Synaptics Inc (SYNA) 2015 Q1 法說會逐字稿

Good day and welcome to Synaptics first-quarter 2015 conference call. Today's conference is being recorded. At this time, I'd like to the conference over to Ms. Jennifer Jarman, please go ahead.

Thank you, operator. Good afternoon and thank you for joining us today on Synaptics first-quarter fiscal 2015 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 the market closed 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.

Forward-looking statements give our current expectations and projections related to our financial condition, results of operations, plans, objectives, future performance, and business. Although Synaptics believes 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 10K for the fiscal year ended June 28, 2014, for important risk factors that could cause actual results to differ materially from those contained in any forward looking statements.

Synaptics expressly disclaims any obligation to update this forward-looking information. With that, I'll turn the call over to Rick Bergman. Rick?

Thanks, Jennifer. And I'd like to welcome everyone to today's call. Synaptics posted record September quarter revenue of $283 million. Which is up a robust 27% year-over-year and was within our project the guidance range. Industry dynamics for the quarter reflected weaker than expected sell through trends for certain customers in mobile. Somewhat offset by greater than anticipated demand in the PC market.

The resulting overall product mix contributed to gross margins that were below the targeted range while non-GAAP net income was $40.9 million or $1.04 per diluted share. We were extremely pleased to announce the close of the acquisition of Renesas SP drivers as the first day of calendar Q4 which was earlier than anticipated. This is a transformational development for Synaptics and positions us extremely well to be able to address the full spectrum of needs for the mobile display market.

The addition of RSPs significantly expands our market and growth opportunities, adds highly skilled engineering talent and broadens our global customer base. I will now provide an update on the acquisition as well as our core markets. Then Kathy will review our first-quarter results and provide our initial thoughts in the combined Companies outlook before opening the call to your questions.

While we are only in the early stages of integrating RSP, we are very excited about what this acquisition means for Synaptics. It not only advances our leadership position in platform level display solutions but solidifies our position as the number one human interface company. By incorporating RSP's advanced display driver solutions into our broad portfolio we expect to increase our addressable market opportunity of approximately $3 billion by more than 1.5 times. The integration process is proceeding extremely well. In the few weeks since the close, we have hit the ground running.

With the organizational design complete as of day one, we are able to immediately begin focusing on execution. This includes integrating the approximately 350 employees we have added through the acquisition and integrating our product road maps. Putting in place necessary infrastructure and systems to support the new business. Bolstering underlying G&A support as we migrate from a JV structure and beginning to meet with customers and suppliers as a combined company.

We are quite pleased with the initial customer feedback. Through the alignment of efforts around the two critical portions of the display ecosystems our customers stand to benefit from more differentiated and high-performance products with a faster time-to-market in a more simplified supply chain. Merging RSP's products, technology and engineering know-how, with Synaptics system-level expertise, will enable us to accelerate the adoption of high-performance, cost-effective touch and display driver integration for the mobile market.

While also extending our leadership position in Touch and DDIC products. In fact, we have already done a tremendous amount of work in determining the go forward technical road map for both DDI and TDDI. Rather than our initial target of calendar 2016 for achieving mass production with the combined DDI offering, we think that goal can be attainable by the end of calendar 2015.

Now, I'll move onto a discussion of our core markets. The smartphone display market is rapidly evolving. Synaptics remains of the forefront of TDDI integrated display designs where touch control and display driver are combined and optimized in a system-level solution to create what we call a smart display.

The continued convergence of technologies provides OEMs powerful new options outside of traditional discrete solutions. With the integration of a touch sensor into the display, OEMs can benefit from thinner and brighter displays while also improving touch performance on their devices and simplifying the supply chain. We are confident in the adoption of display integration solutions.

Our design pipeline remains strong and display integration solutions continue to account for over 40% of our smartphone product shipments. We expect our first production phones to ship for the mid-tier market this quarter with Synaptics ClearPad series-4 TDDI solution. The single chip solution provides the most advanced display noise management and best in class capacitive-sensing performance.

The next Synaptics space TDDI solution is also on schedule to launch within the coming months. While we believe TDDI is the future of smartphone display integration our product portfolio allows us to offer a wide range of solution such as discrete solutions, two-chip In-Cell, single layer On-Cell, and On-Cell.

We have several exciting examples of discrete solution implementations including the latest phones from Microsoft, the 4.1 inch Nokia Lumia 730, and the 5 inch Lumia 830. Our ClearPad solutions can also be found in the 5.2 inch full HD Sony Xperia Z3 and the companion Sony SmartWatch 3 SWR50. We continue to leverage our range of solution options to drive design strength with our China OEMs resulting in increasing market share.

