Good day, and thank you for standing by. Welcome to the Synaptics Inc. Third Quarter Fiscal Year 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Munjal Shah, Vice President of Investor Relations. Please go ahead.

': ': ': Additionally, 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. ': Additionally, 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. ': I will now turn the call over to Michael. ': I will now turn the call over to Michael.

': Running AI models on-device rather than in a data center gives devices security, power and latency advantages. Synaptics differentiates by incorporating AI in every part of the flow from chip development to software to the tool chain. In addition, with a novel gearing approach, we can deliver more inferences at any given system power level than competition. We believe that the totality of our approach will make Synaptics the absolute leader when it comes to delivering AI processing solutions for IoT devices. ': Running AI models on-device rather than in a data center gives devices security, power and latency advantages. Synaptics differentiates by incorporating AI in every part of the flow from chip development to software to the tool chain. In addition, with a novel gearing approach, we can deliver more inferences at any given system power level than competition. We believe that the totality of our approach will make Synaptics the absolute leader when it comes to delivering AI processing solutions for IoT devices. ': The Astra platform includes a family of processors, an open software platform, an AI development toolkit and model framework as well as seamless wireless connectivity. The SL-family of processors are AI enabled MPUs targeted for the edge and are our first products to be released under the Astra umbrella. Two and four core versions are now sampling. The SR-series of processors are AI enabled MCUs and incorporate our pioneering gearing technique which actively manages power as inferencing requirements increase or decrease. A flexible, innovative software platform extends across both product families and supports Linux and Android as well as leading RTOS offerings. In addition, both families leverage the deep institutional knowledge at Synaptics around computer vision and audio machine learning algorithms. The launch of the Astra family of processors at Embedded World was…

Thanks Michael, and good afternoon to everyone. I will first review the financial results for our recently completed quarter and then provide an outlook for our current quarter. Revenue for the March quarter was $237.3 million which was slightly above the mid-point of our guidance. Revenue from Core IoT, Enterprise & Automotive, and Mobile were 20%, 57% and 23%, respectively. Year-over-year, consolidated March quarter revenue was down 27%, but flat compared to the prior quarter, which reflects continued stabilization in our business. Core IoT revenue was up 26% sequentially, but down 49% year-over-year. We believe inventories are now at normal levels in this product sector and we expect to continue to see sequential growth in our fiscal fourth quarter. In Enterprise & Automotive, March quarter revenue was down 1% sequentially and down 30% year-over-year. Several enterprise products are stabilizing though there are still pockets of excess inventory, which we expect to work through in the coming quarters. For the March quarter, our Mobile product revenue was up 33% year-over-year, but down 12% from the prior quarter mainly due to seasonality in our touch controller products for the Android ecosystem. ': During the quarter, we had one customer greater than 10% of revenue, at approximately 12%. For the March quarter, our GAAP gross margin was 46.5%, which includes $14.3 million of intangible asset amortization and $1 million of share-based compensation costs. March quarter non-GAAP gross margin was 52.9% in line with the mid-point of our guidance range. GAAP operating expenses in the March quarter were $127.7 million, which includes share-based compensation of $28.9 million and intangible asset amortization of $4 million. March quarter non-GAAP operating expense of $95 million was within our guidance range and up $3 million from the preceding quarter. Our prior quarter had a benefit from a partial…

[Operator Instructions] Our first question comes from Christopher Rolland of Susquehanna.

I guess my question is inventory, I guess, for Core, you described it as more normal level. Would love to know kind of what you see as the overhang going forward and then where inventory has most challenges and least challenges. That would be great to start.

Generally speaking, I would say that as we said on the last call, inventory has been worked down. We feel that the challenge that we're largely facing, particularly enterprise is more demand related. As we were working through the inventory, I think demand fell and we have this challenge that we highlighted in the prepared remarks around enterprise spending for accessories and kind of small hardware, which is largely where we play. There are still pockets of inventory. A couple of notable examples is in our audio headset business, our enterprise headsets, a little bit in our docking station area, particularly around our DisplayLink product line. But generally, I would say we're kind of out of inventory jail and we feel good and as demand returns, we should see a pull up in the numbers.

And then just so we can kind of understand the legacy DDIC drag. Roughly how big was it in '24 and how big would you expect it in '25?

I mean, I think we called, Matt said in his remarks sort of a mid to low percentage of revenue. I think that we'll see a good part of that continue for the next couple of quarters. But probably by the second half of the year that will go down to a de minimis level, Chris. I mean it probably hits zero by the some part in the fourth quarter. So it's a drag, not a big one, but it's something that we thought we should call out. I think everybody's been aware of it for some time and it hasn't gone into our thinking around the numbers because we knew it was eventually going to go to zero. But I thought the time was right to highlight that it's coming off the table.

