Good day and welcome to the Synaptics second quarter fiscal year 2019 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Jennifer Jarman of The Blueshirt Group. Please go ahead

Thanks very much Stephanie. Good afternoon and thank you for joining us today on Synaptics' second quarter fiscal 2019 conference call. With me on today's call are Rick Bergman, President and CEO, Kermit Nolan, newly named Interim CFO and Wajid Ali, outgoing CFO, as announced in this afternoon's press release. This call is also being broadcast live over the web and can be accessed from the Investor Relations section of the company's website at synaptics.com. A quick reminder that we have posted a supplemental slide presentation on our Investor Relations website. The supplementary slides have also been furnished as an exhibit to our 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 exclude share-based compensations, acquisition-related costs and certain other non-cash or recurring or non-recurring items. Please refer to the press release issued after market close today for a detailed reconciliation of GAAP and non-GAAP results. Additionally, we would like to remind you that during the course of this conference call, Synaptics will make forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. Although Synaptics believes our estimates and assumptions to be reasonable, they are subject to a number of risks and uncertainties beyond our control and may prove to be inaccurate. Synaptics 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 the Synaptics Form 10-K for the fiscal year ended June 30, 2018, 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. And I will now turn the call over to Rick Bergman. Rick?

Thanks Jennifer and I would like to welcome everyone to today's call. Synaptics posted another strong quarter and a positive first half of our fiscal 2019. Revenue was right on the mark, within our guidance range and up 2% sequentially. I am very pleased to report that we handedly our projections for non-GAAP EPS positing year-over-year growth of 40%. This was driven by our sixth consecutive quarter of improvement in non-GAAP gross margins which were up 300 basis points over the year ago period as we continue to inch closer towards our medium-term target of 40%. Our favorable operating performance provides further validation of the positive impact of the Synaptics 3.0 strategy on our company and our financial results. We have made disciplined smart decisions as we transition into a more diverse company with decreasing reliance on mobile and shifting greater focus to IoT. This has allowed us to steadily improve our margins and amplify our earnings power, boosting our profitability profile and business model. As we enter the new calendar year, we believe the significance of this transition is even more evident in light of the current conditions affecting certain areas of our business. As wildly widely reported in mobile, a couple of leading OEMs have publicized significant softness in demand. Like others in the supply chain, Synaptics is not insulated from these trends. However, the value of our diverse customer base and strong position with several China OEMs that continue to post growth is helping to somewhat lessen the impact. We remain a clear leader in the field as we continue to deliver innovation that our customers highly value across OLED DDIC, touch and TDDI. In IoT, we are excited to be sampling our next generation AudioSmart solution to key customers. This is the industry's first to 22…

Thanks Rick. This is a very bittersweet transition as I made a personal decision to pursue an opportunity that makes a lot of sense for me from a professional development standpoint. It's been quite a privilege to work with Synaptics these past four years, along with such a talented executive team. And I am truly thankful to play the role in the company's transformation and expanded growth and profit potential. Having worked very closely with Kermit during my tenure here, I have the utmost faith in his abilities as Interim CFO. And it's my pleasure to now introduce him to walk you through the Q2 financial results and outlook.

Thank you Wajid for your support and confidence and hello everyone. Synaptics posted solid second quarter results with revenues of $425.5 million at the midpoint of our guidance range and up 2% sequentially. As reflected in the presentation materials that we released in advance of this call, revenue from mobile, IoT and PC products was approximately 65%, 20% and 15%, respectively. Revenue from mobile products was up 5% compared with the year ago quarter and up 4% sequentially. Revenue from IoT products was down 18% year-over-year and up 1% sequentially. As we discussed last quarter, we have shifted a large portion of our investment dollars from in-display fingerprint to IoT to enable stronger growth of IoT over the mid-term, which we believe will become more evident towards the end of the fiscal year. Revenue from PC products was up 4% year-over-year and down 7% sequentially. During the quarter, we had two customers above 10% of revenue at 14% and 20%. For the December quarter, our GAAP gross margin was 35.2%, which includes $15.1 million of intangible asset amortization and $800,000 of share-based compensation costs. GAAP operating expenses in the December quarter were $124.8 million which includes share-based compensation of $15.4 million, acquisition related costs of $3.3 million consisting primarily of intangibles amortization and some transitory compensation program costs and restructuring expenses of $2.1 million. Our GAAP tax rate for the second quarter was 36.2%. In the December quarter, we had GAAP net income of $12.8 million or $0.36 per diluted share. On a non-GAAP basis, our December quarter non-GAAP gross margin of 38.9% was near the high end of our guidance range and primarily reflects overall product mix. December quarter non-GAAP operating expenses were $104 million which was below the low end of our guidance range. For the second quarter,…