New phones now shipping in mass production include models from Huawei, ZTE, Oppo, Maizu, Gionee, and Lenovo. Of the China phones leveraging our display integration solutions we are seeing attach rates increase across all phone sizes ranging from 4.5 to 6 inches. While industry projections for large touchscreens are not nearly as high as they once were, our tablets eye solutions continue to be in demand and adoption rates of touch enabled notebooks remain on an upward trend.

Recent tablet design wins include the Huawei Youth8, Gionee x6, and both the 8 inch and 10 inch Lenovo Yoga tablets, along with the dual-mode Lenovo ThinkPad Yoga 14 notebook. Our flagship touchpad family of solutions for notebook PCs continues to dominate the market. As new features like ACM with TypeGuard and click pad 2.0 are helping to drive strong levels of design activity.

Recent models that implement these exciting features include the Lenovo ThinkPad E455 and E555 models as well as the Aspire, Acer Aspire E, V and S series notebooks. We continue to work with Microsoft as our lead partner for the precision touchpad for Windows 10 and are also excited to be collaborating with them to enhance our overall two-in-one strategy. In addition, I am pleased to mention that we are working on new OEM touchpad designs for Google Chromebooks.

We will continue to capitalize on the convergence of our technologies with innovative new solutions such as ForcePad, SecurePad, and TouchBar which will be on display at November 18 Analyst Day. As a reminder, SecurePad integrates our finger ID solution into the touchpad giving tremendous supply chain flexibility for PC OEMs to add modern fingerprint sensing technology into any touchpad capable platform.

Leveraging our concept prototype team and the industry's most advanced usability research group, our solutions are designed to deliver optimized performance and usability with advanced integration options.

Moving to the biometric authentication space we are still in the early days of adoption across the broader mobile landscape and consumer demand is growing exponentially. As a result, we continue to see a lot of excitement among leading OEMs as they work to implement the technology in the next wave of flagship designs. In the interim, I'm pleased to mention that Synaptics swipe-based fingerprint ID solution has been incorporated into the recently launched Samsung Note 4.

We also continue to make strong progress in readying the our-touch area fingerprint sensor for market. We expect initial production to occur this quarter and based on the timing of customer launch schedules to see phones in the market in early calendar 2015. Synaptics continues to be a key enabler of the mobile payment ecosystem.

As a FIDO Alliance founding member we see a consistent trend towards broad industry acceptance and deployment of biometrics. The prospect of secure and intuitive mobile payments is a driving force of this movement. With negatives associated with password security being eliminated from the equation through the local device authentication. All of the online servers providers must work with the wide range of independent devices to drive widespread adoption.

The FIDO alliance solves this problem by establishing a standard registration process by which online service providers can register FIDO compliant devices. The influence of FIDO continues to expand as we've seen with the recent addition to industry titans, Visa and Alipay to explore those directors. We look forward to sharing more fingerprint authentication insights with you at our Analyst Day as we welcome FIDO President and Chairman, Michael Barrett, as a guest speaker to share his thoughts.

Touching on current trends in our core markets we benefited from a strong quarter in PC business as we saw continued signs of recovery with strength in both commercial and consumer segments. As we look at the second fiscal quarter, we are projecting a sequential decline for this business based on normal seasonality and related sell-in versus sell-through patterns. In mobile, we anticipate seasonal impacts in our overall market that is growing but weighted towards emerging markets where the sweet spot is mid-range phones.

We continue to see pockets of weakness in the premium smartphone market reflecting ramp cycles and customer demand levels. After laying on an expected strong quarter from the RSP business it should not be overlooked that we expect to post revenue of more than double that of our December quarter last year. While the first half of the fiscal year is being impacted by slowness at the premium level in mobile, our current outlook for the core business remains strong.

With annual growth now expected to be in the low 20%s. We anticipate a positive growth trajectory over the second half the fiscal year as our fingerprint ID products continue to come online as we continue to make strong progress in the China market and as we expect greater demands for Synaptics TDDI products.

To conclude my formal remarks, we are confident in our position as the top provider of human interface solution. Synaptics leads the market from our touchpad products and capacitive touchscreens to our fingerprint sensor solutions for mobile phones, tablets and notebooks, to our newly acquired high-performance mobile display driver products.

We have taken a giant leap in the Company's evolution by making pivotal acquisitions that have expanded our products set and resulted in a more diversified base of customers and geographies. We expect this to only further elevate our position as a global leader in the key markets we serve. To fully capitalize on the opportunities we are entering another important investment phase as we work towards executing on our strategy of delivering sustainable, profitable growth over the long term.

We look forward to providing you with updates on our progress over the coming months including at our upcoming Analyst and Investor Day. With that, I'll turn it over to Kathy for a review our financial results.

Thanks, Rick. We achieved record September of quarter revenue of $283 million. This represents an increase of 27% year-over-year but was down about 10% from our record June quarter where we benefited from a steep initial ramp of new MobileTouch and fingerprint ID products designs.

