Synaptics Inc (SYNA) 2016 Q2 法說會逐字稿

Good day and welcome to the Synaptics second-quarter 2016 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jennifer Jarmin. Please go ahead, Ms. Jarmin.

Thank you, Adam. Good afternoon and thank you for joining us today on Synaptics' second quarter fiscal 2016 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 synaptics.com.

With me on today's call are Rick Bergman, President and CEO, and Wajid Ali, 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, change in contingent consideration, and certain non-cash or nonrecurring items. Please refer to the press release issued after market close today for a detailed reconciliation of GAAP and non-GAAP results.

Additionally, we would like to remind you that during the course of this conference call Synaptics will make forward-looking statements. Forward-looking statements give our current expectations and projections relating 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 27, 2015, for important risk factors that could cause the actual results to differ materially from those contained in any forward-looking statement. Synaptics expressly disclaims any obligation to update this forward-looking information.

And with that said, I will now turn the call over to Rick Bergman. Rick?

Thanks, Jennifer, and I would like to welcome everyone to today's call.

As you have seen from today's press release, we're resetting our guidance expectations for the fiscal year, given the well-documented downturn in the macroeconomic environment and specifically the mobile phone market, which has resulted in a deceleration of our DDIC business due to significant recent reductions in the forecasts for the smartphone market.

Despite these conditions, our key growth pillars remain intact as we continue to project very strong growth from our fingerprint and TDI solutions over the second half of the fiscal year, which will contribute to a strong performance in calendar 2016.

While our fiscal-year growth will slow from the levels we previously forecasted, it is important to note that our diversified product portfolio and breadth of our global customer base should provide some cover from industry gyrations and enable us to continue to deliver healthy revenue growth and solid profitability for the fiscal year. Specifically, we believe we remain on path to deliver solid revenue growth for fiscal 2016 of approximately 9% to 11%.

More positively, due to the strength of our product lines and resulting near-term improvements in gross margins, along with continued discipline in managing our operating expenses, we expect to continue to manage to our target operating model.

Turning to our high-level results for the second fiscal quarter, revenue of $471 million was within our guidance range, despite the weakness for major customers that materialized towards the end of the quarter. We were happy to achieve the midpoint of our EPS guidance with strong non-GAAP net income of $60 million or $1.60 per diluted share, up almost 10% year over year, and gross margins were slightly above the midpoint of our guidance range.

I will now provide an update on our core markets and Wajid will review our second-quarter results in more detail and provide our current outlook before opening up the call to your questions.

Since our last earnings call, we participated in two big events, our analyst and investor day back in November and, more recently, our presence at CES, where we reinforced our ability to continue to lead the human interface revolution. We emphasized being a step ahead in achieving important industry inflection points, as demonstrated by our best-in-class fingerprint authentication solutions and the launch of an expanded family of TDDI solutions.

We highlighted our continued focus on growth, with multiple opportunities per device leveraging our broad product portfolio, as well as diversification into new markets, such as auto, wearables, and PCs peripherals. And consistent with our Company's DNA, we underscored our continued efforts to pioneer the evolution of the human interface by introducing new modalities and improving the user experience through enhancements like force sensing.

Technology leadership is a fundamental underpinning of our vision and we continue to invest to ensure our position as a leader in human interface and to capitalize on emerging growth opportunities.

Turning to our biometrics division, we are pleased to announce a number of new high-volume design wins that are resulting in greater unit shipments than we would typically see for products within their respective market categories. To start, Samsung expanded its use of our fingerprint sensors in several new smartphones, including the A5, the A7, the A8, and the A9. This complements our shipments to Samsung's flagship Galaxy S and Galaxy Note products.

Additionally, Lenovo selected our Natural ID OneTouch area fingerprint sensor for its innovative ThinkPad X1 tablet. This exciting new product was announced at CES and also uses our TouchPad solution. Moreover, the exciting new Lenovo P50 and P70 ThinkPads feature our area fingerprint sensors. These are the first notebook computers launched by Lenovo with area sensors, providing end users with differentiated, highly secure, and extremely convenient biometrics.

We also work with Intel and Lenovo on a new enterprise-level secure fingerprint authentication for a next-generation Lenovo ThinkPad. Synaptics Natural ID area touch fingerprint solution is supported by Intel Authenticate, a hardware-enhanced multi-factor authentication solution that strengthens identity protection on the PC.

On the ecosystem and payments side, we announced a new agreement with Nok Nok Labs to reduce the complexity of FIDO certification for our customers. Additionally, we are engaged with multiple Chinese OEMs to integrate Alipay in IFAA authenticators with fingerprint support to enable local biometric mobile payment solutions.

