Synaptics Incorporated (SYNA) Earnings Call Transcript & Summary

Yes, gentlemen, we are live. We can hear you, if you could move in a little bit closer, and then Paul will take it from here. Move in closer to each other.

Well, we have to maintain social distance.

Of course. That works. Lovely, guys. Go ahead and begin.

Paul, you're muted.

Paul, we can't hear you.

Hold one moment.

Can you hear me? Can you hear me?

Yes. You're faint.

You're a little quiet, Paul, but we can hear you.

Can you hear me now?

Yes, sir.

Okay. So this is all new for all of us.

Yes.

Can you hear me now? Is that okay?

Right. Right. Yes.

Thank you. Good afternoon. Welcome to the Synaptics session. We're finally here at our JPMorgan TMC Conference. My name is Paul Chung. I'm an Applied & Emerging Tech analyst here at JPMorgan. I'm pleased to have with me Synaptics CEO, Michael Hurlston; and Jason Tsai is here. So just logistically, to the audience, if you have questions, type them into the Q&A feature. We'll try to kind of incorporate them in the session. But before we start, I think Jason wanted to provide some safe harbor language and brief intro.

Sure. Thanks, Paul, and thanks for having us on the conference. Before we get started, we'll be making some forward-looking statements in today's presentation. Please refer to our filings with the U.S. SEC to have a full understanding of the risks and uncertainties involved in investing in our securities. With that said, I'll give a brief overview of the company, and then Michael and Paul will go into their fireside chat. Synaptics has been around for a while. We've been a leader in the human machine interface for decades. Over the last many years, we've evolved from a PC-centric company to a mobile and now layering on IoT. And certainly, as we've been able to have been successful in each of these businesses, we've been able to leverage the cash flow and the market share and the strength that we've gotten from each of these segments and been able to grow into new opportunities. And that's exactly what we're trying to do here now again. If you take a look at our heritage on the touch side, that's still a big core part of who we are. And certainly, on the interface side, it's a big core part of who [indiscernible]. So from a touch perspective, we've talked a lot about OLED, flexible OLED panels driving the next generation of flagship phones. We're one of the leading providers. We are in the pole position here for OLED touch, and we continue to execute well. We've got over 10 design wins that will come to market over the course of calendar '20. On the interface side, with IoT, we've done a lot with the edge SoC stuff, building on our capability of -- building neural network and AI capability at the edge and bringing just a lot more personalization and customization capabilities. With that, with Michael and Dean coming on board over the last 8, 9 months as our new management team, we've been able to execute very well. We've had 3 sequential quarters of gross margin improvements. With the June quarter guidance, midpoint at 46%. That will be our fourth consecutive quarter of gross margin improvements as well as first time in -- the highest gross margin in over 5 years. So certainly, it's doing a lot of things internally about improving the mix, improving the investment choices that we're making to go after higher margin, more differentiated products, all the while being more conscious on the OpEx side, and making smarter investment choices and going after more differentiated opportunities as opposed to just revenue for the sake of revenue. And with that, I'll turn it over to Paul and Michael. You're silent again, Paul. No. No. Sign language.

Bear with us as we address these issues. We still can't hear you, Paul. Gentlemen, you can hear me okay, correct?

Yes. We can hear you fine.

Can you hear me now? Can you hear me now?

Yes. We can hear you now, Paul.

Yes, Paul. Loud and clear.

Okay. Sorry about that, guys. All right. So let's get started. So Michael, you've been at the firm since last August. You've done quite an amazing job, kind of evidenced by the more than doubling of your stock price incentives. Can you just highlight what kind of first attracted you to the firm? What near-term goals did you set out to accomplish first? I think Jason already mentioned a lot of things. But what kind of milestone time have you already crossed off your list? We can start there and move to the longer-term discussion.

Yes. Thanks, Paul. I appreciate the compliment. There's still a lot of work to be done. I think that, that goes to what I saw in the company, which I felt like it was very undervalued when I joined. I think the stock price was just at $30 when I joined. It was trading below 1x revenue. And I thought, as a semiconductor company with some of the underlying assets, it should be valued significantly more highly. I think we're still a ways -- a long ways away from where it should be valued, but we've made some progress, and that's what excited me about the opportunity. It was a very undervalued asset. And I think what surprised me coming in was sort of the -- some of the operational issues that the company faced. There wasn't a lot of infrastructure in terms of making decisions, ROI measurements, thinking about budgets, very fundamental things that I think should be in place. We spent probably the 4 -- first 4 months of my tenure here working on that, getting sort of the raw infrastructure in place, and that's gone relatively well. And now I think as we look forward, we're going to be focused a lot more on remaking the portfolio to the extent we can and sort of looking at road maps and more -- bigger strategic decisions. But that sort of gives you some color on what I saw and what we've been doing for the last little bit.