Revenue mix from mobile and PC products was approximately 71% and 29% respectively. Revenue from mobile products was up 23% year-over-year but down 18% from the June quarter driven primarily by weaker than expected customer demand trends in the premium mobile market. However, China-based mobile customer revenue was a solid contributor again this quarter.

Revenue from PC applications was up 38% from the prior year and up 15% sequentially and was well above our expectations. Synaptics continues to lead the market for notebook TouchPads and ClickPads and design activity continues to be very strong. Non-GAAP gross margin was 44.1% below our guidance range.

Impacts on gross margin included the higher than anticipated PC product mix, other products mixed changes, and delay in certain new customer products. Non-GAAP operating expenses were $75.6 million up slightly from the prior quarter. The increase was primarily related to increase in headcount, partially offset by a reduction in variable compensation expense.

GAAP operating expenses were $84 million including $9.2 million of share-based compensation in the September quarter, $3.4 million of preacquisition integration and transaction costs related to our recently completed acquisition of RSP as well as non-cash charges for intangible amortization of approximately $295,000 partially offset by a $4.5 million credit for a decrease in the contingent consideration. Our non-GAAP tax rate was 17% in the September quarter unchanged from the June quarter, primarily reflecting our geographic profit mix.

Our GAAP tax rate was 27.9%. First-quarter non-GAAP net income was $40.9 million or $1.04 per diluted share. Turning to our balance sheet we ended the first quarter with $450 million of cash. During the quarter, cash flow from operations was very strong at $60 million and we continued to repurchase our shares using $50 million to repurchase 629,000 shares of our stock. Or, approximately 2% of our shares outstanding.

The remaining share repurchase authorization of $150 million is available through July 2016. Employee participation in our equity incentive programs provided net cash of $10.8 million for the quarter. Capital expenditures for the quarter were $19.6 million including investment in IT systems and infrastructure related to our acquisition of RSP. And renovation costs for the expansion of our headquarters campus in San Jose, California.

Depreciation was $4.2 million for the quarter. Receivables at the end of September were $194.5 million reflecting 62 days of sales outstanding. Inventories at the end of September were $76.4 million and inventory turns where 9. Before I move into a discussion about guidance, I'd like to take a moment to recap some details regarding the acquisition of RSP.

The purchase price at the close was approximately $465 million with approximately $67 million held back for a period of 18 months to address post-closing adjustments or claims. And approximately $48 million held back for post-closing working capital adjustments. At the time of the acquisition, RSP had approximately $90 million in cash on their balance sheet which we acquired as part of the acquisition. Initial cash payments for the acquisition of $350 million was funded with $250 million of bank debt and our foreign cash.

Additional acquisition related cash outlays expected to occur later this quarter, or early next quarter, include the $48 million hold back for working capital adjustments and the purchase of approximately $125 million of inventory currently owned and manage by Renaissance for RSP. This will occur post our transition from the Renaissance ERP system to our system.

Our preliminary estimated identified intangible assets is approximately $270 million to $300 million consisting of developed technology, customer relationship value backlog, and inventory purchase commitment and tangible assets with lives ranging from 3 months to up to 5 years. These estimates are preliminary and subject to change.

As we indicated on our June 10 conference call, (inaudible) generated revenue of approximately $650 million during its fiscal year ended March 31, 2014. RSP sales directly to LCM manufacturers similar to our business as we typically sell directly to LCMs, ODMs, or other OEM members in the OEM supply chain. As such we report customer contributions that way in our SEC filings.

We anticipate modest revenue growth this fiscal year for display driver products. As the current products set addresses the premium portion of the mobile market. With growth at certain customers largely offset by weakness in others. We anticipate the gross margin percentage for RSP will be in the range of 26% to 30% depending on product mix.

From an expense standpoint RSP has been steadily increasing its investment to continue to capitalize on market opportunity. With RSP we will initially increase our quarterly operating expense run rate by approximately $25 million. Of which approximately 80% is engineering related.

We anticipate investments in infrastructure, systems and personnel, as well as investments to accelerate our touch and display driver integration efforts will further increase that cost over the remainder of the fiscal year. As a result of our acquisition of RSP, I would also like to update you on near-term changes to our combined target financial model. I will note that it's still very early in the integration process and we expect to develop greater clarity regarding how this translates into longer-term trends as we move forward.

After we pass the transitional period, our overall near-term gross margin target is expected to be in the 37% to 40% range. And we expect variances from quarter-to-quarter based upon the mix of customers and products. Our operating profit percentage is anticipated to remain very strong in the mid-teens. And non-GAAP tax rate is expected in the 16% to 18% range.