Further in our fingerprint roadmap, this quarter we announced a sampling of our Natural ID fingerprint authentication technology for imaging through greater than 200 microns of cover glass, addressing the option of button-free industrial designs for smartphones. This technology is our second-generation under-glass biometric solution.

This versatile new fingerprint sensor solution is designed to operate through glass buttons, as well as thicker cover glass, and is a significant advancement and critical next step to putting capacitive fingerprint sensors under the smartphone glass. We demonstrated this new technology at our analyst and investor meeting and again at CES.

The Company's first-generation under-glass button solution, up to 100-micron thick glass, is already available today for mass production.

Synaptics now has a broad portfolio of fingerprint solutions to fulfill a wide range of customer needs. From form factor and industrial design requirements to enterprise-grade high-security offerings, we extended mobile payment standards compatibility. We are primed to gain traction in the China market, having put in place local engineering teams and dedicated R&D resources, bolstering our abilities to deliver a total module and software solution and developing an ecosystem of local independent hardware vendors.

Indicative of our expanded capabilities and progress in the region, we expect to announce an increasing number of design wins in mainstream phones from leading China OEMs over the course of the year.

Moving to a discussion of our TDDI solutions, the market opportunity is now firmly upon us following the announcements of the expansion of our product portfolio with three new TouchView solutions. These three new TDDI products add to the previously announced TD4300 and support smartphone resolutions from HD to full HD to WQHD. All four solutions are now sampling to leading LCD manufacturers and ramping into full production.

We have multiple design wins for each of the four TDDI solutions at global LCMs, including AUO, BOE, EBBG, Innolux, LG Display, Sharp, and [Tinma]. This design momentum with our LCMs is positioning us well to ramp revenue strongly in the second half of our fiscal year with multiple leading smartphone OEMs in China, Korea, and Taiwan.

TDDI display integration technology marks an inflection point in smartphone architectures that delivers lower overall system cost, simplifies the supply chain, and enables thinner devices, brighter displays, and borderless designs. Underlining this fact, during CES we were pleased to announce that our TD4300 TDDI solution won two separate categories in the 8th Annual Mobile Excellence Awards, including Best Mobile Innovator and Best Technology Breakthrough.

As we continue to innovate our TDDI solutions, we believe that ClearForce will prove to be a significant differentiator for Synaptics. There is clear industry momentum around adding Force Touch to the smartphone user experience and we believe that Synaptics is well positioned to capitalize on this momentum with our TouchView TDDI solution that features ClearForce technology.

To wrap up on TouchView TDDI, we are very pleased that our four solutions we announced at analyst and investor day are now ramping with a healthy pipeline of design wins at multiple top-tier LCMs and OEMs. Synaptics has the strongest TDI portfolio in the industry and we believe this is a major competitive advantage as it represents the architectural revolution of smartphones.

Turning to our traditional touch products, we announced that Google has adopted the Synaptics ClearPad Series 3 Family of touch controller solutions to power its newest flagship smartphones, the Nexus 5X by LG and the Nexus 6P by Huawei. As mentioned last quarter, we leveraged our IP and strength in force sensing technology from opaque PC touchpads for adoption on smartphones with the introduction of ClearForce. ClearForce has been attracting a lot of attention as OEMs seek to differentiate phones, tablets, and automobiles with exciting new force-gesturing applications and we believe that force will become a checkbox item for OEMs.

Synaptics is working hard to meet these market needs. We have already achieved double-digit design wins and serious interest in many more projects and we expect to ship a meaningful number of ClearForce solutions to the market in the near future.

We also announced a sampling of our low-power, tiny-footprint ClearPad S1423 touch controller solution for wearables and small screen applications, including smartwatches, fitness trackers, and touch-enabled appliances, such as printers. Several leading OEMs are shipping Synaptics touch solutions today, including Fossil, TAG Heuer, LG, Huawei, and others.

On the notebook side, while there continues to be uncertainty in the PC market, we are starting to see some signs of near-term stability and two-in-one formats continue to be a bright spot. Additional activity during the quarter included HP selecting our ClickPad solution for its new Spectre x360 G2 model in our TouchPad, TouchStyk, and fingerprint sensors for three models of HP's EliteBook 800 family.

Razer also selected our ClickPad for its Blade Stealth Ultrabook.

At CES, we also showed some new technology showcasing our leading technology and innovations. Automotive is a major opportunity for Synaptics. We are generating display driver revenue from automotive today, and in our CES booth, we highlighted numerous concepts for the future with demos including heads-up displays, haptics, force sensing, hover sensing, and touch and fingerprint biometrics on the steering wheel and center console controls.

During the quarter, we announced a broader entry into the automotive market with a comprehensive and dedicated portfolio of vehicle-specific solutions. Auto manufacturers are gravitating towards Synaptics as the expert in human interface as our industry-leading touch controllers, display drivers, and biometric sensors are ideal for the automotive industry. We expect that our solutions will be implemented in numerous locations throughout the vehicle.

