Synaptics Inc (SYNA) 2015 Q2 法說會逐字稿

Good day, everyone, and welcome to the Synaptics Second Quarter 2015 Conference Call. As a reminder, today's presentation is being recorded. At this time I would like to turn the conference over to Jennifer Jarman. Please go ahead.

Thank you, operator. Good afternoon, and thank you for joining us today on Synaptics' Second Quarter FY15 Conference Call. This call is also being broadcast live over the web, and can be accessed from the Investor Relations section of the Company's website at www.synaptics.com.

With me on today's call are Rick Bergman, President and CEO; and Kathy Bayless, CFO. In addition to the Company's GAAP results, Management will also provide supplementary results on a non-GAAP basis, which excludes share-based compensation charges, and certain non-cash or non-recurring items. Please refer to the press release issued after market close today for a detailed reconciliation of GAAP and non-GAAP results.

Additionally, we would like to remind you that during the course of this conference call, Synaptics will make forward-looking statements. 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 10-K 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 statement. Synaptics expressly disclaims any obligation to update this forward-looking information. With that, I will now turn the call over to Rick Bergman. Rick?

Thanks, Jennifer, and I'd like to welcome everyone to today's call. Revenue for the December quarter, our first quarter of consolidated results following the completion of RSP acquisition, was a record $464 million. This is more than double that of last year, and above our upwardly revised guidance for the period. This capped off a strong finish to calendar 2014, with Synaptics posting back-to-back years of over 50% calendar year revenue growth.

Our second-quarter performance was driven by broad-based strength across our target markets. We delivered strong non-GAAP net income of $55.8 million, or $1.46 per diluted share, up more than 70% year over year. Gross margins were at the high end of our guidance range.

Following up on the key priorities we laid out at the recent Analyst and Investor Day in November, we continue to reinforce our position as the number one interface solutions provider. The expansion of our product portfolio, increased scale, broadening customer base, and our execution across multiple facets of our business are setting us up for a strong second half.

We continue to lay the foundation to capitalize on our two hyper-growth engines, with biometrics and touch-and-display driver integration, or TDDI. Our solutions are rolling out as planned. In addition, the integration with RSP is progressing smoothly, and we benefited from a strong contribution from our display driver products during the period.

Our presence at this year's Consumer Electronics Show also reinforced the breadth and depth of our platform approach. In addition to showcasing our latest and greatest offerings in the smartphone, tablet, and notebook PC markets, as well as our display driver capabilities, this year's booth featured demos in new target markets including auto and gaming. Highlights of the booth tours included the latest versions of SecurePad and ForcePad, wake-up gestures for smartphones, and the world's thinnest smartphone, active and passive pen applications for tablets, and demos of our area touch biometric sensors.

Today I would like to start with an 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.

One of the themes we continued to emphasize at CES is the rapid evolution of the smartphone display market, and the trend towards display integration. Display integration offers OEMs significant benefits: thinner and brighter displays, lower overall system costs, and a simplified supply chain.

I'm pleased to say that Synaptics continues to be the innovation leader, achieving another industry first with our ClearPad 4291 TDDI solution, which is now in mass production and available in several phones, including ZTE's S6 Lux. This is further evidence that Synaptics is leading the charge at the highest level to create a smart display by integrating and optimizing the touch controller and display driver. This system-level solution incorporates our custom processor, and is a platform for future innovation.

We're seeing significant traction for TDDI with LCMs and OEMs, and expect more phones to follow over the coming months. This includes strong interest and demand in the sweet spot of the mid-market, as OEMs recognize the benefits of a simplified solution that is cost-optimized at the system level. We expect to further expand the market as we take our industry-leading technology and solutions, and make them available to the broader market segments.

With RSP now a part of Synaptics, we've added a family of display driver ICs to our broad range of products, and we're leveraging the strength of Synaptics' sales and customer engineering infrastructure to reach a broader set of customers in markets with these products.

At CES we highlighted some key technologies, including local area automatic contrast optimization, for ACO. Local area ACO allows for contrast control by region, making us the first to enable one billion colors, a feature that offers product differentiation for our OEM customers.

Our display driver solutions incorporate this technology, and multiple new products went into mass production this quarter, including support for full HD, as well as WQHD, the highest resolution available on smartphones and tablets today. XIAOMI is one of the OEMs taking advantage of these newest features to power displays on many of its latest smartphones. Other OEMs adopting our display drivers include LG, Lenovo, and HTC.

With the completion of RSP acquisition, Synaptics has furthered our leadership with the industry's broadest portfolio of touch and display products. The first TDDI product to combine Synaptics touch with RSP's display technologies remains on track for later this calendar year.

Synaptics continues to expand our position as a premium touch provider to the major Chinese mobile OEMs. I'm excited to mention that the breadth of our ClearPad product portfolio has led to a design win for our in-cell touch solution in XIAOMI's new flagship smartphone, the Mi Note.