Thanks Kermit. While we can't control the broader market conditions, we continue to march forward with our disciplined strategy and targeted investments under Synaptics 3.0 which has better equipped us to weather gyrations in our markets by expanding our product portfolio and diversifying our customer base while pressing ahead in voice and other growth areas of the business. Ultimately, we are investing to win. As shown at CES, Synaptics is number one in numerous key areas across our technology portfolio and we intend to expand our share. We are well-positioned for leadership in IoT with solutions based on vertically integrated software, firmware and hardware and as a strategic supplier to key market leaders. We continue to innovate and lead in the mobile market with strong growth opportunities across LCD, TDDI and OLED display and touch. We are forging a strong growth path in automotive where we are leading the transition to TDDI and expect the benefit as the connected car drives a revolution in the need for displays. Lastly, we continue to innovate in the PC market where we remain the leader in touch and are capitalizing on additional growth opportunities through fingerprint as well as voice and audio solutions. Our investments are focused on driving technology and product leadership in high-growth markets as well as rapidly increasing our dollar content per box. By carefully developing our product roadmap, we are successfully executing to our financial targets with expanding margins and profitability. With that, we will now turn the call over to the operator to start the Q&A session. Operator?

[Operator Instructions]. And we will take our first question from Kevin Cassidy from Stifel. Please go ahead.

Thanks for taking my questions and congratulations on the good results and good luck, Wajid. Maybe you had mentioned it slightly, I don't know what kind of a snapback we would see in the coming quarters. Can you give us an idea what are channel inventories like? And maybe even the situation on TDDI wafers?

Sure Kevin. So I think as you discussed in the past, for the majority of our business, the idea of a channel isn't a huge concept. We certainly, for our new IoT business is where the smaller companies start to play a bigger and bigger role for us. But for our mobile customers, we kind of manage it. We indirectly have some of that effect with the display manufacturers. But for the most part, we are comfortable and we have accounted for any of that certainly in the guidance that we have. And as we march forward, certainly there's additional opportunity. And that kind of leads us into your second question, which is TDDI. There, any inventory is very, very lean. So we have now, at this point, I can say, supply is meeting demand. We believe we have adequate support from several of our sources to meet the demand out there. And it's somewhat unfortunate though, because we had to pass on a few opportunities last fall that we would otherwise be rolling with if we had the wafer supply. But at this juncture, we are ready to continue forward and grow that business.

Okay. Great. And maybe just gross margin seems to be holding up very well even with weakness. Is it IoT driving that? And is there a room for gross margin expansion still?

Yes. Kevin, if I put out there, the goal for the company is to get to 40% and we are going to have to work at it. And we have six in a row and we are not committing that we will continue to we hit that going up every quarter, because ultimately, we are focused on increasing earnings per share. As you can tell just from the percentages, IoT isn't the number one reason anymore that our gross margin is going up. I would say, it's two things. Our product mix has been somewhat favorable across all three businesses. And then the second factor is just the incredible focus that we have internally on that and recognizing the need that we want to continue to have gross margins go up across the company.

Okay. Great. Congratulations again. Thanks.

Thank you.

[Operator Instructions]. We will move on to Vijay Rakesh from Mizuho. Please go ahead.

Yes. I guess, a good quarter and guide here and best of luck, Wajid. Just on the inventory side, I was wondering if you could give us a little more color on how inventory is looking [indiscernible].

Vijay, thanks for the question, but we kind of heard the first part. And you said inventory and the line broke up quite a bit. Could you repeat it please?

Just inventories in the channel at the distributors?

Inventory in the channel at distributors.

If you are asking about do we have inventory in the channel or at distributors. Someone answer that question for Kevin. We aren't like a lot of our semiconductor peers that have the large international distributors. We run pretty lean with the exception of our IoT business which for a portion of that business with the smaller customers, we do stock inventory. Now we do have somewhat of a channel through the display manufacturers. But as an example, with TDDI right now is very lean because of our ability to meet the market demand through the winter. So overall, the general channel or inventory that we have already sold, so to speak, is fairly lean for Synaptics.

Got it. And just on the gross margin side, obviously it appears to be you guys are executing well. As you look at 2019, how do you see the gross margin plays out through the rest of the year?

Sure. I will start and then if Kermit wants to add some comments as well. A lot of it still, as I said, comes down to mix. And so as we kind of look out through the calendar year, you start to see seasonality. And we have big hopes for our IoT business and that tends to be a second half of the calendar year business. So we will continue to work the gross margins. You saw our guidance for this quarter. And as I mentioned on Kevin's question, from a focus perspective, the company will do our best to continue to inch it up as we move forward.

Got it. Thanks.

[Operator Instructions]. And it looks like we have a question from Kevin Cassidy from Stifel. Please go ahead.

Hi. Yes. Thanks for taking my follow-up. Just on the OpEx, it looks like it was very good control. Can we expect that going forward? Or are there some one-time changes there?

