Synaptics Incorporated (SYNA) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Synaptics’ Second Quarter 2012 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Thursday, January 26, 2012. I would now like to turn the conference over to Ms. Jennifer Jarman, of The Blueshirt Group. Please go ahead, sir.

Thank you, operator. Good afternoon, and thank you for joining us today on Synaptics’ second quarter fiscal 2012 conference call. 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 www.synaptics.com. With me on today’s call are Rick Bergman, President and CEO; and Kathy Bayless, CFO. In addition to the company’s GAAP results, management will also provide supplementary results on a non-GAAP basis, which excludes noncash share-based compensation charges and certain other non-operational and non-cash items. Please refer to the press release issued after market closed 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 including predictions and estimates that involve a number of risks and uncertainties, including but not limited to, statements regarding the company’s future financial performance and outlook, including financial guidance for the third quarter of fiscal 2012, anticipated year-over-year changes in PC and non-PC product revenue for fiscal 2012 and expectation for mobile touchscreen units for fiscal 2012. The company’s expectation that it will broaden its mobile customer base this fiscal year and outpace industry unit growth, the company’s belief that it is leading the evolution of next-generation touch interfaces, the company’s expectation that it will ship its first in-cell solutions in the first half of calendar 2012, and the company’s expectation that its newer technologies will drive even further market penetration and growth opportunities for its touchscreen products. Actual results may differ materially from any future performance suggested in the company’s forward-looking statements. We refer you to the company’s SEC filings, including Form 10-K for the fiscal year ended June 30, 2011, for important risk factors that could cause actual results to differ materially from those contained in any forward-looking statement. We expressly disclaim any obligation to update this forward-looking information. I will now turn the call over to Kathy Bayless. Kathy?

Thanks, Jennifer. We are very pleased with our results for this December quarter. Revenue for the second fiscal quarter of $145 million grew 9% sequentially and was slightly above consensus and in line with the guidance we provided last quarter. Our top line results reflect better than anticipated revenue from mobile phone touchscreen applications, offset by lower than expected PC revenue. Our gross margin performance was slightly above the high-end of our expectations, primarily due to product mix driving strong operating profit, net income and EPS. As a result, non-GAAP net income was $23 million or $0.68 per diluted share, representing sequential increases of 20% and 19%, respectively. In the December quarter, the revenue mix from PC and non-PC applications was approximately 46% and 54%, respectively. Revenue from PC applications was down 6% from the prior year and 3% sequentially, primarily reflecting lower PC peripheral revenue. In addition, the overall consumer notebook market has continued to be weaker than anticipated. Synaptics continues to lead market for notebook touchpads with the market share of approximately 65% and design activity continues to be very strong. Revenue from the mobile touchscreen applications in the December quarter was down 11% year-over-year, but up 21% from the September quarter. Mobile unit shipments increased significantly from both comparable periods. As we discussed the mobile product