Okay. Great. So let's just jump right in to the top line. So PC segment had shown some pretty resilient growth and benefiting recently from kind of work-from-home demand. Unit shipments have been pretty strong. ASPs have also been quite strong. So can you just describe the products Synaptics offers in the PC space, fingerprint, touchpads and then how you've kind of been raising ASPs as well?

Yes. I think -- so to the first part of your question, our products are the TouchPad, and in some cases, we sell just an IC. In other cases, we actually sell the entire pad, the entire subsystem. We'll deliver the board and everything else. In the fingerprint space, you touched on that. That's our other big offering. And there, generally, we sell the entire module, which means the sensor, the IC and all the bill of materials that go with that. Where we benefited in the PC space, it actually started, really, before the whole pandemic, and that was a remix of the portfolio, a remix of what our customers were shipping more toward commercial offerings. Our exposure in commercial PCs is higher than consumer. We tend to do better there. ASPs tend to be better, and we saw a nice boost in our business in the fourth quarter. Now as we look in the first calendar quarter, second calendar quarter and then really even extending into the back half of the year, given the heightened demand, work from home, a lot of that has been centered again on commercial laptops. So we think that, that is going to be a sustained business, at least for the balance of the year. But then, I think it's going to go back to normal. I don't think that this is something that's going to be sustainable for us over a year even. It's probably going to have 3 quarters at most of continued strength, and then I think we'll see a return to our normal level of PC business. You asked about ASPS. I don't think it's necessarily that our ASPs have increased. I don't actually think our share has increased. It's really been a TAM story. So our unit shipments have gone up as a result of our customers, HP, Dell and Lenovo, shipping more. And as they've shipped more, we've benefited. We've certainly seen a rebalancing towards commercial laptops, and that's helped us. But to say that our ASPs have improved is probably a stretch.

Okay. And then as we kind of look past next year, what kind of innovations do you have in the pipeline on PC? Or is it really just a function of units, shipments and overall industry dynamics?

Yes. We're looking at -- we're looking at a couple of things. One, in our core businesses, we see some opportunities to improve attach rates. So if you look -- think about the fingerprint sensor, its attach rate generally is 20%-ish. It's not that big. We think we can grow that by putting fingerprint sensors into like the power key. So it's a very natural, not a kind of an add-on for users that touching the power key, have that, do authentication as well. Our customers don't like the PC sensor being on the deck -- on the top deck where it is today. There's opportunity for us to increase attach rate by coming up with form factors that have it along the side of the PC. So nice opportunities, I think, for us to increase fingerprint attach. The second thing that's going on in the business, Paul, is we are actually -- have planned ICs. We've typically -- in this market, we've leveraged our mobile ICs, and what we're going to do is we're going to do some purpose-built PC ICs. The PC touchpads have different characteristics than the phones, and by doing some purpose-built PC ICs, we think we can boost gross margins a bit and actually boost our share because the performance is better. We think we can do some things to add some features in that regard. So we think we can actually pull up our market share by doing some more purpose-built chips for the PC market, which we haven't done for probably 5 or 6 years now.

Okay. So let's switch gears, moving to mobile, which is your largest segment. Lots of puts and takes in the segment to go through. But firstly, the -- can you guys hear me, okay?

Yes. We can hear you. No. We figured out [indiscernible].

We figured it out. All right. So firstly, the LCD TDDI sale, kind of makes sense that you would offload this lower-margin business, but kind of take us through that decision. Remind us how large that business was and what kind of residual TDDI business you're holding on to.

Okay. A good question, Paul. I mean, I think where we've departed from the previous administration in general, is sort of a flight to quality. I think Synaptics in the past was really driving top line revenue. For the most part, they were looking for big TAM opportunities and acquisition to drive top line growth. And what we've said is, look, we're willing, in certain cases, to trade top line for richer bottom line and better gross margins, better earnings. And I think that's what drove the decision on TDDI. That product was significantly below corporate margins on gross margin. So we thought shedding it would improve our gross margins. And you saw in the guide, now that we've done that, that's a big reason for the 2-point step.