I will now make a few comments regarding our Q2 Outlook. Based on the combined backlog of Synaptics and RSP of approximately $260 million entering the December quarter, customer forecasts and expected product mix, we anticipate record revenue to be in the range of $415 million to $450 million more than double the revenue from the December quarter, a year ago.

Taking into account overall revenue mix of the combined Synaptics and RSP business we expect non-GAAP gross margin for the December quarter to be in the range of 34% to 36%. December quarter gross margin will be impacted by a steep DDI product ramp in addition to overall customer mix dynamics, as well as costs associated with various transition services provided by Renaissance. Including inventory management, warehousing, and other services provided through the ERP systems cut-over date and other service dates.

We expect non-GAAP operating expenses in the December quarter to increase from the September quarter primarily due to incremental costs associated with RSP as explained earlier, as well as certain investments in engineering and in field customer support as we continue to expand our product portfolio and customer base. We anticipate the stock compensation charge for the second quarter to be in the range of $10 million to $10.4 million.

GAAP expenses, based on pre-RSP acquisition, will include non-cash charges of approximately $6 million related primarily to intangible amortization. GAAP expenses will also include intangible amortization related to the RSP acquisition. Due to certain short lives intangible assets included in our preliminary valuation estimates, we expect incremental amortization in the December quarter to be up to $40 million to $50 million subject to change based on finalization of our valuation estimates.

We anticipate additional nonrecurring cash costs of approximately $5 million for ongoing RSP integration efforts and transaction fees related to the closing of the RSP acquisition. We expect non-GAAP cash interest expense to be approximately $1.2 million and GAAP interest to be approximately $1.5 million inclusive of $250,000 of debt cost amortization.

Our non-GAAP tax rate is expected to be in the range of 16% to 18%. Our non-GAAP net income per diluted share for the December quarter is anticipated to be in the range of $1.00 to $1.30 per share. In closing, we look forward to completing the integration of RSP as we move through FY15.

With this business now under Synaptics' roof we believe we are extremely well-positioned to deliver a substantial increase in revenue in the second quarter and to drive record quarterly and FY15 revenue.

Before we begin the Q&A, we would also like to note that while we understand there is heightened interest around some of RSP's historically largest customers in accordance with our and our customers' policies, we do not discuss specifics about certain business relationships or product engagements. With that, we will now turn the call over to the operator to start the Q&A.

Operator?

Thank you.

( Operator Instructions )

Please limit yourself to one question and one follow-up question at a time due to time constraints.

(Operator Instructions)

First will be Rob Stone with Cowen and Company.

I had a couple of questions related to RSP. I think I heard you say, Rick, a comment about annual growth for the base business. How do you see FY15 including RSP, and any color you can provide on seasonality for that business? Thanks.

Sure, Rob, we're going to require to do a little bit of math on your own. So in my remarks I mentioned low 20s percentage points on the Synaptics, call it classic business now for FY15 over FY14 and then actually Kathy mentioned that the RSP business was running about $650 million and we'd expect modest growth year-over-year. Which for us, modest means, call it the mid-single digit percent. I think you can do that.

One thing I just want to point out more generally is, we had this RSP business now for just three weeks and for legal reasons we didn't really get to peer under the hood until three weeks ago. So at this point we're still getting our arms around the entire business, understanding the pluses and minuses that's involved in it, because it is new for us.

While certainly we share a lot of the same customers, the actual dynamics in competitive makeup and so on are quite a bit different. So we're going through a process this quarter where we will certainly know a lot more. And quite honestly in a couple weeks when you're are all here November 18, I expect us to be three times, four times, more knowledgeable about the business than we are today.

Okay. And by when do you expect the transition related drag on gross margins to be over?

Hello Rob. It's primarily -- right now it looks like it's primarily Q2 but it may extend into Q3 for a while. Again, as Rick said, this is really new so we're still working on some of those details determining exactly, some services may drop off at different points in time over the next couple of quarters.

Okay. Thank you.

Charlie Anderson with Dougherty & Company

In terms of the low 20s percentage points, you are taking that down in the classic Synaptics business a little bit in terms of your outlook. I wonder if you can classify the segments of weakness by geography or product sequence?

Sure, Charles I'll try to illuminate it as much as possible. First keep in mind it was mid 20s percentage points to low 20s percentage points, however you want to characterize that, a few percentage points. A lot of that is attributable to the first half we've missed in our fiscal year, which as you can tell from our remarks we've seen in the premium phone segment, the numbers just now being there that we expected a few months back when we gave that guidance, and we wanted to reflect that and give you awareness that it will be a little bit lighter.

That also implies it's a very strong second half of the year for the Synaptics classic business and we like where we're positioned for the second half of the year and we're looking forward to see that growth. That's really a reflection -- we're not going to break down each of the segments and how that breaks out. If you remember last call we talked about all three businesses growing. However the biometrics carrying the load of the growth, and I would still characterize it in that way.