mix was predominantly tails and chips with integrated module solutions representing less than 5% of mobile revenue. Module solutions were approximately 10% of mobile revenue last quarter and close to 50% of mobile revenue a year ago. As we have mentioned on prior calls, tail and chip solutions have lower average selling prices, but carry higher gross margin percentages than full module solution. Non-GAAP gross margin grew to 47.4%, an increase of 640 basis points year-over-year and up 130 basis points from the September quarter. The gross margin percentage was slightly above our expectations due to the overall product mix and a higher than expected mix of revenue from mobile phone applications. Non-GAAP operating expenses were $39.3 million, up $2.2 million from the prior quarter. The increase was primarily due to an additional week of employee-related expense. As discussed last quarter, the December quarter was a 14-week period as fiscal 2012 will be a 53-week year. Headcount at the end of December was 692. GAAP operating expenses were $47.6 million, including $8.5 million of share-based compensation in the December quarter. Our non-GAAP tax rate was 23% in the December quarter, compared with 22.4% in the September quarter, reflecting our geographic profit mix. Our GAAP tax rate was 18.8%. As I mentioned previously, second quarter non-GAAP net income was $23 million or $0.68 per diluted share. Turning to our balance sheet. We ended the quarter with $282 million of cash. Cash flow from operations was $29.2 million. Capital expenditures were $2.3 million and depreciation was $2.7 million. Receivables at the end of December were $86.7 million, reflecting 54 days of sales outstanding. Inventories at the end of December were $29.2 million and inventory turns were unchanged at 11. Now I’ll make a few comments regarding our quarterly outlook, but first I’d like to remind you that the third fiscal quarter will revert back to a 13-week period rather than 14-week quarter we just completed. Looking ahead to the March quarter, we continue to monitor ongoing uncertainty within the consumer spending environment and the impact on end-demand. Based on our backlog of approximately $69 million entering the quarter, customer forecast and expected product mix, we anticipate revenue will be in the range of $128 million to $136 million. This outlook reflects seasonality and continued limited visibility further impacted by the timing of Chinese New Year. We expect both mobile and PC revenue to be down sequentially. PC revenue is anticipated to be relatively flat year-on-year and while we expect mobile phone touchscreen units to be up, mobile revenue is expected to be down, reflecting the mix shift to lower price tail and chip solution, compared to the year ago period. Taking into account our overall revenue mix, including our module-based notebook business and product mix for mobile touchscreens, all of which fluctuate on a quarterly basis, we expect non-GAAP gross margin for the March quarter to be in the range of 46% to 47%. We expect non-GAAP operating expenses in the March quarter to be down some from the December quarter, reflecting a normal 13-week quarter with increase engineering headcount to support our expanded product portfolio and technology roadmap. We expect the FAS 123R charge in the second quarter to be in the range of $8.2 million to $8.4 million. We anticipate that our non-GAAP tax rate for the March quarter and for the year will be in the range of 22% to 23%, reflecting our expected geographic profit mix. Non-GAAP net income per diluted share for the March quarter is anticipated to be in the range of $0.47 to $0.56 per share. I will now turn the call over to Rick for an update on our business.