Well, I think, again, we have taken actions over the last two-and-a-half years to bring our OpEx in line with our revenues. We are definitely anticipating this quarter to be in that range of $102 million to $106 million. I would like to think that we will maintain that. Obviously there's also investment into IoT. But my expectation is we will keep the OpEx down in the $102 million to $106 million range, hopefully this quarter and next quarter for sure.

Okay. Great. And maybe as a follow-up, Rick, you mentioned the 22 nanometer devices. Does that give you a cost advantage also? Or maybe Moore's law now work out as well as for just driving cost, but maybe more for performance?

Yes. Kevin, we recognize we are in consumer devices which there's always cost pressure on those type of devices. So when we made that selection, we really felt 22 nanometer was a sweet spot, especially the global foundries process which is an SOI type of process which gives better performance power than some of the other CMOS technologies out there. But also because it's not quite in the 12 or 14 nanometer node where you talk some pretty darn expensive wafers and mass costs and so forth. We really felt it gave us a notch up from what was 28 nanometer, the right cost point and then the right power performance ratio as well as the ability to continue to integrate.

Okay. Great. Thank you.

Up next is Ari Shusterman from Needham and Company. Please go ahead.

Hello. This is Ari. I am taking this question for Rajvi Gill, Needham and Company. So within consumer IoT for auto, who are your key partners right now and what new partners are you trying to attract to your platform? And same goes for consumer IoT for smart home.

So our key partner is in, let me start with automotive. As you can imagine, it's bit of a combination. We really have to meet with three different entities. One is the classic-branded OEMs. And until some of these products are announced, I can't really go into who they are. But they want to understand and it's so important to them, now with the connected car about where display technology is at. We meet with them. In some cases, they will use a Tier 1 or in other cases, they will go directly to a display manufacturer and the display manufacturers are starting to look more and more like Tier 1s. We have to work with those Tier 1s or display manufacturers to get our product designed in. And you can imagine who the display manufacturers are in the world out there. It's all the names you know, whether it's Samsung, LGD, BOE, AUO, et cetera that participate in the automobile market. As we shift to IoT, it's a much more fragmented ecosystem and we work with all of the key ecosystem players. Of course, Google is a big customer and we have been a strong support of their initiatives around Android and what they have done just globally, whether it's smartphones or anything. We also of course work with Amazon as one of their certified partners on voice. And many of the Amazon third-party solutions are based on our technology that you see available out there. When you move into China, Baidu, Tencent, Alibaba, who we also work with, work for similar reasons. If with IoT, then you shift into, there's also the server provider market. So you are asking kind of a broad question, I guess, in some ways we did a presentation at CES and we list many of those partners and customers in that presentation, if you go out to our Investor Relations website. But the server provider platforms are all the providers out there worldwide. So it's a quite worldwide audience, Bouygues Telecom. We mentioned SK Broadband on this particular call. So that's a smattering of the partners that we work with in those two spaces.

Okay. Thank you for your answer. And then just one quick follow-up. When it comes to OLED, can you give a bit more color and some updates on the road map?

As much as that's publicly available. So today we have a QHD solution for OLED as well as a Full HD. And those can be used either with flexible or rigid OLED panels. We painted very strongly in the script that we have done a lower power version of those devices which has now begun sampling in the marketplace. And then beyond that, you can expect us to continue to innovate around display quality, power and higher levels of integration.

And next we have Charlie Anderson from Dougherty & Company.

Yes. Thanks for taking my questions. I am hopping between calls here. So sorry if some of this has been asked. Just on the IoT, it looks like where you are guiding to in the March quarter will be down maybe 19% or so after down 18% or so in December, if my math is right. So I guess I am just curious what you see as potentially turning that around? I know you have bunch of new products, specifically within IoT. And then as it turns around, I am kind of curious how the margin profile changes? I know the Marvell business you bought and the Conexant business you bought had very different gross margins. So in terms of when you do see that growing as a margin, is that helpful on the gross margin? And then I have got a follow-up.

Okay. Thanks Charlie. So in some ways, I think we should examine as to why is our Q3 guidance down year-over-year. Two kind of reasons there and it's persisted from what we said about Q2, so kind of no news there. it's just a lot of our business was in the smart speaker business and it just had a fantastic year kind of as it came out of the shoot there and so that weakness is persisting into Q3. That's kind of one factor. And then the other factor is just more broadly the whole IoT market is slower, as you have heard I am sure the last few weeks. Those two factors kind of hit the lower year-over-year growth. We kind of expected to kind of grow from here. As I mentioned in my prepared remarks, we will be in mass production with our 22 nanometer products in our fiscal Q4 and that certainly gives us a nice boost. They tend to be a littler higher ASP products. And then as we swing into more seasonality in the back half of the year, I think the year-on-year compares will be much more favorable. And so we certainly expect that business to grow going forward. In terms of gross margin, Charlie, you are right. Conexant gross margins were a bit higher. The Marvell margins were a bit lower than 50%. We kind of balanced out a bit above 50% gross margin. That's where we expect our IoT business to continue to operate going forward.