Other new phones now shipping in mass production include multiple models in the China market from Huawei, ZTE, CoolPad, OPPO, XIONI, and Lenovo; as well as new phones from a broad range of customers, including BBK, Meizu, K-Touch, Teemo, and DOOV. In addition, LG has launched several models, including the G-Flex, C-70, Y-70, and Y-90; while BlackBerry began shipping its new Passport phone during the December quarter. On the large touch screen side, recent design wins include the 13-inch Lenovo Yoga tablet, and the Huawei Youth2.

In our PC TouchPad business, we continue to see strong adoption of our new technology, such as TypeGuard, ClickPad, ForcePad, and SecurePad. Recently we've seen that launch of our award-winning ClickPad with the Lenovo flagship X-1 Carbon, and the HP Omen gaming notebook, in addition to the well-received Dell XPS-13.

Additionally, our ForcePad is designed into the HP EliteBook portfolio 1020, and we can confirm that we are in the design-in phase for SecurePad and ChromeBook projects with multiple OEMs, which will ship later this year. All these designs feature our industry-leading TypeGuard technology, which virtually eliminates accidental cursor movements and scrolling caused by the palm of the hand. Other notable designs shipping this quarter include the Dell Inspiron 7000 series 15-inch notebook.

One of the key growth segments in the PC market is the two-in-one category, where our ClickPads are currently shipping in volume with a market-leading OEM. Additionally, key designs hitting the market include two Dell Inspiron two-in-one models, and a Dell Venue 11 Pro keyboard dock. We believe these design wins in our investment profile in this area will enable Synaptics to become the clear market and technology leader in the two-in-one category.

Our next-generation ForcePad was also designed specifically for the two-in-one market, as ultra-thin notebooks such as the fan-less clamshells are enabled with today's lower-power CPUs. This solution will continue to deliver multi-finger force detection, and stemming from design considerations with the OEM, will be down to 1 millimeter thin, and also feature optional haptics feedback.

Moving to the biometric authentication space, consumer demand for fingerprint sensors and smart phones and tablets, continues to grow rapidly, fueled by the promise of strong security that is also easy to use, as well as the roll-out of mobile payments. An expanding base of mobile OEMs is expected to adopt the technology in the next wave of flagship designs, driving increased attach rates. This includes a movement towards entry and mid-range phones, where our swipe centers offer compelling cost and performance.

One such phone of note that won a CES Innovation Award for its design and functionality is the Saygus V-Squared, which features a swipe-based fingerprint side-scanner from Synaptics. In addition, our new area touch sensor solution is now in mass production, and we expect to see phones in the market incorporating this solution over the next couple of months. As the opportunity for biometric authentication continues to progress, we believe that fingerprint sensors will do much more them locking and unlocking devices.

As a FIDO-aligned founding member, we are pleased to see the FIDO version 1.0 specifications finalized and published. The alliance brings industry leaders together, ranging from enablers such as Synaptics to online service providers such as Google and Microsoft. Together we are working to build an ecosystem that offers simpler and stronger authentication, with the ultimate goal of eliminating password dependence. Synaptics' Natural ID products were among the first to be certified to the FIDO 1.0 specification.

Now I'd like to provide a brief update on the search for a new CFO following the announcement of Kathy's retirement. Considering this could be her last earnings call with the Company, I would like to take the opportunity on behalf of myself and the Board to publicly thank her for her nearly six years of service, and the tremendous contribution she has made toward Synaptics' transformative growth. We wish her the best in her future endeavors. On the positive side, since she is leaving the Company in such excellent financial health, we have no shortage of highly qualified candidates, and are well under way with the executive search process.

As we are now in the new calendar year, I would like to provide a quick update regarding trends in our markets where Synaptics is well diversified, given our breadth of coverage on a platform basis. This stems not only from the broad and differentiated portfolio of products that we have across notebooks, smartphones and large touch screens, but also the wide range of customers we serve in each of these markets.

In calendar 2015, the notebook market is expected to trend slightly below prior-year levels. We anticipate that the overall growth rate for smart phones will move towards the mid-teens, with continued growth in the low- to mid-range phones for emerging markets, and further possible re-distribution of market share among the various mobile OEMs.

As for large touch screens, while industry projections have come down over the past year, we still see ample opportunity to further penetrate the market with our solutions. Additionally, we expect large display integration will play a pivotal role over time in helping to drive cost efficiencies that will further fuel demand.

To conclude my formal remarks, we are very pleased with our Q2 results, and enter the second half with very strong expectations for the current quarter and the fiscal year. As RSP is now fully incorporated into our results, we are tracking well within our revised operating model. We are working through the initial transitional quarters ahead of plan, and expect to see incremental improvements in gross margin and operating profits in the March quarter.

While we are not immune to fluctuating dynamics or speed bumps in any given part of the business, it's very important that investors remember that Synaptics is now a much larger and more diversified global Company than ever before, with an incredibly deep and broad set of solutions. With display drivers now in the mix, combined with the continued up-take of our fingerprint ID products, growing demand for our TDI products, and continued progress in the China market, we expect our FY15 revenues to increase by more than 75% over the prior year. With that, I will turn it over to Kathy for a review of our financial results.