In another CES demo, we showcased touch control for very large area applications, such as office, home, and car windows, where we demonstrated a large window that transitions from transparent to opaque, providing dynamic privacy. It is this sort of innovation that keeps Synaptics at the forefront of human interface technology.

Before I turn the call over to Wajid, I think it's worth noting that despite the current weakness in our DDIC business, our remaining growth cylinders are in place and benefiting from strength and breadth of our product portfolio. What this means is that our fingerprint TDI and touch businesses remain very strong as we have executed on filling out our roadmap for our fingerprint and TDI solutions, as well as advancing our touch controllers and touchpads with the latest technologies and innovations.

Synaptics has a long history of operating within dynamic market environments and we remain extremely confident in our position as a leader of human interface. We are executing on the growth strategy that we've been laying out for you over the course of the year and believe our continued technology leadership and the strength and scale of our business will enable us to maintain healthy growth and profitability.

With that, I will now turn it over to Wajid.

Thanks, Rick.

Revenue for the December quarter was $471 million and, while below the midpoint of our guidance range, represents record second-quarter revenue. Year over year, December quarter revenue increased 1.5% and sequentially was essentially flat. During the quarter, we had four customers above the 10% threshold.

Revenue mix from mobile and PC products was approximately 87% and 13%, respectively. Revenue from mobile products was up 2% compared with the year-ago quarter, but down 1% sequentially. Revenue from PC products was down 4% year over year and up 8% sequentially.

Non-GAAP gross margin of 38.2% was slightly above the midpoint of our guidance range and primarily reflects overall product mix and represents a year-over-year improvement of 230 basis points.

Non-GAAP operating expenses came in better than expected at $106 million, down $3.2 million from the preceding quarter. GAAP operating expenses in the December quarter were $119.9 million, which includes share-based compensation of $13.6 million, net acquisition-related costs of $0.3 million consisting of intangibles amortization, net of change and contingent consideration.

Our non-GAAP tax rate was 17% in the December quarter, while our GAAP tax rate was 21.3%.

Non-GAAP net income for the December quarter was also a record for a second quarter at $60.3 million or $1.60 per diluted share, a 9.6% increase year over year as compared with $55.5 million or $1.46 per diluted share in the second quarter of fiscal 2015.

Turning to our balance sheet, we ended the quarter with $372 million of cash, an increase of $97 million from the preceding quarter. Receivables at the end of December were $337 million and DSOs were 64 days, while inventories were $137 million and inventory turns were 8.5, all consistent with our expectations.

Cash flow from operations was $95 million for the quarter. Capital expenditures for the quarter were $5.2 million and depreciation was $7.6 million.

Now I will make a few comments regarding our quarterly outlook. Based on our backlog of approximately $139 million entering the March quarter, subsequent bookings, customer forecasts, product sell in and sellthrough timing patterns, as well as expected product mix, we anticipate revenue for the March quarter to be in the range of $430 million to $470 million. We expect the revenue mix from mobile and PC products to be approximately 90% and 10%, respectively.

Taking into account our overall revenue mix and reflecting the strength of our product platform, we expect non-GAAP gross margin to continue to improve for the March quarter to approximately 38% to 40%. We expect non-GAAP operating expenses in the March quarter to remain flat, plus or minus 100 basis points from the December) quarter.

We anticipate the FAS 123r charge in the third quarter to be in the range of $14.5 million to $15 million. GAAP expenses will also include non-cash charges of $19 million related to intangibles amortization, of which approximately $14 million will be reflected in cost of sales.

We anticipate our non-GAAP, long-term, cash-based tax rate for fiscal 2016 to remain 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 $1.35 to $1.65 per share.

As Rick mentioned, based on the turbulence in the macroeconomic environment and the impact on customer forecasts, we have revised our anticipated revenue growth for the fiscal year to be in the range of 9% to 11%. We expect our gross margins to strengthen over the balance of the fiscal year and are projecting non-GAAP net income per diluted share for fiscal 2016 to be in the range of $6.20 to $6.60. These assumptions imply solid top- and bottom-line growth and strong operating leverage on a sequential basis from Q3 to Q4, based on the expected ramp of our fingerprint and TDDI product solutions.

In closing, with our broad product portfolio and customer base, we believe we are well positioned to weather the turbulence in our end markets and continue to expect to achieve record revenue and record net income per share in fiscal 2016.

With that, we will now turn the call over to the operator to start the Q&A session. Operator?

(Operator Instructions). Rajvindra Gill, Needham & Company.

I was wondering if you could talk a little bit about the revenue drivers in the March quarter by business line and what you are seeing by each product line.

