Q1 2023 Synaptics Inc Earnings Call
Okay.
Cooperated first quarter fiscal year 2023 financial results conference call.
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Please be advised that today's conference is being recorded and without further Ado I'll hand, the conference over to your first speaker today, Mongol Shah Vice President and head of Investor Relations at Synaptics. Please go ahead Montreal.
Thanks, Eric Good afternoon, and thank you for joining us today.
Fiscal 2023 conference call.
My name is my job.
With me on today's call.
Our president and CEO .
In Butler our CFO .
It's also being broadcast.
It can be accessed from the Investor Relations section of the company's website at Synaptics Dot com.
In addition to the supplemental.
Yeah.
Three of the prepared remarks.
Right.
In addition to the company's GAAP results management will also provide supplementary results on a non-GAAP basis.
Share based compensation acquisition.
Related costs.
Other noncash or recurring or nonrecurring items. Please refer to the press release issued after market close today for a detailed.
GAAP and non-GAAP results, which can be accessed from the Investor Relations section of the company's website.
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Additionally, we would like to remind you that during the course of this conference call we will make.
Forward looking statements.
We're looking statements.
Expectations and projections.
Our financial condition results of operation.
Yes.
<unk>.
Although synaptics believes our estimates and assumptions to be reasonable.
A number of risks and uncertainties beyond our control.
Accurate.
<unk> cautions that actual results may differ materially from any future performance suggested in the company's forward.
Looking statements.
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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.
<unk> expressly disclaims any obligation to update this forward looking information.
I will now turn the call over to Michael.
Thank you and Joel I'd like to wait and welcome everyone to today's call. We had solid results in our first fiscal quarter revenue increased 20% year over year and was slightly below the midpoint of our guidance due to weaker than anticipated sales into Pcs.
We maintained our profitability levels with GAAP and non-GAAP gross margin above the high end of our guidance benefiting from continued positive product mix in Iot.
We delivered solid non-GAAP operating margin and our non-GAAP EPS was above the high end of our guidance range.
Before providing our business update let me highlight the macroeconomic challenges we are facing primarily due to a decline in global consumer spending.
Never in my 30 year career have I seen such an abrupt change in the demand environment with customers moving from shortage positions to access inventory in the span of a few months.
Given these macro uncertainties customers are struggling to build confidence in their own forecasts.
We are instead, focusing on depleting inventories.
Challenges are most acute in our PC and smartphone businesses and in areas of the Iot portfolio that have consumer facing customers such as virtual reality headsets wireless and broadband operators.
A large portion of the slowdown in Iot is due to an accumulation of inventory that we believe will correct over the next two to three quarters.
The slowdown in our PC business is a combination of customers working through inventory and a reset of the Tam as we exit the pandemic.
Meanwhile, our smartphone business has been affected by selling patterns greatly impacted by continued lockdowns and economic concerns in China.
Despite the macroeconomic headwinds we grew our Iot business, 67% year over year in the September quarter and had results in line with our prior guidance.
Our automotive products performed well in the long term growth drivers for our automotive products continue to be promising.
Shifting to electric vehicles larger screen sizes, and increased adoption of integrated infotainment or all tailwind for us.
We have a strong pipeline of design wins with nearly all major Oems for center information displays and are gaining traction as the market conversion happens from discrete chipsets to our integrated solution.
With increasing screen sizes and additional semiconductor device is required to control timing between two or more TDI devices.
He has come online our dollar content increases significantly.
Our video interface products continue to see tremendous new design activity as our customers develop new applications such as wireless stocking.
The upcoming CES, we will be showcasing our wireless docking solution and we expect one or two marquee customers to have a similar product in their booths.
In core docking applications, we are benefiting from growth growing attach rates and continue to win refreshed products.
Our protocol call adapter business is also gaining traction having won two new Intel reference design platforms.
Finally, we continue to successfully move into new applications, such as network displays smart monitors and conferencing systems.
