Q2 2020 Earnings Call
[music].
Jason site. Please go ahead Sir.
Thank you and good afternoon, and thank you for joining us today on Synaptics second quarter fiscal 2020 conference call. My name is Jason side and I'm. The head of Investor Relations with me on today's call or Michael Wilson, Our President and CEO. Indeed Butler CFO. This call is also being broadcast.
Over the web and can be accessed from Investor Relations section of our company's website at Synaptics Dot com.
In addition to a supplemental slide presents presentations. We have also posted a copy of these prepared remarks.
That's relations website. The supplementary slides have also been furnished as an exhibit to our current report on form 8-K filed with the.
C C earlier today and add additional color on our financial results.
In addition to the Companys GAAP results management will also provide supplement our results on a non-GAAP basis, which excludes share based compensation acquisition related cost and certain other noncash or nonrecurring or.
Non recurring items.
Please refer to the press release issued after market close today for a detailed reconciliation of GAAP and non-GAAP results. Additionally, we would like to remind you that during the course of this conference call. We will be making forward looking statements forward looking statements give our current expectations and productions relating to our financial condition.
The results of operations plans objectives future performance EMD business, although synaptics believes our estimates and assumptions to be reasonable there are subject to a number risks and uncertainties beyond our control I may prove to be inaccurate. So.
Synaptics cautions that actual results may differ materially from any future performance adjusted.
These forward looking statements, we refer you to the company's current and periodic reports with the FCC, including the Synaptics form 10-K for the fiscal year ended June 29, 2094 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.
Before we get started I'd like to announce that we're planning on hosting our analyst day in June in New York, and we look forward to discuss in more details about our long term strategy and targets if you at that time.
I'll be sending out more detail shortly I will now turn the call over to Michael.
Thanks, Jason and I'd like to welcome everyone. Today's call I'm pleased to be speaking with all of you again today and report an outstanding quarter and finish to calendar 2019.
In the December quarter, we saw unusually strong demand from our largest mobile customer as well as in our PC business, leading to results that were better than.
We've forecasted three months ago.
We continue to be disappointed with our spending resulting in opex that was lower than expected.
All of this led to our first quarter of 20% non-GAAP operating margin in more than five years and a record quarter for non-GAAP net income and S.
Going to more details on our financial performance later in the call, but I'm really pleased by our team's execution and the operational control and efficiencies that we put in place and are beginning to impact our bottom line.
Now let me update you on the progress, we're making in transforming synaptics than reshaping our business to deliver.
Sustainable high margin long term growth.
Toward the end of last year, we started the process of our strategic review internally to assess our opportunities and risks.
Oh, we're still early in the process.
I'm really encouraged by the highly differentiated capabilities in products like our OLED touch.
And our low power high performance edge computing as to seize.
He sees feature embedded neural networks and AI capabilities for smart audio and video devices and can span a variety of end markets.
We're excited about the opportunities in these product areas and we'll continue to invest here.
We will also certainly deemphasized other parts of the portfolio in order to continue to keep spending in a reasonable on low.
As part of our portfolio optimization, we announced in December the divestiture of our mobile LCD TV product line for 120 million.
And we expect that this transaction will close in the June quarter.
This is the right move for Synaptics as our mobile LCD TV.
Was already very margin dilutive and with ongoing ASP pressure. It would have continued to be a drag on gross margins had we not made the move to divest.
This product line.
You do retain our ability to develop and sell discrete display in touch solutions.
Hi for OLED displays and T.D. I for automotive.
One of those ways, we would look to use the cash from the sale is to look at inorganic opportunities to add more differentiated.
Hi margin accretive assets to our portfolio.
Dean will provide more details later as to the financial impact on our PNM filed that this transaction is expected to have.
Now, let me update you on our businesses.
In mobile as I mentioned earlier, we saw unusual strengthen demand from our largest mobile.
We're in the December quarter, and that strength continues into this quarter.
Demand for the handsets that are display drivers are powering continues to exceed expectations in the short term and we continue to benefit at this current product cycle as this current product cycle plays out.
We're also seeing.
Strong demand and design momentum with our OLED touch sensor as.
