Synaptics Inc (SYNA) 2018 Q1 法說會逐字稿

Good day, and welcome to the Synaptics First Quarter Fiscal 2018 Conference Call. Today's call is being recorded. And at this time, I would like to turn the conference over to Jennifer Jarman. Please go ahead.

Thank you, Matt. And good afternoon and thank you for joining us today on Synaptics' First Quarter 2018 Conference Call.

This call is also being broadcast live over the web and can be accessed from the Investor Relations section of our 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, acquisition-related costs and certain other noncash or recurring 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 conditions, 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 24, 2017 for important risk factors that could cause actual results to differ materially from those contained in any forward-looking statements. Synaptics expressly disclaims any obligation to update this forward-looking information.

I will now turn the call over to Rick Bergman. Rick?

Thanks, Jennifer, and I'd like to welcome everyone to today's call. I'm pleased to report a solid first fiscal quarter for Synaptics, with total revenue of $417 million. We were very pleased to complete 2 major acquisitions during the period, that will be important growth drivers for Synaptics. Subsequently, this is the first quarter that we're breaking out the financial contributions from IoT to our business. As a whole, our consumer IoT business accounted for 14% of total revenue in Q1, and it's expected to represent nearly 1/4 of our revenue in Q2.

On the bottom line, we posted a GAAP loss per share of $0.79, primarily reflecting acquisition-related items, while non-GAAP earnings per diluted share was $1.03.

You'll note that for the first time we posted a supplemental slide presentation in our quarterly earnings presentation. The supplementary slides have also been furnished as an exhibit to our current report on Form 8-K filed with the SEC earlier today. We listened to feedback from investors and believe that these slides add helpful additional color on our financial results.

With our recent acquisitions, we have embarked on an exciting new chapter for Synaptics, moving into the next high-growth platform for the company. The addition of an advanced voice, audio and video technology and IP is extending our position as the world's leading human interface company. And this transition is also expected to drive the positive diversification of our business through a significant expansion of our customer base and our total addressable market.

As we've been working to integrate the 2 new businesses and capitalize on the resulting synergies, it has provided an opportunity to evaluate and rechannel our resources through some of our legacy businesses that are underperforming to these exciting new growth areas.

In addition to our new consumer IoT platform, this includes our development work around Infinity displays for the mobile market with both in-display fingerprint solutions and OLED display drivers.

Now, let's drill down into the specifics around Q1, starting with our mobile business. On the mobile biometrics front, our capacitive natural ID fingerprint sensors are featured on a number of new high-profile smartphones from top tier OEMs. These include several Huawei smartphones, growing our presence at Huawei to more than 6 current models ranging from flagship to value phones.

Samsung also selected our fingerprint sensors for the Galaxy Note 8, adding to previously announced models.

Sharp is featuring us on several Aquos models, while Asus chose us for several of its ZenFones.

While we believe capacitive fingerprint sensors will eventually be replaced by optical sensors on most flagship Android smartphones, capacitive sensors will remain the choice for the broader low end of the market.

With our early innovation in optical, we remain well positioned to win. As mentioned last quarter, over a half dozen customers are sampling our optical solution, including key display manufacturers. These developments are progressing towards mass production post the Mobile World Congress launch cycle. And in the interim, we remain on track to start mass production with a top tier Chinese customer by the end of the calendar year.

Our mobile business continues to see significant market adoption with our TouchView TDDI product line, as our solutions are now shipping with most world's top brands. Recently, we announced a significant expansion of our TDDI product portfolio with 4 new solutions, further extending the industry's broadest TDDI portfolio.

Synaptics TouchView products now cover displays with resolutions from HD up to WQHD+, drive the latest Infinity displays with aspect ratios up to 19 x 9 and support all the various LCD display technologies deployed for smartphones, including LTPS, amorphous silicon and IGZO display technology. We now have the full breadth of TDDI products supporting the market shift towards extra long displays and Infinity displays.

Recently, we announced that TouchView TDDI is featured on over half a dozen Huawei smartphones. Notably, 3 of these models include both our TouchView TDDI and our Natural ID fingerprint sensors.

Additional customers who launched new phones in the quarter with our TDDI products include OPPO, Xiaomi, TCL and Sony.

Jumping to our discrete solutions. Our touch controllers are featured on many of the latest OLED smartphones from customers including Google, Motorola, OPPO and Vivo. Our touch controllers are also designed into the latest high-volume LCD phones, including models from Huawei, Motorola, ZTE and Xiaomi.

On the discrete display driver front, we believe that with our feature lead in OLED DDICs, we will be in a strong position to drive design wins and revenue as the new emerging OLED manufacturers ramp into production. As I mentioned last quarter, we continued to execute on key development milestones for OLED display drivers. We successfully sampled our first OLED DDIC at multiple OLED panel manufacturers, and we are pleased to report that we are well underway on the development of our second-generation OLED DDICs.

Let's move onto our notebook PC business, where we continued to lead in market share with our TouchPads, fingerprint sensors and audio. A recent design win of note is with Lenovo, who selected both our TouchPad and fingerprint solutions for its popular Yoga 920 laptop. We are seeing increased adoption of our industry-leading fingerprint security features on PCs, especially in the enterprise market, as enterprises are increasingly looking to protect devices from hackers.

