Earnings Call Transcript - SYNA Q1 2025

Operator, Operator

Good day and thank you for standing by. Welcome to the Synaptics First Quarter Fiscal Year 2025 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your first speaker today, Munjal Shah, Vice President, Investor Relations. Please go ahead.

Munjal Shah, Vice President, Investor Relations

Thank you, everyone, for joining us today on Synaptics first quarter fiscal 2025 conference call. My name is Munjal Shah, and I am the Head of Investor Relations. With me on today's call are Michael Hurlston, our President and CEO; and Ken Rizvi, 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 the supplemental slide presentation, we have also posted a copy of these prepared remarks on our Investor Relations website. 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 non-cash or recurring or non-recurring items. Please refer to our earnings press release issued after market close today for a reconciliation of the most directly comparable GAAP financial measures to the non-GAAP financial measures presented, which can be accessed from the Investor Relations section of the Company's website at synaptics.com. Additionally, we would like to remind you that during the course of this conference call, Synaptics will make forward-looking statements in our prepared remarks and may make additional forward-looking statements in response to your questions. These 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. Synaptics cautions that actual results may differ materially from any future performance suggested in the Company's forward-looking statements. Therefore, 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 and Quarterly Report on Form 10-Q, 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 Hurlston, President and CEO

Thanks, Munjal. I'd like to welcome everyone to today's call. We delivered very solid performance this quarter. Revenue increased 8% year-over-year and exceeded the mid-point of our guidance range, driven by continued strength in Core IoT product sales, which were up 55% compared to the prior year. Our profitability continues to improve with non-GAAP gross and operating margins higher compared to the prior quarter and the year ago. We delivered strong EPS growth with non-GAAP EPS increasing 56% year-over-year. We had another great quarter in Core IoT, led by our wireless and processor products. We are introducing new products, winning new designs, and increasing our pipeline. Our Core IoT funnel has grown nearly 30% since our last update a year ago, increasing from about $2.2 billion in September of 2023 to over $3 billion today. This design pipeline supports a compounded revenue growth of 25% to 30% over the next five years. In wireless, we are making progress in broad markets, which we defined as a part of the wireless connectivity market that requires lower power and lower cost solutions. At our Analyst's Day just over a year ago, we outlined our SAM from this market segment as approximately $3 billion. Our first broad market chip is back from our fab and is on track to sample this quarter, allowing us to address this opportunity for the first time. Given our level of differentiation, we expect to build share in broad markets and establish a meaningful position over the next two years. Meanwhile, in high-performance Wi-Fi, we continue to build our position with new customer wins and market share gains. The pace of new wins accelerated, nearly doubling in number as compared to just three months ago and spanned across a broad range of customers and applications. In addition, we remain on track to sample the first Wi-Fi 7 device designed specifically for the IoT market later this month. While our overall share is still modest, we continue to believe that we can be a leading player in the next few years. Moving to processors, our Astra products recently earned recognition from industry experts by winning the 2024 EDGE Awards in the Machine Learning and Deep Learning category. Our solutions are gaining market traction