In wireless our opportunities and design wins are increasing our.
Our large customers such as Amazon and Google are releasing new smart home products based on our technology.
We continue to benefit from the transition to Wi Fi six and six <unk> and Iot devices, which is ongoing and still in its infancy.
Customers are choosing synaptics solution for better power efficiency and higher throughput.
We are shipping our wireless design devices in samsung's matter enabled smart home hub, highlighting our competitive strength in the next generation of products.
Our wireless products for the security market are also gaining traction.
Product ramps at ADT, which were launched last quarter are doing very well.
This quarter, we're proud to share that our focus on supporting the home security market as a resulted in additional new wins with fair share this event and others.
Wireless connectivity is the right long term secular opportunity for Synaptics and has become the glue that pulls together multiple pieces of our portfolio.
Finally, we continue to see more opportunities to cross sell multiple technologies into different platforms across our customer base. For example, we're cross selling our audio processors with video transport technology for docking applications and.
In UCC two of the largest customers have introduced new voice over IP phones, utilizing two to five different devices from us.
We have many opportunities like this in our near term sales funnel and we continue to believe the ability to cross sell will be a growth driver for synaptics.
Let me move to our new our two non Iot product groups. Despite the recent near term volatility in the PC market, we see a path to demand stabilization during the upcoming calendar year.
After several years our customers are now looking to innovate this platform to improve user experience.
Certainly the use of haptics and force them to touch pads is driving additional content opportunity.
Long term, we expect increasing video conferencing performance expectations on the laptop to unlock voice and video opportunity for us.
And our smallest business mobile we had forecasted a sequential decline in the September quarter, and the customer pull was weaker than we originally predicted with an acute demand issue in China.
As we look into the December quarter, we have several new handset launches that will likely drive marginal incremental demand, but we do not believe the underlying trends in the market have changed.
Now let me update you on the <unk> acquisition, we announced last week, we acquired a small Israel based team of engineers focused on algorithms for computer vision.
The first application is for presence detection in Pcs and the solution is already shipping in an existing synaptics tier one customer.
We will offer the solution to additional PC customers, but also expect to sell into different areas, such as automotive and smart home applications.
Before I conclude let me share our perspective on our plans to navigate through this environment, our customers have become cautious and there is inventory a varying degree in several pockets of the market.
We are seeing requests for push outs and cancellations of previously placed orders and we are working with customers to find a mutually beneficial solution.
Our visibility into the macro issues with limited and unclear, but we believe the current quarter already reflects a material change in our business.
Assuming there is no further economic deterioration, we believe the magnitude of change going forward will likely be small with a recovery in growth to resume in the second half of calendar 2023.
During this period, we plan to stay true to our capital allocation priorities.
Manage our expenses and prioritize money toward growth areas of the portfolio such as wireless and automotive.
We will shift our inorganic focus to smaller accretive tuck in acquisitions that seem to be coming on the market.
With excess profits, we will continue our plan to buy back shares and pay down debt.
By continuing to reshape our portfolio and focusing on internal execution, we expect to emerge from the current downturn as a stronger growth driven company.
Now, let me turn over the call to Dean to review, our first quarter financial results and provide an outlook.
Thanks, Michael and good afternoon to everyone.
I'll start with a review of our financial results for the recently completed quarter and then provide our current outlook.
Revenue for the September quarter was $448 1 million.
Below the midpoint of our guidance due to weakness in the PC market.
Revenue from Iot, PC, and mobile, where 76%, 15% and 9% respectively.
Year over year consolidated September quarter revenue was up 20% as our Iot products continued to deliver strong growth.
September quarter, Iot product revenue grew 67% year over year and was up 3% sequentially. Despite the weakness in virtual reality as we discussed in our last earnings call.
Growth of Iot during the quarter was led by products for automotive video interface and wireless all growing strong double digits year over year.