And then just a follow-up from me on that, I wonder, did it feel in the December quarter like it's a macro situation, or did it feel like it's sort of a android losing market share to the new Apple devices, in your mind?

Certainly the macro situation is to the premium smartphone market in the android world the growth has certainly slowed down. I think there's been a number of other announcements from some of the OEMs out there that indicate that pattern is obviously the Apple business with the iPhone 6, there's certainly a big replacement or a lot of pent up demand for that particular product category.

I don't see us really losing share. In fact we rattled off a bunch of high-end design wins that we had, whether it's Sony, Huawei, a lot of the fast-growing China OEMs. I feel good that our market share is hanging in there. As you point out, it's the macro situation on the high-end of the android smartphone on world.

Great. Thanks so much.

Osten Bernardez with Cross Research

Good afternoon. Thanks for taking my call. Rick and Kathy, would you be able to piece together what your expectations for RSP for the December quarter and how we should be thinking about the timing of those sales relative to some of the puts and takes with of some of its larger customers?

For the December quarter, as I said, a range $415 million to $450 million for the combined business for the December quarter. As Rick alluded to, there's puts and takes basically and the core business for several factors. And also in the RSP business, as I mentioned. They do have a pretty steep ramp with certain customers this quarter offset by some of the weakness from some of their other customers. Net-net, it should be a strong quarter for that business and I think the guidance range incorporates that.

I just wanted to follow one quick question. As it pertains your relationship with historically your largest customer would you be up to walk through what you're expecting for 2015 from a touch screen controller sales standpoint?

I presume, Tens, up to October 1 we are primarily just in the android marketplace and obviously had Windows business. We don't actually disclose our largest customer. Although it's fairly obvious once you drill down to the area. We're not going to give you the precise sales or anything like that of any customer.

So again, we feel well-positioned without a doubt we have the broadest product portfolio in the Touch industry and now also in the DDI industry and clearly we are the only supplier in the emerging TDDI industry. So we feel really good about our position and every leading OEM at this juncture now probably has Synaptics technology in their phones.

Thank you.

Jaeson Schmidt with Lake Street Capital Markets.

Thanks for taking my questions. Rick I'm wondering if you talk a little bit about what you are seeing from a pricing standpoint both in touch and the fingerprint sensors?

Sure. In some way it's the same old, same old will be my answer. It's a tough market out there in terms of the ASPs in any segment and we expect a quarterly decline across the course of the year. Since fingerprints our new, the ASPs tend to be a little higher, so you'll see a faster decline in ASPs in that particular segment of the marketplace.

Of course the one phenomena that's within a segment so I'm careful with my words. Of course, we're seeing higher growth in the lower to mid range part of the smartphone market, so from an industry ASP those are certainly declining faster than we have historically seen. But, in any one segment to me at the same types of patterns that we've seen.

Okay. And then Kathy, I think last quarter you shared with us how much fingerprint revenue you actually did in the quarter. I'm wondering if you would be willing to share that figure for September?

For the September quarter we've talked about the mobile business, and basically we are including the touch business and fingerprint in this point in time in that business. So for both of those businesses we saw downward trajectory based upon our comments around the premium side of the market.

Okay. Thank you.

Jeff Schreiner with Feltl and Company

Thank you very much. Kathy, I was hoping that you could provide a breakdown of where you think the core revenues for the company are going to be December? I think there's a lot of confusion out there right now with some analysts having Renaissance in their numbers and some not having Renaissance in their numbers.

I think there's already a great deal of confusion about what the consensus number might have been for December. I was just hoping that you could give us maybe a breakdown for this quarter since it's the first quarter of maybe the core revenues expectations in December on a sequential basis. What are those?

So we since Renaissance is very new as of this quarter we put together basically a range that we felt was reasonable for the combined business. I think beyond that what we've talked about is the trends from the core business. We do expect the core -- each one of those segments or portions of the core business to be down. And then to have a pretty nice quarter for RSP. The other items that we pointed to is basically their revenue base before, and $650 [million], you tack on about 5% of that, you can take a look at what you would get to from a quarterly basis to give your reasonable representative amount.

Okay. I was just wondering could you talk a little bit about maybe the fingerprint offering that you provide with the flex unshipped solution versus the silicon sensor implementation that another competitor uses. Is there a real cost advantage that you see and how that can be costs down versus other solutions, and could you maybe talk about that a little bit? Is that a competitive differentiator that you have in the way that you implement the fingerprint sensor technology?

Sure, Jeff, I'll be happy to comment on that. Just, you have it right. We have the sensor, in our case, can either be a packaging type like you see in the Samsung S5 or it can also be, what we call, a chip-on-plex implementation, which you see in some of the notebook implementations out there.