with our funnel growing $300 million in the quarter. Our primary progress to date has been in designs for home automation, security, and appliances. Additionally, we are seeing interest from ODMs and customers for an AI hub that connects to multiple devices, reducing or eliminating the need for cloud connectivity. Customers are drawn to our products because they bring AI capability to edge devices at very competitive price points. In this way, a decision doesn't need to be made immediately as to the AI use cases because our products are plug-and-play replacements for existing MPUs. In Enterprise & Automotive, we are seeing gradual improvement across the enterprise portfolio. Our PC product revenue increased by high-single-digit percentages in the quarter, benefitting from market seasonality and incremental share gains. While 2024 was a year of stabilization in the PC market and notebook units didn't grow quite as expected, there is an increasing belief that demand will grow more appreciably in 2025, driven by multiple factors including the age of the fleet, Windows 10 end-of-life, and new AI PCs. Given our market position in fingerprint sensors, touch pads, and User Presence Detection, any growth will be beneficial to our top-line numbers. Even with limited growth in units next year, we still expect our UPD products to double in FY2025 albeit off a relatively small base. We are ramping design wins at our lead customer and sit on Intel's reference design for their Panther Lake platform. The progress with both Intel and our major customer shows the significant advantage we have. We expect to be able to bring those differentiators to new PC customers and to other applications, growing revenue for this product line over the next five years. Next, our video interface products are showing signs of life again as we have mostly worked down inventory. While revenue from these products improved a double-digit percentage compared to the year-ago quarter, they are still 40% or more below the normal run-rate. Irrespective of the PC market, we believe our video interface products will see improvement in 2025, due to technology standard upgrades and increased manageability requirements. For example, next year's notebook models will include Thunderbolt 5 and our latest devices uniquely support its high bandwidth requirement. Our latest video interface product, Carrera, should see a high rate of adoption as it enables more displays, higher refresh rates, and faster charging capability. Further benefiting this product line is the advent of new ARM-based PCs. Our newly introduced DisplayLink Pro is CPU and GPU agnostic and the only solution available that can support both ARM and x86 processors. In Automotive, end market demand has deteriorated and these products were actually down year-over-year. We remain cautious regarding this product line given the broader market slowdown, the continued decline in legacy DDIC products, and delays in the adoption of new technologies. In Mobile, our Touch Controllers are aligned with the high end of the Android market and are seeing good strength. We continue to win replacement designs with major customers and see opportunities down market with some OEMs. We are also introducing a new frequency-based Touch Controller, which should not only help build share in handsets, but also potentially unlock new non-mobile applications. We also plan to begin deploying capital this quarter. Ken will provide more details in his prepared remarks, but our focus will be on share repurchases. To conclude, we are making progress in Core IoT, gaining share in high-performance Wi-Fi, while building a foundation in broad market connectivity and Edge IoT processors. In addition, our enterprise product sales are growing again and any further increase in end demand should result in improved margins. Finally, we are driving higher earnings and starting to return capital to shareholders. Let me turn the call over to Ken for a review of our first quarter financial results and second quarter outlook.