Other recent design activity includes new PC models from Dell, including the Inspiron 5000 and 7000 Series, and the Acer Switch 3, all featuring our TouchPads.

In addition, with our acquired audio smart solutions for PCs, we have won 100% of HP's 2018 business notebooks, desktops and mobility PCs. And we won numerous 2018 Lenovo ThinkPad and IdeaPad platforms as well as multiple 2018 PC docking stations and displays at HP, Dell and Lenovo. In addition, our AudioSmart has won a significant share of Asus and LG 2018 notebooks.

The addition of industry-leading audio technology is helping us garner more share of the bill of materials in state-of-the-art devices.

Let's jump to automotive, where we are making strong progress in leveraging our entire product portfolio.

Our automotive touch controllers are now qualified at a majority of major Tier 1 and display manufacturers in key geographic locations, including Asia, Europe and the U.S.

We now have design-ins at 5 major European OEMs and Tier 1's for our discrete display drivers and touch controllers. In addition, one of these European Tier 1's is expected to deliver the world's first automotive fingerprint integration for a premier OEM.

We are thrilled to announce that in the fast-moving China market, several design wins are in place and we expect 0.5 million cars in the region on the road this fiscal year with Synaptics solutions.

We are also excited to announce that we have design-ins with a major U.S. OEM for both DDIC and touch. While in Japan, another major OEM has designed in our fingerprint sensor.

Next up, we are also building on our success with TDDI in the mobile market, and we'll bring this technology to the automotive market in calendar year 2018.

I'll close out my section with an overview of our new IoT business, which is comprised of 3 main platforms., AudioSmart, ImagingSmart and VideoSmart.

With our AudioSmart solutions, we brought voice into the fold, which is the fastest-growing human interface modality today. Synaptics is well poised to capitalize on significant growth opportunities with voice. Our AudioSmart far-field voice DSP separates speech signals from background noise and process only the speech signal for industry-leading speech recognition engine accuracy.

One growing area of interest for consumers is a smart speaker category, with Amazon's Alexa interface leading the way. Synaptics is participating as a recommended vendor for our AudioSmart technology within the ecosystems for brands wanting to lever Alexa or similar digital assistants and services.

Early this quarter, we announced AudioSmart has been selected by Anker for its Eufy Genie smart speaker. And last week, we announced we were selected by Naver Corporation of Korea and its subsidiary, Line Corporation of Japan, to develop a variety of speaker-based products featuring Line's virtual assistant, Clova.

Other AudioSmart-enabled smart speakers released during the quarter include Harmon Allure, the Mobvoi Tichome for the Chinese market, the Kakao Mini for the Korean market and Fabric Chorus and the iLive Platinum. In addition, NTT DOCOMO announced a far-field-based Bluetooth speaker for the Japanese market.

In addition to smart speakers, there are many emerging products in the market leveraging AudioSmart. Several are powered by Amazon Alexa, including a unique smart lamp from GE, a clock from iHome and a Lenovo docking station. In addition, Tencent has announced its video-recognizing Qrobot with AudioSmart.

Another piece of our AudioSmart business focuses on personal audio such as headsets and ear buds. During the quarter, Plantronics selected us for its latest headsets, a wireless model for Xbox gaming and a USB headset for the office. Sennheiser chose us for its CIRCLE Series and GSX audio amplifiers. And gaming-focused companies, including SteelSeries, Turtle Beach and HyperX, released high-performance headsets featuring our audio technology.

Let's now move to our ImagingSmart imaging chips used for the fax and printer markets. This business continues to generate solid revenue and margins as we maintain our market leadership in this space. Recent design activity on the consumer side includes HP, who selected our ImagingSmart SoC for its new pocket printer, where you can plug and print directly from your smartphone.

The multimedia solutions piece of our IoT portfolio leverages video processing solutions that are core to the smart home ecosystem and the ongoing paradigm shift in the way people consume home entertainment. The VideoSmart product family leverages sophisticated video and audio processing solutions to deliver an immersive viewing experience independent of source material. Coupled with deep content security capabilities, these solutions are integral to set-top boxes, over-the-top streaming media devices, VR/AR platform and smart speakers. Recent progress in this area includes the release of our sixth generation VideoSmart multimedia solution featuring 4K advanced HDR video processing for the global set-top box market.

In addition, our versatile processors were selected by Harman Kardon for its new JBL LINK series smart speakers and are also being used in the new Google Home mini smart speakers.

By incorporating leading voice, audio and video technologies into Synaptics human interface portfolio, we are rapidly growing our footprint with top global brands in the smart home universe and adding important customer relationships that broaden our customer base and significantly expand our presence beyond our core markets.

In summary, the design wins and activity we've highlighted today demonstrate that we not only continue to execute well across our existing growth drivers but that our consumer IoT business is also off to a roaring start. We are capitalizing on some very exciting opportunities within the smart home market, which we anticipate will rapidly become a very integral part of our revenue and diversification profile.

In addition, we remain on track towards delivering on key technology milestones in the mobile market with optical fingerprint as well as OLED DDIC.

