Synaptics Incorporated (SYNA) Earnings Call Transcript & Summary

Good afternoon and good evening to everyone. I'm Ross Seymore, the semiconductor analyst here at DB. For the final fireside chat of the day, at least, in the semiconductor track, we're fortunate to have Dean Butler, the CFO of Synaptics; as well as Jason Tsai, the Head of Investor Relations. As all the presentations went today, it will be largely a fireside chat. If you have any questions within the webcast window, you can pop a question in there. It will come to me and I can ask management in an anonymous fashion or you can just e-mail me directly at ross.seymore@db.com, and I'm happy to ask them the question that way. Before we get started, let me pass it over to Jason to go through a little bit of the disclosure reading.

Great. Thanks, Ross, and thanks for the opportunity to present here. I really appreciate that. Before we get started, we will be making some forward-looking statements during this presentation. For a full understanding of the risks and uncertainties in investing in our securities, please refer to our filings with the SEC for a full list of disclosures. With that, Ross, please go ahead.

Perfect. Thanks, Jason. So Dean, I want to start off with the same sort of high-level question we've been kicking it off with every company. And there's a couple of big picture things going on this year that make it, I guess, as exciting as any year needs to be and probably more so than we really wanted to be. And the first one would be the COVID side of the equation. While the pandemic is clearly a tragedy and most sense is it seems to have actually created a mix of headwinds and tailwinds for each individual company on the demand and the supply side of things. So as I looked at your business, it seems like there's some benefits to the PC side and detriments to the IoT side and then mobile might be a bit more mixed. But just talk about a little bit about the demand side of things that you guys have seen, either pull-ins or push-outs because of the COVID pandemic?

Yes. Ross, thanks for having us first off. And that's a good place to start. I mean, clearly, it's on a lot of people's minds. So as you alluded to, we're a diversified semiconductor company. We largely play in sort of 3 markets: a PC market, an IoT market and a mobile market. And as you might imagine from COVID and sort of the impacts that that's caused at the macro level, it's impacted our different business areas a little bit differently. So let me just sort of talk about each one briefly. So on our PC side, we have seen an upsurge in PC demand for our products. This is largely driven on the work-from-home phenomenon. Synaptics has good market share in the commercial and enterprise PC market. So as a lot of the enterprises sort of have workers working from home that never were able to or to the extent that individual households are sort of upgrading their personal PCs on a more hard and upgraded performance of the PC market. That's really benefited Synaptics in a big way. We're seeing our PC markets at all-time highs right now. We actually think that it probably continues to the extent that work-from-home sort of continues across the macro economy and marketplace. So that's been a real sort of tailwind for our PC business. On the other side of the coin, we have an IoT business, which largely is selling into a lot of consumer-based electronic products, which really as sort of brick-and-mortar retail has been largely impacted, I think, sort of the Best Buys, the Frys of the world. A lot of our products that sort of were geared around in-home consumption of video, audio, et cetera, had taken a bit of a headwind. The good news on that one is that in this quarter, we're starting to see a little bit of bounce back. The prior June quarter was down fairly significantly. September quarter in our guidance that we recently gave seems that business is starting to bounce back a little bit. So perhaps the worst is behind us when it comes to at least the early COVID-19 implications. But it actually has created a longer term sort of tailwind for the company in this IoT segment, which we're seeing tremendous design -- new design opportunity across our customer base as a lot of consumers look to upgrade their various electronics that are inside their homes, be it sound bars, set-top boxes, streamers, smart TVs, these smart assistance, wireless speakers. So there's, I would say, longer term, that it's actually accelerated some of the content that might be in all of our homes. And our third and sort of final market that we participate in is the mobile handset market, specifically smartphones. And that's relatively neutral. I think so far, what we've seen is consumers continue to consume smartphones. I think there is a big portion of enterprise sales that actually, as people were more remote, working remotely that upgraded a lot of their telecommunications to be remote with lot of handsets being offered to a lot of employees that perhaps didn't have one before. The other thing that's sort of looming on the horizon is what many are hoping for is sort of a super cycle in smartphones with the upcoming 5G wave, which looks like this next generation of smartphones is starting to deploy. So some pluses and minuses. What I would say, Ross, is it's sort of good to be diversified across multiple areas here so that if something is a little bit behind that others are sort of making up for it. And certainly, that's what we've seen so far.