Sure, hi, Raj. So like we said in our prepared remarks, we expect the mix of mobile products to increase sequentially from 87% to 90% of our total revenues and for our PC products to effectively decline sequentially quarter over quarter, both on a percentage basis, as well as on a dollar basis.

Now within the mobile products, we have got a significant drop in our DDIC product line, and we expect to see growth in both our fingerprint products, as well as our core touch business, and our core touch business is primarily going to be driven by both the strength in our small discrete products, as well as initial ramps of TDDI products during the month of March. So that's some color on how we see it by product line for the March quarter.

And as a follow-up, the fiscal-year 2016 guidance of 9% to 11%, just so I have my math correct, on an apples-to-apples basis where I include $200 million of extra revenue for Renesas in the September 2014 -- or fiscal-year Q1 2015 quarter, that basically implies revenue to be down 1% or 2% year over year, if I, again, add the extra $200 million or so of Renesas in fiscal-year Q1 2015. So on apples to apples, it seems like revenue would actually be down 1% to 2%. Is that correct?

It is probably not fair to say that the 9% to 11% year-to-year growth is completely organic, but I think it's a little bit unfair to say that the core business has declined.

We have got a lot of product integration that is happening between RSP and the core business, and so we have got second generation of display driver products, as well as four new TDDI products that Rick talked about, so I think when you combine the products, I think it's a little bit unfair to say that the core business declined year over year.

I do agree there was a bit of a stub-year impact that is positively impacting the 9% to 11%, but it's not -- I don't think it's black and white.

Okay, and just -- and one follow-up question, if I can, and then I will leave it up. The mobile product revenue of $407 million, can you give a little bit of color in terms of the breakout of fingerprint in Renesas?

That's something that we don't break out historically, so that's something that I wouldn't be able to break out for this quarter.

Thanks.

Kevin Cassidy, Stifel.

Thanks for taking my question. I guess as you are looking at the TDDI, are you also winning just DDIC designs, discrete DDIC in China?

Yes, thanks, Kevin. We talked about discrete DDIC being an opportunity for us, and you are correct. Yes, we are. Certainly what TDDI has helped us, we are by far the clear industry leader, and as we have, call it, new customer engagements now with some of the Asian LCMs, TDDI is actually a big door opener for us. We get in there and work with them on doing intel and suddenly they also want to use our discrete DDIC chips on some high-resolution or mainstream type of products.

So to answer your question, absolutely we are getting design wins with some of the Chinese or Taiwanese LCMs that we previously haven't had. Earlier during the prepared remarks, you heard me rattle off a bunch of LCMs. In some cases, those are brand-new customers for us that we haven't had previously and now they are using our TDDI products. But back to your original question, that gives us some opportunity for DDICs as well.

Okay, great. And maybe if you could just talk a little bit about the competition in TDDI. You have been working on it for a lot of years and it seems you should have a significant advantage, but could you talk about where the competition is and the differences between your product and theirs?

Sure, so call it more broadly, for a year we have been shipping TDDI products and I think we have been pretty open. The first couple that were called classic Synaptics design had limitations that kept the growth there constrained, which drove the whole reason for us doing the acquisition of RSP 15 months ago.

And since that time, frankly, I feel like we have been going like gangbusters. We have the quad of parts that I talked about at analyst day and more recently in our prepared remarks, which gives us a big lead over competition. As Wajid said, we're moving into the MP stage and will be shipping for revenue in all four parts by the end of this fiscal quarter.

A big lead there in terms of the number of parts, the quality of the parts, the technology in the parts, and, of course, it is not stopping with this quad of devices. We are following that up, filling in some of the gaps in our product line as quick as we can, so we will continue to add new members to that family.

In terms of other competitors out there, yes, there is a couple others out there sampling one or two type of devices. We haven't yet seen a clear-cut competitor in the marketplace in terms of having the breadth that we do, but everyone in the industry sees what's happening. This is an inflection point and they are trying to scramble in trying to match our capabilities.

For the same reason, we thought the RSP acquisition made a heck of a lot of sense. It is really hard to do touch. It is really hard to do DDIC. I think some of those competitors are starting to run into those walls, which is slowing them down.

So, we're excited about what TDDI can do for the Company. It is right on track with our expectations that we articulated in July and more recently in October and November. Unfortunately, we have this temporary market glitch on the discrete DDICs that is covering up a lot of that great activity.

Great. Thank you for all that color.

Charlie Anderson, Dougherty & Company.

Thanks for taking my questions. Wajid, could you give the percentages of the 10% customers?

Yes, I can. Charlie, I just don't have it in front of me right now.

Charlie, do you have another question? He is looking through (multiple speakers)

Yes, yes, maybe (multiple speakers)

Maybe I can answer it while he is hunting and searching.