Our next question comes from Quinn Bolton of Needham & Company.

Just thinking about the puts and takes between inventory kind of normalizing and soft demand. I mean, several quarters ago, I think you guys thought you might be under shipping end consumption by $100 million or more. Now that you're at the tail end of the inventory correction and guiding revenue up a smidge. It feels like consumption must be down meaningfully and I'm wondering if you had any updated thoughts on consumption. Should we be thinking something the $245 million is indicative of where consumption is across a good part of the enterprise IoT base? Or do you think consumption is higher than that given there are still some pockets of inventory out there that you just mentioned?

No, look, I think that the natural demand is something significantly higher than where we are. I mean, we stated that a bunch of times. I think what sort of surprised us is we had 2 pieces moving in parallel. We had inventory and as we were working through the inventory, we also hit a low point in demand. And so right now we think we're at a very low point in the natural demand and as enterprise spending returns, as automotive returns, we would expect to see a pull up in the numbers. So we don't believe by any stretch that sort of 245, 250, 255 is where we should be. We think that when demand normalizes and we think demand is still quite a bit lower than it would naturally be, we're going to see a pull up in our numbers. So I think the surprise again is as we work through the inventory situation, we hit a point where the current demand is far lower than we'd expect natural demand to be.

And then I guess just thinking about signs of a recovery, what things are you sort of tracking that might point to a recovery? Is it kind of things like bookings backlog? Are the customers particularly interest rate sensitive and you think the demand might not turn until we get a rate cut hopefully later this year? What do you think the biggest factors might be, to kick start the demand in especially the enterprise segment, which seems to be softest?

Yes, I think the first thing is obviously IT budgets going away from sort of AI and to big compute, these large language models that are running in the data center and back toward PCs, monitors, docking stations, places where we have a presence. I mean, I think we talked about it with you in the last call. It seems a little bit counter because IT spending is flat or even slightly up if you look at the numbers. But the underlying detail is that the spending on gadgets, on PCs, on docking stations, on headsets, on enterprise telephony is clearly way down and the balance of the budget is going towards IoT. I'd say that's one thing. I think the second thing for us too is we've got a bunch of new product introductions that are beginning to kick in. We used as we talked to you about, we used the downturn to invest in the business to start running on our wireless platform. Some new docking station products are beginning to kick in. So we've got different parts of the portfolio that are going to start to ramp and that should even if demand remains soft, our NPI introduction should help us pull those numbers up.

Maybe last clarification for me. The core IoT growing double-digits in June, I know it's still fairly low base. Do you think that double-digit growth rate continues in the back half of the calendar year?

Yes, certainly it's going to grow. I mean, we've been growing obviously very hot. We talked about double-digit growth in that business over an extended period of time. We're kind of outgrowing that right now. So I would say it will grow. It certainly is going to grow. The growth rate is TBD and we haven't provided that guidance.

Our next question comes from Kevin Cassidy of Rosenblatt Securities.

As long as we're on the topic of wireless connectivity, the Wi-Fi standards, can you say what your revenue split is right now? And how quickly is Wi-Fi growing? And then my follow-up question will be around Wi-Fi7 and what are the forecasts for that as far as the adoption rate?

Number 1, we don't break it out. I think that now we've tried to give you and the rest of the folks that follow the stock a better look into the business by breaking out Core IoT. But within Core IoT, we certainly don't break out what's processors and what's wireless. I will say it's mostly wireless. I mean, today our processor line is there and we talked about some wins in that space in the prepared remarks. But generally, Wi-Fi is the story. Wi-Fi is doing well. We're getting that business back on track. It was plagued by quite a bit of inventory. And now we're starting to see that business come back in a fairly appreciable way. So we feel pretty good about that. For us, you touched on it, you might have a different question around it when we get there. But Wi-Fi7 is we haven't launched Wi-Fi7. Wi-Fi7 generally still isn't available from an infrastructure standpoint. Our biggest issue right now is actually transitioning the customer base from Wi-Fi5 to Wi-Fi6. And we've got a full suite of Wi-Fi6 products. Our mix is still less than 50% on Wi-Fi6. So we see a pretty significant opportunity to transition the customer base from Wi-Fi4 and 5 to 6. We will, as I said in the prepared remarks, be introducing a Wi-Fi7 chip at the end of the year. And look, we think we're going to be first for an IoT class product that incorporates the Wi-Fi7 standard. But I think that's going to be a while before it really grabs any sort of meaningful foothold.

And on the docking station, is enterprise is slow, but is there inventory on top of that? Does the inventory still have to be depleted? And we're just waiting for enterprise to come back and then it might still be a quarter or so before we see that business growing again?