We look forward to providing further updates on our business model and color on our new markets at our Analyst Investor Day on December 12 here in San Jose, where we will also feature technology demos showcasing our latest products and innovations.

With that, let me hand it over to Wajid.

Thanks, Rick. Revenue for the September quarter, a 14-week period, was $417.4 million, slightly above the midpoint of our guidance range when we adjust for the Marvell multimedia business revenues of $15.7 million. First quarter revenue was down 2% sequentially, primarily reflecting reduced demand for capacitive fingerprint product as well as the display driver product solutions, partially offset by an increase in IoT revenue from our acquisitions of Conexant and the Marvell multimedia businesses and increased demand from our PC products.

Year-over-year, September quarter revenue was up 8%, again reflecting an increase in IoT revenue from our acquisitions. During the quarter, we had 3 customers above the 10% revenue threshold at 11%, 13% and 18%. With the acquisitions of Conexant and the Marvell multimedia business, we will begin to break out our revenue mix between IoT, mobile and PC products, including reclassifying certain of our certain mobile businesses into IoT.

As reflected in the presentation materials released in advance of this call, revenue from mobile, PC and IoT were 70%, 16% and 14%, respectively in the September quarter. Revenue from mobile products was down 15% sequentially and down 7% compared with the year-ago quarter. Revenue from PC products was up 14% sequentially and 19% year-over-year.

Revenue from IoT products was up 157% sequentially and 242% compared with the year ago quarter.

I will now provide a high-level review of certain of our September quarter GAAP results and will follow with the corresponding non-GAAP results. For the September quarter, our GAAP gross margin was 27.4%, which includes $16 million of intangible asset amortization, $15.7 million of inventory fair value adjustment charges and $700,000 of share-based compensation costs. GAAP operating expenses in the September quarter were $131.3 million, which includes share-based compensation of $15.8 million, restructuring and severance-related cost of $1.4 million, and acquisition-related cost of $6.1 million, consisting of intangibles amortization and transitory post-acquisition compensation program costs.

In the September quarter, we had a GAAP net-net loss of $26.5 million or $0.79 per share. Now, turning to certain of our September quarter non-GAAP results. Our September quarter non-GAAP gross margin of 35.2% was slightly above the midpoint of our guidance range and primarily reflects our overall product mix. September quarter non-GAAP operating expenses came in above the high end of our guidance, as the guidance did not include the Marvell multimedia business cost.

Non-GAAP operating expenses were $106.1 million, up $16 million from the preceding quarter. The Increase primarily reflects the incremental operating costs of the acquired businesses. Non-GAAP net income for the September quarter was $35.1 million or $1.03 per diluted share, a 13% sequential decline but up 7% year-over-year.

Turning to our balance sheet. We ended the quarter with $200 million of cash, a decrease of $168 million from the preceding quarter. The decrease in cash during the quarter was primarily related to $397 million used for the 2 recent acquisitions, $94 million used for the purchase of approximately 1.7 million shares of common stock under our stock repurchase program, partially offset by net debt proceeds of $293 million and $40 million of cash provided by operations. Receivables at the end of September were $254 million and DSOs were 55 days, while inventory turns were 6 and inventories were $180 million, which includes approximately $23 million of fair value adjustments.

Capital expenditures for the quarter were $11.4 million and depreciation was $11.3 million.

Before we review the outlook, I want to provide some color on our planned restructuring. With the completion of the 2 acquisitions and recognizing that changes are taking place in our core markets, we carefully and methodically reviewed our operating costs and business structure. As a result of our review, we intend to take actions that will streamline and reduce our operating cost structure, and together with synergies from the acquisitions, anticipate annualized savings of approximately $40 million exiting fiscal 2018.

We also anticipate incremental investments in IoT, partially offsetting these savings. Based on our backlog of approximately $340 million entering the typically front-end loaded December quarter, subsequent bookings, customer forecasts, product sell-in and sell-through timing patterns as well as expected product mix, we anticipate revenue for the December quarter to be in the range of $410 million to $450 million.

We expect the revenue mix from mobile, consumer IoT and PC products in the December quarter to be approximately 62%, 24% and 14%, respectively.

Also, we'd like to provide an update to our outlook for the year. Due to the challenging market for capacitive fingerprint as well as a significant design loss at a particular capacitive fingerprint customer, we now expect revenue for fiscal year 2018 to be approximately $1.7 billion.

I will now provide GAAP outlook data for our December quarter, a 13-week period, and will follow with non-GAAP outlook data. We anticipate the stock-based compensation charge in the second quarter to be in the range of $16.5 million to $17 million.

GAAP operating expenses in the December quarter are expected to be $134 million to $144 million and will include restructuring charges in the range of $5 million to $7 million.

In addition, December quarter GAAP operating expenses will include noncash charges of approximately $22 million for intangibles amortization, of which approximately $19 million will be reflected in cost of sales.

In addition, fair value inventory adjustments to be reflected in cost of sales are expected to be approximately $15 million to $18 million.

I will now provide non-GAAP outlook data for our December quarter.

We expect non-GAAP gross margin in the December quarter to be between 35% to 37%.