That's perfect color. Maybe the last part of the COVID-related questions. Anything on the supply side, where in the past, were there any limitations to your ability to ship or produce? And have those all been rectified at this point?

Yes, there's probably nothing significant that's out there. I mean, every now and then little bits come up. I think when COVID-19 first hit early on, a big part of sort of broadly semiconductor and our broad customer base had some supply chain challenges. Just around moving material in and out of countries, specifically in China, going between provinces. That seemed to be more of an issue for our customers and how we sort of delivered to our customers. The semiconductor supply chain itself had been relatively resilient. And it does seem like there's a few lead times that are extending here and there at some suppliers. I don't know if that's a COVID-19 impact or just sort of a more broad sort of consumption-driven event. But supply chain is largely held in there and it's been largely unaffected, which is good news.

Good. Good. So then the other topic that's kept everybody on their toes this year is the U.S.-China trade dispute and specifically additions to the Entity List, Huawei being the biggest one. So can you give us an update on the Huawei restrictions? How that's impacted your business? I know you've had some divestitures that may have limited that impact, but I believe they were one of your biggest, if not your second biggest customer last year. So any update on where you stand on that? What it means to your second half calendar year business and the ability to get a license to actually ship to them if you desire to?

Yes. I mean, Huawei has certainly been a roller coaster that we're not alone and sort of experiencing this trade tension between the 2 governments. So -- just a little bit of background, perhaps. So Huawei was previously a large customer of ours, over 10%. We divested, as you alluded to, Ross. And LCD TDDI business that we referred to that had a significant Huawei concentration to it. That deal closed in early April. And so with that went a big portion of our Huawei exposure. Our Huawei exposure today is certainly a lot less than 10%, single digits. What I would say is Huawei is a great customer for ours, and they've been a great customer actually for a long time. Unfortunately, us, along with many others, are sort of wrapped into the export control restrictions that recently went into effect. So we ship largely a smartphone touchscreen controllers, and to a lesser extent, some display drivers and some ancillary products to Huawei. Certainly, nothing that would have a government concerned about a technology exploit or the ability to accelerate Huawei's ability to ship 5G infrastructure. We certainly aren't providing any products along that vein. We have applied for a license for the U.S. Commerce Department, I think, along with most of our peers. So that is a license that we've applied for, and we've filed and sort of not yet heard on sort of the determination. I don't think I know of anyone that has to this point. I mean our sort of take on Huawei is it's pretty unfortunate when sort of governments have to act in this way. We sort of believe in open and free autonomy. Really our view on how do we sort of think about Huawei and the impact of the Synaptics business, well, we've been actually hard at work for the past year trying to win our designs at Huawei's competitors. We sort of believe at the end of the day, people are still going to be buying smartphones inside of China and other places around the world, they'll just -- if Huawei has an inability to manufacture and ship those products that they would choose a different brand. And so our goal has been to diversify and win our same sockets at the other competitors so that if Huawei were to lose market share, perhaps we're in a position to regain that market share with one of their competitors. So that's sort of how we see it, Ross.

Got you. That's perfect color. So why don't we get away from the 2 macro questions and get right into the Synaptics details. Since the new management team took over at the company about a year ago, a long list of changes have really been made. How would you summarize the new strategic focus of the company that started a year ago when you joined and Michael stepped and et cetera, a whole bunch of new executives came in. And I really want to focus on kind of strategic focus. First, the technology you're trying to leverage and then some of the organic and inorganic strategies you're employing?

Yes. So it all began, I would say, with the appointment of Michael Hurlston, our new CEO, who joined almost exactly a year ago. I think it was August of last year. So he just passed his 12-month mark. Really, when he and I sort of talked about the opportunity of Synaptics, we both sort of had a mine mill around really the company needed to have a stronger focus on differentiated products in the marketplace. And we sort of set out to carve a strategy around investing in sort of value-creating products. So shying away from more commoditized markets, really trying to better understand where our engineers are adding value for our customers, trying to accelerate those areas, trying to deemphasize areas where we had many competitors or our engineering wasn't highly valued by a customer or areas that just perhaps weren't a best fit inside of a Synaptics portfolio. And we were also not afraid of sort of a shrink to grow, get healthy strategies. So we've set along a path on how do we operationalize the business a little bit better for higher financial efficiency and really a set around the path on what is our core value-add and sort of do those things and cut off some of the more ancillary investments.

