SYNAPTICS Inc (SYNA) Q1 2022 Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Synaptics, Inc. First Quarter Fiscal Year 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to hand the conference over to your host, Mr. Munjal Shah, Head of Investor Relations. Mr. Shah, you may now begin.

Thank you, Krisa. Good afternoon, and thank you for joining us today on Synaptics' first quarter fiscal 2022 conference call. My name is Munjal Shah, and I'm Head of Investor Relations. With me on today's call are Michael Hurlston, our President and CEO; and Dean Butler, our Chief Financial Officer. 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. In addition to a supplemental slide presentation, we have also posted a copy of these prepared remarks on our Investor Relations website. The supplementary slides have also been furnished as an exhibit to our current report on Form 8-K filed with the SEC earlier today and add additional color on our financial results. 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 condition, results of operations, plans, objectives, future performance, and business, including our expectations regarding the potential impacts of our business of the COVID-19 pandemic and the supply chain disruption and component shortages currently affecting the global semiconductor industry. 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 our most recent annual report on Form 10-K for important risk factors that could cause actual results to differ materially from those contained in any forward-looking statement. Synaptics expressly disclaims any obligation to update this forward-looking information. I will now turn the call over to Michael. Michael?

Thanks, Munjal. I'd like to welcome everyone to today's call. We had a great start to our fiscal year 2022 and I am pleased with what we were able to achieve in the last three months. Revenue for the September quarter was above the midpoint of our guidance driven by continued growth in our IoT products. Our mix of IoT revenue improved again, resulting in record GAAP and non-GAAP gross margin. Higher revenue and gross margin in turn drove our non-GAAP operating margin and non-GAAP EPS to record levels in the quarter. Two factors are contributing to the success. First, we are working with tier 1 customers whose products are generally exceeding market expectations. In our existing customer base, we have been able to cross-sell multiple product lines increasing our content, improve our mix, and shift ASPs upward by delivering higher performance and more integrated solutions. Second, we have had success selling into new customers. We saw several new ramps in the quarter that had a meaningful impact on revenue. Our IoT revenues increased 70% year over year. Most every area of our IoT portfolio has experienced dramatic growth and design win momentum. Our fastest-growing piece of the portfolio continues to be our WiFi-Bluetooth combo devices which are seeing traction in a number of new applications such as handheld scanners and networked fitness equipment. Our wireless devices are an example of our cross-selling success as we can attach them to almost every other piece of our IoT portfolio. Our latest generation Triple-Combo wireless device has recently taped out and is now back in our labs for full qualification. This new family of products combines multiple wireless technologies in a single solution including Wi-Fi 6E, Bluetooth, and now 802.15.4. We plan to offer a Thread networking protocol stack on the 802.15.4 engine. Thread is an industry standard that will primarily be applied to in-home automation and industrial use cases. We will also be able to support Zigbee and Matter on the same integrated circuit. Synaptics will now be one of the first silicon vendors offering these triple-combo devices and we are seeing strong customer interest as we begin sampling. In general, our Wireless products are seeing increased design-win traction across a long-tail of customers and applications giving us confidence in believing we will achieve our target of doubling revenues again over the next 18 months. In our video interface products, we continue to see strong demand for our premium docking solutions. Docking stations have experienced a market inflection driven both by the replication of the office setup at home and by flexible workplace configurations. According to Omdia, the total addressable market (TAM) for commercial docks is expected to increase again in 2022. In addition, we have been successful in increasing content in docking stations. For example, we have a design win at a top OEM customer that combines both our traditional DisplayPort technology with DisplayLink. Our expansion into the protocol adapter and converter market is starting to bear fruit with more than 25 design wins. Our next-generation device in this area, Spyder, is now in production at multiple customers and was also selected for use on industry-leading GPU and CPU reference designs. Protocol adapters and converters represent an incremental market for us that we estimate to be up to 80 million addressable units. Another example of our ability to expand our TAM and market reach utilizing our core technology is our success in taking our highest-end mobile display drivers and applying them to the Virtual Reality market. We are seeing