The beauty of it is our silicon, our processor fingerprint processor, is actually separate from the sensor itself. So that not only gives us potential cost advantages because we can continue to shrink our silicone but move it to new geometries are other foundries, or whatever is appropriate and take advantage of the natural semi conductor trends in the industry. That's advantage number one.

Advantage number two is there is tremendous flexibility. Ultimately with the sensor can be put in multiple shapes and different sizes. And then at some juncture put under a glass screen which is where we and everybody else in the industry wants to eventually get.

Thank you.

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

Hello. Thanks for taking my question. Just housekeeping question Kathy, starting next quarter, Kathy, will you give us a breakout of the RSP revenues, or will that be categorized within the mobile segment? What's your plan there going forward?

Well, we have basically for -- we will be filing Pro Forma information, so we will have some information relative to the RSP revenue.

Okay. Great. Thank you.

And then my follow-up question is just on the competitive dynamics of your core touch business. It seems like there's been some disruption from a competitive point of view in the premium segment of the market.

I think there's been some concerns out there that given the two major acquisitions that you have done that you are maybe taking your eyes off of the legacy business or the core business a little bit. How are you thinking about investing in the core touch business, and where is your confidence level that you'll be able to regain your dominant position and regain share in that premium market going into next year?

Sure, John, I'll answer that. For one thing I would characterize Synaptics as creating the disruption in the marketplace. And that's with TDDI. We've been investing in this in a long time. In my prepared remarks, you probably heard me mention and that we're ramping to mass production with multiple phones that you'll see in the marketplace here in a few months, tops. It's a huge trend that's occurring in the industry.

I just happened to be in Asia last weekend meeting with four LCD manufacturers, four major ones and across-the-board they're telling us to move faster in this direction. That there's tremendous demands because of the performance and the supply chain's simplifications and those types of things. If you're a touch controller vendor and you don't have a TDDI strategy you are signaling to your OEM partners that you are not going to be a major player. And so, what I believe we've done is we have upped the game.

If you want to play, you better be ready to play big in the touch business. At least the OEM partners I deal with, they don't just want a premium player they want to have somebody who has a complete product line, because they make a substantial investment in themselves, and with the touch control for that matter also for the display drivers, as well. So, are we taking our eye off the ball in our core products, no.

These are entirely separate teams. They've always been separate teams. And we have some fantastic touch controller products coming out, basically, as we speak. We continue to enhance our road map. When the dust settles after Mobile Ware Congress, let's see where Synaptics ends up. We've seen competitive threats come and go over the past last several years that I've been here and we'll see what happens.

We have over 1,700 employees now, nobody's made a commitment like we have to the human interface and touch business. I am pretty darn confident that we're going to be number one year from now in both the premium and the overall touch controller business.

Great. Thank you. Just to clarify your outlook for the traditional Synaptics business of low 20s percentage point growth for FY15. Are you still assuming some modest growth in the premium core touch business, as part of that outlook at this point?

Well, John, as we've talked about enough, we've seen some weakness basically in the premium side of the android market, as has been discussed. So part of the outlook, the reasons coming down as related to the first half weakness that we've seen in that portion of the market.

Thank you.

Veejay Rackish with Stern Agee

(Inaudible) RSP aside, and you $650 million trailing [0.5%], so on a quarterly basis it's what? $170 million to $180 million. Is that the right number to use, or should it be or significantly higher? And on the core Synaptics going forward when bracket should we use in the gross margins, in the 4% to 6% range or lower? Thanks.

So, from a revenue standpoint that's the math. The quarters will go up and down depending on different factors. Could it be higher or lower in any particular quarter for seasonality, customer ramps? It's going to move up and down. I think you can -- you've got a good basis to work for -- from there.

Got it. And on the core Synaptics what is the go-forward margins?

Well, for Synaptics for the go forward margins, we haven't broken it out at this point in time. Some of the factors that we saw in the first quarter, we see that some of that continuing into the second quarter because of the customer mix. That's where we are right now and we have basically provided what we believe more of a go forward rate is on a combined business, which is once we get through the transition with RSP, more of a 37% to 40% profile.

On the biometric side you did a pretty hefty $100 million last year fiscal. Now with the touch [idea] fingerprint coming out what's your expectation on fingerprint [silicate] FY15? Thanks.

So the finger -- as I mentioned little bit earlier, so fingerprint, we see that as Rick said for the year is to be the most significant from a growth driver in the core business. That's the information that we have at this point. We're not breaking fingerprint out. It's going to be included in either the mobile or the PC side of the business as where the products lie at this point.

Got it. Thanks.

Kevin Cassidy with Stifel

Thanks for taking my question. I am your TDDI product strategy, what foundry plans do you have?

Hello, Kevin, we don't disclose our foundry plans. I can talk more generically at this juncture and then maybe when you see these in production we'll talk more broadly. Kind of generically our approach is going to be we'll have, call it a leading edge fab. We'll do the initial, our very high performance products in, and then we'll follow it up with a lower cost or second or third tier foundry that has much more cost-effective wafers.