So when you looked at the markets where you thought you could actually add more value and get out of the commoditized side of things, obviously, you've had the divestiture there, and we'll go into the M&A side of the equation here in a little bit. But when you looked at the technologies that you truly think are differentiated that you can create value with, what is really the area you doubled down on?

Yes. So I would say we took a lot of our resources that were going into broadly our mobile business. So we had sort of our display driver business, we had our touch controller business and we had various other sort of research areas going into mobile products. We really refocused our whole mobile products around touch controllers and sort of out of display drivers in a broader sense and really hone the teams onto what areas are making a difference in our customers' products and we found display drivers was not one of those. We found that touch controllers really matter to our customers. And so we set on a path to proliferate those products to a greater extent. And we sort of took the pieces that we knew could be highly valued by others outside of Synaptics, such as this LCD TDDI business that we divested and looked at what was the best economics for the shareholders? Was it continue harvest, shut it down or actually look at selling pieces of portfolio? And that one, it was pretty clear to us that it was more highly valued by someone else that perhaps had a better shot at growing that business at a margin structure that's inside their wheelhouse. And so we really -- the touch controllers where we sort of doubled down. The company already had several investments in its IoT areas, and those actually were doing relatively well. We sort of refocused a few of those investments, but largely the indexing toward IoT was already starting to happen. And on the PC side, I mean, that's a great franchise for the company and sort of always has been. This was actually really just rationalizing and make sure that we can run it consistent with a longer term PC business that's sort of a low growth business. So we actually moved it toward higher operating profit to the extent that we could around how do we invest in that business in a low-growth environment for long term sort of cash flow generation.

As you guys made those organic moves, but you also bolstered them with, I think, 3 inorganic moves. You already talked about the divestiture of the TDDI business. But you also did 2 acquisitions, I think, for a bit over $0.5 billion. Some IoT WiFi business from Broadcom and then DisplayLink. Talk a little bit about how those 2 acquisitions fit into the strategic focus of the company?

Yes. So one of the things that we wanted to focus on, Ross, was where is the puck going? So where the markets growing? Where can we add the most value and differentiation? And then how does our portfolio play together? And when we sort of stepped back at our portfolio, we actually were able to find a couple of product assets in WiFi and the DisplayLink compression, video compression technology that we're super complementary and highly synergistic to our existing portfolio. They are both in growing markets in our IoT space, which both are additive in gross margins, which is an indicator to the outside world on and to ourselves, how the customers value your products. So to the extent that you can extract higher gross margins really is about higher value-add to your customers. And what we saw from the WiFi asset, which we got from Broadcom is the rights to their IoT WiFi-related products. This was highly synergistic with our Edge SoC products, which are sort of the main SoC for a lot of the IoT applications that are out there. Most of these IoT applications, I mean, I probably have 8 of these things in my house are all widely connected, right, whether it's a smart speaker, whether it's smart TVs, sound bars, just wireless speakers, all the other sort of gadgets that sort of are in our everyday lives now, almost all of this is wireless. And in some instances, Synaptics was the core SoC, and we could, in theory, pull the WiFi with it. In other instances, we were not the SoC, but the WiFi was sort of the leading edge, and we could potentially pull the WiFi, our audio products, our voice recognition products, our video interface products along with those applications. The WiFi was super complementary sort of to what we were already doing within IoT. And we just happen to be in the right place at the right time, I would say, on that asset. We're sort of uniquely lucky that Michael Hurlston, the CEO of Synaptics, actually was the former General Manager at Broadcom for that WiFi division. And so it's intimately knowledgeable about the products, the customer base. And so it was a fairly straightforward deal for us. The other one that you mentioned was a company called DisplayLink. And so DisplayLink is a company, they're based out of the U.K. They do video compression technology. A lot of what they're into today, which they found a great niche market is PC docking for video interface to stream video from a laptop up into a high-resolution monitor, multiple monitors. This is a business that actually Synaptics was already in, and we are intimately knowledgeable of the customers and the market dynamics, and it was one where when we combined what Synaptics is already doing in this marketplace to what DisplayLink is doing, it's super complementary. And I think Synaptics was sort of in a unique position to understand that and sort of help the DisplayLink team sort of move their technology road map forward.