incredible traction in this area with over 30 models shipping today using Synaptics devices, including the market leader who recently announced a $10 billion investment in this technology area. Synaptics is shipping today in almost all the leading Virtual Reality platforms and we enjoy undisputed market share leadership in this category. Our key differentiators include display resolution and fast refresh rates which are both extremely important in a Virtual Reality headset given the proximity of the display to the human eye. These products had historically been lumped together in mobile, but given their distinct application and growth potential, we are now correctly classifying them in our IoT sector. Dean will go into further details about the financial reclassification in his section. Our automotive products are seeing continued momentum and remain on track to achieve our $100 million annual revenue goal by the end of fiscal 2022. We have executed well on our TDDI devices and now have multiple generations both in production and in design at most major automotive OEMs. While a small part of our automotive revenue mix today, we expect TDDI products to be a more meaningful percentage in the coming quarters, giving us confidence that we can meet or exceed our stated revenue goal. Moving on to our Edge AI processors, our recently announced AudioSmart family of products is a highly integrated single-chip solution with AI-enabled noise cancellation algorithms. We are already in preproduction for this premium headset solution which also reduces systems cost by integrating multiple previously external components. More importantly, it significantly reduces power consumption, enabling extended battery life. Our shipping audio products have seen a boost with the advent of Microsoft Teams and Zoom certifications. Here, we enjoy a performance advantage and have been able to gain significant share in professional grade wired headsets used in video conferencing. Coupled with our strong presence in gaming headsets as well as the addition of DSPG, we should continue to see strength in this part of the portfolio. In addition, our dedicated AI-focused Katana platform is beginning to show early positive signs with our first production customer, taking full advantage of the capabilities of this platform, now shipping. In addition, we are expanding our ecosystem around Katana with new partnerships for machine learning development to support faster time to market for our customers. The market is still in its infancy, but we expect increasing numbers of AI applications at the Edge and are encouraged by the early indicators. Let me move on to our PC business. After two years of strong growth, we believe the market demand will likely normalize. Last year, Chromebook demand was strong, but the current mix is biased toward commercial notebooks which plays more to our strength and has resulted in more stable demand for our products. The focus on innovation in our PC business is showing results, the best example of which is Microsoft’s high-end Surface Studio notebook which features Synaptics Touch in its large form factor Forcepad with precision haptics. A second example is our palm rejection technology which uses AI to prevent unintentional touches from moving the cursor. This enables the design of larger touchpads with a far better customer experience and is now being designed in at several OEMs on their high-end platforms. Finally, in Mobile, I am pleased to say that we have made progress in diversifying our customer base. As we had said previously, we expected that the June quarter to be the revenue nadir for our mobile products. That has indeed proven to be the case as we increased our revenue sequentially in the September quarter. Almost all leading Chinese and Korean Android handset manufacturers are now shipping our touch technology on their flexible OLED panels. Our second-generation controller, which significantly advances performance in high noise environments, started shipping earlier this year and is now the product of choice, particularly in China. Our new high-end flexible OLED display driver qualifications are progressing well and we continue to expect these wins to hit production in calendar 2022. Before I conclude, let me give you all a quick update on our supply chain status. Overall, the supply situation is still very tight with constraints across our full product portfolio. The constraints are most prevalent in our IoT products, where we are winning and expanding our market share quickly, adding pressure to an already difficult environment. We are working with our partners and in select places have been able to garner some small incremental supply though we expect broad challenges to continue through all of calendar 2022. To conclude, I am extremely pleased with the progress we have made in positioning the company for sustained growth. I am very happy with the strength of our portfolio and the opportunities that lie ahead of us to grow our business. We continue to be positive on the potential opportunities that a combined Synaptics plus DSP Group will have and I am happy to report that we remain on track to close the pending merger by the end of the calendar year. Now, let me turn the call over to Dean to review our first quarter financial results and provide our outlook.