Ken Rizvi, Chief Financial Officer

Thanks, Michael, and good afternoon to everyone. I will focus my remarks on our non-GAAP results, which are reconciled to GAAP financial measures in the earnings release tables found in the Investor Relations section of our website. Now, let me turn to our financial results for the first quarter of fiscal 2025. Revenue for fiscal Q1 was $257.7 million, above the mid-point of our guidance, with sequential improvement across Core IoT, Enterprise & Automotive, and Mobile products. Q1 revenues were up 8% on a year-over-year basis and up 4% sequentially. Revenue mix in the first quarter was as follows: 23% Core IoT, 57% Enterprise & Automotive, and 20% Mobile Products. Core IoT product revenues increased 55% year-over-year and 10% sequentially, reflecting new design ramps as well as further recovery in the overall wireless end-market. Enterprise & Automotive product revenue improved 3% sequentially and was down 5% on a year-over-year basis. Our PC products continued to improve sequentially helped by both share gains and seasonality. The year-over-year decline was primarily due to our Automotive products, which were impacted by the overall market slowdown and a decline in legacy products. Mobile product revenue was up 14% year-over-year and 3% sequentially. And as a reminder, our Mobile products are largely driven by the high-end Android market. During the quarter, we had two customers greater than 10% of revenue, each at approximately 12%. First quarter non-GAAP gross margin was 53.9%, above the mid-point of our guidance. First quarter non-GAAP operating expense was $95.9 million and at the mid-point of our guidance range. Our non-GAAP operating income strengthened again in the first quarter, coming in at 16.7%, up by over 400 basis points on a year-over-year basis and up by over 200 basis points sequentially driven by improved revenue and continued operating expense controls. Non-GAAP net income in Q1 was $32.5 million. Non-GAAP EPS per diluted share came in above the mid-point of our guidance at $0.81 per share, an increase of 56% on a year-over-year basis and 27% sequentially. Now turning to the balance sheet. We ended the quarter with approximately $854 million of cash and cash equivalents, down approximately $23 million from the prior quarter. Cash used in operations was $11.4 million, primarily due to $30 million of cash taxes including a one-time cash tax payment related to the onshoring of our intellectual property last quarter. Capital expenditures were $9.1 million and depreciation for the quarter was $7.2 million. Receivables at the end of September were $135.8 million and days sales outstanding were 47 days, down from 52 days last quarter. Our ending inventory balance was $119.6 million, up slightly compared to the last quarter, to support customer demand for our second quarter. The calculated days of inventory on our balance sheet were 93 days. Now let me turn to our capital allocation priorities. First, we will continue to invest in our organic business, as we see significant opportunities for growth, especially in our Core IoT and Enterprise & Automotive products. Second, we will continue to augment our internal capabilities with M&A in a disciplined manner, which we have done successfully over the last several years. Third, we will return capital via share repurchases. Finally, we will continue to maintain a strong balance sheet and liquidity profile enabling us to remain nimble and allocate capital in an efficient manner. Today, our cash balance is higher than our operational requirements. In addition, we have ample dry powder for tuck-in acquisitions. As a result, we intend to return a portion of our cash to shareholders while also continuing to maintain a strong balance sheet. We are earmarking approximately $150 million, or 150% of the free cash flow generated in fiscal 2024, for share repurchases over the next 12 months. Now, let me turn to our second quarter of 2025 guidance. We expect revenues to be approximately $265 million at the mid-point, plus or minus $15 million. Our guidance for the second quarter reflects an expected revenue mix from Core IoT, Enterprise & Automotive, and Mobile products in the second quarter to be approximately 24%, 59%, and 17%, respectively. We expect non-GAAP gross margin to be 53.5% at the mid-point plus or minus 1%. Non-GAAP operating expense in the December quarter is expected to be approximately $96 million at the mid-point of guidance plus or minus $2 million. We expect non-GAAP net interest and other expenses to be approximately $5 million in the December quarter and our non-GAAP tax rate to be in the range of 13% to 15%. Non-GAAP net income per diluted share is anticipated to be $0.85 per share at the mid-point plus or minus $0.20, on an estimated 40.5 million fully diluted shares. We are expecting another quarter of sequential revenue growth in Q2. We have also worked through our internal inventory challenges, and our channel inventory is lean and even below normal in certain pockets. However, as revenue growth is still relatively muted, we will continue to appropriately manage the business and overall expenses while ensuring adequate investments for our long-term growth. This wraps up our prepared remarks, and I'd like to now turn the call over to the operator to start the Q&A session.

Operator, Operator

Thank you. As mentioned, at this time, we'll conduct a question-and-answer session. Our first question comes from the line of Christopher Rolland with Susquehanna. Your line is now open.

Christopher Rolland, Analyst

Hey guys, thanks for the question, and congrats on the quarter. I guess, first of all, road maps and timelines for new products. Have you guys pulled any in or moved any out? And I think you have a broad markets chip coming. Perhaps you could talk about your expectations for that chip in the near-term? Thanks so much, guys.

Michael Hurlston, President and CEO

Thank you for the question, Chris, and for your attention to the call. I appreciate it. First, I believe our timelines have remained stable. We've mentioned that we are on track to sample a Wi-Fi 7 chip this quarter for IoT applications. We're also on target to sample our broad markets chip this quarter. So we have maintained our schedules quite well. In the processor sector, we are currently in production with several of our Edge AI processors, and we have a significant one launching mid-next year, which is also on schedule. In the Core IoT area, we are generally meeting our timelines, and the engineering team has done a commendable job. Regarding broad markets, we expect that particular unit to contribute significantly. As you recall from our Analyst Day in New York, we discussed three segments: high performance, broad markets, and BLE. We projected roughly $150 million in revenue from broad markets by 2028, and that still seems on track. Given the sales opportunities we're generating in that area, I'm hesitant to provide a new figure, but we are currently tracking above that initial number. Overall, we anticipate that the contribution could range between $150 million and $200 million in the 2028 timeframe, which looks promising at this point.

