could expect -- you saw the run rate that we did last quarter on the notebook side. And you'd expect, with a full quarter, what that number could turn out to and maybe some seasonality. You get a pretty good idea that the other segments are starting to kick in, in our fiscal Q4.

Okay. And my follow-up question is related to the ramp-up of investment. You mentioned that you expect to grow expenses some more in the March quarter.

Is that something where the step-up rate above your normal investment should level off probably? And can you say if maybe fourth quarter is when that happens? Or do you see the biometrics business growing so rapidly that we'll continue to see above-average investment for several quarters?

Well, Rob, as I said, it's the top priority is for us is still growth. As long as we see some great opportunities out there in the markets and the businesses that we have, we're going to continue to invest ahead of that curve. So both on the touch controller side, as well as the fingerprint side, we see robust opportunity. So we're investing in both of those business.

I will say, on the fingerprint side, we're having a tough time dealing with all the opportunities. So we're trying to add as many people as quickly as we can over the next couple of quarters. At the same time, we never compromise; we want the best people in the industry.

I think one of the things that gets a little bit ignored about Synaptics is what we've done in terms of investment in R&D. We've kept that at nice, healthy percentages, so we can have that growth. But we do a really good job managing the SG&A side of things as well -- sub-10% of our revenue. In that way, we manage the overall OpEx, so more of that translates to the bottom line.

Okay. A final quick one, if I may? You mentioned good progress in China. Do you have a sense of how your market share might have changed since you discussed it at the analyst day last year?

Well, as you know, we only do the market share precision once a year, because it is really, really hard to track it down. And China is the worst region to do it because there's inventory effects; there's just the variety of many, many different customers and so on. We continue to -- so I can talk in more generalities than specific numbers.

But we continue to do well in the high end of the phones. The customers there are just as demanding as the rest of the world. So our top-of-the-end products get designed in there -- in our share and the OEMs, and so on. I talked a little bit about that in the script. We are making very good, solid progress in more of the mid-range of the marketplace, as well, where things like single-layer on-cell come into play.

We still have work to do for the lower end of the market, and it does take specific team solutions to get down to some of the cost points there. But that's the opportunity for us. It's a big chunk of the market there, and we've got our lasers aimed at that segment. I think you will start to see some results at maybe the tail end of this fiscal year, and certainly next year.

Thank you very much for taking my questions.

Thanks.

Thank you. Our next question is from the line of Paul Coster with JPMorgan. Please go ahead.

Thanks for taking the question. Kathy, this may be difficult to answer, but could you hazard a guess at what the pro forma EPS guidance would have been in the March quarter without Validity, just so that we get a apples-to-apples comparison against the consensus numbers that are out there?

Yes, I really -- we didn't put those together just because of the fact that it is a full-quarter impact out there, and it's very much an estimate -- an overall forecast for the quarter.

The other point to make there, Paul -- of course, whenever you get a question, that this is going to be difficult to answer. You probably know the answer before you start.

But anyways, keep in mind: We've quickly integrated the Validity team into the Company, so we have people from our operations, and our architect and analog team already contributing heavily into this business unit. So it gets harder and harder to do the -- how much contribution from this particular business versus other businesses, if the world hadn't changed? So the world has changed a lot around here at Synaptic, and I think we've made great progress integrating the team, and leveraging the combined strengths of both Companies to really go after this marketplace.

Got it. Amortization, and Kathy, we should assume about $5 million a quarter now for the next few -- at least couple of years now, right?

Yes, so for the March quarter, when I said the amortization change to contingent consideration -- we're looking at it being around $5 million for the March quarter. And I put some cautionary language in there in the script because of the contingent consideration. It's a large number, depending upon how successful we are with the business -- discount rates going forward. Every quarter that number gets adjusted -- the fair value gets adjusted. So that could move a little bit quarter on quarter.

And then as the IP R&D -- as we finish up the development there, that will add some additional ongoing amortization after that. So $5 million next quarter; likely, go-forward, it will be a little bit higher after that.

Rick, you sound very confident that Validity is going to be adopted. Can you just remind folks what it means in terms of the average selling price per unit? And also what it means in terms of gross margins relative to the corporate average?

Yes, the ASP for these solutions can widely vary depending actually whether it's swipe or area. And then actually, there's a chip versus tail-and-module type of dynamic there as well. For those that have tracked Synaptics for a while, you will recognize that language. And we're still sorting through what's the best business model, which can add a bit of a flavor to the overall selling price.

And plus, we're so early in this marketplace. Ultimately, to get the adoption rates we want to have, we've got to drive down the solution cost to the OEMs. There's no doubt about that.

Just like we said with the acquisition, for a swipe-type sensor, it's a little bit higher than we normally get in a touch controller for a ClearPad-type of solutions on the mobile phone. Then the area sensor is another notch above that.

In terms of gross margin, it should land right with our corporate average, is what we believe.

All right, thanks very much.

Our next question is from the line of Liwen Zhang with Blaylock Robert Van. Please go ahead.

Thank you. My question has been answered.

Great, thanks.

Thank you. Our next question is from the line of Rajvindra Gill with Needham & Company. Please go ahead.

Thanks, and congrats on the good progress. Just a point of clarification on the Validity or the overall fingerprint sensor market. So, Rick, you said that the market is going from 50 million units in 2013 to 500 million units in 2015. Does that exclude Apple?