Thanks, Rick. We are extremely pleased with our December quarter results, as revenue of $464 million represents record revenue for Synaptics, and was above the high end of our revised guidance range. December quarter revenue increased 125% year over year, and 64% from the September quarter. The December quarter includes the results of RSP post the close of the acquisition on October 1. With the resulting change in our product mix, we also expanded our customer base, and had four customers above the 10% threshold during the period. The revenue mix from mobile and PC products was approximately 86% and 14%, respectively, in the December quarter.

Revenue for mobile products was up 198% year over year, and 99% from the September quarter, and consisted predominantly of revenue for mobile phone applications comprised of touch, fingerprint, and DEIC solutions. Our strong mobile revenue growth year over year was driven primarily by fingerprint and DDI solutions from the acquisition of RSP. DDIC solutions represented slightly over 50% of mobile revenue in the December quarter. Further, we achieved solid contributions from China-based mobile customers. Revenue from PC applications was down about 9% from the prior year, and 21% sequentially, due to the strong-sell in during the September quarter.

Non-GAAP gross margin of 35.9% was at the high end of our guidance range, benefiting from slightly lower product cost across our product portfolio. GAAP gross margin of 27.4% reflects approximately $39 million of intangible amortization, $33 million of which is associated with the RSP acquisition, including supplier arrangement, backlog, developed technology, and tangible assets. The supplier arrangement intangible associated with the required inventory purchase and the backlog intangible have very short lives, since they relate to products to be sold.

Non-GAAP operating expenses were $98.4 million, up $22.8 million from the prior quarter. The 30% increase in non-GAAP operating expenses was primarily driven by an increase in personnel-related expense, in connection with the acquisition of RSP.

GAAP operating expenses were $98.4 million, including $10.4 million of share-based compensation, non-cash charges of approximately $6.2 million for intangible amortization primarily related to RSP customer relationship intangibles, and $6 million of non-recurring closing, integration, and retention costs related to the RSP acquisition, offset by $15.4 million of net currency re-measurement and transaction gains related to the hold-back liabilities and transition of the RSP business, and a $7.1-million reduction of contingent consideration.

The strong year-over-year increase in revenue and gross margin dollars in the December quarter drove an 86% increase in non-GAAP operating profit dollars. This newly acquired business contributed significantly to a substantial increase in operating results. In addition, we achieved 15% non-GAAP operating results, moving into our mid-teens target operating range earlier than anticipated.

Our non-GAAP tax rate was 17%, unchanged from the September quarter, reflecting our anticipated long-term cash tax rate. Our GAAP tax rate was 28%, and reflected the benefit of the retroactive reinstatement of the federal research credit. Second-quarter non-GAAP net income was $55.8 million, or $1.46 per diluted share. In addition, RSP was accretive to non-GAAP net income and EPS, as expected.

Before we dive into the balance sheet, I would like to take a moment to review some additional details of the RSP acquisition. We determined the purchase consideration value for GAAP accounting to be approximately $474 million, consisting of the initial cash paid of $349 million, and approximately $125 million of hold-back liabilities payable to the sellers as of the close date. Identified intangible assets were valued at $251 million, and goodwill was determined to be $153 million.

Turning to our balance sheet, we ended the second quarter with $327 million of cash. The cash balance decreased $122 million from the prior quarter, due primarily to the RSP acquisition-related cash activity. The cash balance includes $245 million of net proceeds from the issuance of bank debt. Cash paid at the date of the acquisition, net of $55 million of cash on RSP's balance sheet, was $294 million. In addition, cash flow from operations this quarter was a negative $16.5 million, resulting primarily from post-acquisition inventory purchases of $115 million from Renaissance, which owned most of the RSP inventory prior to our system cut-over at the end of October.

In addition, we used $41 million for share repurchases during the December quarter, bringing our year-to-date stock repurchases to approximately $90 million for 1.3 million shares, or 3.5% of our shares outstanding. The remaining share repurchase authorization is $109 million, available through July, 2016.

Capital expenditures for the quarter were $14.7 million. Depreciation was $6.3 million. Receivables at the end of December were $335 million, reflecting 65 days of sales outstanding. Inventories were $145 million, while inventory turns were eight.

I will now make a few comments regarding our quarterly outlook. Based on our backlog of approximately $245 million entering the March quarter customer forecast and expected product mix, we expect to have another very strong quarter. We anticipate revenue to be in the range of $450 million to $490 million. Taking into account our overall product revenue mix, we expect non-GAAP gross margin in the March quarter to be 37% to 39%, moving into our target range.

We expect non-GAAP operating expenses in the March quarter to increase from the prior quarter, reflecting our ongoing investment in engineering and in-field customer support, primarily related to our high-growth opportunities in fingerprint, and to accelerate our TDDI solutions further into the market. We anticipate the FAS 123-R charge to be in the range of $10.9 million to $11.3 million. GAAP expenses will also include non-cash charges of approximately $26 million, related to intangibles amortization, of which approximately $19 million will be reflected in cost of sales.