Thanks, Michael, and good afternoon to everyone. Before I begin, I’d like to go over the reporting change of our Virtual Reality focused products. This set of market-leading products has been purpose-built from our core technology and until now was historically classified as part of our Mobile products grouping. The emerging Virtual Reality market has been rapidly growing and is poised for long-term secular growth which is unrelated to mobile phones. Starting this quarter and inclusive of our first quarter results here today, we are realigning our Virtual Reality revenue classification to better reflect a more accurate category for Synaptics as part of our IoT reporting going forward. A simplified reconciliation of this change can be found in our supplemental slide deck available on our investor relations site. Moving on to the fiscal first quarter results, revenue for the September quarter was $373 million, slightly above the midpoint of our guidance. Revenue was up 14% sequentially, reflecting continued strong demand across our IoT, PC, and Mobile products as all areas grew sequentially. Year over year, the September quarter revenue was up 13%, driven by growth in our IoT revenue, partially offset by a decline in our Mobile revenue as we continue to focus our efforts toward more attractive IoT opportunities. Revenue from IoT, PC, and Mobile were 55%, 24% and 21%, respectively, in the September quarter. Revenue from our IoT products was up 70% compared with the year-ago quarter and up 16% sequentially as our revenue momentum in this area continues to outpace almost all peers. PC product revenue was up 5% sequentially and up 10% year-over-year despite many of our customers continuing to face component constraints. And, as we had previously highlighted, our Mobile business bottomed in the June quarter and was up 19% sequentially in the September quarter as several of our design wins began shipping. During the quarter we had two customers greater than 10% of revenue at 12% and 11%. For the September quarter, our GAAP gross margin was a company record at 53.2%, which includes $16.9 million of intangible asset amortization and $1 million of share-based compensation costs. GAAP operating expenses in the September quarter were $137.5 million, which includes share-based compensation of $34.6 million, acquisition-related costs of $10.6 million consisting of intangibles amortization and transaction costs, amortization of prepaid development costs of $2.5 million and restructuring-related costs of $1.4 million. Our GAAP tax expense was $5.9 million for the quarter. In the September quarter, we had GAAP net income of $40.2 million or GAAP net income of $0.99 per share. Now, turning to our non-GAAP results. Our September quarter non-GAAP gross margin of 58% was a company record and at the high end of our guidance range, reflecting a continued strong mix as we prioritize our highest value products to customers. September quarter non-GAAP operating expenses were slightly below the mid-point of our guidance at $88.4 million, and up $2.2 million from the preceding quarter as we invest in our engineering capabilities while balancing responsible spending levels. As a result, our non-GAAP operating margin of 34.2% in the quarter was the highest on record at Synaptics. Our non-GAAP tax expense was $14.8 million for the quarter. We had non-GAAP net income in the September quarter of $108.7 million, which is an increase of 26% from the prior quarter and an increase of 63% from the same quarter a year ago; non-GAAP EPS per diluted share was $2.68 as our focus on profitable growth continues to drive positive earnings for our shareholders. Now turning to the balance sheet. We ended the quarter with $347 million of cash on hand, a decrease of $489 million from the preceding quarter as we paid down $506 million of our convertible notes bringing the outstanding balance to zero. Cash flow from operations was $58 million during the quarter. Receivables at the end of September were $270 million and days of sales outstanding were 65 days, up slightly from 63 last quarter. Our days of inventory was 51, down from 53 last quarter, and ending inventories were $89 million. However, inventory remains below our desired level due to continued supply chain constraints. Capital expenditures for the quarter were $4.7 million and depreciation was $5.2 million. Before I provide the outlook for our December quarter, I’d like to remind everyone that our guidance excludes any impact from our pending DSPG acquisition. Customer demand and backlog for our products continues to remain extremely strong. We anticipate revenue for the December quarter to be in the range of $390 million to $420 million. Similar to last quarter, our backlog at the start of the quarter was above the high end of our guidance range as we are still supply constrained, limiting our ability to service our customers’ full demand. We expect our revenue mix from IoT, PC and Mobile products in the December quarter to be approximately 58%, 22% and 20%, respectively. Our expectation incorporates our IoT products growing an estimated 44% on a year-over-year basis, significantly faster than the broader market and faster than all of our IoT-focused peers. I will start with GAAP outlook and will follow with non-GAAP outlook. We expect our GAAP gross margin for the December quarter to be in the range of 54% to 55%. We expect our GAAP operating expenses in the December quarter to be in the range of $134 million to $141 million, which includes acquisition-related charges for intangibles and transaction costs, prepaid development cost amortization, share-based compensation, and restructuring costs. We expect our fiscal 2022 GAAP tax rate to be approximately 20% to 25%. Finally, our GAAP net income per share for our December quarter is expected to be in the range of $1.25 to $1.65. Now, the non-GAAP outlook for our December quarter. We expect our non-GAAP gross margin momentum to continue into the December quarter. We expect non-GAAP gross margin in the range of 58.5% to 59.5%, as we continue to prioritize and deliver to an increasingly positive mix while navigating supply chain constraints and changing input prices. We expect our non-GAAP operating expense in the December quarter to be in the range of $90 million to $93 million as we continue investing into the engineering growth drivers of our business which further our long-term revenue trajectory. We expect our non-GAAP net interest expense to be approximately $4 million in the December quarter. We expect our long-term non-GAAP tax rate for fiscal 2022 to continue to be in the range of 11% to 13%. Non-GAAP net income per diluted share for the December quarter is anticipated to be in the range of $2.90 to $3.20 per share, on an estimated 41 million fully diluted shares. This wraps up our prepared remarks. Now, I'd like to hand the call over to the operator to start the Q&A session.