Christopher Rolland, Analyst

Excellent. Thank you, Michael. Also perhaps a follow-up on the Core IoT funnel seems like great growth there, great revenue CAGR, 25% to 30% over the next five years, really strong there. Perhaps you can put a finer point on growth. Where is it coming from? How much is Wi-Fi, how much is Bluetooth, how much is processors? Just kind of work up where you're maybe most excited and where you think like needle-moving growth is really going to be coming from here to track to that 25% to 30%.

Michael Hurlston, President and CEO

Yes. Very good question, Chris. I mean I think obviously, near-term; it’s all Wi-Fi. So our high-performance Wi-Fi, as we outlined in the call, is doing super well. We're actually, again, I'd say, exceeding expectations at this point relative to design wins and projections we have coming out of our funnel. That is all kind of carries us through this fiscal year. In 2026, we start seeing contributions from this broad markets chip. I mean I don't think it's going to contribute in fiscal 2025 just given its sampling schedule. And then, in 2026, we start to see the very early knee-up of the processor initiative, right? We've got our existing processors, as you know well, that are focused in these narrow verticals that are contributing revenue today. But the broad market processor with the AI capability, we'd expect to see kind of first revenue late fiscal 2026, but really contributing meaningfully in 2027. So that's kind of the rank order. BLE, you talked about, I think BLE, we've got to look at very carefully our BLE strategy, that's one area where we are tracking behind a bit. We've got to look at how we can find a way to accelerate our BLE opportunity, which I think in our 2028 projection in the SKUs and the stack-up that we gave to you at Analyst Day, was somewhere between $50 million and $100 million of contribution, so the smallest of the three Wi-Fi segments. But I would say right now, Chris, we're tracking a little bit behind on BLE.

Christopher Rolland, Analyst

Excellent. That AI product sounds really cool too. Thanks. Thanks so much, guys.

Operator, Operator

Thank you. Our next question comes from the line of Kevin Cassidy with Rosenblatt Securities. Your line is now open.

Kevin Cassidy, Analyst

Thank you for taking my question, and congratulations on the great results. My question is similar to Chris'. As you enter the Wi-Fi 7 market, how does the upgrade cycle compare to previous Wi-Fi upgrades? Are you experiencing more demand for this? Could you provide an overview of what's happening in that market?

Michael Hurlston, President and CEO

Yes. Kevin, good as always, thanks for paying attention to the company and giving us all the coverage that you do. I would say it's very consistent actually. I mean what happens is you're going to get kind of a step function up, and we'd expect to see that in our fiscal 2026, probably a little earlier than the broad markets where you go from sort of zero penetration in the IoT segment to something like 20% to 25% penetration, relatively rapidly, a pretty big step function because there are certain devices they're going to gravitate very naturally to Wi-Fi 7. A lot of the video transfer products that we've talked to you about before: drones, set-top boxes, things of that nature. Then it takes some time from 20% to 25% to, let's say, 50% penetrated, probably takes two to three years, right? That's kind of the normal curve. And then to get the last 50%, you start kind of mixing in, just thinking about legacy Wi-Fi standards, and by then we'll probably have Wi-Fi 8. You're really never going to see any one standard occupy more than 50% to 60% of the shipments. You're going to have older technologies occupy a good chunk and then you're going to see probably a similar step-up in Wi-Fi 8 as you do in Wi-Fi 7 getting to that 20% to 25%. So for us to expect much more than 50% to 60% of all shipments on Wi-Fi 7, that would kind of defy historic norms. But we would expect a fairly fast step-up and then kind of a slow dribble from there up to kind of a normal share of the market.

Kevin Cassidy, Analyst

Okay. Great. Thanks. And so as long as you're showing your customer product roadmap for upgrades, they stay with you through the cycles.

Michael Hurlston, President and CEO

Yes. The way it works is that when Wi-Fi 7 is introduced, it will gradually take over some of the Wi-Fi 6 market share. Wi-Fi 6 is currently around 50% penetration, possibly slightly below that, while Wi-Fi 4 and 5 still hold a notable portion of the market. As Wi-Fi 7 comes into play, Wi-Fi 6 will likely remain relevant for some time, gradually replacing Wi-Fi 4 and 5. With the introduction of Wi-Fi 8, the presence of Wi-Fi 4 and 5 will diminish, and Wi-Fi 6 will also start to lose ground. Generally, there will be about 3 to 4 standards in circulation at any given time, depending on the application and pricing. The positive aspect for us right now is that we have all these standards covered: 4, 5, 6, and 7. So we are in a strong position.