Thanks, Kathy. Fiscal Q2 marks my first full quarter since joining Synaptics and I’m impressed with the team's performance. Despite the revenue headwinds from the transition away for modules in the mobile touchscreen business, the company continues to execute and delivered a sequential increase in revenue and further improvement in gross margin. Today, I’d like to touch on some of the exciting product announcements we made during CES, as well as our continued progress on our advanced technology and our leadership position in the markets we serve. Then we’ll be happy to take your questions. During the second quarter we began shipping our first on-cell solution with our ClearPad 3200 in the Sharp DC250 smartphone. This phone features one of the most advanced touchscreens on the market with a 4.5-inch 3D screen and a 12-megapixel HD camera. We also began shipping solutions into many of the first Ultrabooks and we are now actively engaged in over 50 new designs expected to hit the market in the coming months. Several of these products were showcased at the recent Consumer Electronics Show in Las Vegas, as well as our latest technology innovations. This year's show was all about thinner, lighter and more energy-efficient devices. As devices continue to decrease in size, maximizing the functionality of the footprint is crucial to the performance of the end product. New technology and form factors add levels of complexity that require in-depth system level engineering support to provide ease of integration. This is evident in all of our key product markets for mobile phones to tablets, the new form factors in the notebook PC, such as hybrid and Ultrabooks. Our strong product line-up supports these trend including our new high-performance ClearPad 7300 single ASIC solution for touchscreens up to 12 inches. Our solution enables OEMs to deliver highly differentiated tablet devices to market with the strongest performance, shortest development time and the lowest cost. The single ASIC solution simplifies design complexity and delivers higher performance versus competitive multi-chip solutions. Multiple tablet programs based on this solution are in active development and are expected to reach the market by mid-2012. We also unveiled our Design Studio 4 tool set. This is an important differentiator for Synaptics based on our history as a full solution provider with a deep understanding of touch technology. This platform accelerates our ClearPad development cycle by enabling our customers to evaluate and optimize touch performance in their products. It’s embedded with our patented SignalClarity technology, which improves accuracy and finger separation and provides unmatched environmental and electrical noise immunity. With over 10 years of system-level design experience now incorporated at this software level, we are enabling our customers to provide compelling products that are high performing, robust and easy to integrate. In addition to the Sharp on-cell mobile phone I mentioned previously, we are shipping our ClearPad solutions into a number of new mobile phones with Huawei, LG, RIM, Sony Ericsson, Sharp and GTE. We continue to expect to broaden our mobile customer base this fiscal year and to outpace industry unit growth. Synaptics is leading the evolution of next-generation touch interfaces that deliver lower overall costs and tight integration with multiple display types. We began shipping solutions for mobile Sensor-on-Lens implementation a couple of quarters ago. Our on-cell technology is in the market today and our in-cell solutions are not far behind. Our development work continues with the top 6 display OEMs with the first in-cell solutions expected to ship in the first half of calendar 2012. While the touch interface is rapidly becoming a must-have solution, there’s still a long runway for penetration of capacitive touch within the broader mobile market. By 2014, 50% of the mobile phones are forecasted to remain unserved by capacitive touch solutions. We expect these newer technologies to drive even further market penetration and growth opportunity for our touchscreen products. Moving to the PC market, Synaptics is uniquely positioned to provide the innovation, performance and sleek design characteristics that are necessary to drive the new wave of Ultrabook PCs. We are the Clear leader in the first wave of Ultrabooks, including the HP Folio 13, the HP Envy Spectre, which garnered a Best of CES award for Lenovo U300s, the Acer Aspire S3, the Toshiba Portégé Z830, and the Toshiba Satellite. Our solutions leverage our industry-leading QuickPad with image-sensing technology that detects multiple fingers and supports large TouchPad surface areas, ideal for precise navigation and sophisticated gesture recognition. The majority of these designs are also enhanced by our InterTouch technology, providing high-speed connectivity to those motherboards for heightened TouchPad performance. As a Microsoft co-engineering partner, we are working closely to develop solutions that maximize the touch-first experience for Windows 8. Our longtime leadership in the TouchPad phase puts us in a unique position of pursuing 2 touch interfaces in the notebook form factor, with both TouchPad and the touchscreen devices. The stringent certification requirements in Windows 8 raises the bar on touchscreen performance and are supported by our new single ASIC ClearPad 7300, while the TouchPad specification promotes a premium user experience. These include larger TouchPads and QuickPad with high-speed interfaces and fast and fluid multi-touch gesture capabilities. During his keynote address at CES, Intel CEO demonstrated a hybrid convertible PC that had Synaptics technology in both the TouchPad and on the 12.5-inch touchscreen. This demonstrates -- demonstration underscores our advanced reference design work with Intel over the past 6 months in both the touchscreen and TouchPad areas. Our work with Microsoft and Intel are examples of our broad set of global ecosystem partnerships to drive solution adoption within our market. In addition, Synaptics is in the reference design for nVidia’s recently announced Tegra processor Direct Touch Solution. And as we push ahead with our on-cell, in-cell and integrated display drive roadmap, we have the opportunity to expand our strategic positioning across not only OEMs but with center and display manufacturers, and processor companies. We believe our strong partnerships have provided and will continue to provide increased opportunities for our touch solutions. As we move forward, we couldn't be more excited about our business. Synaptics is extremely well-positioned to capitalize on the rapidly growing markets we serve. And focusing primarily on touch, we are investing in the right areas and have created a broad set of advanced solutions tailored for multiple products and markets that drive our future growth. We are in the leadership position with our Intel and integrated display driver efforts for mobile touchscreen, our system engineering-based design tool, our support of the growing Ultrabook market and our ClearPad 7300 single ASIC offering for the market, tablet market. With our top tier engineering team and a complete knowledge of the solutions environment, combined with our global technical design center, we expect to accelerate our competitive edge as the opportunities for our technology continue to expand. With that, we will now turn the call over to the operator to start the Q&A session. Operator?