We recognize that it's a pretty darn competitive market and we need to employ that strategy, which we haven't historically done with our touch controller business. Which is one of the reasons, of course, we heard some of the success that I mentioned to John with our internally developed TDDI chips. But we didn't have that scale, unfortunately, with Synaptics to be able to do lower-cost solutions. Now with the RSP acquisitions we can do high-end, cost-effective solutions, midrange solutions and a whole breadth of products.

Okay. Great. Interesting. On the swipe fingerprint recognition versus area fingerprint recognition, when do you think you'll have a crossover in the revenues from each one of those products?

Your asking for a pretty tough prediction there, Kevin. I was asked that same question last quarterly call and I typified that the middle of next year. If I was a guessing man I'd still say it's in the area. Interestingly, we're seeing a surge in interest in swipe because there's just some things you can do in terms of form factors with the swipe sensor that you just can't do with the area sensor. I'd still -- obviously the area sensor has higher volumes, or excuse me, higher ASP's.

I would stick with that answer. To be the bigger picture here though is just a huge surge in interest in the position that Synaptics is in to take advantage. A year ago when we had to pull the trigger for the validity acquisition, it was far from clear whether fingerprint was going to be almost a must-have feature for mid and high-end phones.

As we look forward now with the announcements with Apple with their payment solution and what we're seeing with FIDO, and the interest in Ali Baba in China I don't think there's any doubt now that fingerprints are going to not just be a convenience security feature, but also a major factor in mobile e-commerce. We're just thrilled with our position and our ability to continue grow Synaptics due to our investments a year ago.

Okay. Thank you.

Raj Gill with Needham & Company

Just a question on the gross margins for Q4. For the core business it does imply margins coming down again, as well as continue to decline in March, if you strip out the Renesas. So I wanted to get a sense again of what's going on in the gross margins? Obviously you're having a mix shift with China customers. Is PC also effecting that in Q4 or, can you talk a little bit about the margins going forward? Just to reiterate your long-term target is 37% to 40% for gross margins?

That's basically the nearer-term combined model post some of the transition activity that we're going to see over next quarter and maybe into the following quarter. For the core business what we saw last -- in the September quarter we saw some weakness in the premium side of the business. As we've talked about before, the midrange is sweet spots. The emerging markets are coming up. So from the premium side to the sweet spot, the midrange, the emerging, as we've said, we do give up a little bit a gross margin there.

Some of the issues are just -- there's delays in the first half of the year on some customer program ramps, so as far as the overall product mix, we still have some older products basically that are continuing for a longer period than we had originally anticipated.

Okay. So if the Renesas business is going to grow maybe 4% or 5%, so you're looking at something like $680 million, and if the gross margin is around 28%, you talked about some of the OpEx going up a little bit adding about $25 million, which was obviously a little bit unusual related to more of the initial up front costs.

I wanted to get a better sense of what the operating margins would be for Renesas post some of these initial acquisition costs, because if you look at what they've done historically has been in the 20% gross margin -- operating margin.

Yes, so what we've indicated -- what we indicated before at the time of the acquisition was -- as far as that business it was a joint venture. We don't know whether it had fully loaded costs in that or not. And also, whatever the profile was of the customer, if you look at the profile of the customer today, the range that I gave from a gross margin standpoint 26% to 30% depending upon specific customer mix is what it is.

Also from a cost standpoint, the $25 million that I talked about is the amount they've increased their operating expenses to support more products in the marketplace and so that's what we're picking up into our balance sheet. Net-net again, they were a portion of a business carve out financial statements. We're investing in the business basically to accelerate TDDI, also putting in infrastructure for that business.

Net-net and I've portrayed is for the combined business we'll still have a very healthy operating profit model in the midteens, again, for the near-term and we're still working through all of the modeling and the integration. So it's still very early overall. That's our view for near-term operating model, post some transition.

Raji, just to add a little bit to that as well. This is a longer-term opportunity, as well, and Kathy alluded to it. If you look at RSP, they were oriented heavily to a small customer base and even with their LCD manufacturer strategy it tended to sharp JDI and LGD. We see huge opportunity with China and Taiwanese LCM manufacturers, as well. And that means we have to invest both in silicone solutions where they have some different requirements, as well as a pretty substantial support a infrastructure and that payoff isn't immediately.

That's certainly going to impact the operating structure and we're going to ship some of those resources from traditional DDI solutions to TDDI, which requires a higher investment because you have to do firmware and other things that you wouldn't otherwise do. But, I'm excited about those investments because I think it weighs the path for much longer term success.

Great. Think very much.