And PC, our September quarter revenue was down 20% sequentially and down 26% year over year below our expectations due to a significant weakening of PC end demand and as a result, an increase in inventory held by customers.
Although commercial notebooks are not immune to economic downturns, we still expect synaptics to outperform the overall PC market because of this higher commercial mix.
As we look ahead, while demand visibility is limited we expect the PC market pressure to continue through mid 2023.
Our September quarter mobile product revenue was down 36% sequentially and declined 49% year over year lower than our prior expectations.
Android based smartphone sell through continues to be weak prolonging the clearing of inventory.
We expect the December quarter to March only benefit from the ramp of several customers new flagship products.
But given the economic concerns in China, we expect this market to have a delayed recovery.
During the quarter, we had one customer greater than 10% of revenue at approximately 13%.
Tributary servicing multiple Oems.
For the September quarter, our GAAP gross margin was a new company record at 57, 1%, which includes $23 5 million of intangible asset amortization and $1 1 million of share based compensation costs.
September quarter non-GAAP gross margin was also a new company record at 62, 6% and above the high end of our guidance range driven by a 100 basis point benefit during the quarter, which is not likely to repeat along with strong product mix.
GAAP operating expenses in the September quarter were $143 7 million, which includes share based compensation of $31 5 million acquisition related costs of $9 5 million, consisting of intangibles amortization and amortization of prepaid development.
Costs of $2 5 million set.
September quarter, non-GAAP operating expenses of $102 million were down from the preceding quarter and below our guidance, primarily due to lower than expected personnel related costs as we began to meter our hiring.
Our GAAP tax rate was 37, 7% for the quarter and non-GAAP tax rate was 17%.
Both our GAAP and non-GAAP tax rates were impacted by the tax law changes, becoming effective in our fiscal 2023.
In the September quarter, we had GAAP net income of $64 6 million or GAAP net income of $1 59 per diluted share.
Our non-GAAP net income in the September quarter was $143 1 million a decrease of 9% from the prior quarter.
And a 32% increase from the same quarter a year ago.
non-GAAP EPS per diluted share of $3 52.
Was above the high end of our previous guidance range as stronger gross margins and lower operating expenses flowed directly to the bottom line.
Now turning to the balance sheet.
We ended the quarter with $912 million of cash cash equivalents and short term investments on hand.
An increase of $36 million from the preceding quarter with cash flow from operations of 78 million, partially offset by $31 million of cash used for payroll taxes related to our equity compensation program and $13 million of cash used under our share repurchase program.
Cash paid for capital expenditures and depreciation for the quarter were both $6 2 million.
Receivables at the end of September were $284 million and days of sales outstanding were 57 days down from 61 last quarter.
Days of inventory were 96 above 82 days last quarter and ending inventory balance was $179 million as our inventory turns have slowed.
We are working with our supply partners to adjust to the current demand environment, but in the interim we expect our inventory to increase again next quarter before beginning to bring these levels back down.
We restarted our share repurchase program in September .
And bought back approximately 120000 shares in the quarter for an aggregate cost of roughly $13 million.
As we highlighted last quarter with sufficient cash reserve dry powder available for tuck in acquisitions, we plan to use excess cash flow towards the repayment of debt and share buybacks.
We plan to continue to repurchase shares and at the quarter and have $564 million available under our current authorization.
Now, let me turn to our December quarter outlook.
As Michael mentioned, we are facing headwinds across our three product groups as customers have turned cautious with their orders there are multiple requests for customers and channel partners for push outs and cancellations of existing orders to reduce their inventory.
As a result, we anticipate revenue for the December quarter to be in the range of 350 million to $380 million.
A sequential decline of approximately 19% at the midpoint we.
We expect our revenue mix from Iot PC and mobile products in the December quarter to be approximately 73%, 15% and 12% respectively.
Unless the macro economic environment further weakens our expectation is that many of these customers will have depleted much of their inventory and be in a position to return to normal consumption levels by mid calendar 2023, and therefore resumed growth in the second half.