Your first question comes from the line of Christopher Rolland of Susquehanna.

This is Steven on for Chris. Could you talk about demand for connectivity, any long-term wafer contracts to support this? And when might you have an integrated connectivity plus IoT platform?

Yes. The first question is around the demand. Obviously, it's very, very strong. Our backlog is certainly significantly outpacing our ability to ship. We don't have any long-term contracts that guarantee any supply, but we've been really working very well with our key foundry partner. This is one of the areas that we've seen outsized supply relative to what we projected. We really have had some good support from our foundry partners. On our IoT platform, of course, our long-term goal that we talked about with the merger with DSP Group is to try to create an edge AI-enabled platform where WiFi or Bluetooth is combined with compute, a processor at the edge of the network. And that's something we're very much on track to do. We haven't announced any specific platforms there, but that certainly part of our long-term plan, and our development remains very much on pace.

And just a quick follow-up. What is the timetable for production in shipping OLED TDDI?

Yes. We expect to be in production in the first half of 2022.

Your next question comes from the line of Raji Gill of Needham.

Congratulations on the strong momentum. Michael, I wanted to discuss the virtual reality market. You are separating it from mobile and integrating it into IoT. Could you provide an estimate of the revenue that represents within IoT? Historically, there has been some movement from mobile to IoT in the numbers you've shared, so I'm interested in understanding the scale of that. Looking ahead, how do you perceive the adoption rate of VR? Additionally, how is your display technology facilitating the adoption of virtual reality headsets?

Yes, I will address the second part of your question, and then Dean can discuss the revenue breakdown. We are very excited about this market. We have been anticipating this shift for a while, even before there was significant news about this segment. We had created products specifically for this market a long time ago. As I mentioned earlier, we possess unique technology that helps with focus. Having a display so close requires precise technology to create a focal point. We hadn't discussed it much before since it didn't generate meaningful revenue, but it's become more significant now, and we see great growth potential moving forward. Additionally, the market is seeing denser OLED displays moving to 2K x 2K and 4K x 4K, which are challenging from a display driver perspective, along with newer display technologies like Micro OLED, which we expect to be used in specific goggles, and mini-LED as well. We have invested in these areas, giving us a strong advantage in core technology and as we look towards various display types and content in the future. Overall, we are optimistic about our position. Now, I will hand it over to Dean to discuss the specifics of the revenue breakout.

Yes. Raji, we actually tried to make everybody's lives simple. In our supplementary deck on our Investor Relations site, we actually have a table that gives the reconciliation, but just to give you some quick numbers. In fiscal 2020, this was about $12 million for the year, so sort of $4 million a quarter. That's grown pretty significantly over the course of the last 1.5 years. This quarter, we just concluded was $13 million in the quarter. So that is sort of roughly on a $50 million annualized run rate today. And given where virtual reality is in the marketplace, we just think there's a ton of potential sort of going forward in this area. It's really probably just getting started.

Okay. Perfect. Michael, regarding the Triple-Combo that integrates various wireless protocols like 6E, Bluetooth, and 802, how are you approaching this in relation to your edge AI processor? Are you integrating this Triple Combo with your embedded SoC, or are you aiming for more discrete applications? Can you clarify your strategy with the Triple Combo? Is it about bundling, or are you observing significant growth in standalone Triple Combo devices?

Yes, I don’t want to sidestep the question, but it's both. We believe that the 802.15.4 Thread protocol will be a key connectivity standard for edge AI processors due to its ideal range and lower bandwidth capabilities. Since edge AI platforms typically don’t handle large data rates, this is important. Additionally, there’s substantial standalone demand. Our main customers using WiFi and Bluetooth combinations for applications that require video processing and high bandwidth are also interested in connecting controls through the same platform, which is likely to utilize the 802.15.4 protocol. This gives us a strong competitive edge in our core markets.