We expect non-GAAP operating expenses in the December quarter to increase to approximately $110 million to $114 million, reflecting incremental quarter-over-quarter cost associated with our acquisitions that were completed during the first quarter.

We expect quarterly operating expenses to decrease in future quarters, as our restructuring activities are realized.

We anticipate our long-term non-GAAP tax rate for fiscal 2018 to be in the range of 12% to 14%.

Non-GAAP net income per diluted share for the December quarter is anticipated to be in the range of $1 to $1.15 per share.

To conclude my remarks, based on our first quarter results and current outlook for the second quarter, the first half of the fiscal year is shaping up roughly as anticipated.

I will now turn the call back over to Rick.

Thanks, Wajid. We've covered a lot of ground today. So before we open up the floor to the audience, I'd like to emphasize just a few key takeaways from today's call.

The first is that our business is in the midst of a transition, and we are very excited about opportunities we have through our new high-growth consumer IoT markets.

In addition, our in-display products will start to go into production soon, with optical fingerprint expected to be a key driver in the second half of the fiscal year.

Lastly, we anticipate a renewal in TDDI growth which should start to improve in Q2 and over the course of the fiscal year, helping to offset the expected declines in our discrete display driver business.

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

(Operator Instructions) And we will now move to our first question. This will be from Rob Stone with Cowen and Company.

Rick, I wanted to start with the in-display fingerprint plans. So if I heard you correctly, you're expecting mass production to start with one customer before the end of this quarter. And then, it sounded like you are in discussions with a number of other customers, but those are for products that might come out after Mobile World Congress. When do you think the first phone, the design win that's going into production this quarter, is meant to appear in the market? Will that be out by Mobile World Congress?

Rob, thanks for the questions. Yes, in terms of the first phone, our initial production is imminent, where we will begin to ship units, and then our device then gets assembled into a phone through the balance of the calendar year. And I would certainly expect to see that product in the marketplace before Mobile World Congress. As you well know, from following the mobile markets, there's kind of -- setting aside a couple of large manufacturers, the balance of the market, there is kind of 2 major cycles: one is roughly the spring and then one is roughly the fall. And it seems to have shifted a little from everyone focusing on Mobile World Congress to a little bit behind Mobile World Congress now. And those are the high-volume phones that were in the final stages with the OEMs working out the different design wins there.

Okay. And then second, in the guidance for the year, you described a design loss at a high-volume customer for capacitive fingerprint sensors. How do you feel about the rest of the capacitive business? And is the onset of optical enough for your fingerprint sensor revenue to grow on the year? I think that was you originally had talked about fingerprint sensors being one of the potential growth drivers for the year. It sounds like full year revenue now more or less flat.

We don't break out our specific product lines, Rob So just a little more commentary on the capacitive fingerprint market. I think it's pretty well known it's become -- the phone part of the market has become pretty tough, with ASPs declining relatively quicker than maybe everybody expected. There are certainly some strengths to it, and we kind of alluded to that in the script, that it's a very high-volume segment, and our intention is to continue to participate in the high-volume parts of the marketplace. But as it's commoditized, we can certainly lessen our investments in that particular area for phones. On the PC side, they actually much more greatly favor the security as well as actually the larger fingerprint sensors, where certainly we are quite strong with our particular architecture. So we see that as an area of strength. And then, as we mentioned, starting kind of from now going forward, growing strengths in volume in our optical fingerprint solution. How that all adds up versus last fiscal year, I'm not too sure. But in general, a little tougher market, but things are certainly looking up in a couple of those segments that we're participating. And we're excited about the back half of the year and what it will do to our overall fingerprint product line.

At this time, we will hear from Kevin Cassidy with Stifel.

You mentioned there seemed like good strength in the PC revenue. Is that content increases and what kind of content is driving the increases?

Yes, Kevin. Obviously, as you know, in general, there's a little bit of strength in the notebook market, but that doesn't explain the whole story. And that's a content increase story for us. As I just mentioned on Rob's question, we're really the only supplier that offers a secure fingerprint sensor. The mobile market is a little bit different, where it's a very contained system, but PCs are more open system. And of course, it serves the enterprise market heavily. And so the major OEMs there really favor our particular architectural approach, again, which is unique with our Match-in-Sensor as well as our encryption technologies, while the other fingerprint sensors are generally just mobile providers and then they try to squeeze in their mobile products to the PC customers, which to a certain degree the PC customers really want a PC-focused solution, which is what we offer into the market.

Okay, great. And just to go back to the design loss. Maybe just to bring it out. Was it a lower-priced capacitive fingerprint solution that won? Or did it -- was it a change over to a 3D sensor?

I'm not sure what you're getting with a 3D sensor.

Oh, facial recognition, sorry.

Okay. It continues -- their solution. There are certain segments or certain times complicated -- this decision, where we'll choose to participate and not participate with in terms of our margin profile and so on. But to answer your question straight up, it was a capacitive fingerprint solution that prevailed.

We will now move to John Vinh with KeyBanc Capital Markets.

Just a follow-up question on 3D sensing. Now that we've seen a flagship phone launched by Cupertino does not have a fingerprint sensor but does have 3D sensing. I'm just curious as to what your thoughts are in terms of the market going forward? Are you seeing any sort of customers hop to or consider deploying 3D sensing and omitting a fingerprint sensor going forward?