So Rick, it is interesting. You mentioned at the analyst day and at CES that you had a much improved fingerprint sensor and you mentioned some design wins. I wonder to what degree maybe if I X out Samsung, that's your largest customer, and when I think about the China market where we are seeing a lot of designs in the industry, to what degree is that in your guidance? Is that more of a back half of calendar 2016 that you would see that ramp?

And then I also wonder to what degree ClearForce is in the guidance at all for the fiscal year, if that is also more of a back half of calendar 2016 event for you guys?

Okay, yes, thanks, Charlie. So let's start off with the fingerprints. I often get this comment, well, if we X off Samsung.

So as you heard, there's a lot of good news with Samsung and it is by far the number one Android smartphone manufacturer. We all heard their results earlier today. And we continue to expand our success there, so we have a very strong, strong position with the number one fingerprint -- number one smartphone -- Android smartphone manufacturer in the world.

And then, there is also Lenovo that I talked about as well, so they are certainly a China OEM likewise, and we also rattled off, okay, we got a tablet and a few notebooks, which to me is very exciting. This is a ThinkPad product line. In a prior world, you won ThinkPad and that made you because everybody recognizes the quality and capability that is encompassed in that ThinkPad product line. And of course, we have some Lenovo phones as well.

Kind of a long-winded introduction. You'll see certainly we have built in some success with other China manufacturers in our fiscal-year 2016 guidance. We expect to see a number of launches here in the spring time frame of calendar 2016, which obviously will impact more fiscal Q4 at this juncture, but starting to roll out in that time frame.

Then you asked about ClearForce. ClearForce is a little bit different. We will start to see our first design wins maybe a little sooner. I am always a little cautious because we are working hand in hand with whether it is fingerprint or our display products with the OEMs, and suddenly for reasons totally outside of what we are doing, maybe they change apps processors or decide to change their physical ID, suddenly (technical difficulty) schedule moves a couple of months.

But nevertheless, it is more -- think of it more in the spring time frame, and then that actually will become more and more common. As I mentioned, we could see it quickly become a checkoff item because we're building that capability into our TDDI devices, and once that happens, you have a mainstream solution, it is not quite for free, but you get force for a very low premium. And it is a great differentiator for us and actually it is a great win for the end users when we are able to fully let that capability be unleashed in the second half of the calendar year.

Perfect, and then, Wajid, did you come up with the answer?

Yes, yes, I just found it. It was staring right at me. So yes, the answer is 12% to 23%, those were the top four customers. The range was as low as 12% to 23%.

Perfect, and then if I could just sneak in a follow-up, the guidance for the full year, it looks to me like it might potentially assume OpEx down into the June quarter and gross margin up a little bit. I wonder if you could speak to that.

Yes, we're expecting our gross margins in the back half of the year to improve versus the first half of the year. Like I talked about in some of the prepared remarks, we are expecting to see improvements in TDDI revenue and in fingerprint revenue back half versus the first half, so gross margins will -- are expected to improve.

You can see that right from the March guidance, as well as from the June guidance. As well as -- as far as operating expenses are concerned, we are calling them flat plus or minus 100 basis points for the March quarter, and for the June quarter, we are expecting it to stay sequentially flat to the March quarter as well. So, you have got that right.

Great, thanks so much.

Rob Stone, Cowen and Company.

Thanks for taking my question. Wajid, I just wanted to follow up on your OpEx commentary. When you say flat, are you speaking in percentage terms or in absolute dollars because revenue (multiple speakers)

Absolute dollars. Absolute dollars.

Okay.

Yes, so we're expecting March operating expenses in absolute dollars to be sequentially flat, plus or minus the 100 basis points in fiscal Q3, and then flat in dollars for the June quarter to the March quarter, plus or minus 100 basis points. That's the range that we are looking at.

Okay. A question for Rick on the fingerprint sensors. When might you see the Gen 2 under-glass solution, which I guess is sampling now, when do you think that could be shipping for revenue?

That particular product will be a second half of the calendar year. You got to understand when you move under glass we are changing a bit of the paradigm in the industry, so that means we have to work with the module manufacturers to either do recessed glass or build the glass buttons and then, of course, work with the OEMs in how that impacts their industrial design. So that takes a little longer.

You saw samples of the part in November, but realistically we would see mass production in the second half of the year. The phones that I talked about launching in the spring would be using more of our current -- what we would call our current generation products, [Piper, Metallica], which we have had samples on for a number of months.

So do you expect to see some -- you mentioned a number of fingerprint sensor design wins shipping through the end of fiscal 2016. Do you expect some of those will include the first-gen under glass?