We expect to maintain our strength in gross margins with GAAP gross margin for the December quarter expect it to be in the range of 53% to 56%.
Out of an estimated 45 million fully diluted shares.
We expect non-GAAP net interest expense to be approximately $8 5 million in the December quarter, and we expect our fiscal 2023 and long term non-GAAP tax rate to remain in the range of 16% to 18%.
Lastly, we do not believe that the newly imposed U S. Export controls has or will have any material effect on synaptics revenue or supply chain.
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 very much yes, we will conduct the question and answer session.
As a reminder to all of our listeners to ask a question press Star one one on your telephone and wait for your name to be announced please.
Please standby.
Well I compile the Q&A roster. Please.
Our first question comes from Raj Bindra Gill at Needham <unk> Company Raj Bindra. Please go ahead. Your line is open.
Yes, Thank you for taking my questions.
Maybe some more details on the Iot business, if I can so the guide implies Iot down.
About 22% sequentially.
Wondering if you could talk a little bit about some of the sub segments I know I know, Michael and Dean you mentioned kind of broad weakness across consumer.
Inventory accumulation is being burnt off but.
Are there any kind of specific acute.
Areas that were more that were more pronounced where that was video interface.
Talked about VR in the past.
Wireless slowing down I'm, just curious if you can maybe elaborate a little bit further within Iot.
Yeah, Rajeev, let me take that I mean, I would say that.
Biggest problem is probably in the VR glasses area.
Some pretty acute issues there we.
We do have problems in other areas, the consumer facing businesses, but they're not nearly as acute.
I'd say on the upside into the areas you touched on automotive and video interface continue to do relatively well.
Wireless is choppy and that that's one where I think we've had some more significant inventory issues, but our design traction. There is is really really strong so were pretty confident that that one is as more of a temporal issue.
Thanks for that Michael and on the gross margins Guy.
Guiding to 61%.
No.
Despite revenue coming.
Coming down.
19% sequentially gross margins are are 61%.
Okay.
Which is very good to see is this I would imagine this is a kind of a disciplined approach in terms of.
Margins are you walking away from business, because its not meeting a certain margin threshold.
Just curious how are you able to kind of maintain those high margins when revenue is coming down at these levels.
Yes, I mean.
I think there's maybe three parts to the answer Roger I mean number one is we continue to be disciplined I don't know where necessarily walking away from from business, but we continue to be pretty price disciplined in our approach.
And maybe it's as we've talked about before not attacking certain sectors of a given market is more.
Apropos to what's going on.
Having said that I would say we are seeing price pressure for the first time in a while.
Conversation that we're getting into our customers.
More than I'd like.
So I think over the long term the gross margin will be in the ZIP code, but I don't imagine it going up much from here.
I appreciate it thank you.
Okay standby for our next question.
And the next question comes from Gary Mobley at Wells Fargo. Gary. Your line is open. Please go ahead.
Hey, guys. Thanks for taking my question.
I appreciate the comments that you, perhaps see a bottom or a completion of the inventory flush by the mid part of calendar year 'twenty three but if I look at the guidance that youre, providing for the December quarter, It's al.
The $85 million sequentially and in about the same amount from from prior expectations.
So how much of that is inventory drawdown, how much of it is representative.
The new baseline for the markets that you serve.
How much.
All of it is pricing related and then as well how do you see all of those factors playing into sort of the progression.
The first half of calendar year 'twenty three.
Yes. Good question, Gary There is a lot of pieces there what I would say in broad terms really what we've been hearing mostly from customers about inventory drawdown.
And in fact, the sequential decline, we're actually trying to get out ahead of it working with customers and channel partners to find a mutually beneficial way to draw down the inventory. So that we can work back from a sustained level.
I would say, it's a little different in each kind of market area for example in PC.
Honestly think we're probably under shipping the market at this point and I think the drawdown will probably happen relatively quickly if we rewind the clock in fact, we're probably shipping into the PC market.