We anticipate our non-GAAP cash-based tax rate for the March quarter and for the remainder of the year to be in the range of 16% to 18%. Non-GAAP net income per diluted share for the March quarter is anticipated to be in the range of $1.40 to $1.70 per share.

In closing, we are extremely pleased with our financial results for the first half of FY15. We are on track for another year of record revenue and earnings per share in the fiscal year, driven by the expanded breadth of our platform solutions fueling our continued growth. With that, we will now turn it over -- turn the call over to the operator to start the Q&A. Operator?

Thank you.

(Operator Instructions)

Ambrish Srivastava, BMO Capital Markets.

Hello, thank you.

Just trying to understand the guidance, really, in terms of seasonality. Based on the full-year numbers that you gave out, that implies June should be flattish. Is that right? And is that against what normal seasonality would be for you?

Well, we expect to have a strong second half for the year, so from a seasonality standpoint we have many different products now that are ramping at different points in time into the market place. I think as Rick mentioned, we expected for the year for revenue to be up over 75%. Really, what we're looking at for the next couple of quarters is, we've got some new ramps of, as we mentioned, the fingerprint area solutions ramping into the market place. Typically we see ramps within smartphones moving later into the year. Otherwise, March is always a little bit seasonal for PC products for the TouchPad business.

Ambrish, this is Rick.

To jump in for second, I think the story here is we're not declining in this quarter, based on the mid-point of our guidance, which typically's been a tough seasonal quarter. As you could imagine, there's a couple big ramps that we may have enjoyed the last quarter. We're powering through that with a lot of new products coming on board, and we're excited about it. It's tough to now call the next quarter, as you can imagine. We're giving you a rough idea of where we see the year, but things could be a little better, a little worse, of course.

Okay. That's fair, Rick. Thank you.

Just a quick follow-up on the margin front on the overall operational trends. Good to see you guys pull in a couple quarters ahead of what you have been telling us. Help us understand what are some of the dynamics behind that? Thank you.

From a gross margin standpoint, as we mentioned, we do expect to see March quarter up-tick in gross margin, and December quarter was better than anticipated. There was a little bit better cost mix across the product portfolio in the December quarter. In the March quarter we actually finished the transition arrangements that we had with Renaissance, so really some of those transition costs -- we won't have those going in to do the March quarter. Again, we've got a different mix of products -- good factors basically supporting the improved gross margin mix in the March quarter.

Thank you.

Vijay Rakesh, Sterne Agee.

On the same gross margin question here -- as you look at 2015, where do you see gross margins trend? Does the gross margins now pretty much incorporate all your pricing for the year now?

The gross margin trend for the year -- again, we talked about we are just going through the quarters, as I mentioned. We are ahead of expectations or at the high end with the December quarter, as I mentioned, based upon a little bit better cost. As we go into the March quarter we've incorporated the new DDI, the former RSP business, into our supply chain. We finished all of the transition activity or the transition services that we incurred. If you'll recall, at the Analyst Day we said our gross margin target model is now 37% to 40%. We're operating well within that target model now, and feel that's a good range for us.

Got it. Going back on TDDI, what percent of revenues do you think, as TDDI ramps, where do you see that mix going through the year, or exiting calendar 2015?

Where do we see the mix in what regards?

For TDDI.

You mean from a percentage of our shipment?

Yes, on the mobile side.

Those will still be a relatively small part. It is going to be rapidly growing, there's no doubt about it. We've introduced one device that's now in mass production, in a pretty interesting ZTE phone, as you heard in the prepared remarks. We will add another family member to that in a couple of months. Then we will really start to roll out a broad set of products in the latter part of year as we get the former RSP team and our team, Synaptics team, working together on a brand new set of products.

Expect very high growth rates this year, not a huge impact on the percentage of our units, but certainly setting us up in calendar 2016 for a nice chunk of the mid-part of the marketplace.

The last question here on RSP -- having gone through this again quarter here on RSP, do you feel pretty comfortable on how the trends there look? Thanks.

I'll talk to call it the product and strategic trends. Real happy with the integration. In some ways, it went really better than we expected. As I mentioned, we're working great together, the two engineering teams, on future products. Everybody knows what their role is, who their manager is. It's a great team that we were able to bring on line. We're thrilled about that, and thrilled about the investment. Obviously, you see from the financial results that we talked about today from last quarter and then the current quarter, it's panning out pretty well there, as well. I'll let Kathy talk about any additional financial trends.

From a financial trend standpoint, I think, as Rick mentioned and we said on the call, we had a very strong contribution from RSP in the December quarter. As I mentioned earlier, we've really completed the system cut-off, cut over to the Synaptics systems during the December quarter, so the products and everything are under our supply chain base. We're really -- it's really part of the business now. We're looking at it as a fully combined business on a go-forward basis, really starting in the March quarter.

Rob Stone, Cowen and Company.

Hello, Rick and Kathy.

My first question is speaking to the nicely above-seasonal trend in March, you just said that TDDI is ramping but it's still relatively small. Is the above-seasonal trend mostly coming from new fingerprint design wins? Or are you also seeing design win pick-ups in the base touch controller business?