Probably not. I would expect to see those use more of the classic overcoat materials that are in place today. 100-micron glass is interesting because of the cosmetic view, but it certainly comes with some limitations as well. So if you just think of how thin 100 microns actually is, very, very thin, so it makes it hard to handle and obviously you want a high-quality solution.

Now that being said, some of the glass manufacturers are okay with doing that, but it certainly comes with some complexity and some cost. Hence the whole reason we did Denali, our second-generation process, was to take away some of those limitations and that's why we are seeing the interest in that product.

Okay, and then it sounds like the June quarter is going to be the first quarter where you will be shipping volume TDDI for all three months of the quarter. Can you give us a sense roughly of how much that might contribute to revenue overall? In the June quarter?

I don't want to peg it to a particular number, given that we're in the early ramp stage, and for the same reasons I mentioned to Charlie is, well, all you need is one OEM or a couple of OEMs to slide things around a little bit and then the number is off.

But previously we have talked about what makes a dent in our financials, and clearly it better be over 1% or a couple percent for us to be touting it as a major impact to our business.

So we're real excited about what TDDI can do, and again I feel like we have made great progress over the last six months on fingerprint and TDDI, and because of this, call it, glitch in the market for high-end smartphones right now this quarter, next quarter maybe, it is covering up some of that great work. But the reality is our product lines are very strong and we are right on path with those two pillars of growth that we've been talking about for at least a year, if not longer.

Do you have any visibility on the next cycle for discrete DDICs?

Next cycle in terms of what do you mean?

Well, your commentary suggests that your discrete DDIC business is weak in the second half of this fiscal year, but you have talked about a few things that are likely to ramp in the second half of the calendar year. I'm just wondering what your midterm outlook is for discrete DDICs.

So the second half, obviously we got to be careful about -- we already have moved into our fiscal Q4, so I don't want to start guiding the second half of the calendar year. But there is obviously seasonality, certain customer cycles, and so on that would suggest our DDIC business -- it is not a share loss or anything, as I am sure you understand. It is the marketing conditions out there that have received a lot of publicity the last week.

And a lot of smarter people can make guesses on what's going to happen in the second half of the year rather than me, but nevertheless with the seasonality and normal customer cycles, we would expect a very nice return to what we have been enjoying with DDICs over the past six or eight quarters.

Great, thanks very much.

(Operator Instructions). Ambrish Srivastava, BMO.

Sorry about that. Can you hear me now? Hello?

Pardon the interruption. It looks like Mr. Bergman and Mr. Ali's line has just dropped. Ms. Jarmin, are you there?

I am here. Hopefully they're trying to dial back in as we speak, so stand tight, everybody.

Yes, let's give them a minute to dial back in (technical difficulty)

Yes, Adam, they are working on dialing back in, so everyone, please -- you're back?

Jennifer, it is Rick and Wajid. We are back.

(multiple speakers). I didn't even start asking my questions and you guys dropped off. It's not going to be that hard.

My first question was, and I apologize if it has been covered, could you please comment on the health of the end market? We have all seen, watched both Apple and Samsung's numbers and the guide. So outside of those two -- and we've also seen Xiaomi has missed their numbers for the full year, so please help us understand what's going on besides the two -- those two guys.

And then, my quick follow-up is, Wajid, if I look at the -- in the context of your backlog coverage and your assumptions for the end market, what gives you the confidence and should give investors the confidence that the full-year number now will not see another guide down? I know it can always happen, but just help us understand your confidence around that. Thank you.

Yes, sure, I will let Rick pick up the question on the markets and then I will follow up with the backlog coverage question.

Okay, thank you, Ambrish. So yes, there's certainly been no shortage of news around our primary market, the mobile space, over the past couple of weeks.

And I think what has happened to a number of us is the forecast changed fairly substantially towards the end of the last calendar year. And we have addressed our plans and what we have seen is weakness I would say specifically in the higher end of the smartphone marketplace.

Of course, there is always seasonality that occurs this time of year, but I think it caught a number of us offguard about the severity of that. And that's now built into what we have for our Q3 and then additional weakness in Q4 as well.

So, however, as I mentioned earlier in the question from Rob, we're certainly hopeful that the market comes roaring back and the customers that we serve in the market certainly come roaring back because there continues to be tremendous innovation in the marketplace, and over this few month period, at least, our customers are indicating some exciting plans for the balance of the calendar year.

And Ambrish, related to your question on the backlog and the confidence on the guide, so the backlog coming into the March quarter was a little bit lower than usual, but bookings in the month of January have been in line with expectations. I think that the one thing that caught us a little bit by surprise was the incremental softness in the PC market.

Now, obviously that has helped us improve our gross margins for the March quarter, but that's how we are thinking about Q3, the PC market a little bit down, the mobile business a little bit up. We have got good backlog coming in and we have got -- we have had reasonable bookings during the month of January that give us confidence on fiscal Q3.