As you May remember our first win was with the wall weight made 30 pro last year or making very good progress with our customers and delivering a differentiated touch solution with premium features that include active pen support.
Detection and support for high report Rage of 90, Hertz and a 120 hurt on the latest generation of on cell flexible OLED displays.
I'm very excited by our pipeline here and I'm confident that our industry, leading OLED touch controllers will be a meaningful growth driver.
As long term, it's driven by the ramp flexible OLED panel production.
Moving to Aiotv this business performed as expected in the quarter.
And as new product launches with multiple customers delivered solid results.
And she asked last month, we announced in Demoed several new.
I O T products, including ours vs 600 family of edge computing software enriched Esa sees that combine CPQ GPU and NPU with over six teraflops of performance to power audio video computer vision.
And and deep learning AI capabilities, combining intelligence and personalization to provide an enhanced experience for consumers.
We're seeing strong interest from retail device makers and TV service providers and this new family of Sbcs will plug power and new generation of smart.
Displays smart cameras Soundbars set top boxes voice enabled devices and other emerging connected products.
Our design pipeline continues to grow across all of our T. segments, and we're confident that the business will continue to be a strong growth driver for synaptics.
In T.C., we saw unusual strength this quarter driven by a couple of different dynamics.
As we talked about last quarter, we saw what we believed to be accelerated orders ahead of the anticipated tariffs that were supposed to be enacted in December.
Well, we also saw strength in the enterprise market as.
Companies continue to upgrade to Windows 10 ahead of Windows seven support that ended in January.
We do not expect the strength in the PC market to be sustainable we continue to enjoy high market share in our fingerprint touchpad product lines.
Overall, I'm really excited by the momentum.
We're seeing in our business, we have a strong pipeline of wins with all our major customers.
Our strategy to focus on more differentiated solutions that have my or higher margins is beginning to pay off an operational discipline is averaging as adding leverage to our model.
We still have a lot of work ahead of us in this transformation.
But I'm very encouraged by the early progress were making and our incredible team that is executing toward a stronger more profitable features for synaptics.
Now, let me turn the call over to deemed to review, our second quarter financials and provider outlook.
Thanks, Michael and good afternoon, everyone.
I'll start with.
Review of our financial results for our recently completed quarter and then provide our current outlook for fiscal Q3.
Revenue for the second quarter fiscal 2020, 388 million was approximately 6% above the high end of our previous guidance range.
Up 14% from the.
Leading border and down 9% from the same quarter last year.
Our revenue strength from the quarter.
Reflects better than expected demand from our largest LCD display customer.
And from our PC customers.
During the quarter, we had two customers above 10% revenue at 21%.
And 13%.
Well the December quarter, our GAAP gross margin was 41%, which includes 8.2 million of intangible asset amortization 600000 of share based compensation costs 200000 of retention program costs and 1.8 million.
Partial reversal of previously accrued loss on a supplier commitment agreement.
GAAP operating expenses for the December quarter for 124.8 million, which includes share based compensation of 14.5 million.
Intangible amortization of 3 million.
Restructuring expenses up 13.3 million and retention program costs of 3.4 million.
We accrued a GAAP tax expense in the quarter of 12 million, bringing the year to date GAAP tax rate to 22.3%.
GAAP net income for the.
There was 19.8 million or a net income of 58 cents per diluted share.
On a non-GAAP basis, our December quarter, non-GAAP gross margin of 42.9% was 40 basis points above the high end of our guidance range.
And primarily reflects ongoing cost saving initiatives and an overall better product mix.
The December quarter non-GAAP operating expenses were below the low end of our guidance range at 89.2 million and down 6.3 million from the preceding quarter.
Right.
Merely reflecting the benefit of restructuring activities that have resulted in the achievement of the previously announced 40 million annualized Opex savings six months ahead of schedule.
And to reiterate Michael's comments from earlier I'm pleased to point out that our 20% non-GAAP operating margin.
<unk> for this quarter was the first and more than five years for Synaptics.
Non-GAAP tax rate for the quarter and year to date period was 12%.
Non-GAAP net income for the December quarter was 70.1 million or $2.04 per diluted share.
A 29% increase year over year, compared with 54.4 million or $1.55 cents per diluted share in the second fiscal quarter of 2019.
Both of these were a record high for the company.
Now turning to our balance sheet.
We ended the quarter with approximately 425 million of cash on hand, an increase of 74 million from the prior quarter, primarily driven by cash flow from operations.
Receivables at the end of December or 246 million.
Dsos dropped to 57 days.
Inventory were 103 million and inventory days were 42 down from 63 in the prior quarter, reflecting stronger product demand throughout the quarter.
Capital expenditures for the quarter were 3.2 million and depreciation was 8.1 million.
Before I turn to our guidance. Please let me discuss the expected impact of our mobile LCD TV die divestiture.
We expect this transaction to close in our fourth fiscal quarter and when it does will receive 120 million for this product line plus an additional.
Minimal cash payment for on hand inventory at that time.
You know perspective, let me give you a sense in scale and scope of this mobile L. cdti.
Product line.
For the last fiscal year 2019 revenue was more than 300 million and gross margins.
We're in the mid twenties.
Mobile LCD TV is a profitable product line or synaptics and while most of the associated Opex will move off of our piano. We really came some of the opex in the form of trap cost that will take us several quarters to unwind.
Revenues from this product line is expected to decline in fiscal 2020 as compared to fiscal 19 as we've been more selective in the mobile LCD cdti revenue opportunities, which we've pursued so that gross margins. This year will be higher in fiscal 19.
Well the higher than fiscal 19.
It will still be meaningful dilutive to the corporate outbreaks.
I will provide additional color after the transaction closes.
Now, let me discuss our outlook for the third quarter.
Based on our backlog entering the March quarter.
Lastly, 284 million subsequent bookings customer forecasts product sell and sell through timing patterns as well as expected product mix, we anticipate our total revenue for the March quarter, which includes mobile TDD Guy.
To be in the range of 300.
It is 30 million to 350 million.
We expect the revenue mix from our mobile Aiotv and PC products to be 52%, 24% and 24% respectively.
I will now provide gap outlet for our March quarter and follow with non-GAAP outlook.
We expect our GAAP gross margins to be in the range of 39.5% to 41.5%.
In fact, our GAAP operating expenses to be in the range of 115 to 120 million, which includes charges for intangible amortization stock based.
And we also expect to accrue restructuring and retention related costs.
Finally, we expect our GAAP tax rate for fiscal 2020 to be in the range of 20% to 25% for the fiscal year.
I will now provide non-GAAP outlook for our March quarter.
We expect our non-GAAP gross margin for the March quarter to be between 42%.
44% and anticipate this to be our third consecutive quarter, what non-GAAP gross margins above 40% we.
We expect non-GAAP operating expenses in the March quarter to be in the range of 88.
8 million to 91 million.
We anticipate our non-GAAP tax rate for fiscal 2022 continues to be in the range of 11% to 13%.
Our non-GAAP net income per diluted share for the March and first quarter is anticipated to be in the range of $1.30 cents to one.
Dollar 60 cents per share.
This wraps up our prepared remarks, so now I'd like to turn the call over to the operator, starting to QNX session operator.
Thank you.
Thanks to ask a question. Please take note by pressing star one on your telephone keypad. If you were using SPD speakerphone. Please make sure your mute function.
And that's turned off given out your signal to reach our equipment.
Again press Star one to ask a question well pause for just a moment to all not everyone an opportunity to signal for questions.
Well take our first question from Charlie Anderson of Dougherty and company.
Yeah. Thanks.
As for taking my questions and congrats on the strong results.
I wanted to start with gross margins because it made a lot of progress there. So far I wonder if maybe you guys could summarize what what's been done so far in terms of cost saving initiatives to help gross margin sort of be on mix and potentially what's left to do and then just sort of taking aside the a the LCD.
Hi, I'm transaction, you know what are some of <unk>. Other levers that are available to you to enhance gross margin and I've got a follow up.
Hi, Charlie this is Michael Thanks for that thanks for the nice words I think that's yeah. We.
The first benefit obviously is on on mix we've had.
<unk> alluded to in his remarks, we've walked back from some of the G. III business that in the past I think we would have would have taken.
Like we talked about data on the last couple of calls so that certainly Ben <unk> been a benefit.
But we.
Definitely have a lot more operational focus.
And we started really looking at our costs and that means our variable costs, whether it's from suppliers from.
It all parts of the supply chain and I think.
In the very early innings, there, but we started to find opportunities where we can take some cost out of that business.
We're going to continue to do that I think that's going to be a multi corridor.
Project, we're trying it I think you and I talked about to rationalize our supply chain right now.
Our supply chain is very very wide.
And and I think that by making some moves to consolidate the supply chain.
We should get some more leverage and hopefully get.
Get some better costs out of that out of assist stuff, but I think we're certainly early innings. There. So there's still some.
Room, we think we have on the gross margin line.
Great. Thanks, so much for the color and then for my follow up question on Aiotv kind of a two parter here looks like you'll be up sequentially in March I think.
Typical seasonal pattern as that you've been down historically at merchant Aiotv. So maybe just wondering what's different this year and then I think heading into the year. The thought was that that business.
For the full year to grow into low teens, and I think you'll need maybe 100 million dollar quarter. So in June but that to happen. So maybe just update us on your view on R&D for the full year. Thanks, so much.
So I'll, let Michael handled the yield visibility on Aiotv from a project perspective, but just to give you a little bit of color. So I.
He has a business sequentially Q3 midpoint versus kind of Q2 actual.
It's slightly down where we think for for the March quarter.
It is up year on year in so.
In the seasonal pattern. This is actually you know seasonally down in our fiscal Q3, So just to give you a little color.
It's seasonally down.
Were up double digits year on year from where we where last year. So so it really positive on I'm kind of where this things kind of in growing Michael if you want to make up.
Yeah, I mean, Charlie I think you know we continue to see nice areas of strength across the portfolio.
Well, we talked about edge, so seized I think that.
We have a nice design pipeline, there and continue to be optimistic about the growth the wired audio business.
We've talked about some wins there were some inbox headsets and I think we kicked off and.
Another couple so we continue to be pretty excited about that business and then of course the video interface business continues to click along its a lower.
Portion or smaller portion of our overall portfolio, but is accretive on the margin line and we continue to grow that business as.
Well, so I think we continue to be optimistic as Dean said this next coming quarter is down.
But I think that's in line with what we normally see in terms of seasonal patterns.
Okay, great. Thanks, so much.
Thank you well take our next question from Christopher Rolland with Susquehanna.
Hey, guys. Thanks for the question in a very nice quarter.
[noise].
[noise] way manufacturing is pretty heavy and in the we want region I know the to the leading [laughter] trainees OLED display manufacturers or earn their.
There.
For.
But there wasn't a lot commentary about how this might affect your business trip just wonder you know how you're looking on it.
You know what sort of adjustments we.
We should happen, our and our heads at least as we move through the quarter.
Yeah.
So you know Chris Izzadeen. So let me just give you a little bit a sense just how we thought about our guide for the quarter. So it's a fluid situation I think as everybody kind of points out and and there's not a whole lot of clarity I mean, given that there's kind of the extended lunar new year right now for a lot of the factories.
In greater China.
But what I will say is.
Our our direct supply chain.
Doesn't run through through the roof on kind of region.
Largely our our direct supply chain.
Resides outside of greater China for a large extent, but as you correctly pointed out many of our.
Customers supply chains to Ron you know inside of greater China, and so we've chosen to be just a little bit conservative on how we've guided this corner, but but we feel that we've kinda incorporated you know what we know as of today into our guide.
Great. Thank you [laughter] and.
And then why have you yeah.
About the TBD I business. You know you said that revenue was 300, but it sounded like it was it was declining [noise].
So I'm wondering you know when this does eventually come out and in true how much less than 75 million.
Oh quarter run rate should we be using [noise].
And then also on a gross margin side here.
Getting like maybe a 450 basis point benefit for a company gross margins when you take the south but like you said [noise].
You've already walked away from some of the lower and stuff. So it's something like 300 basis.
At this point B b more like it thanks.
So Chris I I'm not sure about your math, because I think internally, we don't quite get to the number that you're kinda estimating.
But to give you a sense on on what this business size is like I said last fiscal year was was.
A little bit north of 300.
We selectively walked away from a little bit business there.
But.
<unk>.
It's not vastly different so you know I would say, it's kind of low double digit you know kind of percentage that we've probably walk from.
You know how to sort of think about it.
And remember the other thing that you might want to think about incorporating.
This TDD Guy this is the normal kind of mobile seasonality cycled that you would see.
So I hope that helps.
Great. Thanks, so much.
[noise].
Thank you as a reminder to ask a question. Please press star one.
We'll take our next question from Ari Shusterman of Needham and company.
[laughter] right sorry, taking the question Port right you go.
So first off wanted to say good job on the great quarter and my first question would be regarding that.
Use of cash or further M&A or are there certain areas sectors, you want to particularly focused sign or like what can we expect in the future.
Yeah, I don't know Oh, sorry that we have specific areas of focus what would I will say.
Thematic Lee is that.
We're right I think in the past the company is look for bigger Tam acquisitions, there was marvell and connect sense that were both in pursuit of of large tabs and I think that Dino.
Hi are more on the page of trying to do what I'd call tuck ins that are going to be margin and and operating income accretive. So we're we're looking for perhaps smaller things that are going to be much more inline with our current business adjacent to our current business.
This is and will add on on both the gross margin line and on the op margin line. So.
At least directionally, that's where we're going I as I said at the outset I don't know that we have anything specifically identified that meets that we certainly think that there's some things out there that can fall into that so.
[music].
Thank you and that my follow up would be about the set top box market opportunity. Previously you mentioned that this would be a big area.
Yes for you guys can you, perhaps talking about your positioning there when should we expect a potential ramp in that area. Thank you.
I I think.
Thank you we feel good about the opportunity or on our edge has to seize generally and I think that there's the Ed just to see we built a platform that can go into consumer applications, you've seen design wins from from so legal and his team on Google We've talked about that in the past we think that we.
We have an interesting platform for example for video surveillance and then of course, there set top box sit on set top box, we today have very.
Minimal market share we've got some customers in Korea, we've got Swisscom, but generally speaking our presence there is fairly small.
We think that as a north American supplier, we have opportunity to grow the footprint potentially in North America potentially in Europe, but I think those ramps will take some time the customer base is obviously, one that first we need to get qualified in.
They're in their products and then they need to ramp it's not a quick ramping segment.
And and I don't expect even in this calendar year to see much in terms of materiality in that in that space.
Thank you.
Thank you well take our next.
The question from Brett Simpson every research.
Yeah. Thanks, very much I have a question on the OLED touch opportunity.
You see in front of you I you mentioned in your prepared remarks that you have walked away as you're sort of first customer here can you maybe just talk more generally apart.
How you see all that talk having we hit a lot about why OCA as a it's a it's a big opportunity here and.
You know what gives you the confidence that we're gonna see enable differentiation for you guys and all that talk.
So that's really the first question. Thanks.
[noise].
Yeah, Brett I I'd Fair question, I think that we definitely feel very good about our technology.
In the flexible OLED segment why Oct, a is a specific Samsung brand.
It says a theater display as you know.
And the ability that to pull out signal from a very noisy environment. When you're touch circuit is right up against the the old led the pixels that are driving the display is is really a challenge and we feel like we've been able to resolve that.
With high precision analog front ends.
And were able to really pull signal out a capacitive signal that represents your finger.
I'm very noisy backdrop that comes from the L.L.C.D.'s or the pixels that are being right next to embed it touched circuit.
We have proof points today as you called out and we stated in the remarks on walk away.
We think that we've got a good design pipeline, there and as a result of our differentiated technology. So we think that this is gonna be a growing segment for us in the coming quarters.
And we.
We feel good about maintaining that we've got a roadmap now that was very very focused on on OLED touch and we think that we can maintain.
A lead there for for the foreseeable set a design cycles.
And maybe just that just a quick follow up on mobile in general if we look beyond fiscal 2000.
Any you know obviously, there's a lot of moving parts here you have that.
Closing the deal for mobile TDD eye, and we know window TDR generally.
Isn't a declining state and then you also have your largest customer were healthy healthy these not going to be around forever.
So I'm just looking at you know.
Mobile business you see in front of you beyond fiscal 20, how do you think about growth or how do you think about managing the balance between some of those declining product cycles and.
It is like like like all that Todd do you do you think physical 21 or over the sort of medium Carmd mobile returns to you and your growth for.
Thanks.
Yeah, I mean, I I think it's it's hard to forecast there are a lot of moving pieces, but I think that.
Pundits had sort of written I saw because they'd seen this decline in the LCD.
Display driver.
And there's no doubt that that that has been is declining segment for us.
But I think that what's not been appreciate it is our differentiation on on full led touch.
And we think that certainly that's going to be a growing segment for us.
All the two pieces.
Move together I don't know that we have a good read on it depends on how launches go next year and the mix looks between LCD and OLED, but yeah, we feel pretty good about the business right now and certainly from a gross margin perspective, we see opportunities there depending on the mixed goes to continue to enhance.
Gross margin and operating margin in or mobile segment.
Great. Thanks very much.
Thank you well take our next question from Paul Chung of JP Morgan.
Hey, guys. Thanks for taking my questions. So its first I just wonder.
Under leverage levels, which are pretty excellent.
Will be even better after the sale you know the P.D. I business, but.
Longer term leverage levels are you comfortable with and.
Can you also remind us if you have any hedges in place to kinda offset some of the.
Yeah.
The impact of your convertible and how we should think about that we should there and then I've a follow up.
Yeah, I apologize that Dean so one just on leverage ratio and you know when we have our analyst day, which Jason you know kind of alluded to at the beginning of the call I will be talking a little bit more about kind of cap structure, there so sort of.
Attune, but I would say where we are from the.
No debt capacity level, we have you know clear capacity.
Available to us, but right now we have we have no intention is going to tap kind of more more data on the balance sheet. So let me just straight up.
And the.
Other question that you had around and do we have hedges on our convert and how to think about dilution. So no. Our convert does not have any hedges directly attached to it.
It does have a potential dilution faster, but the company does.
You know reserve a call provision that's actually embedded inside of our instrument.
Okay. Thanks, and then.
Just don't PC demand you know it looks like you expect.
Another solid quarter in through Q.
Can you do you think.
Thank you can quantify the pulling demand do you think kinda drove to Q strengths and maybe Threeq guide as well and then as we kind of move out you know 612 months from now do you think we kind of revert back to that mid 60 million dollar a quarterly run rate or maybe possibly lower the pool and kind of effect.
Excellent her but thank you.
Yeah, I mean, I think that it is it is unusual so I would say generally we'll probably see you revert to our normal quarterly run rate, our normal quarterly run rate as a bit higher that $60 million.
Dollars, but generally speaking we should to your point revert back to that it's it's been up really pleasant surprise. It think that we talked about it in the prepared remarks, we thought.
You know last quarter.
Was going to sort of be the end of it given the <unk> <unk>.
What we thought were pull ins ahead of the tariff, but we have a very nice quarter in front of us and I think that what we're seeing is on on a mix basis.
A higher percentage of commercial laptops coming out in those commercial laptops, we have better exposure to.
In consumer.
Demand seems to be you know sort of up a little bit I think the PC segment is growing 4% to 5%.
The commercial segment and certainly the customers works largely exposed to in the commercial expose segment, which are the big three they seem to maybe be doing better than.
On an average so on balance our business is growing higher than the the run rate of the PC market.
But again I think that that's you know a probably not sustainable we do have very very high market share in that segment, but for us to be.
Following meaningfully above the average growth rate of the PC market given our high exposure is probably probably not one that was something that we should expect.
Great. Thank you.
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At this time, we have no questions in queue.
[noise], Okay with that I'd I'd really like to thank all of you for joining US today, we look forward to seeing you at upcoming investor conferences and.
Looking at our upcoming analyst day, Thank you very much.
[noise]. Thank you ladies and gentlemen. This concludes todays conference you may now disconnect.
[noise] [noise].
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