John, great question. So as you know, there's multiple approaches to authentication, and the different approaches, they have pluses and minuses. We haven't fully unveiled our optical solution, but it will be available very soon. And to me, there's nothing simpler than to do a simple motion. Touch on the screen -- bam, you're immediately into your applications or your opening screen. I think for that reason, at least what we've seen in the broader customer base, we see tremendous interest in our optical solution. Cost is also a factor, availability, and so on. So I can honestly say just in China and other places in Asia over the last several weeks, and I haven't seen anyone back away from proceeding with either our optical solution or other authentication approaches for 3D or facial recognition.

Great, thanks. And my follow-up question is on IoT. It looks like the implied guidance for IoT suggests you're going to do roughly about $80 million in connection to Marvell revenues in the next quarter. A couple of questions there. One, can you give us a little bit more color on the types of products Synaptics -- or I guess, your products that you would classify into IoT? And I think you have previously talked about doing $200 million to $250 million in kind of Conexant, Marvell revenues in fiscal '18. It seems like you're well ahead of that. You're on pace, obviously, at a $80 million run rate. I'm wondering if we should -- if you have any sort of updates to that outlook in fiscal ‘18.

Okay, I'll start, and then I'll let Wajid add some commentary at the end. In terms of the products, quite simply, we've had investments in a couple of areas. We've mentioned them, but haven't featured them prominently because they represented a few percent of our revenue. One area was automotive, so everything we're doing from display drivers to fingerprints to touch. For the most part, it was display driver revenue. But as you heard from my commentary that it's quickly switching over to adding touch and fingerprints and potentially voice in the future. The other area was a product line we haven't talked about that we actually through another acquisition about 5 years ago from IDT, some high-speed SerDes technology, specifically in the video area. And we've been slowly building that up to be a fairly interesting business. As you can imagine, it's a great pairing with the Marvell technology that we've just acquired -- or product that we acquired. So it certainly made sense to put all those into our IoT business. Now as we look forward, yes, so the last time we were on this call, you're correct. We kind of bracketed it at $200 million to $250 million. We've learned from doing a number of acquisitions here at Synaptics while the due diligence process is far from perfect. And so of course, when we did our first announce, there's a natural sense of conservatism. It kind of was one factor. The other factor was frankly, we're getting all types of design wins. You heard me spend about 5 minutes talking about all the different smart speakers getting around the world. We're in the Amazon ecosystem. We're doing great in the Google ecosystem. Our set-top box business is doing well. So that was a pleasant surprise that the business is a little bit bigger than what we portrayed in our October phone call. I don't know if you want to kind of give a outlook on how big it could be.

The one thing I would add, John, is that, Q2 is a seasonally strong quarter for both of those businesses. So we will see some seasonality moving into Q3 and Q4, but that will probably be offset by the design wins that Rick talked about earlier. So it is trending up nicely. I wouldn't classify it as a $320 million run rate business at this point in time. But it's certainly reaching the 3 handle on an annualized run rate basis based on everything that we're seeing right now.

At this time, we'll take a question from Paul Coster with JPMorgan.

Yes, I think you've talked about TDDI reaccelerating in the back half of the year. I think I heard you say that. Is that correct? And is it associated with capacitive touch or capacitive plus OLED?

Yes, so Paul, what you heard us say is we kind of expect the business to build kind of in the subsequent quarters. Q1 over Q2 -- Q4, excuse me, was a bit flat. But we see some growth going into Q2 and then Q3, and then into Q4. Not the type of growth we saw a year ago, which was pretty spectacular given the size of the business and so on. But we do see, as we've introduced these 4 new products that I mentioned both in the script and we had a press release a couple of weeks ago, as they start to kick in, in the second half of our fiscal year. Those are all LCD displays. In terms of our OLED DDI, we don't expect to even sample that until the end of next calendar year. It's the rough time we've provided on that.

Okay, got it. I'm sorry, I missed that. And then, you talked of the move to optical fingerprint. Is that synonymous with in-display and with OLED? Or can you separate the adoption from those other 2 technologies?

Actually, you caught me on this one, Rob -- or excuse me, Paul. You actually are correct. There is optical that doesn't have to be in-display, and we've talked about our partnership with OXi, which continues to be an option for us. But my comments today were really about our in-display solution, specifically for OLED displays.

At this time, we'll move to Rajvindra Gill with Needham & Company.

So Wajid, on the $40 million savings exiting fiscal year '18, I was wondering if you can kind of maybe elaborate further on the cost restructuring as it relates to the acquisition but also this broader plan to restructure, reorganize your business along the growth drivers. I wonder if you could bring more detail on that.

Sure, sure. So I mean, we took a look at the 2 acquisitions that we have done, and we had through the natural course of business had agreed on some synergy targets for those 2 acquisitions kind of back at the beginning of our fiscal year. As we saw some of the deterioration in the capacitive fingerprint product line that Rick talked about earlier, we recognized that we needed to do a little bit more for those product lines that are affected by the decline in the demand. So we are going to extend some of the synergy reduction that we had originally planned at the beginning of the year. To put it into context, it affects less than 10% of our workforce. And it's not only to prune those product lines, but it will allow us a little bit more headroom to invest in our IoT business. You probably heard some of the questions that were being asked earlier, really alluding to the fact that the business is doing much better than -- both the businesses are doing much better than we had expected. And so we see lot of opportunity there, and we want to make sure that we can shift some resources into those product lines. So by doing some reductions, we can create some room to do that.