As far as fiscal Q4 is concerned, we have got reasonable visibility into our -- into many of our customers' forecasts, and we have also got good visibility on our TDDI product design wins, as well as reasonable visibility on our fingerprint design wins.

Now, obviously, the two latter ones are helping boost up our gross margins more than we saw in the first half of the year, so that is positive, and we're counterbalancing that, I think, quite well by making the right structural changes within our operating expenses so that we can weather any type of volatility there is, either in fiscal Q3 or in fiscal Q4, so that's really what gives us confidence on the balance of the year and that's really the reason why we provided EPS guidance for the full year, so that we could portray that.

Okay, thank you (multiple speakers)

Yes, Ambrish (multiple speakers) -- sorry, just to add a little bit more on it. I know you recently started tracking us maybe a year ago, but a couple of years ago, I remember back in the day we had lost an important touch socket roughly this time of year, and the Company kept just rolling along. Our financial performance was good and we stayed very profitable and so forth and continued to grow after a brief pause.

I can't help but see this situation as quite analogous as, yes, there has been this blip in the market that we got to fight through, but if you do the numbers, you'll see our fiscal Q4 is just fine and Synaptics is making good operating profits and we feel we are positioned well, and it sets us up for a very good fiscal 2017 as well, based on -- back to the pillars of strength that I talked around fingerprint and TDDI.

Thank you. Very helpful, gentlemen.

Paul Coster, JPMorgan.

Thanks for taking the question. As we see this next-generation TDDI chipset being adopted, Rick, what kind of brands and what kind of handsets are we going to see it deployed on? Is it going to be flagships or is it through the range?

That's the real exciting news there. We are getting some top-tier brands for OEMs. Of course, at this juncture we can't mention those names, based on our policies and their policies.

However, you will actually see both flagships, as well as mainstream phones. As I mentioned, we have that breadth of resolutions and we have multiple LCMs, multiple OEMs per part. And so if we have an HD device, you can imagine that is more mainstream, and if we have a QHD device, you can imagine that's more of a flagship type of category. So to answer your question, all of the above.

Okay, and then on the China side with fingerprint, you sound confident that you're going to come back at that market pretty well. Is it through the OEMs or is it through the panel manufacturers? What is the go-to-market strategy and what is the level of confidence?

Sure. For China, you have to have a triangle in place. There is, of course, ourselves and then there is the OEMs that drive a lot of the specs and the quality requirement and so on, and then typically you have an IHV, an independent hardware vendor, that actually takes our sensor and makes it into a button or a module.

So, where we had a gap previously was in some ways that third category, the IHV. We had, of course, great OEM relationships because we have been shipping them touch products for quite some time and now TDDI devices and force and all that good stuff, but we didn't have all of our products in modules ready to roll with the IHVs.

As we talked about during the analyst day, we fixed that situation in the second half of calendar 2015 and now we're securing the design wins and they're going through the final qual process right now, and we hope to tell you about them in the spring time frame.

Thank you.

Rajvindra Gill, Needham & Company.

Thanks for the follow-up. I am just trying to get a sense of the mobile products business because I think in the past, you have had -- you have given at least some color commentary on the fingerprint, on the Renesas business, if I'm going back through the old transcripts, of how they have trended. So any color there would be helpful in terms of what fingerprint is doing in the March quarter, what TDDI is doing. That will be helpful. Thanks.

So Raj, it becomes a little bit more difficult on the RSP business because, as I talked about earlier, there's a lot of product integration that is happening. And so, because of that product integration, we have talked about the success we are expecting in TDDI both for the March quarter and for the June quarter.

So we are seeing positive trends there.

Rick and I both talked about our DDIC business declining in the back half of the year, so that is the additional color. So really is what is left over is our fingerprint business. And our fingerprint business, at least in the March quarter we are expecting to see material improvements sequentially and we are also expecting to see improvements in our fiscal Q4.

So, that's really about the level of color I can provide at this time. But when you take a look at our gross margin profile, our gross margin profile this -- the March quarter versus the December quarter, the reason for the uptick is because of that positive product mix related to both fingerprint and to TDDI, unfortunately offset by the weakness that we are seeing in DDIC that Rick talked about earlier.

Yes, I appreciate that. On the DDIC, is the weakness across the board both on Android and non-Android?

I can't talk about particular customers, but if I take a look at the first half of the year versus the back half of the year, our DDIC revenues are declining quite a bit. We are hoping that picks up again in the latter part of the calendar year, but at least for our fiscal year we are seeing that decline in DDIC second half versus first half.

But just to be really clear on the hints that we are giving here, this isn't due to the weakness of our product line or losing share or anything of that nature to somebody else. It is our customers' forecasts that are driving this significantly lower outlook for second half of the year than previously.