Less than pre Covid levels. So I think that market actually has seen a pretty significant shift and I think they should be able to get through it pretty fast and Iot is so broad you sort of have different.
Inventory corrections that will happen over the next couple of quarters, and then lastly, I would say, there's probably an insignificant amount that I would attribute to pricing while theres. Some pricing conversations I don't think that that's a significant factor here.
Alright, thanks for thanks for that color.
And there is I guess some speak out there about some increased foundry quotes I'm wondering if you're seeing that from your foundry partners and.
That's the case I'd love to hear your view on whether or not you'll be able to pass along those higher quotes onto your customers. This year.
Yes, Gary.
Yes, it's a mixed bag. So we've actually for the first time seen some reductions from our supply chain. Our operations team has worked pretty tirelessly in fact, our operations leaders in Taiwan right now.
And we've seen some supply pricing reductions not significant but movement in the negative direction for the first time in a long long time, having said that you're probably alluding to.
Early significant supplier who's sort of telegraphed at mid single digits increase at the end of the calendar year.
We are still working on that at this point I don't know if we'll be successful in and watering that down to any degree.
As we have in the past, we're going to work with our customers to see if they will take.
On the additional price increase that we get from from our largest supplier.
I think it'll be more difficult. This time than it has been in the past I mean to be very fair I think it's going to be a bigger challenge than we've had in the past to pass on that pricing increase.
So we're trying to work with that supplier to tamp that down a bit again, not sure that we're going to be optimistic.
Successful in any way there so we're going to have to navigate that that in the first half of next year.
Thank you.
Okay.
Okay standby for our next caller.
Chris Thank car at Cowen has our next caller Chris Your line is open. Please go ahead.
Yes, hi, Thanks for taking my question I appreciate it I had two of them postponed for Dean you got them, it's about the gross margin sustainability.
You mentioned gross margin should be in the same ZIP code I'm just kind of curious based on your comments on things maybe bottoming around middle of next year.
Revenue declines in March and June quarter, how.
How should we think about gross margins.
Into the first half looks out into 'twenty, three and then I had a follow up.
Yeah, Chris So Michael had alluded that we worked pretty hard for the last three years to get our gross margins.
In the 60% range.
And we've been pretty disciplined on selling sort of premium devices getting our mix right improving our cost structures.
And quite honestly, we've done a tremendous job. So we just ended the quarter at 62 guiding at midpoint 61.
So we think we're staying there for sort of the near term.
With.
No.
Question, just a minute ago about foundry prices with customers being a little bit more sensitive to USPS I do think there is probably going to be a little bit of pressure on the margins, especially as we continue to go through kind of volatile times in the macroeconomics.
That being said look if you wanted to think about what could be a downside pressure, it's not all that significant.
Look just to remind everybody on the call our long term gross margin target for the company longer term and sustainably is 57% or better.
So it's kind of low Sixty's high fifties is probably the way to think about it Chris.
Got it.
<unk> helpful Dean for the color.
I have a long term strategic question for Michael.
Okay, a lot of Iot and a quarter of your bookings from mobile and PC.
Do you think it makes sense to find a better home for their mobile PC also.
A couple of hundred person Iot or is it something not under consideration.
Of course, it's definitely something that we get asked almost every quarter. So it's a fair question I would say the following.
First of all I think our mobile business is a local minimums. So selling now is probably the economics are very difficult on our end.
Obviously, we continue to be optimistic that we can make progress in that business.
A lot of the headwinds are not of our own making.
I'd say the second issue that we would have is the buyer right mobile our mobile business.
<unk> is a business that people have inquired about most of those are not people that we can sell to they might be Chinese buyers, which presents a significant problem. So we've certainly considered it it's something that comes up all the time.
But I would say for US right now we're in a position of stand Pat.