Your next question comes from the line of Karl Ackerman of Cowen.

I have two questions. Last quarter, Dean, you mentioned that 90% of your expected revenue for fiscal 2022 was backed by order backlog. However, it seems like you've recently received a higher wafer allocation from your foundry partner for this legacy Broadcom asset. You also noted that your order backlog for December is above the upper range of your guidance, indicating significant improvement. My question is whether that 90% figure for the order backlog supporting fiscal 2022 will increase. Additionally, could you discuss the growing order backlog you have, not just in WiFi but across IoT? I believe this could reinforce not only the December quarter guidance but also the outlook for fiscal 2022.

Yes, Karl, you're remembering correctly. So really, we've had continued momentum, as you might imagine. Our backlog coverage of what we said last quarter at 90% has gone higher from here in this quarter. We have been signaling through our supply chain for quite some time that we're winning in the marketplace. Our momentum is growing with customers. And therefore, we've slowly been trying to improve our supply alignment but clearly the customer demand continues to outstrip the supply capability. So there's still a gap for us to catch up, but we're certainly still 90% or better, Karl.

Very helpful. If I may, for my follow-up, could you provide a bit more color on what appears to be share gains and new growth opportunities in your PC segment? I ask because your primary peer for touchpads spoke about a moderation next quarter, but maybe simply just driven by your greater mix towards enterprise. So anything that you could add would be very helpful.

Karl, I believe you understand correctly. We are more optimistic than some of our competitors primarily because of our focus on the commercial sector, where we generally perform better. That's the main point. However, we are also making progress in gaining market share. While it's not a significant change, we have managed to improve by a couple of percentage points. So, it's a combination of factors, but the most important aspect is our shift towards commercial notebooks.

Your next question comes from the line of Ambrish Srivastava of BMO Capital Markets. Probably the biggest reason for our more optimistic outlook compared to one of our competitors is the shift towards commercial. We usually perform better in that segment. So that's likely the main point. However, I believe there are underlying factors as well; we are gaining market share. I wouldn't describe it as significant, but we have been able to make some progress, moving a couple of percentage points. Therefore, it's a combination of factors, but I would say the key driver is the overall shift towards the commercial notebook.

This is Jitendra for Ambrish. It's good to see the sequential growth returning to your mobile business. Can you discuss any recent demand weakness in the Asia handset market noted by some competitors and whether it might affect your business in the short term? If so, how should we approach this situation?

Yes, I think the main factor for us is the number of design wins. The significant development for us is the transition in the Android marketplace to flexible OLED displays. As this change has occurred, we've been able to increase our market share and, in fact, boost our revenue. That's the key takeaway. While there are some fluctuations in the market and various rumors about supply issues and declines in places like India, our primary focus remains on our strength in this market. We are gaining share, and therefore, some of the background noise is not as concerning to us as it might be for competitors with stagnant or more balanced positions.

That helps. As a follow-up, great to hear about the order revenues on track for the $100 million for the year. You talked about TDDI being a small part of the mix today. Could you briefly go on like various products and technologies that are driving your design wins today? And how do you see them grow over time?

Yes. Our primary business today is really discrete display drivers. We have a bit of discrete touch, but our mix is dominated today by discrete display drivers. Over time, that TDDI piece is really what's growing. I mean our design win traction is very predominantly on TDDI. That represents content gain for us because you're able to pull a Touch circuit in with the display drivers and there's a timing controller as well, as you likely know. So there's a lot more content. And then really, our position there is vastly stronger where we're one of a handful of suppliers that can supply discrete display drivers or discrete touch circuits. There are 1, maybe 2 that have meaningfully competitive TDDI solutions. We think we're winning in a fairly outsized way in TDDI. We think we have relatively outsized market share. So as that becomes the technology of choice in automotive, we feel like we're going to do really, really well. And that's why Munjal and Dean sort of feel good, and we all feel good that we're going to be able to hit this revenue target that we put out there.

I am showing no further questions at this time. I would like to turn the conference back to Michael. You may proceed.

I'd like to thank all of you for joining us today. We look forward to speaking to you at our upcoming investor conferences during the quarter. Thanks a lot.

This concludes today's conference call. Thank you for your participation, and have a wonderful day. You may now disconnect.