Let me be clear. It's actually 30 million units in 2013, and 530 million in calendar 2016. It's the same data I showed at the CES presentation, so it's third-party data. Obviously, everybody is watching what's going to happen here, but at least that's one assessment of what the market will do, and that does exclude Apple.

Okay. And going back to the Validity business as well, you're bringing in the accretiveness for the Validity business into the June quarter. At that point, you will say -- you'll recognize a full quarter of operating expenses. And I think Kathy said that it was a little bit over $7 million, partially, of OpEx in the December quarter. So we expect the OpEx to increase for Validity going into March into June quarter. Remind us again what the gross margins for Validity are?

Gross margins for Validity -- as Rick just mentioned, they should fall within the corporate range.

Okay. So you basically, then --

Let me make a correction on the OpEx comment, Raji. So OpEx was -- when we talked about the acquisition of Validity, they were running at $7 million per quarter. We increased it some from there, but we only had a half a quarter.

So I would look at it -- I really would look at it more like it was somewhere in the $4 million-plus in the December quarter, and then you get a full-quarter effect -- double that in the March quarter. Then we're continuing to invest.

Right. So if you are going to be accretive in the June quarter with a full quarter of OpEx, plus your investment in Validity, then the revenues must be $20 million-plus for Validity.

That was the backward math that everybody has been running for -- ever since we did the Validity acquisition, yes.

Thanks a lot. Appreciate it.

Next question is from the line of Charlie Anderson with Dougherty & Company. Please go ahead.

Yes, thanks for taking my questions. Two quick housekeeping ones. Number one, did you have a 10% customer, and what was that percent?

Then also, in terms of that $4 million coming from Validity in Q4, was there anything abnormal? Was it more back-half weighted, or is that the run rate? It's more like an $8-million-a-quarter type of a business now, in terms of mostly being PC?

I'll take the second half, and then let Kathy answer the percentage question.

So obviously, fingerprint sensors are used primarily in commercial notebooks. And from all reports, and our own experience, it was a very good calendar Q4 for commercial notebooks. So we enjoyed some of that strength.

Now, our hope is, because the world is getting conditioned to be using fingerprint sensing -- it really brings all the security and the convenience aspects of it -- that we'll see attach rates increase both in the commercial and consumer segment. So, over time, we actually hope that attach rate goes up. But that's the dynamic -- a very strong calendar Q4 in commercial notebooks.

Then, Kathy?

So the other part of the question was: From a 10% customer standpoint, we actually had two. And so the biggest OEM that we're working with -- their contribution was about 19% of revenue this quarter. And we had one other 10% customer, which was an ODM at 11%.

Perfect. Thank you so much.

It strikes me that you have two extremely important products that are in sampling mode right now. One would be the small-area sensor in biometrics, and the other would be ThinTouch. Rick, do you feel like we're going to move into -- maybe a quarter from now, you'll talk about design wins, and then maybe we see revenue by the December quarter? Walk us through how you see those two starting to contribute.

Let's start with the fingerprint first. As you well know from following us, Charlie, we don't talk about design wins; we talk about product launches after our customers go out and announce. And certainly, for fingerprint sensing, we should start to see a cadence begin in the June quarter, and then going from there in terms of customer announcements.

On ThinTouch, it's a bit of a longer cycle, just because it's so fundamental to the physical ID of a notebook and so on. It's really the first decision that's made on a notebook or a tablet. And so, as everyone saw at CES, we have something that we think is now pretty good, and we can go out and begin sampling to the OEMs. But that cycle, both design-in and qualification and so on, really would push us towards the latter part of calendar 2014, and then even into 2015 as well.

Perfect. Thanks so much.

Our next question is a follow-up from the line of Jeff Schreiner with Feltl and Company. Please go ahead.

I just want to clarify one thing. Did you say that Validity's contribution was about $20 million in the March quarter?

No, we did not. I think the question was -- is if you -- we said that we expected to be accretive in the fourth quarter. So the conversation was: Is if you go through OpEx and gross margins, what that would mean would be -- it would need to be somewhere around a $20-million contribution level in the fourth quarter.

Okay. And just to follow up, Rick, you talked about growing at 20% the core business, and then adding accretion on from the Validity acquisition. How are we able to track whether you're keeping along those guidelines, if you're not going to break out Validity?

Well, it's a fair question. We try to provide the annual guidance to help you do your role as best as possible, and give you as much flavor as we can on where we're going. But the annual guidance is something we give once a year. And as I said, we are, and it's the classic touch-controller business, we believe we will get there for FY14.

Okay, thank you.

Jeff, one other thing to keep in mind is -- we look at how we break out the business is we're also looking ahead. And it's not inconceivable a year from now that you will see a TouchPad solution, for example, with a fingerprint sensor. And so, how do you account for that?

Well, one way is: Well, it's notebook, and that's part of the PC segment. So we're also -- as we're making what's the best way to get visibility, we're thinking a little bit ahead as well.

At this time, there are no further questions in queue. I would like to turn the call back over to management for closing remarks.

Okay. Well, thank you for everybody for participating, and it was great to see everybody at CES as well. And certainly it's going to be exciting calendar 2014 for us, with a lot of new products and a lot of excitement in the market with our customers that use our products. So, look forward to talking to some of you in a little bit, as well as the rest of you three months from now. Thank you.

Thank you. Ladies and gentlemen, this does conclude our conference for today. We'd like to thank you for your participation, and you may now disconnect.