It's a business that throws off a good amount of cash and as I said, we expect it to continue to grow it's a small part of our portfolio as you know, it's less than 10% and in that context, it's something that doesn't cause us to lose sleep like it did four or five years ago. When it was a big portion of the portfolio.
<unk>.
Got it thanks, a lot Michael and thank you really appreciate the insight.
Yes, Thanks, Chris.
We have one last caller for today coming in from Christopher Rolland of Susquehanna. Christopher Your line is open. Please go ahead.
Hey, guys. Thanks for the question.
My question I guess is around Wi Fi it seems like.
Consumer Wi Fi is moving pretty quickly from shortages to SaaS.
So I know you guys didn't have wafers.
For a while I don't know.
That position is now in terms of supply.
But perhaps you can talk about the outlook there what you guys are seeing.
Is that part of the push outs and cancellations and any expectation for pricing there as well would be great.
Yes, Chris.
Fair questions I think that Wi Fi business is one where we've seen some pretty significant inventory buildup.
If you remember one of our largest customers in that business as a module supplier, where they take our dye put together a bunch of the other RF components, and then ship it to a whole host of end customers some of which are consumer some of which actually or industrial or even enterprise customers.
And I think what happened was they were expecting to ship as part of a matched set a customer may have been missing one component.
They were there orders on them to build out the wireless module and then as those other components came in.
Enabling a finished finished goods sell off they had some difficult.
Difficulty then shipping out the module Guy had some difficulties shipping out to the end customers. So there has been a relatively appreciable inventory buildup on our wireless business.
That said as Dean said, we expect that to work through quickly primarily because we continue to win there if you look at our opportunity funnel.
For Wi Fi, it's the strongest in the company our design wins, we have a measure where we record design wins thats the strongest in the company. So I think this one as I said to a previous question or I think is a very temporal issue.
We feel really really good about this business.
Got a number of new design wins, both in GPS and Wi Fi and Bluetooth and we continue to feel positive about the business, but I think Chris it's mostly around some some inventory buildup that happened at our module maker.
Thank you very much Michael for that.
And I guess my next question's around Iot and display link or Doc PC docking products overall, so it looks like the Tam has been reduced there by call it a quarter, maybe even a third.
How would you expect your docking stations and your PC products too.
Two two.
To kind of trend.
Versus that overall Tam reduction is it about the same is it better worse.
Would love those slots.
Yeah, I'm not I'm not quite sure where you get the Tam reduction certainly the PC Tam has reduced the documentation Tam.
It has actually gone up or at least remain flat because theres been an offsetting of that.
Tax rate of a Doc to a PC has gone up pretty considerably.
Offsetting our bettering the reduction in the client shipment. So we feel continue to feel good about docking I think I said at the top Chris that.
The two areas in the Iot portfolio that where you're seeing strength or automotive and dock.
And that continues to be true.
We have opportunities now to build on our docking momentum.
We're going into other applications like smart monitors like video conferencing and that is a different tam, but increases our opportunity size that asset out of that asset and obviously the Wi Fi asset that we got from Broadcom or two that we are particularly pleased with them and continue to.
Believe that.
We have some long term secular growth drivers ahead of us.
Yes, that's exactly what I was asking the relationship between the PC Tam in your markets and it sounds like Dell outperformed so thank you very much guys I appreciate it.
Thanks, Chris.
And are there any more questions out there from our audience as a reminder.
Just need to press star one one on your telephone Starwood.
Star one on your telephone to ask a question and we'll stand by.
For a few moments just to see if there's any more questions.
Okay.
At this time.
Like to turn it back to Michael <unk>, President and CEO at Synaptics for closing remarks.
I would like to thank all of you for joining US today, we look forward to speaking to you at our upcoming investor conferences during the quarter. Thanks for your time and attention and continued support of the company.
And this concludes our program you may now disconnect.
Thank you.
Yes.
The conference will begin.
<unk> T to raise your hand during Q&A you can dial star one one.
Sure.
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Yeah.
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