Brett Simpson with Arete Research

Thanks very much. I just wanted to dig in on the December revenue guidance. Just on the classic Synaptics business, is this growing year-on-year in December quarter? And can you help us maybe just give us a sense for the fingerprint revenues. What run rates, quarterly run rate did you have in the September quarter? Thanks very much.

So in the December quarter from a core business standpoint year-over-year, yes it will be up. Basically, as I've mentioned for fingerprint, fingerprint is now incorporated with the mobile business, so we don't plan on breaking that out in the future.

Okay. Thanks, Kathy. And you talked about fingerprint touch [idio-sensing] being something you'd expect to ship in the December quarter. Can you give us an update where you are with first shipments here?

Just more broadly on the touch sensors we actually have two solutions. One which would be called large touch fingerprint solution, which is actually ready for mass production at this juncture. And then there's a small touch sensor, as well which would be used more on buttons as an example. We expect both of those to be ready for MP this quarter and then showing up in phones and other form factors in early calendar 2015.

Again, we feel well-positioned that we have the broadest array of solutions in fingerprint. But it's not just about who has the best sensor or right sensor, it's about who has the best software stack, who has the right intellectual properties position, and then who can consistently deliver very high quality manufacturing. To me there's nobody even close to us when you at all those three things up.

Okay. Thanks, Rick.

One final follow-up on RSP. I think you mentioned in FY15 modest revenue growth. But can you give it a sense of the long-term growth outlook for RSP? And if I understand that there's one big customer in your revenue mix here and so when you did do the due diligence prior to completing acquisition. How comfortable are you, you can sustain this business with this large customer over the next couple years?

As you can imagine, and actually the future out there we can't comment about any specific large customers, whether it's our touch business, our DDI business. Generically, any major OEM, we're going to have to go in there and earn the socket every time and they're going to look at multiple other solutions, different solutions types. In some cases, they'll look at vertical integration because they have that capability.

We go in there with a battle in mind and when we do our due diligence, we weren't really focused on any particular customer or anything else. We were more focused on the technology in the position in the marketplace and the ability, as I mentioned, in my prepared remarks to do something that we called smart displays. This isn't about slapping two chips together and going out there with the TDDI solution.

It's about really building an entire platform solution over time that will continue to add more value, more features, more performance, and really build that going forward. That's where a lot of the value came through. RSP was a clear target from us at the very beginning. They have absolutely the best engineering talent when it comes to displays in the industry.

So that's been the big positive surprise after the acquisition was the dedication and the capabilities of this team and what the two teams can do working together. I think we're just going to just light this thing on fire.

Interesting. Thanks. Maybe just one final thing. Can you just give us a sense? Oled displays: how does TDDI play out with Oled displays. Is it something that you feel that you can target because it's more on-cell? Is that still relevant?

It's absolutely still relevant to think about TDDI for Oled. Now I will save you look at RSP's existing product line, as well as our own there aren't Oled DDI solutions in that product suite. So, with the exception of one LCD manufacturer out there, there's not a whole lot of Oled capacity going -- nor will that change for a couple of years. A number of them have announced plans to increase Oled productions. So, I think by 2017 or 2018 the makeup of the LCD manufacturer landscape will change quite substantially.

That also gives us that amount of time to scale off the work on the propriety IP and technology, as well. But it's definitely applicable. The value proposition is there just as strong as it is on LTPS or amorphous silicone.

Our next question comes from Anthony Stoss with Craig-Hallum

I also wanted to drill a little bit more on RSP. RSP's biggest customer clearly the expected units are going to be up substantially more than 5%. Kathy, in your up 5% year-over-year guide do you anticipate all other RSP customers being down materially? Secondly, if you could talk about average ASPs at RSP, are they up? Or, flat or down year-over-year? Thanks.

So, Tony, the main thing that we've wanted that we've talked about as RSP is if you look at the product set today it is very targeted what they've been shipping to the premium side of the market. So the premium side of the market is there are only so many units out there. So what we're seeing is yes, they have got certain customers that could be up, others down.

Just in general we feel like the overall growth rate that we've talked about is the one that makes sense. As far as ASPs go what we've seen there's a really wide range for DDI and for RSP. I think what we've seen is pretty wide range. One dollar to two dollar range depending upon screen resolutions and other factors.

Okay, but on average basis is it down year-over-year? Is that what you are seeing after looking in the hood?

I don't think it's necessarily down year-over-year.

Okay. Thanks, Kathy.

That does conclude the question-and-answer session. I will turn the conference over back to management for any additional or closing remarks.

Thank you everyone for joining us on the call today. We got lots of great questions and I appreciate that. Obviously, our business has changed quite a bit over the past year. And hence, I really look forward to seeing many of you at our Analyst Day on November 18, where we have a lot more time to get into the new businesses, and the markets and where we're going. Thank you very much and I look forward to seeing everyone.