All right, got you. Thank you.

Paul Coster, JPMorgan.

Rick, I am so sorry I have to ask this, but can you comment on the M&A stories that have been floating around?

Paul, you can probably anticipate what my answer is going to be on the question in that particular area, so we are not going to comment on rumors or market speculation.

Let me rephrase it, then. In principle, anything that creates shareholder value, is that something the Board would consider?

Paul, we had a form of that question back in October as well, and as a public company, the answer is at the end of the day it is our job to maximize shareholder value, so we will listen to any great ideas that can do that and evaluate them appropriately. But as a company, as you can tell, we are excited about growing Synaptics, so that continues to be job number one for myself and my team.

Okay, thank you.

Vijay Rakesh, Mizuho.

I thought you mentioned some nice design wins on the TDDI side and fingerprint coming through from China as you go through the year. Actually looking out as you exit 2016, any thoughts on how -- what the mix of force sensing and fingerprint and TDDI would be?

When you say mix, do you mean revenue mix or can you narrow it down a bit?

Yes, as a mix of revenues, yes.

Between force sensing, TDDI, and fingerprint?

Yes.

It is hard to -- we don't at this point split out those product lines. It would really hard to call it split out force sensing. As I indicated, that's a capability we are actually building into our TDDI devices, as well as our discrete touch, so those -- that will get mixed quite a bit.

In terms of overall where is TDDI going to be, we gave the market size for calendar 2016 as part of our analyst day deck. I believe it was 60 million or 70 million units and we think we will get the lion's share of that business in calendar 2016, so that gives you a general ballpark.

On fingerprint, Wajid talked about the great growth that we are having this quarter and how that strength continues into fiscal Q4, and we would expect to continue that to roll forward as we get these new products and additional OEMs. But in terms of percentages, unfortunately we can't really throw something out there.

Got it. And you look at the China market, obviously you are throwing a lot of effort into it now. Would you expect fingerprint and TDI to pick up in China or TDI is more of a later, maybe more fingerprint in the second half?

So China is a very important part of any of our plans for all of our product lines. As I mentioned, we have some unnamed OEM design wins and clearly some of those are the Chinese OEMs. And likewise, as I said, you'll expect to see some product announcements on fingerprint in the springtime from -- certainly from China or Asia area.

Thanks.

Osten Bernardez, Cross Research.

Thanks for taking my questions. I just wanted to follow up with respect to DDIC, given what you're seeing in the market today both from a broader macro perspective and from some of the higher-end customers. What is your thoughts today on the longer-term growth trajectory for DDIC versus what you were thinking not too long ago when you first acquired Renesas as the -- I believe it was a mid single-digit growth rate long-term, 5, 6 percentage points, and now we're in a world where obviously smartphones are growing at a much slower pace. How should we be thinking about that?

We haven't called it reset our expectations on DDIC. I presume you are talking about discrete DDIC, and at this juncture I would say the only thought rethinking that we have done, we have some customers that are focused in that area that will continue on and there are separate forecasts around their business. But in general, if anything right now we are more optimistic about where TDDI is going, and at some level it is certainly going to start cannibalizing the DDIC business.

And for us, for the most part, that is pretty good news because where we would see that cannibalization, frankly, we don't have a huge amount of share to start with, so that's for the most part upside for us.

And so, again, we are more encouraged about the adoption rate of TDDI than we were just three or six months ago when we first started sampling the parts, based on all the LCM design wins or momentum that you heard me mention earlier in the prepared remarks.

And following on in the comment with respect to shareholder return, was there -- it looks like you did not repurchase any shares. I am not sure. There wasn't any commentary, but if not, why not? And then, attached to that is could you -- what portion of your cash is in the US?

Yes, so probably close to $150 million of cash is in the US right now.

We didn't buy back any shares, you are quite correct, this quarter. The Board had authorized an additional $273 million of share buybacks at the end of the prior quarter, at the end of Q1, to bring our cumulative authorization to $[1.050] billion.

And at our analyst day, we talked about a number of pillars to our capital deployment strategy, and share buybacks is one of those pillars. As a reminder, we had purchased close to 5% of our outstanding shares back in August, and so we have got to balance all the opportunities and the pillars in front of us while we are looking at our cash deployment strategy. So that's the reason we didn't buy back any shares in fiscal Q2.

There are no further questions. I would now like to turn the call back over to management for closing remarks.

Thank you, everyone. It was a long call today. We know we had a lot of news, a lot of changes in the marketplace, so thanks for everybody hanging in there, and for those that I will see in Barcelona, I look forward to being able to talk or update you on the business and our products at that time. Otherwise, we will talk next quarter. Thank you very much.

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect your line and have a great day.