There's several trends ongoing in the March quarter. Again, the PC products obviously are smaller as a portion of the total business, and there's a little bit of seasonality there. But otherwise beyond that, we are ramping the new area sensors, so we're seeing strong growth with the fingerprint business picking up. Also, even if we look within the DDIC business, we've mentioned one of the things that we thought was a great opportunity would be to take the RSP product out to a wider range of customers. We actually are already starting to see benefit for that. Again, we've got a lot of strong trends within the different components of the business.

Great. Can you say, Kathy, about how much fingerprint sensors contributed to total revenue?

The trend for this quarter is -- we haven't broken that out for a while, so the trend for the December quarter was really similar to the September quarter. As I said, it's with new ramps and the area sensors picking up from there.

Osten Bernardez, Cross Research.

Thank you for taking my questions.

I guess to begin, I was wondering if you would be able to provide some color into what you're expecting for your PC-related business? You commented you're expecting, or that the market is expecting PC sales to slow down or to be slightly lower than they were a year ago for calendar 2015. But do you think that Synaptics can grow its PC-related business in this calendar year?

Sure, I will take a crack on that.

Again, we're not going to give specific guidance for any one of our segments. But in terms of the overall market and our relative position, we are very well-aligned with the footprint that we have in PCs. Of course now it's expanded beyond our traditional TouchPad area to fingerprint sensors, as well as large touch screen solutions, as well. Can we grow in that space? Certainly from an overall products perspective, absolutely. As we incorporate more of those solutions as we showed at CES, we had some systems that had all three of our different solutions -- actually, even one that had our display driver, as well.

In terms specifically the TouchPad business, we are adding more higher-valued solutions like ForcePad and SecurePad, which certainly gives us a chance for higher ASPs in a relatively flat market. Then the one area of the traditional -- call it traditional -- PC marketplace is the two-in-ones that I highlighted in my remarks. We think we're seeing actually very strong growth in that particular segment. Given that we are the premium supplier, that tends to be more premium solutions, so that benefits Synaptics. There's certainly opportunity for us to grow within the PC marketplace.

Got it. Lastly for me for now, I was wondering if you would be able to comment on your ability to find talent regionally for RSP to ramp up at the pace that you would like to serve the customers out of China? Are you able to find the people that you need in order to service them in a timely and efficient manner?

Sure. That's a great question.

As the innovator and technology leader, we're always struggling adding the best talent. That certainly is a driving factor behind some of the acquisitions that we do. That's the first thing looked -- are there great people in that team? Obviously, RSP gave us a great running start there. We've also been staffing up substantially in Taiwan, as well. Now, that helps support our Taiwanese customers, as well as in China. But as we showed in our Analyst Day, we are dramatically staffing up in China.

But what really helps us, frankly, is the reputation of Synaptics. A few years ago we weren't a well-known semiconductor company. Now we're clearly one of the fastest-growing companies out there. If you think about the footprint that we have in the marketplace now, it's pretty impressive. We now play in the iOS market, the Windows market, and clearly the Android market. There's only a couple companies that have that type of footprint in the marketplace. We're able to go out and get the best of the best now, whether that's China, here in San Jose, or other sites around the world.

Anthony Stoss, Craig-Hallum.

Hello, guys. Great job on the execution. A couple questions here.

Rick, if you can give us a little bit more detail on maybe the linearity or quantify the number of fingerprint wins you have and how you'll think they roll out over the rest of this calendar year? Also, why do you think you are winning in the fingerprint side? Lastly, Kathy, could you tell us if you expect your China-based revenue to be up sequentially in March? Thanks.

Okay, sure. I can't quite give you a linear equation on our design wins, but expect the pace to pick up over the course of the year. We pointed to Mobile World Congress as an event where you will see some solutions come out. We expect those to continue to ramp over the year.

As we indicated in our last quarter call, we are a little bit behind on the area touch sensors; but we had a couple solutions that we are working on. At this point both of those are in mass production, and we feel real good about our overall competitiveness of our product line at this juncture. Any ground that we needed to make up we have now made up at this juncture. As people expect from Synaptics in that particular product segment, we'll quickly move ahead as well, and be the leader and innovator there from a market share and technology perspective.

Charlie Anderson, Dougherty & Company.

Thanks for taking my questions, and congrats on the quarter-end guide.

I wanted to ask about maybe fingerprint sensor ASPs, both touch and swipe. What do you see as the trends there? And maybe on the margin side, too? I remember you started from a low base in gross margin fingerprint. Where's that trending? I have a follow-up.

Okay, I guess I'll tackle the ASP question and let Kathy take the margin question. Thanks for the questions.

We talked about the ASPs, a swipe is around $2 and the area sensor's around $4. Given the growth in the market and the volumes we expected those ASPs to come down over time over the course of calendar 2015 and forward years. We're certainly seeing competition in the market place.

We're starting to, of course, see ASP degradation, as well. Last call, again we positioned it around 15%, 20% per year. I think that's a reasonable, accurate statement in a given segment or with a given solution. Obviously, as a technology company what we try to do is add more features and have next generation and so on, so our ASPs stay more flattish. But with a particular solution, yes, it's going to face that type of curve.