And Rick, on the OLED DDIC product sampling at the end of calendar '18, I guess, how do you kind of characterize the competitive landscape in that market given the fact that you're dependent on other panel makers besides Samsung to really penetrate into that market? In other words, I would presume that the non-Samsung makers, whether they're Chinese, Japanese, would have to ramp a sufficient amount of panel capacity in order for you to partner up with them and penetrate into the market and capitalize on the transition to OLED. Given the fact that Samsung already has its own OLED DDIC, it would be very unlikely, in my mind, for them to use yours. So if you could describe that process.

Sure. I think we've cautioned patience. Well, certainly we've been sampling our OLED drivers now for almost a year. We have cautioned that we are dependent on the OLED panel manufacturers, which we characterize as ramping in the second half of '18 and then mostly in '19. I don't really see any change from that forecast that we've been given. Certainly, there's a couple of other guys that are beginning their initial production. But from a real volume perspective, it's a second half '18 -- this is calendar, I'm referencing -- or calendar '19 going forward. And we're working with them. They can be seen in some of the recent reviews on the OEMs that have OLED displays. We'll see pretty detailed analyses because they're in flagships about the quality of the displays. So it's very important that the OLED manufacturers pick the right display driver partner. And given our long history and really being the main player at the higher end of the market, a lot of those IPs, which we talked about, that applied to LCDs also applies to OLED manufacturing. And so we will continue to work hand-in-hand with the OLED manufacturers as they ramp up over the next 12 months.

We will now hear from Brett Simpson with Arete Research.

I just wanted to follow up on the Mobile business. We've seen the business decline in the September quarter, and you're guiding for a down again in December. I wonder if you can talk about moving parts because there is a lot of different products in that division. But can you just maybe help us in terms of it sounds like TDDI is growing, but what's happening with the DDIC business and fingerprints? And let me just talk about the outlook for mobile and how you see the second half of the fiscal year for mobile?

Okay. Again, I'll start and then maybe Wajid can fill in some of the quantitative blanks that I leave. Certainly, the success that we've talked about with the start of our IoT business, if you just do the math for our December quarter, says it's north of $100 million. So we're pretty excited about what that means. Because as you well know, we position that as our next growth platform. Mobile has treated us very well over the last 7 years, but the inherent growth of mobile smartphones, as everyone on this call knows, is really starting to tail off as it has reached 1.6 billion units a year. So as part of that, as you pointed, we have things that go up, we have things that go down over the last couple of quarters. In the first half of our fiscal year, our capacitive fingerprint business is going down. Conversely, though, we also expect our optical business to pick up substantially in the second half of our fiscal year. Likewise, there's a major customer that we all know of that has moved on to a different display type, and it has to impact our DDIC business. We've seen that coming for a couple of years. Hence, the investment in TDDI. And there is some offset of that. So again, we're not going to break out our fiscal year by the different product lines, where we stand, but you certainly could expect that IoT to continue to grow. But given the size of its impact, that means our mobile business has really got to hang in there as well. It won't be good growth vehicle for us anymore, but we certainly see with what we've invested in OLED and TDDI and our in-display solution, that it will continue to be a good solid business going forward for Synaptics.

And maybe just a quick follow-up, Rick, on OLEDs. Can you talk about any qualifications you've got with OLED display vendors or how that whole process works? And I think you have been more focused on the Chinese display makers. What progress do you expect in calendar '18? And when do you think OLED becomes a meaningful business for Synaptics?

Well, the process started, as I said, almost a year ago. We started sampling customers right at the tail end of last year, beginning of this calendar year. And a lot of them, they're bringing up displays. So there was a big cheer when a display would come up and we would all be happy. A lot of that again was our display drivers in general, where were pretty solid with those customers working through to bring up at their manufacturing lines. And as you noted, we're working with the Chinese and Japanese OLED display manufacturers. They're going through this whole process over the past months, and we will continue to work with them. In terms of when it becomes meaningful for us, again, I would say it's the second half of calendar '18. But we'll be right there when those other manufacturers begin initial mass production of their OLED panels.

We will now move to Vijay Rakesh with Mizuho.

I'm just looking at the December quarter. It looks like the mobile guide is down about 10% sequentially, if I do just a simple math. Is that weakness -- I know you said TDDI growing. Is that weakness primarily from the fingerprint side and DDIC?

Yes, Vijay, that's right. Yes, both of those areas are declining. Probably, the capacitive fingerprint business is declining more than we had expected. But some of that is related to the softness, that one particular customer is seeing, and some of it also may be related to transition activities that are happening related to the switchover of suppliers.

Got it. And the full year that you guided flat now ex-acquisitions, it looks like it's down significantly year-on-year. Does that incorporate just -- most of it is from the DDIC side? Or and do you still expect the fingerprint business to grow year-on-year?