Big step-up.

Yes. So that's where we're focused. What we retained, I think are some interesting assets. One is automotive, and automotive for us has been a business that's very small. It's been characterized at the moment by discrete touch circuits and discrete display drivers. We think that moves to an integrated touch and display offering sometime late in our fiscal year this year, where we'll start actually seeing cars ship with TDDI -- integrated TDI and then being a nice growth vector off of, obviously, a very small base but a nice growth vector for us going forward. So that's piece one. We did also retain the OLED DDIC assets, and that's important for us because as we think about our opportunity going forward, we've built a nice position on touch that I'm sure we'll talk about here in a minute. Our opportunity is to pull through DDIC by leading the strong touch position. In the past, we were mostly DDIC and then we tried to pull through our touch, and we didn't have great success with that strategy. This time, I think we have a touch position, which is obviously very important to the OEMs. And then I think we can use that to pull through DDIC in the coming years.

Okay. So speaking of DDIC, let's move on to that. So you acquired it through RSP, Apple goes kind of full OLED. Where does that kind of leave this business? There should be some residual demand for some legacy iPhones, but can you talk about some of your other partners that are pretty material as well in this business? And how do you see this evolving? I don't know, you just mentioned it will lead you to maybe the OLED TDDI. We'll talk about that a little bit later as well.

Yes. No. I think your comments are fair. As you look at our LCD DDIC, we've retained the single DDIC and we've got exposure to a large customer. That customer just introduced an LCD handset, the SE 2. We've got some exposure to that. So we feel good about that. And frankly, it's been the LCD phones, iPhone 11, if you look at that SKU stack. Now you look at the SE 2 priced at $399, the price points of the phones have been the one -- those have driven sales, probably above expectation. We don't see that diminishing anytime soon. And given our current exposure to iPhone 11 and SE 2, I think we feel like we've got a decent position. No doubt, to your point, that the road map is moving to OLED, and as that happens, we've got to find intersection points on OLED. And we think we've got opportunities there, but I think that remains to be seen.

Okay. And then thirdly, on mobile, the most exciting piece, which is the OLED touch. So first, can you kind of walk us through how the firm developed that technology? Are you able to win business at large OEMs? And then kind of what is the competitive environment in this space?

Yes. I mean, let me do some characterization of it because I think there's been a lot of confusion on this point. I think the market has been -- call it a 2-step. We had a transition from LCD to OLED, and OLED had sort of been considered a monolithic event. There's actually 2 flavors of OLED. There's rigid and there's flexible OLED displays. And so you had a transition, really, first from LCD to rigid OLED and then from rigid OLED to flexible OLED. And our competitive advantage is on flexible OLED. Flexible OLED are thinner displays. They enable these wraparound type of industrial designs. They're thinner, they're easier, cheaper to manufacture, but they actually have richer color and hue contrast. So the market is moving to flexible OLED. As that market moves to flexible OLED, we think we've got technical advantage. What happens in these thinner displays, we call on-cell -- in on-cell, it's interesting. It's kind of a misnomer as a technology. You actually have the touch circuit, the bars and stripes that form the cross hatches that sense your finger. And then the display driver, the display LEDs themselves, they're intermingled on a single plane. And basically, now to resolve signal, the signal being your finger, from the noise, a high noise background, that's the LEDs that are pumping noise into those bars and stripes, they have to have a very high-precision analog circuit. And the challenges have become a lot more apparent, a lot more difficult to solve as you move to on-cell flexible technology than they were in rigid. So rigid, we have a place in rigid touch. That's a very competitive landscape. You've got -- Goodix is in there. Broadcom has historically participated in that market with one customer. As the market moves to flexible, that's where we've seen great advantage. And Jason talked about in his opening remarks, 10 handset wins, flagship, major wins that we have. We started shipping or will ship in the next few months. Those are all on flexible on-cell displays, and our touch technology stands out there. Really, right now, we seem to be kind of the only game in town. I don't see a lot of competitors out there. If we do get competition, it's going to be more rational competitors probably with high-precision analog circuitry, U.S. or European suppliers rather than Chinese and Taiwanese suppliers. You need -- and has historically been a bastion of U.S. semiconductor providers, you need very high-precision analog circuitry to pull this off. And we feel like we've got that and got some competitive advantage.