Charlie, as far as the gross margin goes, I think if we go back we've said originally when we had the swipe-based solutions, they were a little bit higher cost, there were some -- we put them into the supply chain. We did some updated versions. But as far as getting those newer versions out in the marketplace, it took a little longer than expected because of basically the unit volumes -- it took a little longer to get the unit volumes out. But if we look at the solutions today, whether it's the swipe-based solutions or the newer area solutions, we are seeing some nice margins in the product group right now.

Perfect. Then my follow-up was -- just as it relates to seasonality, with Android you've usually had a much larger June than March. I wonder, are you seeing a change in your mix? Obviously there's a little bit different with DDI, but maybe on the Android side specifically, are you changing the composition of your customer base, and that's reflected in the seasonality?

I guess to a certain degree what we will see how after the year plays out. You are correct -- we've had a booming fiscal Q4 the last couple of years, fueled by smartphones, and then specifically -- at least like last year and the prior year -- in China. Now we're starting to see a little bit different seasonal pattern coming out of China, much more sustained growth. We've heard a lot about the Chinese New Year opportunity coming up here, where people are using them as gifts, and so on. I think we're seeing that as another seasonality.

Again, as I mentioned, if you think about where we are, especially in the higher end of the marketplaces in notebooks and phones and tablets, to a certain degree we're getting pretty close to having our fingers or having a product in almost every high-end solution shipped out there. We going to go with the global market. It's up to us to increase our relative share or footprint in these various platforms. Maybe some of the bigger swings that we've had from a seasonality perspective aren't going to be as present with Synaptics going forward.

I would add to that, we are seeing, with the broader selection of solutions and product out there, we do have different ramp schedules that are going on within different parts of the customer base right now, and the product base. I think as everybody's seen, when we talked about Q2 and the new DDI business as far as it being about 50% of revenue, there's a different pattern that we've seen there already, relative to some of the other traditional patterns that we've seen. Again, I think, as Rick said, we have so many different products and different ramps going on now, we could see different patterns overall, and have more of a stable trend.

Paul Coster, JPMorgan.

Thanks very much for taking my questions. On customer concentration, can you just talk to us a little bit about the customer concentration within the RSP segment specifically? Then, on a go-forward basis, do you see the concentration changing materially in the next quarter?

As I mentioned on the call, we did -- now that we have the new business, typically at Synaptics we've had maybe one customer that's been over 10%. As I mentioned on the call, we actually had four over 10%. That's a result of the fact that now we do have a new business into the mix. Also, the fact that typically what's as normal with Synaptics we sell into the supply chain. The customers are typically OEMs and LCM providers in the supply chain.

As far as concentration goes, we do expect to have similar spread of solutions, whether it's four or three or how that works out in the future, we'll see. But we do have -- we've broadened our customer mix significantly. As Rick said, we are serving basically a very broad set of the operating systems, as well as the customer base out in the marketplace.

Okay. My follow-up question, maybe looking out a little bit further then the next couple of quarters, Rick. As you start to bring TDDI and fingerprint and basic touch together into integrated solutions, do you anticipate that it will be more difficult for your clients to pick off single solutions, and they'll be funneled into taking the whole package?

Well, there's two angles to that, Paul. One is from a customer relationship perspective and support; and then actually from a technology perspective. I will address both of those. On the first one, certainly our ability to have a worldwide sales and application and technical support structure is not easy to replicate. It's taken us several years, as you know following us, building up a team in Korea and then China, Taiwan, and so on, and training them and getting the best people. We think we just got the fantastic team aligned around the various smart device suppliers in the world. That's that aspect.

From a technical or integration aspect, absolutely it's going to raise the bar. Call it over the next 12 months or 24 months with TDDI right in front of us, it's not about just delivering a touch device. It's now, you have to do a display driver interface product. Those things can have, for example, 3,000 IOs in a fairly leading-edge process technology. There's only a handful of companies that can deliver that combined solution. As you heard in my prepared remarks, we are the first ones out of the gate to do that, again, as Synaptics.

I think a week ago you probably heard one other vendor out in the marketplace that was delivering touch solutions throw in the white towel, because if you don't have a display integration strategy, you will not have a close relationship with your OEM partners out there, because they want touch suppliers or TDDI suppliers that can provide the whole range of solutions. At this juncture we are uniquely capable of doing that.

Liwen Zhang, Blaylock.

Thank you for taking my questions, and congratulations on strong performance.

I have a question related to your area fingerprint. There are some articles recently mentioning that you guys have to use a Taiwanese company called Aegis Technology Software Solutions. Is that true? If yes, how does that impact your area print ASP? Down the road should I expect you to solve the issues? What's your strategy for that?

In terms of the particular issue that was raised, I don't want to go into too much detail, because frankly I've heard a lot of misinformation out there about what we have and what we don't have. For example, today it was the matcher technology. We, by far, at least for third-party suppliers for fingerprint sensors, ship much higher volume by 10X than anybody else. This is matcher technology that we own that we developed, and is shipping obviously with phones like Samsung.