So I think Rick mentioned earlier that we're not going to comment at a product line level. I think the one thing we should probably point out is that maybe on a year-on-year level, we may not see growth. But our plans for in-display are such that exiting the fiscal year, we should see year-on-year growth, quarter-over-quarter or year-over-year versus Q4. So that's currently what our plans are. And we probably don't want to go into more details than that.

We will now take a question from Andrew Uerkwitz with Oppenheimer.

Rick, you mentioned earlier that the large OEMs are moving away from traditional LCD display drivers from your business there. And you had another large customer switching at least one socket. Do you foresee those 2 customers being 10% customers for the rest of this year or even into next year? And how are your relationships with those 2 companies?

Well, as I mentioned -- thanks for the question, diversification is very important for us and to a certain degree that's why we've highlighted our different product lines in terms of what IoT means and how we can grow that. Again, we have had dependency in a couple of large customers and kind of we go up and down with their fortunes and particular design wins. And we've heard clearly from you and shareholders that a little more stability would help in our business. One of the big messages coming out of our results this quarter and in the next quarter is the diversification steps that we are taking. So whether that -- that doesn't mean we want us to or other large OEM customers to become small contributors to our revenue. We have to grow the other parts of our business, certainly, to make that the case. We have great relationships with all the OEMs. And sometimes, their needs change for products. Sometimes we pick up new major customers. So a couple of those, we've alluded to in the AR/VR space as well as the Google Home that I mentioned earlier, today. Certainly, they're not 10% customers for us, but they are not small customers for us. And so we'll just kind of go up and down in certain parts of the market. Now we're growing more rapidly. So I don't know if I'm really getting into the heart of your question, but we expect the customers that we've -- that have been 10% customers for us to continue to be major customers for us. Whether they are quite above 10% or a little below, we'll wait and see. But those customers, keep in mind, are interested in our broader product portfolio as well.

I just had one follow-up on IoT. In mobile, I heard you said a handful of customers. How has the sales and R&D and support changed now that you brought in an entire IoT division, which presumably has a much broader customer base?

No, it's a significantly different operating model. And to a certain degree, you heard me, it's actually tough to keep up with the smart speaker or the digital assistant market because, of course, everyone talks about the U.S. market, where there's 3 or 4 options there with Microsoft and Apple, certainly, Amazon and Google. But then, you go to Asia, which what we've talked about our relationship with Tencent and Baidu. And then you go to Japan, where there's Line. Korea, you have Naver, and so forth. So we have to have a much more broad worldwide sales force. So for the most part, the Conexant acquisition, we kept in their IoT sales team, and we're now building that up to accommodate the higher levels of business than we anticipated. So at Synaptics, we actually had a pretty low sales requirement in terms of very focused on a small set of OEMs. Now we're developing that worldwide sales force also for automotive. So what we have is broader product set. So it's great to have this channel. So suddenly, there's a channel that's kind of worldwide. We can leverage with of course the new IoT Products but also our existing products that we had at Synaptics.

We will now go to Tom Sepenzis with Northland.

Just on the housekeeping. The interest rate was about $6 million in the quarter. Is that the new normal servicing the convertible?

No, the interest expense was about $0.5 million during the quarter. But the cash interest expense was a little bit higher.

Okay. And then just in terms of what you're seeing in the set-top box market, obviously, you're seeing strong growth across the IoT from, I think, both of the segments that you bought. But we've seen a number of companies that are component companies in the set-top box market that have had pretty weak quarters and weak outlooks for December. So maybe if you could just talk about that market. A lot of this is being caused by customer churn and cutting the cord, and how that's impacting the cable guys. So how do you see that impacting this Marvell business?

Again, we're getting some questions this afternoon. First thing is I would caution U.S. versus rest of the world. So there is a certain phenomenon going on if you are in the U.S. But in Europe, it's different, Asia is different, Africa it's different. So the service providers are around the world at varying levels of success and so on. The other aspect that I want to bring up to is, of course, the set-top box manufacturers, think of them as smart boxes, so whether it's directly managing cable content or doing many other things for the home such as security and, of course, personal digital assistants and so on. So the nice part about what we have at Synaptics now is to a certain degree, we're prepared to go whatever called the architecture that comes out in the in-home. So if a set-top box ends up being the central hub for the market, we have SoC solutions that we got from our multimedia business solutions. If the smart speakers are more applicable, of course, then we have DSPs from Conexant. So we're somewhat architectural independent. We have the solutions for the smart home. And I know we've got a lot of questions why Marvell, why Conexant. I think once you start to look at the different architectures that are emerging around the world, we are one of the best positioned companies to take advantage of this as the smart home market grows.

We will now hear from Jagadish Iyer with Summit Redstone.

Two questions. First, in terms of, Rick, how should we think about the sustainability of biometrics in China between high end, mid and the low-end smartphones as we look at the over the next 12 months? And how is your partnership going with OXi as you kind of try to make inroads with these Chinese smartphone makers? Then I have a follow-up.