[Operator Instructions] And our first question is from the line of Rob Stone with Cowen and Company.

I wanted to just touch base on the PC trends for a minute. Do you attribute the atypical sequential performance to cannibalization by tablets or people waiting to get these new Ultrabooks? I understand that year-over-year delta had more to do with peripherals been done, but if you can comment on sequentially and then with respect to the Ultrabook designs, do you see those ramping more substantially in the second half of the calendar year?

Thanks, Rob. In terms of the seasonality, the numbers we are projecting are typically in line with the seasonality. Now obviously, Q4 we’d all like to see higher growth -- notebook growth rate than we did and certainly some of that can be attributed to the hard disk drive issue in Thailand. That has kind of generally slowed the market overall. And on the second part of your question around Ultrabooks. We certainly we expect to see sales beginning out that’s the number one, number of them are already in the marketplace, but that should accelerate through the end of the year. It’s kind of high point, of course, we have all seen Intel’s projection of 40%, which does seem to be in the high range, but there is no doubt it is a very exciting category that gives us great opportunity.

Okay. Any comments, if you’re willing to, on how much tablets contributed either to Q2 or to your outlook for the second half?

It’s always tough to put a finger on it and there is various estimates on how much the tablet market might be cannibalizing a bit of the notebook market. Mostly that’s around the refresh rate. So we haven’t seen nor the feedback from our OEM. So that’s a huge impact, obviously, it’s impacted our tablet plan more so directly than our notebook plan.

Yes. Let me add a little bit to that, Rob. I mean, as far as our tablet business, we’ve been shipping into a couple of tablets and as Rick said on the call, I mean, we’ve announced our 7300 solutions, and we have active designs underway that we expect to hit the market by mid-2012. So we do expect to see some more Tablet revenue over the next couple of quarters as far as how fast that develops. We will just have to see how the market develops overall. But with Ultrabooks and also with Win 8 coming along in the focus on touch, we think there is going to be additional avenues beyond just tablets and other -- as other form factors come into play and also supportive touchscreens even in clamshell. So we’re very excited about larger touchscreen opportunities going forward.

So can you comment on how much tablets contributed to Q2?

Still very little.

And our next question is from the line of Charlie Anderson with Dougherty & Company.

I wondered if you guys could kind of just touch on PC in terms of your market share. I think you guys have sort of hovered around 65% and I wonder kind of where you stand today and kind of where Ultrabook maybe takes that? And also you’ve got a competitor who has started to talk a little bit more about entering that market, who's been a traditional player on the smartphone side. So I wondered if you could address that as well?

Sure. Our market share is roughly where it’s been in the mid-60s area and as we move forward, particularly the Ultrabook category gives us an opportunity certainly to go above that. But as we look forward and try to balance all the different notebook segment categories, mid-60s is the general area where we plan. Certainly, we have another competitor out there that is talking about plans in this area. That’s nothing new for Synaptics and we continue to have really the best solutions in the marketplace. We are kind of seen as the top solution. So as OEMs do look at things like Ultrabooks and so on that are addressing the premium segment, they want the best supplier and that’s Synaptics, and that’s a technology statement, that’s operational statement, that’s a support statement, a driver statement and so on. So we really think we have a clear differentiated product in this case and we plan to hold that share.

And then quick question for Kathy on the OpEx. You said it would be down a little bit. I know you’re going from a 14-week to a 13-week. If I do kind of the conversion, I think, you’re still up definitely a little bit. And I wonder if you could just kind of talk about is it R&D kind of where you’re driving that extra cost and then kind of how you’re thinking about operating margins, in terms of how you’re planning your OpEx going forward?

Sure, Charlie. As far as what we’re looking at for next quarter on operating expense, I said operating expense we expected it to be down a little bit quarter-on-quarter. So we get back to the 13 weeks. So the expense comes down for that but we’ve also continued to hire. So we’ve been hiring consistently, Q1, Q2, Q3 and from an investment standpoint, I mean, we are really continuing to hire in engineering within our core business, systems engineers, architects, to really support our expanded product line up and our technology roadmap. From a model standpoint, the operating expense this quarter with $145 million of revenue, R&D was around 18% and SG&A was around 9% or 27%. The target is as we are still transitioning with the revenue from modules to chips and tails. We are targeting R&D to continue to be in the upper teens in the range of SG&A of 7% to 9%. So operating profit that results in operating profit target of still mid-to-upper teen for the near-term.

And our next question is from the line of John Vinh with Collins Stewart.

First question is on mobile. You guys had mentioned that you expect to continue to broaden your customer base and gain market share. I was wondering if you could clarify does that mean you expect to ship into additional Tier 1 customers this fiscal year that you had not previously shipped to in the prior fiscal year, does that comment apply to Tier 1 customers is basically my question?

Yes. We expect to add to our Tier 1 customer base.

Great. And my follow-up is basically on kind of the share gains that you’ve gotten in the mobile market. It sounds like you guys have been pretty consistently confident and have some good visibility there. Can you talk about what has allowed you to regain market share within the mobile market?

Certainly. Ultimately, we had starts with world-class products, so with our 3200 product line that’s really allowed us as a strong entry back into the mobile space. So we are now viewed as the leader with technology there and we were kind of first with some of the leading edge technology. And of course it’s some of the other things I mentioned as well, with our design center support around the world and how we support our customers worldwide and that set of services, the tools that we bring, I mentioned DS4, SignalClarity, those types of technologies all put us in a leading position. And so now we’ve secured those design wins that will allow us to grow faster than within the industry.