We move to the area. Some of that technology can be leveraged. Some of it we want to take other paths. We license IP of all different kinds all the time. We've announced one agreement with Precise Biometrics, partly to help us to address the plethora of different solutions that we see out there. We can't address every solution. We do the same thing on the hardware side, as well. At the end of the day, we're going to deliver a complete solution that our customers can count on that will be the best in the industry.

Thank you. My next one is regarding your entry into automotive end market. Can you give us some update on your -- any progress or the strategies on that? I understand it will be a long-term one, as well.

Yes -- as you hit on it, it's a longer-term strategy. You're not going to suddenly see a car next year configured with a bunch of Synaptics products in it. We've started the process. We already have qualified parts for automotive applications. We're going to continue to build that core capability. The one thing we do have to do is build out our sales and support infrastructure -- much like I talked like we had to do for the smart devices market out there. We simply don't have people in Detroit or certain parts of Japan or Europe where we need them located.

We've been in that process of staffing up, and we're winning designs now for platforms that will come out in calendar 2017 and 2018. Our strategy is simply the same as it's been in our other three target markets: we're going to have the best team and interface solutions in the marketplace. We're going to partner closely with the leading OEMs out there, and at the end of the day, delight end users by delivering just a great experience.

Brett Simpson, Arete Research.

Thanks very much.

I have a first question for Kathy. Kathy, can you take us through the FX impact of RSP? We've seen big moves between the dollar and the yen. Can you maybe walk us through, whether it's COGS or OpEx, how does your cost basis RSP sit between yen and dollar? To what extent has the yen benefited results here? Thank you.

Sure. One of the things that I pointed out in the conference call is, we actually had one of the big differences actually between the non-GAAP results and the GAAP results was the fact that in the GAAP results we had picked up $14.5 million of gain associated with the yen-to-dollar relationship. The biggest impact that we saw related to currency really in the quarter had to do with the acquisition in and of itself.

The move -- when we closed the acquisition the yen was about 109. By the end of the December quarter for us, it was trading at 120. The liabilities -- the hold-back liabilities that were associated with the purchase, basically we had a favorable gain associated with that and some of the other balance-sheet impact. Again, we removed all of that activity out of the non-GAAP results.

For non-GAAP purposes, if you look at the business today as it's incorporated into Synaptics, really the only thing that's yen-based going forward is really just local spending, like personnel and facilities-related. Again, the business has been incorporated into our worldwide structure, so revenue is in dollars, COGS is in dollars. Again, it would be -- we don't expect, really, the movement basically in currency to have a very significant impact on the actual results of operations. Some, yes, but not material, because of the fact that revenue and COGS are all in US dollars.

The inventory you bought from Renaissance, the parent company, is that in yen or is that in dollars, just to understand?

Yes, the one-time purchase from Renaissance, that was a yen purchase. There was also, just based upon the timing of the purchase and the payment, there was also some gain on that. Again, that was all part of the delta between the non-GAAP and the GAAP results. We did not include that in the non-GAAP results.

John Vinh, Pacific Crest.

Thanks for taking my question.

Had a follow-up question regarding the moving parts into your better-than-seasonal guidance for the March quarter. You talked a little bit about ramps in fingerprint sensors and DDIC, but just also wanted to clarify. Directionally, are you expecting the touch business to be up in the March quarter, as well? And if you could clarify what's driving that?

Hey, John.

Are we expecting the touch business to be up? I think the touch business overall, we are seeing some good progress in the touch base business. We do have a lot of the newer ramps going on for phones starting up in the March quarter and in the June quarter. I think just in general -- again, from a trends standpoint, we do have broader set of customers and businesses going on. More of the effect that we're seeing going into the March quarter is from the DDIC business, broader base of customers there, and also new ramps in fingerprint.

Great. My follow-up is just related to some of the industry consolidation.

You talked about, I think, Maxim announced they were looking to exit the touch market. I think one of your other competitors has talked about the possibility of maybe exiting the touch business, as well. Are you starting to see any pricing stability in the touch market? You talked about 15% to 20% declines in most of your businesses. Is that a little bit better in touch, or are you still seeing those types of ASP trends there?

John, it continues to be a tough market out there. It's the nature of the beast when you're in a client market. That's what we prepare for, that's what we plan on, and we develop products that can handle that type of cost or price curve; make sure our cost curves are aligned with that, as well. I wouldn't say it's substantially changed.

There's certainly consolidation going on. Our vendors dropping out of the business as they look forward and see diminishing opportunities, specifically if they don't have a good display integration strategy. I would expect the consolidation to continue. I believe that should add some stability over time. Is it 2015? No. But as we move out to over 2016, 2017, certainly I hope let's the case.

I think the other thing that's really good is to go back, take another step back as to -- if you look at these size of Synaptics now. The good news is with, again, the broader products portfolio, the size of the business, and the scale. We've always run a very tight supply chain, but now we are in a position basically where we can continue to drive good strong supply-chain benefits for the larger side of the business to be a very strong competitor as we continue to go forward.