Let me add [indiscernible] I think one of the things that -- to Michael's point, about the misnomer, is that we don't expect this to be a light switch event where all handset OEMs go with one flavor or the other. There's going to be a slowly phasing in of new products. And as we've typically seen, new technology today becomes kind of the lower-tier technology of tomorrow. So what was -- rigid OLED was a premium product, and that will come in to become the more mainstream product where as flexible OLED comes in. So you're going to see a mix and match from different handset OEMs, depending on the strategy, depending on the market segments they're going after. So I think one of the biggest kind of confusion around our opportunity here is, why is this not a binary outcome, and that's just not the way the industry works.

Okay. Can you also talk about the gross margin profile of this product? And then what other major OEMs? You've already kind of listed some, but if you could remind us as well.

Yes. Gross margin is generally above corporate averages in the business. So we like that. We've talked about Huawei as a customer. I think that beyond that, we haven't talked specifically about wins, but there are certainly wins in other major handset guys other than Huawei. And I think as products get released in the balance of the year, Paul, you'll see our circuits, we'll be able to talk more about those wins.

Okay. And then to round out mobile, what other parts of the business are material? And then on the pipeline, I know you've mentioned we're ways away from OLED TDDI, but what else can we kind of look forward to from your innovation team?

Yes. OLED TDDI is certainly the big thing. I mean, we've got sort of steps along the way where we think we can enhance our performance on touch. We think we can build sustainability around the touch franchise for a couple of generations on our stand-alone touch circuit. But ultimately, we want to build toward OLED TDI. And I think what happened in LCD TDI, quite frankly, as we led with display driver and tried to pull through touch, and our touch performance wasn't there. I mean, our heritage has always been in touch. But in mobile, frankly, if you look back in time, most of our business was coming from display driver. So we leveraged display driver and then tried to pull through touch. This time around, we're trying to build, really, a sustainable franchise around touch and pull-through display driver. And I think the combination of those 2 events really gives us confidence that we're going to be unique in the market and be able to really differentiate ourselves from competition. You asked about other parts of the business. I mean, I think we've got -- in mobile business, we've got little bits and pieces of AR/VR that are nice margin enhancers for us, not huge top line. We still play in rigid touch. We still have pockets of display driver outside the one big thing that you did mention, and those are opportunistic. We're just sort of approaching those if we're able to find a way to get the margin profile to hang together. We work that out, but our main focus is on touch and really trying to build that franchise out.

Okay. And before we get on to IoT, can you just talk about your June quarter kind of revenue guidance, how that guidance kind of compared what you were expecting, if you kind of exclude the TDDI sale? I think there's a little bit of confusion there. If you could kind of clear that up for all of us.

Yes. No. We were kind of disappointed at the way numbers got reported and we, perhaps didn't do as good a job pulling those -- making sure that people had pulled out the TDDI out of their estimates. To give some color, I'm sorry, I didn't answer your question you asked a while ago. I think the estimate that Jason provided was the first half of our fiscal year, we generated $130 million from our TDDI business. So sort of an average of $65 million a quarter. You kind of do the math and you pull that out of our base revenue number. We felt like our guidance should have been -- on the top line, Paul, should have been received well. And obviously, the early headlines were less complementary of the numbers than we thought they should have been. At the midpoint of our guide, subtracting out TDDI, we felt like we had a pretty encouraging number. That didn't come through in the early reports. People who caught up to it later did get the story right. But frankly, by then, sort of an after-hour trading and things like that, we didn't perform as well as we would have liked. Jason, did you want to add anything?

Yes. I think, just if you take a look at it sequentially, if you exclude the TDDI effect, our revenue in the June quarter is relatively stable, relatively flat compared to March, which is better than what we typically see from a seasonality perspective going from March to June. So on an absolute basis, the March quarter, we did well, but the June quarter guidance was a solid guidance. It was better than what consensus was expecting. Consensus was expecting, roughly almost a 10% decline sequentially, 8% decline sequentially, whereas if you x out the TDDI effect, we're actually kind of net flat, and that would have been certainly a beat-and-raise as opposed to just kind of below expectations. And I think that was one of the things that we should have done a better job with.

Got you. Thanks for clearing that up. We only have a couple of minutes. Sorry for all the technical difficulty in the beginning. But any highlights on the IoT segment, why the firm acquired this business, how this kind of flows through on gross margins? You could talk about kind of the edge SoC. Any other things you're excited about, most in the IoT space?