Kevin Cassidy, Analyst

Okay. Great. Thanks for that detail. Maybe for just a little more details, what are your end-market exposures as far, say, consumer, the IoT Wi-Fi in consumer maybe in the home, versus industrial? It seems in this earnings period that industrial has still been weak and maybe home is getting better. But I'd like to hear what you see is happening in the end market.

Michael Hurlston, President and CEO

Yes. We have very little industrial. So that's one. We have very little automotive. I think we've talked about one win. We are making progress in the automotive market with our Wi-Fi, but nothing to speak of yet outside of one win I think we talked about two earnings calls or so ago. Our exposure is predominantly consumer and then a reasonable mix of enterprise. That's kind of how we think about the Wi-Fi business, probably, I don't know, Munjal, 65% consumer, 35% enterprise.

Munjal Shah, Vice President, Investor Relations

Yes. And then, yes, that's the right way to think about it. We may have some other end markets. But to your main end markets, Michael is right, primarily consumer, some enterprise, a little to no industrial and automotive.

Kevin Cassidy, Analyst

Okay. Great. Thank you.

Michael Hurlston, President and CEO

Thanks, Kevin.

Operator, Operator

Thank you. Our next question comes from the line of Krish Sankar with TD Cowen. Your line is now open.

Krish Sankar, Analyst

Yes. Hi, thanks for taking my questions. I told them, Michael, one is you had nice sequential revenue growth this year every quarter. So as you look into March quarter, do we expect seasonality to impact this revenue growth cadence? Or do you think there are any green shoots that can help avoid the seasonality in March?

Ken Rizvi, Chief Financial Officer

Yes, thanks, Krish. It's Ken here. I appreciate the question and ongoing support. We do not provide guidance more than one quarter ahead. We have guided for our fiscal Q2. However, as we approach March, we typically see some seasonality, particularly in the PC space during that quarter. Therefore, we expect a bit of seasonality in that timeframe. Additionally, the automotive market is currently a bit sluggish, so we expect these two factors to influence the March quarter.

Krish Sankar, Analyst

Got it. Got it. And then just a quick follow-up, you spoke a lot about the Wi-Fi 7. I'm kind of curious how to think about the ASP and gross margin differential between Wi-Fi 7 compared to Wi-Fi 6?

Michael Hurlston, President and CEO

Yes, we have a first-mover advantage. We are pleased with our average selling price and margin position, which is likely in the $1 to $2 range on a like-for-like basis. There are variations like 1-by-1s and 2-by-2s, but generally, you can expect an ASP uplift of $1 to $2 and a margin uplift of around 8% to 10%. This uplift may decrease over time, as Wi-Fi is a highly competitive market. However, due to our first-mover advantage, we believe we can maintain this position for about a year before facing increased price competition.

Krish Sankar, Analyst

All right. Thanks a lot, Michael. Very helpful.

Operator, Operator

Thank you. Our next question comes from the line of Quinn Bolton with Needham & Company. Your line is now open.

Quinn Bolton, Analyst

Thank you for taking my question. I wanted to follow up on the previous discussion about growth. You mentioned a 3% quarter-to-quarter growth in Enterprise, and it seems like there may be signs of demand stabilization or an improved outlook. Can you elaborate on what you're observing in enterprise IT? Are corporate IT budgets beginning to strengthen? Additionally, could you share your insights on the current pricing environment across the processor and wireless segments? Is it stable, or are you experiencing pricing pressure, particularly from competitors in Asia? Thank you.