Yes. So I mean, first, Kevin, it did grow. So I think we're coming off the bottom on dock. There still are pockets of inventory. I think I may have said to a previous question that we have kind of 2 halves of the business, as you know well, the DisplayLink and DisplayPort sides of the business. The DisplayLink, which is the Dock Anywhere, has a bit more inventory that I think we need to work through. And that's a big piece of our gross margin profile. So that's been particularly slow. The DisplayPort side of the business, I think we're probably at equilibrium now. That's the piece that kind of grew on quarter. And that's facing more of this demand challenge that I highlighted in Quinn's question, where we see pretty suppressed demand across the enterprise and automotive portfolio. As demand normalizes, we'd expect that docking business universally to pull back up.

Our next question is from Krish Sankar of TD Cowen.

Michael, I had 2 of them too. First one on gross margins, you keep hearing about lagging as foundry vapor prices have come down, but you're not seeing any gross margin benefit for you. So I'm just kind of curious, is your gross margin really tied to volume or in the Enterprise Auto segment or, is there something else going on?

I mean, I think there's 2 factors for us. One and the dominant factor is mix and we've you and I have talked about this a couple of times. And our mix for our gross margin profile, the enterprise and automotive is our strongest driver. And again, there's mixed issues within enterprise and automotive. But the slowest part right now of our E&A business is also our highest margin. That's comment one. Comment two, I would agree with you that the foundry pricing seems to move a lot. We are partnered with one particular foundry guy. As you know, we kind of moved our strategy to be very, very heavily weighted toward one supplier. That one supplier has been the slowest to move on pricing. So I would say that we are hearing the same things that you are that there are price, there's price relief across the semiconductor supply chain. I think that's less true with some of the bigger suppliers. And we are certainly partnered with one of the biggest and that particular supplier has been less apt to move and respond to kind of current pricing conditions.

And then a follow-up, thanks for some of the color you gave on the Astra platform. It seems like you've seen some Edge IoT devices for AI come out lately, but the issue seems to be around latency. From Astra's standpoint, do you require a smaller and more optimized AI model to run full inference on devices or you think the model sizes today, you can actually run full inference with no latency with your actual platform?

Look, I think on Astra, well the technology, we can't run large language models or gene sequencing or things like that. But within the 2 and 4 core portfolio, we can run a whole gamut of AI models. And those AI models are large in size. They come from a traditional AI source, such as an NVIDIA being trained in the data center, our trick is we have a compiler that takes those models and compiles them into our code size. And at least as far as I understand it, and we've spent a lot of time on this with our division head, those models run without latency problems. I mean, that's one of the advantages that we highlight in this business that we have very little latency, high security and high power efficiency across this product line. And that's one of the advantages we bring. Rather than having to go back and forth to the data center, you can run these AI models on chip. And obviously that has significant latency advantages.

Our final question comes from Peter Peng of JP Morgan.

Just for the wireless portion in your Core IoT, it was kind of at that $200 million revenue run rate. I think where are we and are you still confident in getting back to those levels?

Yes, Peter. No, I mean, we are obviously very confident in being able to get back to those levels. I think like we've been talking about with enterprise and automotive, there is a demand issue in the wireless. It's some of it's consumer facing. We actually have quite a bit of it that's enterprise facing. Our inventory as we said in the prepared remarks is largely worked through. So now it's a little bit of a suppressed demand environment. We'd expect that we continue to work through that demand will return and when it does we'd expect that to go to $200 million and beyond. And then in addition as we talked about, we have a lot of new products, our new products that are coming online and we also have new design wins that are coming online. So the sum total of those obviously gives us a lot of confidence in that wireless business. We would expect we haven't seen that snap back to $200 million, but we'd expect to get there and beyond as time goes forward.

And then my thoughts on your mobile. So, that low-single-digit, that's like almost a $9 million to $10 million revenue drop off per quarter. And so you have and you talked about, potentially winning some in the mid-tier Android space and then you combine that with the Android recovery. So, like, as we kind of think about fiscal '25 for your mobile, is this going to be flat, down, up? Any indication would be helpful.

Yes, I mean, probably I would say too early to call. You got the puts and takes right. I mean, I think that in general, we'll be sort of a low-double-digits type of hole that we have to fill due to the DDIC socket. I think the numbers are about right and we've talked about that on lots of different calls. So I think that you have the framing of it roughly correct. We are winning, we did really well last year with flipping one of the large Android customers over. We seem to be holding up really well in China. So our China handset business is very, very strong and we have high market share. We do as you called out, we expect to win now in the mid-tier. So kind of the sum total of that, I would expect that on balance, flattish is probably where we end up in that business, but again, too early to sort of call.

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Michael Hurlston, CEO for closing remarks.

I'd just 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 a lot.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.