Sure. So in some ways, the China market is somewhat sorting out because you have flagship phones that are OLED, not a whole lot of, call it, mainstream phones. And then you have the low-end phones. So at least from an authentication or biometric perspective, what we're seeing, of course, in the OLED phones is tremendous interest in the optical -- our in-display optical solution. Everyone wants to eliminate their home button and then go to edge-to-edge displays. The capacitive back of the phone has just a certain awkwardness to it, and our in-display solution is quite elegant. So again, tremendous demand. That's what I think you'll see there. However, of course, capacitive fingerprint solution is very cost-effective. So for that kind of bimodal market, the lower-end solutions, I think you see capacitive for quite some time. It's really hard to the cost point for capacitive solutions. So our intention is to play in both of those markets. And then there was a second half of the question. If you could repeat it for me again. Sorry.

OXi.

So OXi was primarily intended to be under glass only. And so initially when we engaged with OXi, the hope was you would see under glass on the front of the phone. But that would not be an edge-to-edge-display. It would be in the bezel area of the phone. As I just discussed, the bezel area is going away kind of across-the-board both for OLED and LCD phones. So we're kind of retargeting a lot of that in an effort to apply to different parts of the market. So OXi is quite successful in some of the, what we call it, industrial or integration type of market. So we're supporting them in that area. And then there's certainly opportunities, for example, for on the back of the phone, where you have a glass back, like a lot of the phones that have been announced over the last few months. You could actually use a through-glass fingerprint solution there, and so were seeing interest in the market for that type of solution.

And just as a follow-up. It's been a few quarters, I guess, on the Conexant acquisition. So how should we think about generally on a big picture in terms of content increase for these home devices vis-a-vis the ASP reduction that you would now nominally see? Can you provide some kind of context to it in terms of how we have to look at it over the next, say, 1 to 2 years?

Okay. I don't know if we have several quarters under our belt. We have several months under our belt, so it's pretty hard and this is a rapidly growing market to kind of product what ASPs are. It's clearly a more sticky business and the product life cycles are going to be longer with the audio products. And it certainly depends which ones. Headsets will have -- for example, for some of the gaming applications I mentioned, or an enterprise environment, they have actually pretty long lives. But it's a much more disbursed customer base. So the ASP declines that we've historically seen in phones, would be much higher than I would anticipate us having in the audio market.

And we'll now move to Charlie Anderson with Dougherty & Company.

So Wajid, since you brought up the year-over-year growth for fingerprint sensors in the fourth quarter, I thought that was in a sense sort of implies tens of millions of dollars of contribution by my math. I guess, first is that right? And secondly, kind of how locked-in is that today? Or is it fluid? How do sort of describe those programs that you're looking forward to generate that revenue?

Yes. So you're right with the math there, Charlie. So that would imply tens of millions of dollars worth of in-display product revenue exiting fiscal Q4. Like Rick talked about earlier, and I'll let him comment as well, we're going to mass production with one customer in this calendar year. And then we're lined up with a number of panel manufacturers as well as customers who we are looking quite closely with and expect to launch post Mobile World Congress. It will be a little bit shifty between Q3 and Q4 depending on whether the shipments start in March or April. But I think having a sense of where we think the business will exit Q4 is probably the relevant metric because there could be some pluses and minuses on where the months end up on those shipments. Rick?

Just to talk about the status on those, I would say, we're in the final testing phases with these customers, where they have to fundamentally make a final decision whether to move forward with in-display or alternative approaches. But the testing and qualification process is going well. But it is the phone market, so I always caution things can change quickly right up to the time they launch particular with their phones. But overall, the progress has been very good.

Great. And I have a follow-up. A few of your semiconductor peers have some sort of multiyear outlook on growth rate for IoT business to the extent they have a large IoT business. I wonder, I know you sort of outlined how those businesses were growing your bottom. I wonder if you look out over the next couple of years, what your thought is on the growth profile of this new IoT business for you?

Yes , so Charlie, when we bought the businesses and we had our initial call, we had said that we thought this year, the annualized run rate would be $200 million to $250 million. And based on all the comments we've made on the call, I think everybody can see that it's clearly trending more towards something closer to $300 million on an annualized basis. So we're already beating our first year of 15%. Everything on the horizon, from a design win standpoint, from a customer engagement standpoint to how busy our head of sales, as well as our head of marketing for those divisions are, seems to point to a growth rate that would be close to or above the 15% that we mentioned when we first bought the businesses. So certainly, the activity seems to support that level of growth rates for those businesses. I'll pass it to Rick.

I guess, I'll use this as a pitch to come to our Investor and Analyst Day. We've covered a lot, a lot of territory this afternoon. I can tell by the questions that there is a lot of interest in our new areas as well as our existing areas. And I can promise you that we will have a lot more demos than we normally have. As you can imagine, voice is certainly and video is certainly an exciting area in terms of the demos, along with our normal phone and notebook demos. So we'll be able to answer all the questions you've asked us as well as additional questions during that 4-hour session on the 12th.

This will conclude the Q&A session. At this time I'll turn it back over to management for any additional remarks.

Again, thank you. Just a great deal of questions today. We really appreciate it. We certainly look forward to seeing everybody on December 12 here in San Jose. Thank you very much.

And again, that does conclude today's call. Thank you all for your participation.