Michael Hurlston, President and CEO

Yes. Thanks, Quinn. First of all, I think you got the tone and tenor right. We certainly are liking enterprise for the first time in a while. We're seeing much better results in the enterprise area. I'm not totally sure that it's driven necessarily by some magic uptick in IT spending. I think it's driven a lot by refresh cycles. Our video interface products we talked about being up sequentially. There we've introduced two new devices that have pretty compelling use cases that are driving adoption. So I'd say that's happening there. In PC, we're kind of bubbling with the market, but I think we've actually had some share gains that have led to some incremental revenue growth in the PC area. So if you look across the portfolio, we would expect now-ish, as we've talked about, that we get a much better sense for IT budgets. We feel that the IT budgets will be better. It looks like all the things that we've talked about relative to assets being sweat for longer, necessary updates coming to roost, looks like that could be better. And so I think outside of some of the seasonality that Ken talked about in Q1, which who knows where it ends up, but I think it's good to provide some caution, generally, we feel pretty good. Yes. Also a good question. Still, the pricing environment has not been that challenging. We certainly see it in the areas that we've highlighted, Wi-Fi, to a certain extent, in mobile, we see it. We don't have a lot of China exposure. And so that, the Chinese pricing environment, as we understand, is a little bit of a challenge. But I would say right now the pricing pressure is plus. I mean, in other words, if I look at it historically in the semiconductor business, I don't think it's nearly as bad as it was in 2015, 2016, maybe even 2017. It seems to be holding up relatively well. Yes, there are pockets of price pressure, the Wi-Fi touch controllers, some of the others. But mostly we're able to hold pricing. On the other side, we don't see a lot of help from the suppliers on cost reductions on the input side.

Ken Rizvi, Chief Financial Officer

Yes. And Quinn, maybe I'll just jump in here as well. It's Ken. Good to talk to you. I'd say, if you look at some of the markets we serve and some of the products that we have, we have very strong print positions, so on those products, there's very little pricing pressure just given our print position.

Quinn Bolton, Analyst

Got it. Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Peter Peng with J.P. Morgan. Your line is now open.

Peter Peng, Analyst

Hey, good afternoon, and congratulations on the strong guidance. It sounds like Enterprise is starting to finally move in the right direction. How would you kind of think about the recovery profile of this? Does this kind of follow how we would observe in the Core IoT? Do you think this is more muted? And then what kind of margin implications does this have given that this is a higher margin segment?

Michael Hurlston, President and CEO

Yes, I think it will really depend on IT budgets and spending. We're definitely seeing some positive signs, which is encouraging. The main factors driving this are within our control, including new features and market share gains. Overall, we haven't seen significant increases in IT spending yet, but we feel more optimistic about it occurring in 2025. If that happens, it’s important to note that our margins are affected by what we ship. An increase in PCs, as mentioned earlier, may not significantly benefit our margins. However, an uptick in our video interface products, audio products, and enterprise telephony would improve our margin profile. The impact on margins will vary based on the source of the growth; PCs tend to align with the corporate average margin, while other segments can boost it.

Peter Peng, Analyst

Thank you. My follow-up is about your Astra platform. Could you provide some insights into your customer engagement? How extensive is it? Is there any geographic concentration? It would be helpful to get more details on that.

Michael Hurlston, President and CEO

Yes, that's a good question. I was just discussing this topic with our division leader before the call. The answer is quite broad. Currently, we are actively seeking opportunities across various segments and determining where we fit best. Our products are unique as they are very low power and low cost, priced around $5 to $7, while still enabling substantial compute capabilities. These devices can achieve 10 to 12 TeraOPS of inferencing. As a result, they can be applied in many areas such as home security, appliances, home automation, and industrial applications. Our goal for the first or second quarter next year is to complete our exploration process and focus on two or three specific segments to pursue more aggressively. We are optimistic about our position, as the size of our opportunity funnel reflects this. Our value proposition to customers is clear: we can replace competitor processors in a plug-and-play manner without increasing costs while adding AI capabilities. This means that once customers identify their AI use case, they can easily implement it without having to plan for it from the start.

Peter Peng, Analyst

Great. Thank you, guys.

Operator, Operator

Thank you. I'm showing no further questions at this time and would now like to turn it back to Michael Hurlston for closing remarks.

Michael Hurlston, President and CEO

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 so much.

Operator, Operator

This does conclude the program, and you may now disconnect. Thank you.