Okay. Great. And then, Rick, just sort of a big picture question. You have exposure on the LCD side and then also exposure on the OLED side. I am curious just as sort of the consumer taste shifts and sort of what you are seeing real-time in terms of what people are after? Has anything changed in your view of what you need to invest in from a LCD versus OLED perspective internally? Thanks.

Sure. So again as I mentioned to a previous caller, we actually have our best look at the trends between the two in terms of percent of the marketplace in the Investor Relations site with the presentation we did at CES where we showed OLED, non-Korean suppliers being a little less than 100 million displays this year. So nothing to change out over the past month. So we are really excited about the OLED ramp and we think it will continue to be a higher and higher percentage of the smartphone marketplace. Kind of balancing that though, of course, I think consumers are speaking in terms of price points that they want for their phones. And LCD continues to have a substantial cost advantage versus OLED displays, at least for the next couple of years. So we are kind of sticking with that mix going forward. As you can imagine, we are shifting more of our investment dollars to OLED, because there's higher growth rates there while we also want to maintain our share and position in the LCD market.

Okay. Great. Thanks so much.

And, I guess, I should add there Charlie as well, that's independent of automotive where we certainly are picking up our investment in automotive will be vast majority of that will be LCD for the next decade.

[Operator Instructions]. We will move on to Brett Simpson from Arete Research. Please go ahead.

Yes. Thanks very much. Rick, I just had a follow-up on the mobile business. I don't know if could give us a sense for how you see TDDI as a market opportunity this year? Do you think in calendar 2019, TDDI will grow just bearing in mind there is a transition to OLED underway? And then just on the OLED side, can you give us a sense for what proportion of your mobile business is OLED today or help us sort of size this and how you think the ramp will play out? It's helpful knowing that you are seeing non-Korean OLED at like 100 million units this year. But any market share projections or anything you can help us just to sort figure out where you are positioned and how you think it plays out over the course of calendar 2019, that would be very helpful.

Sure. Let me see if I can address each of those questions. On the TDDI side, clearly the market will be bigger in 2019 than 2018. Now one of the challenges, of course, we have is, we had a pretty good share in 2018. And so our goal is to maintain that share as best we can. And it won't be a huge growth driver for us, but we still see the opportunity in the calendar 2019 to grow that business year-over-year. Today, most of the TDDI market is in the Full HD segment. The HD segment, for example, is still a mix of a discrete type of solutions. But that's going to change very quickly as everybody is getting the benefits of TDDI finally. So a pretty rapid shift. That's in the presentation that I mentioned as well, our view on what percent of the market or what opportunity we have in TDDI. On OLED, I have to remind myself, there is a couple of pieces to OLED. One is the display drivers which I tend to talk most about. And the business as part of the company is, sorry I am doing some quick math here, it's still relatively small, think in the five percentage area of our quarterly results. Maybe even a little bit lower than that. As we move forward, of course we expect that to be higher. The 5% with the display driver comment. Of course, we sell touch controllers and there we participate much more broadly in the OLED markets. And I mentioned three design wins that we had with OPPO and Vivo. And those are all with Samsung display, as an example. That business is even bigger than the kind of the 5% category that I talked about. So we are a fairly reasonable sized participant in the OLED market today.

Great. And Rick, just to follow-up on that. As you look at the sort of the year playing out for OLED in calendar 2019, how do you see that non-Korean display, that OLED opportunity, the 100 million unit market that you described? How do you think your market share plays out? And can you give us a sense as to how that business evolves as we go through the year?

Well, it will ramp through the year, of course, as these various suppliers are bringing on capacity. So I don't know if I can give you a Q1 is this and Q4 is that type of number. I will say it is a bit less than 100 million units as best as we can tell. And our market share, again it's really hard for me to peg down on particular product line, especially when we are in the early stages. But this kind of historically in the small display market, we have been in the 30-ish percent market share.

Right. Thanks very much. That's helpful. Cheers.

It looks that there are no further -- sorry, it looks that there no further questions. [Operator Instructions]. And I apologize. Would you mind clarifying that last answer? I apologize, I interrupted.

Sorry Emily. I just wanted to make it clear. It is part of our SAM or the non-Korean OLED display manufacturers.

Okay. Perfect. Thank you. [Operator Instructions]. And there are no further questions. I would like to turn it back over to management for closing remarks.

Okay. Thank you everyone for joining us on the call today. We look forward to seeing some of you again soon at Mobile World Congress in the latter part of the month. Goodbye.

And this concludes today's call. Thank you for your participation. You may now disconnect.