Great. And then, my last question is on in-cell. I was wondering if you could just give us a sense of how you guys are looking at the in-cell market. What sort of confidence you guys have about beginning shipments in the first half of 2012 here? And then also is how do we think about the ASPs on in-cell versus your current kind of chip and tails business?

Okay. I will take the first half and then I’ll let Kathy talk to the second half. So in terms of our view on in-cell it’s unchanged. We still believe it is the ultimate solution for cell phone, it brings the attributes, the thinner, lighter solutions and ultimately lower cost as well. And as I mentioned in the prepared remarks, we expect very soon to see the first cell phone that utilize our in-cell technology, and that’s just beginning of a significant trend in the market. And we were not pegging the exact percentage, but the growth rate will be very high over the next couple of years as virtually every OEM and LTM are very interested in this technology.

Yes, John. As far as the ASPs go, I mean, the in-cell solutions, I mean, those are -- they are higher end solutions, they are more advanced technology, so if we look at the product line up, I mean they carry a premium to the rest of our products. So haven’t talked about general ranges or anything.

And our next question is from the line of the Li-Wen Zhang with Pacific Crest.

First one I would like to clarify, Rick, you mentioned like over 50 new design wins [indiscernible] are those for the touch chip solution or for the ClickPad?

At this juncture all the introduced Ultrabooks have the ClickPad solution.

ClickPad. Right. Okay. And then, if you don’t mind can we get a fee range for the notebook ClickPad?

An ASP range for notebook ClickPad?

Yes.

Well, Li-Wen, what I said in the past is when we look at our TouchPad business, typically a regular TouchPad could be in the $2 range and if you’re looking at a ClickPad it could be a nice premium over that range.

Okay. And also I think a couple quarters ago, Russell mentioned about this fiscal year outlook for the top line is right down 1% to 6% and also he commented on the second half of this calendar year to grow double digits. And are they still hold in the, this growth opportunity still hold and also what kind of range if double-digit growth range for the second calendar half this year -- second half of this calendar year, I'm sorry?

Okay. Let me see if I can address that. So we’re not make any -- we are not updating our guidance for the full fiscal year. If you look at the third quarter and you pick -- you look at the midpoint of the range with the visibility that we have right now that’s about $132 million, so our current view would be towards the lower end of the range that we previously discussed.

And our next question is from the line of Rajiv Gill with Needham & Company.

In the notebook market, Rick, you had talk about potentially 2 touch interfaces in the notebook as Microsoft kind of pushes more touch enabled notebooks. Just wondering, based on your conversations with the PC OEMs. Are touch enabled Ultrabooks at a right level of price in terms of there’s enough cost that has been brought down in some of the components and materials where you will see kind of more of a surge in touch enabled notebooks in the future, or it could be you have an additional dollar content per device you could get from?

Yes, Rajiv, interesting question and it’s a question we ask all the OEMs, what is that opportunity because obviously it represents the great growth opportunity for Synaptics if we participate on the on-screen touch. And the momentum certainly is growing in that area. So in some ways it’s a bit of a surprise. It’s hard to peg a figure on how many notebooks will ship whether they timeframe with the touch enabled screening. But clearly the OEMs are interested and a lot of it is supported by some end user data that we’ve been and they have been looking at. And I mentioned the Intel demo at CES, where it showed a great example where touch makes sense if you have one of those hybrids with the screen that can move around. Certainly, you can see that, now I can see a mode where you would want both indirect and direct touch going forward. Now you were also asking a little bit about the cost. The cost does need to come down on touch to enable broad deployment of that technology because with the larger screen sizes, of course, the sensor itself becomes quite an expensive proposition. And in the retail market we all know that there is price elasticity. But there are smart people working on that cost and as volumes go up, I’m convinced the cost of those -- the largest sensors will also come down to enable that experience to a broader set of customers. And I think we’re all going to start demanding to have touch as broadly as we can. So again, I’m not going to get pinned down on a figure but it could be a very compelling opportunity a year from now.

And on the handsets side, what -- any change in terms of the competitive landscape from your existing competitors in terms of aggressive pricing? Are you seeing any aggressive pricing from the existing competitors? And along those lines, silicon laboratories has gained a little bit of share on say phones lower end platforms. Are you seeing silicon laboratories or any other potential new competitive threats in the marketplace?

Certainly, a low end part of the marketplace, we’re seeing several potential new competitors, it's a couple of the big names and then, a couple of the smaller Asian-based companies out there. But it’s a pretty serious pace on new technologies and so on. And we have a very close engagement with the OEMs and they really look towards suppliers that have a broad set of solutions and are in this for the long term. And so obviously we view Synaptics fits into that category and then there is a couple of the other large players that fit in that category as well.

And last question for me, the gross margins have moved up very nicely, like 600 basis points from the last 2 to 3 quarters -- few quarters. Are you expecting maybe any other margin -- more margin expansion as you get into the first half of year -- fiscal year ‘13 or do you think we’re kind of peaked out at these 47% gross margins? And I will put it in other words, I mean, do you also think you get gross margin improvement on the PC side with these ClickPads on the Ultrabooks maybe you can get some help from that segment?

Rajiv, let me see if I can address the question. So for gross margin, I mean, the way that I look at it is the PC portion of the business that still carries kind of the historical lower gross margins unit and all and the Clear solutions, the mobile part of the business and also large touchscreens they carry higher gross margins. So I talked last quarter and I’m going to stick with it, the near-term range that I’m looking for on gross margin is kind of 45% to 47%. And that’s assuming roughly a 50-50 mix of traditional TouchPad ClickPad solutions, plus or minus a few points versus the Clear solution. So it’s really dependent upon whatever that mix of the business between the TouchPads, ClickPads and then the Clear solutions. But again, as we go forward, I mean, I do think that there is, we’ve got great opportunity from a positioning standpoint with Ultrabook’s and also Win 8 because of -- with our ClickPads, because if you look at the specifications for all of those devices, they're specifying the larger TouchPad, a lot more ClickPads, so we view that as positive, definitely from an ASP statement as we go forward.

And our next question is from the line of Shaw Wu with Sterne Agee.

My question is on sort of clarification on the question earlier. Kathy you talked about your fiscal ‘12 guidance, you are sticking with the range. I think you guided down 1% to 6%, it's at the lower end of that. I’m just wondering, that would imply a pretty steep ramp in the June quarter sequentially. Now what would -- just any color you can share there in terms of what would drive that?

Let me see if I can clarify it any more. As I said, we’re just, I mean, we’re not providing an updates and when I look at what our guidance that we gave previously and the midpoint of our Q3 that’s our current view that we would be at the lower end of the range. As we go forward, I mean, with the product positioning as we said, moving out into the first half of calendar ‘12, there’s additional opportunities with tablets and also some additional products positioning as we move in further along into the year. So that’s where we are today, that’s our current view.

Okay. And then just to expand on that, would this include, I guess there is, you talk about the design activity particularly in the mobile space, I guess would that, I guess would you anticipate, I guess the start of the ramp of those programs like, I guess in the June quarter?

Well, in the mobile space again as Rick said and we said before, we expect to grow faster than market in this fiscal year. So broadening in the customer base there, we expect to see that this fiscal year.

And our next question is from the line of Daniel Amir with Lazard Capital.

First of all, can you comment a bit on the fact of what’s going on with nVidia sigma [ph] processor and in fact if they are using the reference design? What is exactly the opportunity there for Synaptics? I mean, is it something that we should take notice or is this something that is not going to really move the needle that much for you?

Sure. Now we see it as a great opportunity for us. As you can see we are in the reference platform with nVidia and that was a tablet platform, which today, as we noted earlier in the call, we don’t have a huge market share position in there. So the timing is really good. Moving in with the tablet we have a brand new 7300 ASIC and so working with nVidia’s, obviously done pretty well in the tablet marketplace. So we see a lot of opportunity. In terms of the technical implementation and similar things, it has some -- the approach has some strengths and weaknesses. We are working through those with nVidia and we will approach the right customers with the right system configurations to take advantage of that approach.

Okay. And with regards to the gross margin commentary from before, is it, I mean, is it fair to say that if your mix is higher in the PC side towards Ultrabook/Win 8, then your margins would be higher in the PC space?

I think it goes back to the solutions. So again, I mean, if in the Ultrabook spaces we go forward, right, if we get into the situation where we’ve got TouchPad and then we start seeing touch screens then you are going to have we would have Clear solution, as well as Quick solutions and in the same type of form factor. So my statement basically, relative to gross margin, is when we look at the types of business, right, the chips and tails for the Clear solution, they have higher gross margin percentages than the traditional TouchPad QuickPad business. So really you have to look at the combination of those types of solutions and that -- what that mix is quarter-to-quarter.

Okay. And then my last question is what’s your assumption basically and kind of the notebook unit growth this year that you’re working off of?

Well, at this juncture we are more or less just sticking with the IDC number, which for the year I believe is about 9%. With expectations of the first half of being a little tighter because of the drive shortage and then the second half opening up quite a bit, not only because of the supply chain differences but also because Windows 8 rolling in the latter part of the year.

And our next question is from the line of Jeff Schreiner with Capstone Investments.

Rick, could you follow-up with you last comment there? 9% growth with the first half being weaker due to HDD, I don’t find any commentary in the press release about HDD being any impact to the PC or hearing any commentary of that today. And 65% share in the TouchPad market where people’s likely even lesser share are making commentary regarding how much it impacted their guidance. I was wondering if you could tell us, on a percentage basis, how much did Thailand HDD hurt you in December, how much is it may be headwind in March and does it carry on into June quarter?

Yes. There’s great questions, John, and again we’ve been trying to fair out answers ourselves and it’s a bit of a challenge because our answer is a bit dependent on another part of it, the supply chain. And to a certain degree it sounds like a simple question, but its complex because to where to see hard drive allocation go -- do they favor notebooks, which is obviously good for us and that’s kind of a theme that I’m hearing. So to a certain degree we go out and talk to our OEMs and look at their forecast and so on and let that guide our direction. I think, in general, the entire industry is being a little bit cautious right now to that visibility gets better. And we are in the middle of Chinese New Year break right now, part of that visibility is -- the clouds might start to lift here in a few weeks as people get a handle on what’s going on. Certainly there’s an opportunity, the channel is pretty low. At some point when the drive supply comes back they will be a channel activity to resell that, but at this juncture our Q4 it didn’t seem to -- Q2 didn’t seem to have much impact and we try to comprehend that impact in the guidance we’ve given for Q3.

Right. And in Q3 you guided to where it would be sequentially down around 8% where over from fiscal year ‘04 to fiscal year ‘11, the average sequential decline was around 13%. So you were down less than -- you are doing better than seasonal and what’s driving that I guess, in terms of the guidance into March if there’s no real impact from HDDs in Thailand at this point and juncture?

Now well, keep in mind I mentioned earlier that our Q2 and of course, the industry calendar Q4, it’s hard to say how much of some of that impact was built into a lower Q4 number as people went down historically lower channel rates and inventory rates either because of the hard disk drive or anticipation of pending shortages in Q1. So the seasonal pattern could be a bit different in that regard. And I know some of the processor vendors and obviously the place where I came from have voiced bigger concerns about that particular issue. But they are a little bit different place in the food chain and in terms of processes tend to be stocking the devices and I think they put in it at the last minute and so on. So we are more assembled right this part of it the notebook. So again, it’s a tricky situation and we are playing the best as we can and I hear your question and it is a very good question and a lot of people asking us is about our footprint and the notebook industry. But at this juncture this is the best guidance we can give you.

Okay. And just one last question for me. What was the actual growth rate of the TouchPad market in calendar year ‘11 and what outside the notebook units, what type of gross should be using that 9% on top of what we expected the calendar year ‘11 TouchPad market would be? And I guess if you look at that you’ve got competitors that are forecasting, you are kind of saying maybe would be in line with that look better at this point, but you’ve got competitors forecasting something 4 times that for their notebook, TouchPad growth. I mean, are we starting to see where now that Alps is kind of being removed from the business model, there’s 2 new competitors that are moving up that could actually start to maybe dink beyond a little bit about 65% share you’ve enjoyed for a long time?

I’m sure the other competitors have ambitious plans in this marketplace and Synaptics has always had to fight off 2, 3, 4 players at any one time and the names change over that time period but the battle stays similar. So again, I can’t comment on what their plans are or what they are projecting. I can only look at the design wins that we are securing and the majority of those are now enhanced for the next wave of notebooks, which will come with Windows 8, and we feel good about our mid-60s projection.

And your next question is from the line of Kevin Cassidy with Stifel, Nicolaus.

With all these different growth factors that you have, if you look at next year, where do you think your mix would be? If last quarter was 46%, 54%, how do you think it would be PC versus non-PC?

Kevin, we haven’t necessarily broken that out. I mean, I think that we do see since, we have limited participation in tablet market, we see that as an upward trend. If you look at the notebook market we do expect to grow with market from the unit standpoint, I think from an ASP standpoint and the traditional TouchPad and ClickPad area we see a richer mix of the larger TouchPads and ClickPads. So I would say that, that bodes maybe some slight favorable ASPs there. And in the mobile market, as we said, we do expect to grow faster than market and we’ll just see how the mix ends up.

Okay. Great. And it would be you’re working with the top 6 glass suppliers you had said, do you expect anyone of them to be a top 10 or 10% customer?

It’s too early to tell from a timing standpoint. Over time, as we said, we do expect in-cell to really become a big part of the market. And if you look at how we sell our solutions, we will be selling -- we do sell our in-cell solution into the LCD manufacturers.

Okay. And maybe just one other question there. Going on the reference designs you mentioned working with Intel and also with nVidia, will there be other reference designs that you’re working with, other processor manufacturers?

Certainly. Our goal is to work with all of them. Because from an efficiency perspective, as you think, you can get in a reference platform and it’s -- they actually distribute it out to the customer base. It’s much easier than going out to the broader customer base and trying to win those battles one at a time against somebody that’s already in the reference design. It provides a starting point. It’s -- I’m certainly not implying that how you get to win, OEMs play a major role there but it’s better to be in than not.

And our last question is from the line of Joanna Makris with Mizuho Securities.

Can you comment a little bit about how you see the gross margin impact from in-cell over time and how that may looks to the model?

The gross margin impact, in-cell solutions, I mean they are more, I mean they are reflective of the current solution types that we’re shipping today for our Clear solutions and mobile. And so we would see gross margin similar to what we are selling today in the mobile side of the business.

Okay. But not incremental?

Well, again, we’ll see how it goes, early on I mean their premium solutions, the advanced solutions that carry higher ASPs and typically better margins, but in general, I mean, the way that I would look at it today is that, we are reflective of our Clear solution for the mobile business.

And our final question is from the line of Brett Simpson with Arete Research.

Just a couple of questions, I mean first off, I think in the past you talked about 2012 being...

Brett? [Technical Difficulty]

So my question really is looking at some of the market share changes at the OEM level and smartphones. So in the last couple of quarters we’ve seen enormous gains from guys like Apple and Samsung, and these are traditional customers for Synaptics? And looking -- going forward I mean, you’ve talked about market share gains for Synaptics in 2012 and given the share changes of the OEM level, are you still confident that’s the case this year?

Yes. Brett, we try to look at the landscape of our OEMs when we make these projections and yes, we’re still confident. I mean, think about certainly a couple of the big OEMs have made some nice gains. We also play a major role for some of the best growing, although today smaller, but not too small anymore, right, which such as the DTE and Huawei have really made large gains in 2011 and they have great momentum rolling into 2012 with the markets that they serve.

Okay. Great. And so when it comes to Intel, you mentioned there’s a lot of OEM interest and a lot of display makers are looking to run product in this category. How do you see the acceptance of the technology through the course of this year and to what extent are we likely to see issues like manufacturing yield get in the way of the ramp up?

Certainly, from the perspective of the OEMs and the LTM’s, in-cell is the right direction to go. Because ADC is a thinner, lighter and ultimately lower cost solution that Intel promises. But with any high volume manufacturing and complex processes, there is a yield curve. So yes, initially this year you’ll see a number of different introductions and the technology will ramp through the course of the year and then, of course, calendar ‘13 will be much bigger. And what that -- it’s really tricky to guess right now as how steep that ramp is, but there is no doubt that the Intel ramp is on its way very soon.

Thank you. And that does conclude our question-and-answer session. I would now like to turn the call back over to management for closing remarks.

All right. Thank you very much and -- for joining us for the call today, and we look forward to updating you next quarter.

Ladies and gentlemen, this concludes the Synaptics’ Second Quarter 2012 Earnings Conference Call. Thank you for your participation. You may now disconnect.