Yes. Paul, I mean, look, I think that we've sort of pivoted the reason for the acquisition pretty considerably over the last couple of months. The general manager that runs that business, Saleel Awsare, has done a really nice job making a platform out of that business. So most of our exposure on IoT, as you know, has been on consumer and largely on one customer, which Jason has talked about being Google. That business, due to Best Buy and things like that being closed, was down. Now that's been a headwind for our business overall. But what we're trying to do with that now on a go-forward basis is attack a number of different markets and market segments because consumer, we think we can expand actually in consumer and be a meaningful player at Google and then beyond Google, right? We think we have the right solution to go in and attack that. In the middle part, a business where we've had smaller exposure, which is in set-top box, carrier set-top boxes, we've kind of nibbled around the edges. We got a couple of design wins in Korea, some small wins in Europe. We think there's opportunity for us to expand there. We brought in some people that know that business well. And it's a very software-centric business. We've got a guy that knows how to build platform software. So that's the second segment. And then there's another segment that we haven't talked about a lot, which is surveillance cameras. And we think in the surveillance camera, we can leverage that, again, same hardware, same solution. We can go in and start applying the AI engine that we have in the chip to things like low light conditions or object detection and really help the surveillance market. So that's further out in time, but our goal has been to transform that asset from a single point, consumer-type of play to one silicon, one software investment but a multi-market type of play. And I think in doing that, we should build some diversity in the portfolio.

And then you mentioned your retail outlets being closed. COVID-19 has been wreaking havoc on everyone. So do you kind of just see demand push out? And then on the kind of operational side, how has this impacted your business? What steps have you taken with your workforce? Anything you can mention on the pandemic impact?

Yes. I think, maybe the second question first. We've been pretty lucky. I think that the work from home -- I think as a hardware company, you definitely want to be more in the office, there's more collaboration that naturally needs to take place. But we've actually been pretty lucky. We were able to tape-out 2 chips, which I didn't think was going to be possible in a work from home environment. So our engineering execution engine had continued. I expected us to miss a couple of beats. That hasn't happened so that's been good. Our supply chain, our -- we've actually done a pretty good job of being able to maneuver things around and keep the supply chain largely intact. So the one thing that we certainly have been hit by is weakness in end demand in the consumer segment, but that's been offset a bit by -- we talked about at the beginning, better-than-average demand on the PC and our docking station business, which we haven't spent a lot of time talking about. So it's kind of, look at our fundamentals. We've been surprised so far how well things have held up. We hope that continues. Who knows what happens in the back half of the year? But certainly, as far as we can see, we feel pretty good about where we are, both as a -- from a business perspective and also from an engineering and engineering execution perspective.

Okay. So we have a couple of minutes left. I didn't get to go into the income statement, but let's do that now quickly. Sorry for the shortened time, but...

No. No worries.

What are your expectations for margins in the near term and long term? And how do ASPs kind of trend over time? And then what kind of cost can you work on there? And then I guess, you can wrap it up on your R&D and what you're spending your R&D on and things like that. So...

Okay. Let me just take the different lines as quickly as possible. On gross margin, we've seen great lift. Jason talked about that in his opening remarks. I think we've come up from -- when I took over the business, we were sort of hanging at 38, 39 for years and years. We've seen a nice run-up now at 46 points at the midpoint of our guide. It's going to be very difficult to expect 2 points a quarter going forward. So we sort of asymptotically hit -- no, I wouldn't say, a limit. I think there's still some more we can get out of this business, and it's been primarily focused on mix. We've got improvements in our mix that have helped us. We've walked away from bad business. I mentioned earlier, we're definitely trading revenue for margin, but we also -- operationally, there's been costs that we've been able to squeeze out of the supply chain. And I think that process is going to be ongoing for the next couple of quarters. So [indiscernible] hit 50 on the gross margin line. Over the next few quarters, I think we'll get there. On the OpEx line, that's drifted down. I think that will continue to drift down. There's still some cost we can wring out of the TDDI business. Jason's talked about trapped costs. So I think that will continue to drift down. But again, we've had a pretty steep decline. I think it will flatten out here going forward.

Okay. Great. Well, thank you so much for your time. I know it was a little difficult, but we're kind of new to this virtual setup and...

Paul, you made it work.

It worked in the end, it worked in the end. All right. Thanks, guys.

Yes. Right. No. Thank you for your time, Paul. Appreciate it. Thank you.

Bye.

Bye.