Kevin Cassidy, Stifel.

Thanks for taking my question.

As you go to the area of fingerprint, can you tell me a little more about the FIDO alliance and its role there? Is area fingerprint qualified with FIDO? Could you just say what the influence FIDO has on the market?

Sure. To answer your real specific question, our area touch centers are not qualified yet with FIDO. We expect to see market release before we would take that step. There's really -- then a corollary to that question; there's really not anything new that you have to do with the area versus the swipe sensors. You follow the same type of process to go through it.

But the real promise about FIDO is standardizing mobile e-commerce. It really opens the door so you don't have all these independent relationships going on between banks and credit card companies and either retail or mobile stores out there around the world. This is to have a unified standard that everybody can support.

If you look at the roster of FIDO members now, you will see people in all those different types of companies in all those different type of categories -- Microsoft, Google, Visa, and so forth. The big step there is -- again, it's not something that's a light switch event. It will be one, two years. But gradually people will get more comfortable with making all the transactions with their smartphones, and they'll start leaving their wallets behind.

Okay, great. Thanks for that definition.

Kathy, just on the backlog coming into the quarter -- relative to your guidance, it seems lower than past quarters. Am I wrong on that, or is there something different happening with your model, or you're having more turns within the quarter?

I think it's a very strong backlog, basically, for the new combined business. We think it's very supportive. I don't think there's anything that's changed too much as far as when we get -- sometimes there's a little bit of timing difference in backlog, just because if it's front-loaded in a back-loaded quarter. March quarter, if you look at the March quarter, sometimes it tends to be a little more back-end loaded. In general, we think it's a very strong backlog and supporting the revenue range that we put out there. We're very comfortable with that.

Rajvindra Gill, Needham & Company.

A question on the OpEx. Implicit in the guide, if I take the mid-point of everything and add the interest expense, it seems like the OpEx will be up about 8% sequentially to something in the $106 million to $107 million per quarter range. I just want to make sure if that's the right number? Should we be looking at OpEx going up at that rate and then stopping as you start to optimize the model? How do we look at the OpEx trajectory?

I think the OpEx -- could it be quite that? I think the OpEx is in a range relative to the gross margin, as well. You have to look at all of the costs, plus or minus a little bit. I would say in general they could be up that much, or a little bit lower. The main things are, is going forward again, we're continuing to invest in the high-growth portions of the business.

Right now we are making progress already with broadening the customer set, driving more penetration with the DDI business in China and other places. But we do need to add some support. As we said, we are really trying to drive the TDDI adoption, so we are doing some increases associated with that in OpEx. But we are continuing to try and make sure we are focusing very tightly on that to target the increases.

We also do have to -- the one thing that's happening this quarter is, we are moving the whole RSP team. They're basically still embedded in the old Renaissance building, so they're moving to a new facility in Japan. There's probably a little more infrastructure cost associated with moving them to a new building outside of the Renaissance place. Otherwise, on a go-forward basis we wouldn't expect to see percentage increases in that range.

You would not expect to see?

We would not, no.

Rick, on the TDDI, is there a way that you could maybe quantify your technological lead with TDDI? You have TDDI phones in production. The commentary is very positive going to the second half. It seems like there's competition either from the main display driver companies like NovaTech and Himex that are trying to do the reverse with the touch controller. Maybe you can talk a little bit about how you see that segment of the competition? And then the touch controller competitors in Asia trying to integrate the display driver? Maybe you could talk (inaudible - technical difficulty) their traction?

Sure, Raj.

Probably maybe as an example, I will use the part that I just disclosed in my script, which is the TDI device 4291. It's an HD, so high-definition device. That's clearly the mid-range part of the marketplace, and of course it has touch integrated. What makes it appealing to the smartphone OEMs out there right now is actually the great touch capabilities. It's an in-cell type of implementation. They get the benefits of display integration, certainly. It allows them to do a thinner, lighter phone without compromising touch.

As we've demonstrated, touch isn't easy to do when you do it as a separate chip. Now you combine it with a display driver and put it right on the actual LCD display. It's not an easy thing to do. That's clearly our differentiation. Now as we move to higher resolution, this is where the RSP strength comes into play, because display drivers aren't easy to do either, when you're talking about millions and millions of pixels. Certainly a very discriminating audience in terms of the quality of what you see. I mentioned one of the capabilities around the contrast control. That's a very big deal. Everybody wants the best-looking display on their phones, whether it's inside, outside, and so forth.

From a touch controller perspective, if they try to home-grow that technology -- good luck. It's taken us four or five years, and we actually acquired assets five years ago now, or six years ago, that helped get the ball rolling. It's taken us until today, basically, to have a part in production. Again, these are starting to be fairly substantial technology barriers that I think will really winnow down the number of competitors in the touch marketplace, and also the DDI market place.

That concludes today's question-and-answer session. I'll turn the call back to Management for any closing or additional remarks.

All right. Well, thank you, everyone. We used the full hour today. I appreciated all the great questions. I certainly look forward to updating you again next quarter.

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation.