Q2 2022 Synaptics Inc Earnings Call

February 3, 2022

Good day, and thank you for standing by welcome.

Synaptics incorporated second quarter fiscal year 2022 financial results conference call. At this time, all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press Star wondering your telephone. Please be advised that today's conference is being recorded.

You require any further assistance. Please press star zero I would now like to hand, the conference over to MS. Jill Shah head of Investor Relations. Please go ahead.

Thank you good afternoon, and thank you for joining us today on Synaptics second quarter fiscal 2022 conference call. My name is <unk> Shah and I'm, the head of Investor Relations.

With me on today's call are Michael <unk>, 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 Dot com.

In addition to a supplemental slide presentation. We have also posted a copy of these prepared remarks.

Investor Relations web site.

The supplementary slides have also been furnished as an exhibit to a 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.

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 to Netflix we will make forward looking statements.

Forward looking statements give our current expectations and projections relating to our financial condition.

Operation plans objectives, future performance and business, including our expectations regarding the potential impact on 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.

<unk> 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.

Now ill turn the call over to Michael.

Thanks, Vishal I'd like to welcome everyone to today's call.

Finished calendar 2021 on a strong note and I'm proud of what we were able to achieve with.

Capitalized on market opportunities, while navigating supply and logistics challenges.

We delivered double digit revenue growth in 2021, while still managing to consistently improve gross margin.

Revenue for the December quarter was at the midpoint of our updated guidance with continuing strength in our Iot products are.

Our GAAP and non-GAAP gross margin was another record for the company.

Higher revenue and gross margin in turn drove our quarterly non-GAAP operating margin and non-GAAP EPS to record levels as well.

Our momentum remains strong and we are seeing many growth drivers, particularly in Iot applications.

Our design win pipeline remains robust and we see continued opportunities to cross sell our products driving our dollars per platform higher.

Our customers are introducing new digitally enhanced products that are smarter and more connected than ever.

At this year's CES show several products, such as Iot home hubs smart cameras wireless workplace configurations.

Art door bells, and smart monitors were announced and feature our semiconductor solutions.

In early December we completed the acquisition of DSP group.

And welcome a talented group of unbelievably capable engineers, we expect the team to accelerate our product roadmaps in the areas of wireless home security and low power edge AI.

The learning that DSP group has had on voice enabled AI products will serve us well as we embark on tackling the even more promising long term opportunity.

Lying machine learning to simple computer vision applications.

Our integration is on track and we are already seeing the benefits of the two teams working together.

Synaptics larger sales force and strong customer relations ships are bringing DSP group technology into new accounts that were not previously accessible.

Meanwhile, we are seeing pull through of Synaptics technology, particularly wireless on existing DSP group platforms.

Our Iot products are now at a milestone $1 billion annual revenue run rate growing 60% year over year and accounts for 62% of our total revenue.

Wireless continues to be the fastest growing piece of the Iot portfolio.

New sockets are being unlocked as Iot customers begin the transition to Wi Fi six.

Wifi six is particularly well suited for Iot devices, because it allows a greater number of products to connect to the network simultaneously without any one device being starved.

And other high traffic units on the same network.

The technology also enables low power kind of assumption, which is particularly critical in battery powered Iot devices.

Our competitive differentiation is strongest and high bandwidth low power applications, because our Wi Fi six products are 90% more power efficient compared to prior generations and 35% more efficient than competition.

We have design wins across a variety of product categories, including surveillance cameras drones smart displays gaming Wearables smart speakers and other consumer centric devices.

Our industry first triple combo wireless device is being sampled and we expect initial revenue towards the end of the calendar year.

The product is based on the Wi Fi six standard enabling devices to operate at a higher frequency band, where there is less congestion.

We're making organic investments to grow the business deploying new engineering resources and are happy to report that we now taped out two new products based on our internal efforts with our strong momentum we remain confident in achieving our target to double our wireless revenues again.

Our video interface products continued to lead the market on our latest innovations are creating distance to the field.

Our newly announced wireless docking solutions simplifies the work area and was demonstrated at CES. This year by one of our largest customers.

We're excited about the potential of this new class of product that enables improved productivity for end users and flexible workplace configurations for enterprises.

The solution is a prime example of our ability to cross sell multiple technologies in this case, combining our wireless connectivity video compression and processor expertise.

In the protocol adapter and converter market, we're seeing early traction as we enter a completely new market opportunity.

We have introduced two devices in recent quarters, which open up that additional Tam and now have a dozen or so design wins ramping over the next few quarters.

Our differentiated solution as a single chip offering the lowest power consumption by 75% and reduces overall footprint by 60%.

We're seeing terrific market traction and.

Virtual reality headsets with continued revenue growth and design win momentum.

We are winning across the board, including many VR manufacturers in China.

Our display technology as the highest performing custom designed for those headsets and is the first and only solution in the market that supports a total resolution of greater than four K with refresh rate of 120 Hertz a high refresh rate is essential for smoothest motion as it allow us for higher free.

I'm rates and lower latency that are both critical to ensure a more realistic VR experience.

We are continuing to invest in our future roadmap that features even higher resolutions and refresh rates as well as leading the transition to newer display technologies such as micro OLED.

The market is still in its infancy, and we feel confident about our position market potential and the strength of our roadmap.

In automotive, we achieved our goal of $100 million in annual revenue run rate two quarters ahead of plan.

Our automotive TDI products are now designed into more than 50 car models across 20, plus Oems and we're seeing production ramps at six Oems in Europe and in Asia.

We are very well positioned because our share of TDI based solutions is much higher than our share in a discrete implementation and the market mix of these devices, though relatively small is increasing rapidly in fact, nearly all new designs are being initiated around TDI technology.

Moving onto our processor technology, we now have a complete suite of products that range from ultra low power solutions that run simple machine learning models to complex high performance video decoders that feature neural networking capability.

We believe every consumer edge device will become more intelligent driving the need for task specific processors with artificial intelligence extensions rather than general purpose microcontrollers.

Our processors are targeted at audio and video applications event detection and with the addition of DSP group low power edge AI use cases.

Our audio smart family of processors are being designed into headsets tablets, smart monitors and docking stations and boast a compelling combination of integrated voice features noise cancellation and low power consumption.

Our video Smart series combines a high performance CPU GPU and neural network processing unit into a single software enriched SFC and complex applications, such as smart signage sound bars and video conferencing systems.

Finally, our katana processors feature of the ability to run both voice envision machine learning models at very low power levels.

At CES, we announced our first significant customer Lenovo utilizing katana in one of its tablets.

We are encouraged by continuing early indicators in the low power hei market and remain excited about its long term growth prospects.

Let me move on to our PC product applications.

After two years of strong growth, we expect market demand in calendar year 2022 to remain about at the same level as 2021.

Within that the expectation is for a commercial market shipments to be a bigger part of the mix, which plays to our strength.

We are gaining share in Pcs because of our technology and innovation at.

At CES, we launched our latest system on chip that enables the design of larger sized touch pads with haptic capability.

It is the first device to comply with the NIST SPN 800 Dash 193 standard and we feature 384 bit encryption, reducing external threats on the PC. We began shipping this device in the quarter and expect all of our major customers to design it in during the calendar year.

Finally in mobile many new models from Chinese smartphone manufacturers using our touch technology launched in the last few quarters, but it appears the end demand for some of the Oems didn't materialize as expected.

On the other hand, we began shipping production units of our new high end flexible OLED display driver in the quarter, which adds yet another growth vector for synaptics.

Before I conclude let me give a quick update on our supply chain in general supply remains tight.

In our case the constraints are most prevalent and newer faster growing areas of our portfolio, where new design wins are significantly outpacing any incremental supply. We're getting we expect challenges in all facets of the supply chain wafers to backend to protests fist through all of <unk>.

2022.

To conclude Q2 was yet another in a series of strong quarters for the company, we set multiple corporate financial records in the quarter, particularly around gross margins.

Meanwhile, we continue to grow top line revenue by both developing entirely new product categories and executing well in our core business.

Now, let me turn the call over to Dean to review, our second quarter financial results and provide our outlook.

Thanks, Michael and good afternoon to everyone.

Before I begin I'd like to remind everyone that our Q2 results and Q3 guidance includes the impact of the DSP group acquisition, which closed on December <unk> 2021.

Integration of this new team is well underway.

We have successfully migrated all major DSP group systems and processes to the synaptic platform.

And our $30 million operating cost synergies are on track.

Moving on to the fiscal second quarter results revenue for the quarter was $421 million at the midpoint of our updated guidance Rev.

Revenue was up 13% sequentially with strong demand for the company's Iot products.

And was partially aided by the DSP group acquisition, which includes approximately one month of contribution.

Revenue from Iot PC and mobile.

We're 62%, 20% and 18% respectively in the December quarter.

Year over year, the December quarter revenue was up 18% driven by growth in our Iot revenue, where we are continuing to focus our efforts.

Our Iot product revenue increased 60% compared with the year ago quarter.

And up 27% sequentially and our.

Our revenue momentum in this area continues to outpace almost all peers and is now at a milestone $1 billion annual run rate.

Our mobile and PC revenue declined year over year due to timing of certain programs.

<unk> product revenue was down 7% sequentially and down 10% year over year and was impacted by continuing supply chain shortages for certain components at our customers.

Our PC demand over the last six to nine quarters six to nine months excuse me.

Has been relatively flat as we continued to see a stable commercial market.

Our mobile product revenue declined 3% sequentially and declined 26% on a year over year comparison due to a prior product transition with a certain customer.

During the quarter, we had two customers greater than 10% of revenue at 13% and 12%.

For the December quarter, our GAAP gross margin was a company record at 53, 5%, which includes $19 9 million of intangible asset amortization $4 1 million of inventory fair value adjustment at $1 3 billion of <unk>.

<unk> based compensation costs.

GAAP operating expenses in the December quarter were one.

$147 5 million, which includes share based compensation of $35 3 million acquisition related costs of $10 4 million, consisting of intangibles amortization and transaction costs.

Amortization of prepaid development costs of $2 5 million.

And restructuring related costs of $5 1 million.

Our GAAP tax expense was $2 million for the quarter.

In the December quarter, we had GAAP net income of $69 5 million or GAAP net income of $1 71 per share.

Now turning to our non-GAAP results our.

Our December quarter non-GAAP gross margin of 59, 5% was a new company record and at the high end of our guidance range, reflecting a continued strong mix as we prioritize our highest value products, while passing through changing input prices.

December quarter non-GAAP operating expenses were at the low end of our guidance at $94 2 million and up $5 8 million from the preceding quarter due to the partial inclusion of DSP group.

Our non-GAAP operating margin of 37% in the quarter was another record for Synaptics.

non-GAAP tax expense was $18 1 million for the quarter.

We had record non-GAAP net income in the December quarter of $132 8 million, which is an increase of 22% from the prior quarter.

And an increase of 58% from the same quarter a year ago.

non-GAAP EPS per diluted share was $3 and 26.

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 $574 million of cash cash equivalents and short term investments on hand.

An increase of $227 million from the preceding quarter as a result of strong cash flow from operations of $122 million and the inclusion of cash and investments, which were acquired as part of the DSP group transaction.

Receivables at the end of December were $312 million and days of sales outstanding were 67 days up slightly from 65 last quarter.

Our days of inventory were 70 up from 51 last quarter.

Ending inventories were $133 million.

This includes an increase in work in progress inventory as we pipeline material for a growing revenue projections and the inclusion of the DSP group inventory, which includes the purchase price accounting step up.

Normalizing for DSP group inventory days would be approximately 60 at quarter end.

Despite the sequential increase we expect inventory to remain low given our revenue and shipping forecast, while our supply chain constraints continue to depress inventory below our desired level.

Capital expenditure for the quarter.

It was $8 5 million and depreciation was $6 4 million.

We anticipate revenue for the March quarter to be in the range of $450 million to $480 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.

Further.

Our demand signal continues to be strong as our backlog position has expanded and is now higher than it was when we met one quarter ago excluding.

Excluding any M&A related backlog adds.

We expect revenue mix.

From Iot PC and mobile products in the March quarter to be approximately 63%.

19% and 18% respectively.

We anticipate our Iot products growing almost 100% on a year over year basis at the midpoint.

Significantly faster than the broader market and faster than all of our Iot focus peers.

We expect our GAAP gross margin for the March quarter to be in the range of 52, 5% to 53, 5%.

We expect our GAAP operating expenses in the March quarter to be in the range of $159 million to $166 million, which includes acquisition related charges for intangibles and transaction costs prepaid development cost amortization share based compensation and restructuring costs.

Finally, our GAAP net income per share for the March quarter is expected to be the range of $1 25.

<unk> to $1 55.

Now non-GAAP outlook for our March quarter.

We expect non-GAAP gross margin momentum to continue into the March quarter we.

We expect non-GAAP gross margin in the range of 59, 5% to 65%, which at the midpoint of 60% would be a notable milestone achievement and representing one of the greatest gross margin expansions success stories across the semiconductor industry.

We expect to continue prioritizing our focus on delivery to a robust and positive mix, while continuing to navigate supply chain constraints and changing input prices.

We expect our non-GAAP operating expense in the March quarter to be in the range of $104 million to $108 million an increase from the December quarter. As we now add a full quarter of expenses related to the DSP group acquisition, while continuing to self fund.

Organic growth opportunities.

We expect our non-GAAP interest expense to be approximately $8 million in the March quarter.

As a reminder, our interest expense is higher due to the debt financing related to closing the DSP group acquisition.

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 March quarter is anticipated to be in the range of $3 40 to.

The $3 70 per share on an estimated 41 million fully diluted shares.

This wraps up our prepared remarks, I'd like to now turn the call over to the operator to start the Q&A session operator.

Thank you.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key please standby, while we compile the Q&A roster.

Our first question comes from Rajiv Gill with Needham <unk> Company. Your line is now open.

Yes, thank you and congratulations on stellar results.

Question on the on the Iot the growth that you saw in the quarter, 60% year over year and the growth that youre expecting in the March quarter up 100%.

I'm wondering if you could maybe describe.

Some of the sub segments of Iot, which is driving the growth for instance, last quarter, you mentioned virtual reality headsets, adding.

Adding to the Iot number you're talking about automotive growing kind of faster wireless connectivity.

Curious, how you would kind of segment those.

Particular areas within Iot.

And how we think about those segments not only in the March quarter, but kind of progressing throughout.

'twenty two.

Yes, Rajeev I think your question actually touched on the three that I would pick as being the big growth drivers and that would be first the VR goggles. Obviously, we have a large customer in that space thats doing really well, but I think we've talked about in the prepared remarks is the fact that.

We're winning everywhere and now Chinese goggles are starting to come online.

And drive some pretty good volumes so feel good there.

Second one you touched on is automotive and.

The issue there is we're going from a world of these discrete chips that touch and display drivers discrete touch and display drivers to TDI.

And while we participated in discrete touch and discrete display drivers, we had relatively low market share as the market begins to tip towards TDI.

We have high market share there.

<unk>.

As that becomes the preponderance of the two.

Units the chip, we expect we're really going to do well.

And then the last one also you touched on which is the wireless products.

We're winning there.

It's our Wi Fi Bluetooth combos, and then a mix of our Standalone GPS products that are really driving the results. So those are really the three areas of course.

Our other businesses are doing pretty well too.

In fact, there is there's not a single area in the Iot portfolio that I could point to that was showing weakness.

And Thats excellent to hear and then on the supply situation.

Last time, we spoke the supply situation remains tight.

You are in the process of consolidating your foundry partners you had mentioned in the past that you had as many as 10 foundry partners that you are in the process of consolidating those two to a few.

So wanted to get an update in terms of how youre looking broadly at your supplier relationship.

Yes.

Are you getting are you.

Confident that youll get the extra capacity as the year goes on.

And.

Are you going to be able to get capacity for some of the new products and the two areas that you are focusing for instance, Wi Fi Wi Fi protocol chips versus the more mobile oriented chips.

Yeah again excellent question Rajeev I would say the following I mean, certainly we feel like we can get incremental supply.

That supports the guidance and keeps us optimistic about.

The future.

That said Youre, obviously right we touched on in the prepared remarks, our biggest challenges are all these new growth areas for us because our demand is outstripping our ability to get incremental supply. So I think dean talked about even some backlog accumulation and his or her.

Remarks, and we see that in Wi Fi, we see that in the VR goggles, we see that in automotive we see that in these protocol adapters. So in all of these areas, where we've got effectively new categories of products, we're having the most difficulty keeping up with supply.

But we are able to get incremental supply here and there and that gives us some confidence that.

We're going to be able to continue on this growth factor that we've outlined.

Great and just one more question, if I could squeeze in and ill step back into queue. The gross margins, 60% just phenomenal margin expansion. The last couple of few years.

The 60% margin for for March.

Can you talk about what's driving that both on a fundamental basis.

Perhaps you can talk about the contribution that DSP is having.

But even putting aside USP.

It does imply that the margins within the different segments Iot mobile PC have been improving.

Obviously the next question is how much of that is price increases I know you talked about that youre passing the input costs.

Form of price increases so I would assume that would be neutral to the <unk>.

Margins, but can you discuss how price is affecting your.

Your margins if at all.

Yes, rajeev, so on pricing, but I'd say thats largely margin neutral I mean, where input pricing has gone up certainly.

Had the price pass it along to many of our end customers.

But it should be thought of as margin neutral really the margin increase as we guide into the March quarter is all around mix.

One as our Iot portfolio continues to grow those are a number of product areas that actually are margin accretive for us, but all areas of the portfolio have been improving that margin over time as really our focus has been on selling the premium versions of products.

<unk> and all of the market areas. So the more premium devices and PC, we're going after a premium things in mobile and of course, many of the premium areas in Iot and so that's sort of been our fundamental shift really over the last couple of years and Thats, what youre seeing here going into March.

Great. Thank you very much.

Thanks Roger.

Thank you. Our next question comes from Christopher Roland with Susquehanna. Your line is open.

Hi, This is actually <unk> on for Chris and Thank you for taking our question.

So I just wanted to follow up on the supply question earlier, you said your number of unconstrained news around the wafers.

And we've actually seen some other companies either investing heavily into capex or just locking in wafers weighted in expense. So is this something that youre, considering and if you could just elaborate a bit more on your strategy here. Thank you.

Yes.

Think we obviously, where we can where we're looking at entering into these long term agreements to try to lock up supply.

Not consistent across the board.

If we think it makes sense then we will enter into those agreements I would say that that's that's not universal our tactic to them for the most part has been to work with key partners and sort of increment out. This wafer supply we are of course a fabless.

Semiconductor company. So we are not subject to capex per se.

Were strictly a consumer in it.

And it runs into the cost of goods line. So.

It's.

Obviously, a never ending battle, where we're doing what we can to increment our supply.

And as I said in certain cases, and you alluded to it where we see opportunity we will look at and entertain long term agreements.

Great and then as a follow up.

<unk> talked about the Chinese handset market being weaker than expected.

So how are you seeing this end market demand here into the back half of the fiscal year.

Yes, I mean, obviously mobile is now a smaller part of our portfolio. We certainly believe in our roadmap, we're winning the majority of our touch sockets, we feel good about our position both in Korea and in China as I think we've talked to them.

On previous calls, it's Dan what's the sell through and Thats, obviously harder for us to determine there seems like there's some softness.

But for us it is.

Smaller part of the portfolio now I think <unk> talked about it being sub 20% of the overall mix.

I'd say on the upside we've got this new launch of our OLED display driver Dean talked about a minute ago in his comment in general and mobile we're trying to go after the very highest end of the market and this is a good example of it to very high end OLED display driver and so now in each.

Handset, we have an opportunity and particularly at the high end to sell more content per phone.

Thank you.

Thank you. Our next question comes from Derek Soderberg with Colliers Securities. Your line is open.

Hi, guys. Thanks for taking my questions actually want to start with <unk> you have some nice large service provider wins in the U S and Europe .

Just curious how that ecosystem build out is progressing.

I'm wondering what's the best path to build out that ecosystem is it to sort of integrate into other chipsets are simply cross selling.

The best path to driving growth and you Ali.

Good question I think that there.

Hands on where it goes in the ecosystem. So we're just at the beginning of our ramp with with one specific north American customer.

And the opportunity is to go into these endpoints window sensors door sensors that likely will be <unk> only.

As the technology itself is really conducive to longer range lower bandwidth types of things. So I think the sensor will ultimately be the only where you get into an opportunity to combine technologies is in the hub the thing thats controlling all the endpoints.

And you certainly get into opportunities in things like surveillance cameras. So we are looking at certainly in the first phase cross selling cross selling our Wi Fi Bluetooth combos into those sockets and then as that market present progresses, we will evaluate should we bring <unk> into some sort of super.

Combo chip.

To really create a defensible defensible socket.

As I say I don't know that the highest volume piece of it will ever go to a combo type of solution because you kind of single function out at these window brake sensors and door open closed sensors.

Got it got it as my follow up there's been some data out there that a good portion of growth has been from inventory build.

Obviously for you guys in March quarter, it looks like it's going to shape up nicely, but sort of beyond that do you have any visibility into sell through for Iot in PC. Thank you Matt.

And some softness in mobile.

Any visibility into channel inventories.

Some of your larger customers.

How are you factoring any of that into internal expectations for the year.

On that would be great, yes, Derek I would say, we have probably limited visibility into individual and customers' inventory positions, but what I can say is within our channel partners. The inventory remains very low.

We don't really see inventory buildup in any specific area I think the one exception is <unk>.

Mobile that you touched on that that actually is sort of recently weekend for us.

Outside of that.

We don't see anything specific in Iot.

PC continues to have the occasional match that issues I think you've sort of heard from others around that but that doesn't look like inventory to us it just as sort of an up and down on how they.

Pull that that inventory through to their factories.

Got it thanks guys.

Yep.

Thank you. Our next question comes from Anthony Stoss with Craig Hallum. Your line is open.

Hi, guys my congrats, especially on the gross margin improving from 40% to 60% roughly in two years, it's pretty remarkable.

Michael on the Iot side, just phenomenal growth how much of that is from content expansion or taking share.

So what are you or where do you see content can go for you guys with more products hitting in that market and then for Dan I'd Love to hear your thoughts with supply constraints any any view on the June quarter, but do you think it's going to be seasonal above or below or in line.

Yes, Tony I mean, just sort of talk about the Iot business.

We've talked about the growth vectors being the wireless VR and automotive I would say the long pole and our growth is actually new categories.

Where we've actually gotten into new businesses for us.

Those are really new businesses for us.

Particularly if you consider automotive the shift from discrete where we havent playing for a while but really ramping the TDI solution.

So in terms of the revenue line I'd say, that's the long pole in other areas in our kind of our core run rate businesses, we do feel like we've been taking historic share.

Our video interface business continues to run really strongly and we feel like that's a franchise business, but I'd really say the long pole in terms of growth are these new categories that are coming into play and creating new veins of revenue that we can go and mine.

And Tony on your second question, which was around supply constraints, maybe beyond the March quarter.

We're sort of not.

Taking questions beyond March at this point, but what I would say.

Looking out our supply constraints are certainly.

Concern for US we would certainly take more if we could get it from our suppliers.

But the backlog is extremely strong.

That backlog as we sit here today is actually higher than what it was a quarter ago. So you can sort of read that as sort of net.

New orders coming in are outstripping shipments going out and then despite having a great December quarter and despite now with this guidance in the March quarter.

That continues to be strong so we're sort of sitting here and not concerned as we look out beyond March.

And then if I could have a quick follow up with Michael shifting gears, a little bit into the auto side you guys have recently entered on the connectivity side I'm curious if you can share any details on the traction you are seeing or really anything in auto.

Yes, Tom I mean, I'd say thats.

Not quite right.

Obviously looking at connectivity for auto, but we Havent entered there our focus has been on a lot more of these video transferred types of products wearable products.

Consumer gadgets of different varieties automotive remains something we feel like we could go into if we want to but at this point.

We're more in kind of a look and look at look through the window type of mode.

Got it great job guys. Thank you thanks Tony.

Thank you. Our next question comes from Karl Ackerman with Cowen Your line is open.

Yes. Good afternoon, two questions for me, please one for Michael and one for Dean.

Michael you spoke about now shipping OLED display drivers, which complements your OLED touch controller offering I'm curious how you think about integrating both of those components that may allow you to broaden your mobile offering to new and past significant customers.

Yes, Carl I mean, we've talked about that I think when I first got here, we talked about our mobile TDI product for high end OLED phones.

As we got into it and we've talked about in previous calls I think we saw this.

Real opportunity and.

OLED discrete discrete OLED display drivers not doing a TDI solution.

Right now I would say most of our bandwidth is occupied on a family of discrete display drivers we continue to investigate TDI.

The opportunity for us in the engineering priority allocation has been on discrete simply because we see a quicker path to entry there are better process match in terms of the touch circuit in the display driver.

And there is all kinds of new products that are opening up the folds, the flips or things like that where it requires a little bit of nuance on the display drivers so I would say.

That's where we're spending our time, although to your point I think you ultimately will end up combining the two technologies.

Understood. Thank you Deane.

This is the first time you gave the number of car models, you're designed into if I if I'm correct.

Are all these models ramping today or is there a way to think about the step function of how they will ramp over this year and next year.

Yes.

Explain the numbers that we gave I think we said we are designed into 50 plus models in 20 different discrete manufacturers six of those are ramping now so there's a lot. That's future. There are design ins design wins they are not production.

And we really tried to characterize this market as really being in the early innings of a shift to TDI.

Most of the units that go out today are still discrete display driver discreet touch, but we starting to see that tipping point and certainly as I said in the prepared remarks.

Most most if not all new designs or TDI base, rather than discrete basis, and just one quick data point for you. Carl we have previously talked about sort of 40 plus models.

And sort of the update here is now it's 50% so it's incrementally adding to our model count that we have previously.

Helpful. Thank you.

Thank you. Our next question comes from Kevin Garrigan with Rosenblatt Securities. Your line is open.

Hi, guys. This is Kevin Garrigan on for Kevin Cassidy, Thanks for taking my questions and let me Echo my congrats.

My first one.

And expected inflection point coming in the second half of calendar 2022 for new Android smartphone launches.

Can you give us an idea of what the adoption rate of flexible OLED is for these new smartphones.

Has the competitive landscape changed in the flexible OLED touch market lately.

Yes.

I think our.

Our sense is that the number of flexible OLED displays are increasing.

And increasing I would say.

Not dramatically, but but something short of that so the mix is definitely going to flexible OLED.

We continue to have strength and advantage in flexible OLED touch controllers, so as the market tips that way, we feel we feel pretty good and then.

As we've characterized the second driver in our mobile business is a shift from Korean displays to Chinese displays in there in the Chinese displays we think we have the opportunity to sell in that display driver again, the kind of the highest end of the.

SKU stack.

Got it Thats helpful.

Just as a follow up you guys announced the wireless docking station reference design can you give us a sense of what the dollar content increases for you in a wireless docking station wired and should we kind of view this product as cannibalistic to your current product line or is it kind of more market expansion.

Yes, I'd say, it's a little bit of both I definitely think there is going to be some cannibalization.

But we also think it's it's got features to open up a whole new market set so I think it's a bit of both.

And then I think on the second one we're looking at tens of dollars on the content side that steps up from a traditional wire dock to go to one of these wireless docs. So I don't know the exact exact numbers, but it's something north of 10.

Okay perfect Thats very helpful. Thanks, guys and congrats thank you Kevin Thanks, Kevin.

Thank you. Our next question comes from Martin Yang with Oppenheimer. Your line is open.

Hi, Good afternoon. Thanks for taking my question I have one question for <unk>.

Can you maybe talk about the GAAP gross margin trend in the past quarter and also being in.

In the guidance it feels like it.

Pat lighter than previous guidance for the December quarter and March is another.

How much do we read into this and what are the reasons behind that cap margin trend. Yes. Good question Martin So the first thing to know is notable that.

The GAAP gross margin for the December quarter is actually a record as well for Synaptics. So it's trading.

Sort of in line a record on the non-GAAP and GAAP side at the same time.

December and even more so into the March guide for the GAAP gross margin is going to be highly influenced by the DSP <unk> acquisition. So there are a number of inclusions on GAAP related.

Step up in inventory value intangible amortization that will run through the GAAP only side, so youre going to see that if that deal for a couple of quarters until you get through sort of that initial amortization schedule.

Got it Thats perfect.

Thank you.

Yes.

Yeah. Thanks Martin.

Thank you and our next question comes from Brett Simpson with it.

Research Your line is open.

Yes, thanks, very much I wanted to ask.

The non-GAAP non-GAAP gross margins.

Mentioned this is like.

One of the bigger jumps in the history of the semi industry in terms of the performance gains and it's been a it's been a fantastic improvement over the over the last few years, but when I look at the portfolio you offer theres still a lot of.

You're putting a lot of consumer areas, where generally the returns are structurally lower than we would normally see and certainly a lot of your peers would have lower gross margins and so my question is the performance of the business has been fantastic, but really how sustainable are the gross margin returns across the business, particularly as some of the.

Categories that you highlight start to mature.

Thanks.

Yes, I mean, maybe I'll take the first comment and then turn it over to Dean obviously, we feel good about the sustainability of the gross margin line I think mostly because while you are right. The end markets in which we play our consumer auto where there's quite a bit of competition.

We feel like we've got a level of differentiation a level of integration and a level of performance enhancement that.

Gives us the ability to sell at higher asps than our competitors.

We.

We really do feel like the gross margin is something we worked on we've worked on structurally since Dean and I got here.

And we've obviously improved in almost every quarter we've been together.

Hi.

It's going to level off at some point I mean, there is no question. It is not going to improve at the rates we've seen but.

I do think that it's.

That's sustainable.

Yes, Brett I think that's the important point to take our Cros is that.

Largely our products are aimed at premium portions of our end markets sort of just broadly characterizing as consumer and low margin is not necessarily a true fat.

In fact, we talked about and for instance, our areas of processor right. We're going after things that are doing AI at the edge.

Video Transport D code and code.

Audio with high end features.

Wireless connectivity Wi Fi six and <unk> E. That's the cutting edge Wi Fi standard today with lower power than any of the competitor solutions on the marketplace.

<unk> unique capabilities to transport video.

In a wired form factor, even in PC and mobile we go after sort of.

High end commercial laptops were now integrating haptics type designs into some of RPC products on the mobile side again, it's aimed at AD flagship high end flexible OLED type mobile devices, where in fact, the engineering is valued in the things that.

Synaptics can bring.

Is valued by the customer base and therefore, we can extract a reasonable gross margin. So I think that's the way to think about it Brett is not necessarily sort of overly generalizing, but you would think about it is the premium areas.

Okay. Thanks for that and then maybe just a follow up on.

On pricing I guess, we've seen a big foundries TSMC is one of the big foundries, they've been raising prices quite quite meaningfully.

Going into 2022 .

And we're seeing a lot of chipmakers are passing that on as it is issued if they can can you maybe talk about I'll give you a perspective on how youre dealing with those cost increases and when you look at that March quarter guide, how much of that sales increases.

Generally.

<unk> a pricing increase thanks.

So we're no different from many of our peers and I think we've been pretty straightforward that we have seen input prices changed.

In the past quarter quarters before that and we've incorporated any known pricing changes for our March quarter Guide.

We do pass along these price increases largely to our end customers.

And so while as input prices changed largely that ASP changes in conjunction.

And it is actually the economics 101, right and when.

<unk> outstrip supply.

You actually will see this phenomenon.

So yes, we have been successful in passing that along and we continue to do so if input prices were to continue to change.

But it's fully incorporated into our March guide.

Got it thanks very much.

Yes, no problem Brett Thank you.

And at this time I'm currently showing no further questions I'd like to hand, the conference back over to Mr. Michael <unk> for closing comments.

I'd like to thank all of you for joining US today, we certainly look forward to speaking to you at our upcoming investor conferences during the quarter. Thanks to all.

This.

Today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.

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Good day and thank you for standing by welcome to the Synaptics incorporated second quarter fiscal year 2022 financial results Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one on your telephone please be.

So today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to Montreal Shah head of Investor Relations. Please go ahead.

Thank you good afternoon, and thank you for joining us today on Synaptics second quarter fiscal 2022 conference call. My name is <unk> Shah and I'm, the head of Investor Relations.

On today's call are Michael Hoffman, 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 Dot com.

In addition to a supplemental slide presentation. We have also posted a copy of these prepared remarks.

Investor Relations website.

The supplementary slides have also been furnished as an exhibit to a 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.

We're looking statements give our current expectations and projections relating to our financial condition.

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.

<unk> cautions that actual results may differ materially from any future performance suggested in the company's forward looking statements.

<unk> expressly disclaims any obligation to update this forward looking information.

I will now turn the call over to Michael.

Thanks, Mitchell I'd like to welcome everyone to today's call. We finished calendar 2021 on a strong note and I'm proud of what we were able to achieve.

We capitalized on market opportunities, while navigating supply and logistics challenges we.

We delivered double digit revenue growth in 2021, while still managing to consistently improve gross margin.

Revenue for the December quarter was at the midpoint of our updated guidance with continuing strength in our Iot products are.

Our GAAP and non-GAAP gross margin was another record for the company.

Higher revenue and gross margin in turn drove our quarterly non-GAAP operating margin and non-GAAP EPS to record levels as well.

Our momentum remains strong and we are seeing many growth drivers, particularly in Iot obligations.

Our design win pipeline remains robust and we see continued opportunities to cross sell our products driving our dollars per platform higher.

Our customers are introducing new digitally enhanced products that are smarter and more connected than ever.

At this year's CES show several products, such as Iot home hubs smart cameras wireless workplace configurations.

<unk> door bells, and smart monitors were announced and feature our semiconductor solutions.

In early December we completed the acquisition of DSP group.

And welcome a talented group of unbelievably capable engineers, we expect the team to accelerate our product roadmaps in the areas of wireless home security and low power edge AI.

The learning that DSP group has had on voice enabled AI products will serve us well as we embark on tackling the even more promising long term opportunity applying machine learning to simple computer vision applications.

Our integration is on track and we are already seeing the benefits of the two teams working together.

Synaptics larger sales force and strong customer relations chips are bringing DSP group technology into new accounts that were not previously accessible.

Meanwhile, we are seeing pull through of Synaptics technology, particularly wireless on existing DSP group platforms.

Our Iot products are now at a milestone $1 billion annual revenue run rate growing 60% year over year and accounts for 62% of our total revenue.

Wireless continues to be the fastest growing piece of the Iot portfolio.

New sockets are being unlocked as Iot customers begin the transition to Wi Fi six.

Wifi six is particularly well suited for Iot devices, because it allows a greater number of products to connect to the network simultaneously without any one device being starved.

Other high traffic units on the same network.

The technology also enables low power consumption, which is particularly critical in battery powered Iot devices are.

We have design wins across a variety of product categories, including surveillance cameras drones smart displays gaming Wearables smart speakers and other consumer centric devices.

Our industry first triple combo wireless device is being sampled and we expect initial revenue towards the end of the calendar year.

The product is based on the Wi Fi six standard enabling devices to operate at a higher frequency bands, where there is less congestion.

We are making organic investments to grow the business deploying new engineering resources and are happy to report that we now taped out two new products based on our internal efforts with our strong momentum we remain confident in achieving our target to double our wireless revenues again.

Our video interface products continued to lead the market and our latest innovations are creating distance to the field.

Our newly announced wireless docking solutions simplifies the work area and was demonstrated at CES. This year by one of our largest customers.

We're excited about the potential of this new class of product as it enables improved productivity for end users and flexible workplace configurations for enterprises.

The solution is a prime example of our ability to cross sell multiple technologies in this case, combining our wireless connectivity video compression and process our expertise.

In the protocol adapter and converter market, we are seeing early traction as we enter a completely new market opportunity.

We have introduced two devices in recent quarters, which open up that additional Tam and now have a dozen or so design wins ramping over the next few quarters.

Our differentiated solution in a single chip offering the lowest power consumption by 75% and reduces overall footprint by 60%.

We're seeing terrific market traction.

Virtual reality headsets with continued revenue growth and design win momentum.

We are winning across the board, including many VR manufacturers in China.

Our display technology as the highest performing custom design for those headsets and is the first and only solution in the market that supports a total resolution of greater than four K with refresh rates of 120 Hertz a high refresh rate is essential for smoothness of motion as it allows for higher <unk>.

<unk> rates and lower latency that are both critical to ensure a more realistic VR experience.

We are continuing to invest in our future roadmap that features even higher resolutions and refresh rates as well as leading the transition to newer display technologies such as micro OLED.

The market is still in its infancy, and we feel confident about our position market potential and the strength of our roadmap.

In automotive, we achieved our goal of $100 million in annual revenue run rate two quarters ahead of plan.

Our automotive TDI products are now designed into more than 50 car models across 20, plus Oems and we're seeing production ramps at six Oems in Europe and in Asia.

We believe every consumer edge device will become more intelligent driving the need for task specific processors with artificial intelligence extensions rather than general purpose microcontrollers.

Our processors are targeted at audio and video applications event detection and with the addition of DSP group low power edge AI use cases.

Our video Smart series combines a high performance CPU GPU and neural network.

Assessing unit into a single software enriched SFC and complex applications, such as smart signage sound bars and video conferencing systems.

Finally, our katana processors feature the ability to run both voice and vision machine learning models at very low power levels at.

At CES, we announced our first significant customer Lenovo utilizing katana in one of its tablets.

We are encouraged by continuing early indicators in the low power edge out market and remain excited about its long term growth prospects.

Let me move on to our PC product applications.

After two years of strong growth, we expect market demand in calendar year 2022 to remain about at the same level as 2021.

Within that the expectation is for a commercial market shipments to be a bigger part of the mix, which plays to our strength.

We are gaining share in Pcs because of our technology and innovation at.

At CES, we lodged our latest system on chip that enables the design of larger sized touch pads with haptic capability.

It's the first device to comply with the NIST SPE 800 Dash 190, <unk> standard and we feature 384 bit encryption, reducing external threats on the PC. We began shipping this device in the quarter and expect all our major customers to design it in during the calendar year.

On the other hand, we began shipping production units of our new high end flexible OLED display driver in the quarter, which adds yet another growth vector for synaptics.

Before I conclude let me give a quick update on our supply chain in general supply remains tight.

2022.

To conclude Q2 was yet another in a series of strong quarters for the company, we set multiple corporate financial records in the quarter, particularly around gross margins.

Meanwhile, we continue to grow top line revenue by both developing entirely new product categories and executing well in our core business.

Now, let me turn the call over to Dean to review, our second quarter financial results and provide our outlook.

Thanks, Michael and good afternoon to everyone.

Before I begin I'd like to remind everyone that our Q2 results and Q3 guidance includes the impact of the DSP G Group acquisition, which closed on December <unk> 2021.

Integration of this new team is well underway.

And we have successfully migrated all major DSP group systems and processes to the synaptic platform.

In our $30 million operating cost synergies are on track.

Moving on to the fiscal second quarter results revenue for the quarter was $421 million at the midpoint of our updated guidance.

Revenue was up 13% sequentially with strong demand for the company's Iot products.

And was partially aided by the DSP group acquisition, which includes approximately one month of contribution.

Revenue from Iot PC and mobile.

We're 62%, 20% and 18% respectively in the December quarter.

Year over year, the December quarter revenue was up 18% driven by growth in our Iot revenue, where we are continuing to focus our efforts.

Our Iot product revenue increased 60% compared with the year ago quarter.

And up 27% sequentially and our.

Our revenue momentum in this area continues to outpace almost all peers and is now at a milestone $1 billion annual run rate.

Our mobile and PC revenue declined year over year due to timing of certain programs.

<unk> product revenue was down 7% sequentially and down 10% year over year and was impacted by continuing supply chain shortages for certain components at our customers.

Our PC demand over the last six to nine quarters six to nine months excuse me.

Has been relatively flat as we continued to see a stable commercial market.

Our mobile product revenue declined 3% sequentially and declined 26% on a year over year comparison due to a prior product transition with a certain customer.

During the quarter, we had two customers greater than 10% of revenue at 13% and 12%.

Share based compensation costs.

GAAP operating expenses in the December quarter were $147 5 million, which includes share based compensation of $35 3 million acquisition related costs of $10 4 million, consisting of intangibles amortization and transaction costs.

Amortization of prepaid development cost of $2 5 million and restructuring related costs of $5 1 million.

Our GAAP tax expense was $2 million for the quarter.

In the December quarter, we had GAAP net income of $69 5 million or GAAP net income of $1 71 per share.

Now turning to our non-GAAP results our.

Our December quarter non-GAAP gross margin of 59, 5% was a new company record and at the high end of our guidance range, reflecting our continued strong mix as we prioritize our highest value products, while passing through changing input prices.

December quarter non-GAAP operating expenses were at the low end of our guidance at $94 2 million and up $5 8 million from the preceding quarter due to the partial inclusion of DSP group.

Our non-GAAP operating margin of 37% in the quarter was another record for Synaptics.

non-GAAP tax expense was $18 1 million for the quarter.

We had record non-GAAP net income in the December quarter of $132 8 million, which is an increase of 22% from the prior quarter and an increase of 58% from the same quarter a year ago.

non-GAAP EPS per diluted share was $3 and 26.

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 $574 million of cash cash equivalents and short term investments on hand.

An increase of $227 million from the preceding quarter as a result of strong cash flow from operations of 122 million and the inclusion of cash and investments, which were acquired as part of the DSP group transaction.

Receivables at the end of December were $312 million and days of sales outstanding were 67 days up slightly from 65 last quarter.

Our days of inventory were 70 up from 51 last quarter and ending inventories were $133 million.

Normalizing for DSP group.

Inventory days would be approximately 60 at quarter end.

Despite the sequential increase we expect inventory to remain low given our revenue and shipping forecast, while our supply chain constraints continue to depress inventory below our desired level.

Capital expenditure for the quarter.

Was $8 5 million and depreciation was $6 4 million.

We.

Dissipate revenue for the March quarter to be in the range of $450 million to $480 million.

Further.

Our demand signal continues to be strong as our backlog position has expanded and is now higher than it was when we met one quarter ago excluding.

Excluding any M&A related backlog adds.

We expect revenue mix.

From Iot PC and mobile products in the March quarter to be approximately 63%.

19% and 18% respectively.

We anticipate our Iot products growing almost 100% on a year over year basis at the midpoint.

Significantly faster than the broader market and faster than all of our Iot focused peers.

We expect our GAAP gross margin for the March quarter to be in the range of 52, 5% to 53, 5%.

Finally, our GAAP net income per share for the March quarter is expected to be the range of $1 25.

<unk> to $1 55.

Now non-GAAP outlook for our March quarter.

We expect non-GAAP gross margin momentum to continue into the March quarter we.

We expect to continue prioritizing our focus on delivery to a robust and positive mix, while continuing to navigate supply chain constraints and changing input prices.

Organic growth opportunities.

We expect our non-GAAP interest expense to be approximately $8 million in the March quarter.

As a reminder, our interest expense is higher due to the debt financing related to closing the DSP group acquisition.

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 March quarter is anticipated to be in the range of $3 40 to.

To $3 70 per share on an estimated 41 million fully diluted shares.

This wraps up our prepared remarks, I'd like to now turn the call over to the operator to start the Q&A session operator.

Thank you.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key please standby, while we compile the Q&A roster.

Our first question comes from Rajiv Gill with Needham <unk> Company. Your line is now open.

Yes, thank you and congratulations on stellar results.

Question on the on the Iot the growth that you saw in the quarter, 60% year over year and the growth that youre expecting in the March quarter up 100%.

I'm wondering if you could maybe describe.

Some of the sub segments of Iot, which is driving the growth for instance, last quarter, you mentioned virtual reality headsets, adding.

Adding to the Iot number you're talking about automotive growing kind of faster wireless connectivity.

Curious, how you would kind of segment those.

Particular areas within Iot.

And how do we think about those segments not only in the March quarter, but kind of progressing throughout.

'twenty two.

Yeah, Rajeev I think your question actually touched on the three that I would pick as being the big growth drivers and that would be first the VR goggles. Obviously, we have a large customer in that space, that's doing really well, but I think we talked about in the prepared remarks is the fact that we're winning.

Everywhere and now Chinese goggles are starting to come online.

And drive some pretty good volumes. So feel good there second one you touched on is automotive and the.

The issue there is we're going from a world of these discrete chips, the touch and display drivers discrete touch and display drivers to TDI.

And while we participated in discrete touch and discrete display drivers, we had relatively low market share.

As the market begins to tip towards TDI.

We have high market share there.

And.

As that becomes the preponderance of the units the chip, we expect we're really going to do well.

And then the last one also you touched on which is the wireless products.

We're winning there.

It's our Wi Fi Bluetooth combos, and then a mix of our Standalone GPS products that are really driving the results. So those are really the three areas of course.

Our other businesses are doing pretty well too in fact, there is there's not a single area in the Iot portfolio that I could point to that was showing weakness.

And that's excellent to hear and then on the supply situation.

Last time, we spoke the supply situation remains tight.

I wanted to get an update in terms of how youre looking broadly at your supplier relationship.

Are you getting are you.

Confident that youll get the extra capacity as the year goes on.

And.

Are you going to be able to get capacity for some of the new products and the two areas that you are focusing first Wi Fi Wi Fi protocol chips versus the more mobile oriented chips.

Yes, again excellent question Rajeev.

Say the following I mean, certainly we feel like we can get incremental supply that supports the guidance and keeps us optimistic about.

The future.

That said, you're absolutely right and we touched on in the prepared remarks, our biggest challenges are all these new growth areas for us because our demand is outstripping our ability to get incremental supply. So I think dean talked about even some backlog accumulation in his.

<unk> and we see that in Wi Fi, we see that in the VR goggles, we see that in automotive we see that in these protocol adapters. So in all of these areas, where we've got effectively new categories of products.

We're having the most difficulty keeping up with supply, but we are able to get incremental supply here and there and that gives us some confidence that.

Going to be able to continue on this growth factor that we've outlined.

Great and just one more question, if I could squeeze in and ill step back into queue. The gross margins, 60% just phenomenal margin expansion. The last couple of few years.

The 60% margin for for March.

Can you talk about what.

Driving that both on a fundamental basis.

Perhaps you can talk about the contribution that DSP is having.

But even putting aside ESP.

It does imply that the margins within the different segments Iot mobile PC have been improving.

Obviously the next question is how much of that is price increases I know you talked about that you are passing the input costs in the form of price increases. So I would assume that would be neutral to the margins, but can you discuss how price is affecting your margins if at all thank you.

Yes, Roger so on pricing.

I'd say thats largely margin neutral I mean, where input pricing has gone up certainly we've had the price pass it along to many of our end customers, but it should be thought of as margin neutral really the margin increase as we guide into the March quarter is all around <unk>.

<unk>.

One as our Iot portfolio continues to grow.

A number of product areas that actually are margin accretive for us, but all areas of the portfolio have been improving that margin over time as really our focus has been on selling the premium versions of products and all of the market areas. So the more premium.

M devices and PC, we're going out for premium things in mobile and of course, many of the premium areas in Iot and so that's sort of been our fundamental shift really over the last couple of years and Thats, what youre seeing here going into March.

Great. Thank you very much.

Thanks Roger.

Thank you. Our next question comes from Christopher Roland with Susquehanna. Your line is open.

Hi, This is actually <unk> on for Chris and Thank you for taking our question.

So I just wanted to follow up on the supply question earlier, you said your number of unconstrained news around the wafers.

And we've actually seen some other companies either investing heavily into capex or just locking in wafers weighted in advance. So is this something that youre, considering and if you could just elaborate a bit more on your strategy here. Thank you.

Yeah.

Think we obviously, where we can where we're looking at entering into these long term agreements to try to lock up supply.

That's not consistent across the board.

If we think it makes sense then we will enter into those agreements I would say that that's not universal our tactic to for the most part has been to work with key partners and sort of increment out. This wafer supply we are of course a fabulous.

Semiconductor company. So we are not subject to capex per se.

Were strictly a consumer.

It runs into the cost of goods line. So.

It is.

Obviously, a never ending battle, where we're doing what we can to increment our supply.

And as I said in certain cases, and you alluded to it where we see opportunity.

We will look at and entertain long term agreements.

Great and then as a follow up you also talked about the Chinese handset market being weaker than expected.

So how are you seeing this end market demand here into the back half of the fiscal year.

Previous calls.

Dan what's the sell through and Thats, obviously harder for us to determine there seems like there is some softness.

But for US it's a smaller part of the portfolio now I think dean talked about it being sub 20% of the overall mix.

I'd say on the upside we've got this new launch of our OLED display driver Dean talked about a minute ago in his comment in general and mobile we're trying to go after the very highest end of the market and this is a good example of it is a very high end OLED display driver and so now in each.

Handset, we have an opportunity and particularly at the high end to sell more content per phone.

Thank you.

Thank you. Our next question comes from Derek Soderberg with Colliers Securities. Your line is open.

Hi, guys. Thanks for taking my questions actually want to start with <unk> you have some nice large service provider wins in the U S and Europe .

Curious how that ecosystem build out is progressing and I'm wondering what's the best path to build out that ecosystem is it to sort of integrate <unk> into other chipsets are simply cross selling.

One of the best path to driving growth New Ali.

Good question I think that there it depends on where it goes in the ecosystem. So we're just at the beginning of our ramp with with one specific north American customer.

And the opportunity is to go into these endpoints window sensors door sensors that likely will be <unk> only.

As the technology itself is really conducive to longer range lowered bandwidth types of things. So I think the sensor will ultimately be the only where you get into an opportunity to combine technologies is in the hub the thing thats controlling all the endpoints.

And you certainly get into opportunities in things like surveillance cameras.

So we are looking at certainly in the first phase cross selling cross selling our Wi Fi Bluetooth combos into those sockets.

And then as that market progresses, we will evaluate should we bring <unk> into some sort of super combo chip.

To really create a defensible defensible socket as I say I don't know that the highest volume piece of it will ever go to a combo type of solution because you kind of single function out of these window brake sensors and door open closed sensors.

Got it got it as my follow up there's been some data out there that a good portion of growth has been from inventory build.

Obviously for you guys March quarter, it looks like it's going to shape up nicely, but sort of beyond that do you have any visibility into sell through for Iot in PC I think you'd mentioned some softness in mobile.

Any visibility into channel inventories of some of your larger customers.

How are you factoring any of that into internal expectations for the year anything on that would be great. Yes, Derek I would say, we have probably limited visibility into individual and customers' inventory positions, but what I can say is within our channel.

<unk> partners the inventory remains very low.

We don't really see it.

Inventory buildup in any specific area I think the one exception is.

In mobile that you touched on that that actually is sort of recently weekend for us.

Outside of that.

We don't see anything specific in Iot.

<unk> continues to have occasional match that issues I think you've sort of heard from others around that but that doesn't look like inventory to us.

Just as sort of an up and down on how they pull that that inventory through to their factories.

Got it thanks guys.

Yes.

Thank you. Our next question comes from Anthony Stoss with Craig Hallum. Your line is open.

Hi, guys my congrats, especially on the gross margin improving from 40% to 60% roughly in two year is pretty remarkable.

Michael on the Iot side, just phenomenal growth how much of that is from content expansion or taking share also what are you or where do you see content could go for you guys with more products hitting in that market and then for Dean and love to hear your thoughts with supply constraints any any of them.

You on the June quarter, but do you think it's going to be seasonal above or below or in line.

Yes, Tony I mean, just sort of talk about the Iot business.

<unk> <unk> <unk>.

Talked about the growth vectors being the wireless VR and automotive I would say the long pole and our growth is actually new categories.

Where we've actually gotten into new businesses for us.

Those are really new businesses for us.

Particularly if you consider automotive the shift from discrete where we have been playing for a while but really ramping the TDI solution. So in terms of the revenue line I would say that's the long pole in other areas in our kind of our core run rate businesses, we do feel like we've been taking historic share.

Our video interface business continues to run really strongly and we feel like that's a franchise business.

But I'd really say the long pole in terms of growth are these new categories that are coming into play and creating new veins of revenue that we can go and mine.

And Tony on your second question, which was around supply constraints, maybe beyond the March quarter.

We're sort of not.

Taking questions beyond March at this point, but what I would would say.

Sort of looking out or so.

Apply constraints are youll certainly.

A concern for US we would certainly take more if we could get it from our suppliers.

But the backlog is extremely strong and fat backlog as we sit here today is actually higher than what it was a quarter ago. So you can sort of read that as sort of net new orders coming in are outstripping shipments going out and then despite having.

Great December quarter, and despite now with this guidance in the March quarter.

That continues to be strong so we're sort of sitting here and not concerned as we look out beyond March.

Okay, and then if I could have a quick follow up with Michael shifting gears, a little bit into the auto side.

Guys I've recently entered on the connectivity side I'm curious if you can share any details on the traction youre seeing or really anything in auto.

Yes, I mean, I'd say that that's.

Not quite right I mean, we're obviously looking at connectivity for auto, but we havent entered there our focus has been on a lot more of these video transferred types of products wearable products.

Consumer gadgets of different varieties automotive remains something we feel like we could go into if we want to but at this point.

We're more in kind of a look and look at look through the window type of mode.

Got it great job guys. Thank you thanks Tony.

Thank you. Our next question comes from Karl Ackerman with Cowen Your line is open.

Yes. Good afternoon, two questions for me, please one for Michael and one for Dean.

Michael you spoke about now shipping OLED display drivers, which complements our OLED touch controller offering.

Curious how you think about integrating both of those components that may allow you to broaden your mobile offering to new and past significant customers.

Yes, Carl I mean, we've talked about that I think when I first got here, we talked about our mobile TDI product for high end OLED phones.

As we got into it and we've talked about in previous calls I think we saw this.

Real opportunity and.

OLED discrete discrete OLED display drivers not doing a TDI solution.

Right now I would say most of our bandwidth is occupied on our family of discrete display drivers we continue to investigate TDI.

And there's all kinds of new products that are opening up the folds. The flips the things like that where it requires a little bit of nuance on the display drivers so I would say.

That's where we're spending our time, although to your point I think you ultimately will end up combining the two technologies.

Understood. Thank you Deane.

This is the first time you gave the number of car models, you're designed into if I if I'm correct.

All these models ramping today or is there a way to think about the step function of how they will ramp over this year and next.

Yes.

Explain the numbers that we gave I think we said we are designed into 50 plus models in 20 different discrete manufacturers six of those are ramping now so there's a lot that's future their design ins design wins theyre not production.

And we really tried to characterize this market as really being in the early innings of a shift to TDI.

Most of the units to go out today are still discrete display driver discreet touch, but we starting to see that tipping point and certainly as I said in the prepared remarks.

Most of all most if not all new designs or TDI base, rather than discrete basis, and just one quick data point for you. Carl we have previously talked about sort of 40 plus models.

And sort of the update here is now it's 50% so it's incrementally adding to our model count that we have previously.

Helpful. Thank you.

Thank you. Our next question comes from Kevin Garrigan with Rosenblatt Securities. Your line is open.

Hi, guys. This is Kevin Garrigan on for Kevin Cassidy, Thanks for taking my questions and let me Echo my congrats.

My first one bears and expect an inflection point coming in the second half of calendar 2022 for new Android smartphone launches.

Can you give us an idea of what the adoption rate of flexible OLED is for these new smartphones.

Has the competitive landscape changed in the flexible OLED touch market lately.

Yes.

I think our.

Our sense is that the number of flexible OLED displays are increasing.

And increasing I would say.

Not dramatically, but but something short of that so the mix is definitely going to flexible OLED. We continue to have strength and advantage in flexible OLED touch controllers. So as the market tips that way, we feel we feel pretty good and then.

We've characterized the second driver in our mobile business is the shift from Korean displays to Chinese displays in there in the Chinese displays we think we have the opportunity to sell in that display driver again at the kind of the highest end of the.

SKU stack.

Got it Thats helpful.

Just as a follow up you guys announced the wireless docking station reference design can you give us a sense of what the dollar content increases for you on a wireless docking station versus wired and should we kind of view this product as cannibalistic to your current product line or is it kind of more market expansion.

Yeah, I'd say, it's a little bit of both I definitely think there is going to be some cannibalization.

But we also think it's it's got features to open up a whole new market set so I think it's a bit of both.

And then I think on the second one we're looking at tens of dollars on the content side that steps up from a traditional wire dock to go to one of these wireless stocks. So I don't know the exact exact numbers, but it's something north of 10.

Okay perfect Thats very helpful. Thanks, guys and congrats thank you Kevin Thanks, Kevin.

Thank you. Our next question comes from Martin Yang with Oppenheimer. Your line is open.

Hi, Good afternoon. Thanks for taking my question I have one question for <unk>.

Can you maybe talk about the.

GAAP gross margin trend in the past quarter and also being in.

In the guidance it feels like it.

Pat lighter than your previous guidance for the December quarter and March.

Another slight step down.

Should we read into this and what are the reasons behind that cap margin trend. Yes. Good. Good question Martin So the first thing to know is notable that the.

The GAAP gross margin for the December quarter is actually a record as well for Synaptics. So it's.

Trading.

Sort of in line a record on the non-GAAP and GAAP side at the same time.

December and even more so into the March guide for the GAAP gross margin is going to be highly influenced by the <unk> acquisition.

So there are a number of inclusions on GAAP related.

Step up in inventory value intangible amortizations that will run through the GAAP only side, so youre going to see that effect for a couple of quarters until you get through sort of that initial amortization schedule.

Got it that's perfect.

Yes.

Yeah. Thanks Martin.

Thank you and our next question comes from Brett Simpson with <unk> Research. Your line is open.

Yes, thanks, very much I wanted to ask.

The non-GAAP non-GAAP gross margins.

Mentioned this is like.

One of the bigger jumps in the history of the semi industry in terms of the performance gains and it's been it's been a fantastic improvement over the over the last few years.

Look at the portfolio you offer there is still a lot of.

And you're putting a lot of consumer areas, where generally the returns are structurally lower than we would normally see and certainly a lot of your peers would have lower gross margins and so my question is the performance of the business has been fantastic, but really how sustainable are the gross margin returns across the business, particularly as some of the <unk>.

New categories that you highlight start to mature.

Thanks.

We feel like we've got a level of differentiation a level of integration and a level of performance enhancement that.

Can you gives us the ability to sell at higher asps than our competitors.

We.

We really do feel like the gross margin is something we worked on we've worked on structurally since Dean and I got here.

And we've obviously improved in almost every quarter we've been together.

Hi.

It's going to level off at some point I mean, there's no question. It is not going to improve at the rates we've seen but.

I do think that it's.

That's sustainable.

Yes, Brett I think that's the important point to take our Cros is that.

Largely our products are aimed at premium.

<unk> of our end markets.

<unk>.

Lee characterizing as consumer and low margin is not necessarily a true fat.

In fact, we talked about in for instance, our areas of processor right. We're going after things that are doing AI at the edge.

Video Transport D code and code.

Audio with high end features.

Wireless connectivity Wi Fi six and <unk> E. That's the cutting edge Wi Fi standard today with lower power than any of the competitor solutions on the marketplace.

<unk> unique capabilities to transport video.

In our wired form factor, even in PC and mobile we go after sort of <unk>.

High end commercial laptops were now integrating haptics type designs into some of our PC products on the mobile side again, it's aimed at AD flagship high end flexible OLED type mobile devices, where in fact, the engineering is valued in the things that.

Synaptics can bring.

Okay. Thanks for that and then maybe just a follow up on on.

On pricing I guess, we've seen a big foundries TSMC is one of the big foundries, they've been raising prices equipment quite meaningfully.

Going into 2022.

Generally.

Our pricing in place thanks.

So we're no different from many of our peers and I think we've been pretty straightforward that we have seen input prices changed.

In the past quarter quarters before that and we've incorporated any known pricing changes for our March quarter Guide.

We do pass along these price increases largely to our end customers.

And so as input prices changed largely that ASP changes in conjunction.

And it is actually the economics 101, right and when.

<unk> outstrip supply.

You actually will see this phenomenon.

So yes, we have been successful in passing that along and we continue to do so if input prices were to continue to change.

But it's fully incorporated into our March guide.

Got it thanks very much.

Yes, no problem Brett Thank you.

And at this time I'm currently showing no further questions I'd like to hand, the conference back over to Mr. Michael <unk> for closing comments.

I'd like to thank all of you for joining US today, we certainly look forward to speaking to you at our upcoming investor conferences during the quarter. Thanks to all.

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

Q2 2022 Synaptics Inc Earnings Call

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