Synaptics Incorporated (SYNA) Earnings Call Transcript & Summary

Good afternoon. I'd like to welcome everyone to the afternoon session on the third day of the Crédit Suisse 24th Annual Technology Conference. It's my pleasure this afternoon to introduce the management team from Synaptics. We've got about a 30-minute window here now to have a fireside chat. If you do have any questions, because of the virtual format this year, you will need to e-mail them to me, and I'll try to work them in to my prepared comments. But I always like to start off these fireside chats by kind of giving the opportunity to kind of level set investors that might be new to the story around your core IP, the markets you're looking to exploit. I mean, clearly, I've always seen you guys have a great legacy in sensing display drivers. But you've also done a lot on the inorganic front around M&A, especially this year to kind of reposition the company. So maybe if you can spend the first couple of minutes really talking about kind of the core IP, the end markets you're looking to exploit and kind of the overreaching strategy for the company.

Yes. Thanks, John. This is Jason Tsai. I'm the Head of Investor Relations here. And before we get started, just a quick safe harbor. We'll be making some forward-looking statements during this presentation. So please refer to our filings with the SEC for a list of risks and uncertainties in investing in our securities. With that said, to your point, John, the -- Synaptics today has transformed quite a bit. Michael, our new CEO, joined about 15 months ago, Dean joined a little -- about a little over 12 months ago. And they've really done a great job transforming the company. I think most people who haven't looked at Synaptics in a couple of years remembers, to your point, a display driver and sensing company that was largely dominated by mobile, which accounted for 50%, 60% plus of our total business. Since Michael and Dean came on board, they've really changed the mindset and mentality and really the drive within the company to go after not just -- not revenue but in the short term to pursue profitability. And what we've done over -- what they've done over the last 15 months is increasing our gross margins by over 1,000 basis points, increasing our operating profitability from kind of low mid-single digits to this quarter based upon our guidance. At the midpoint, you're looking at kind of 25%, 26% operating margin, which is best-in-class in semis. And so they've done a tremendous amount. They've walked away from businesses that didn't make sense. They've streamlined the R&D process to make sure that we're pursuing more differentiated products down the road going forward. And they've also sold and divested low margin, undifferentiated products like our LCD TDDI product. But then with that money, brought in accretive assets that are going to grow: our display link assets at 77% gross margin, the Broadcom wireless IoT connectivity asset that's going to be growing very meaningfully over the next few years. This is really setting up the foundation for a much stronger Synaptics going forward. So if you take a look at the December quarter guidance, 41% of our business is now going to be coming from IoT, which is now the biggest chunk of our business; 34% will be coming from mobile; and 25% will be coming from PCs. So despite all the challenges we faced here in 2020 with COVID and the pandemic, our business has actually weathered the storm incredibly well. And we're seeing a lot of strength as a result of some of these new dynamics. Working from home has been very strong for our PC business and in certain elements of our IoT business as well. The backlog and design platform wins that we have across all of our products really hasn't been any -- hasn't been stronger than it is now for a very long time. And so we are really well positioned to grow going forward, but grow profitably, which is, I think, something that was lacking at Synaptics for a very long time.

Now that's a great intro. And Michael, especially given kind of your background, I'd love to get your kind of view on the Broadcom IoT acquisition. That was an asset that under Broadcom, I would argue, was woefully under-levered because of their go-to-market strategy. What did you see in the IP? And why you think it was a particularly good fit with the core Synaptics business?

Yes, John. First, I have to give you credit for having a fireside chat and having a true fire, okay? So that's 10 points right out of the shoe, best fireside chat, bar none, no one can take that away.

Ambience is everything.

I love it. I love it. No, it's a great question. So I think we saw it exactly like you framed the question, that Broadcom was not particularly focused on that business. They had grown a significant book of business in a short amount of time. They had a -- as you likely know, there was a similar deal that they struck with Cypress Semiconductor. That deal timed out, I believe, in 2019, if I remember correctly. So in kind of a year's time, they've grown from $0 to $65 million, and that was largely given the fact that a team that was really focused on handsets, which is the market that Broadcom cares about, had lost handset revenue. They were the team that was tasked with growing the Huawei business. Huawei sourced the Wi-Fi socket from high silicon. So you had this team that really didn't have a lot to do, and they went out sort of going after business that Cypress wasn't servicing. And they grew a book of business a very quick amount of time from $0 to $65 million. And so we hopped on that train. We're very focused on it. Broadcom doesn't like businesses that aren't 70% gross margin. We're quite fine with something that's in the mid-50s, which is where this is. And we're superfocused on it. And we think we can grow it from the $65 million book that we inherited to something much, much greater than that over the course of a couple of years. We'd love to do what Cypress did, which was take a $200 million business and get it to well over $500 million in a couple of years' time. We think we can follow a similar trajectory with this business.

No, that makes a lot of sense. Jason, in your opening comments, you talked about strength in the PC market. And I know as you guys think about that end market longer term, you're not embedding a lot of growth, but it has been the strong market year-to-date. And I think one of the concerns investors have is how much of that demand was pulled forward from the sort of work from home, school from home economy? And how sustainable do you think that could be? I'd love to get sort of your perspective on: One, how sustainable you think the strength is going to be; and two, what can you guys do to kind of augment growth above market?

Yes. Maybe, I'll take the question, John. But look, I think you're right. I think that we certainly felt like we got some benefit from the work from home. Our concentration in PC is largely commercial. So enterprise driven laptops, and I think that movie, certainly from a work from home perspective has largely played out, yet we've still seen strength in that business. And so like our -- some of the people that are in this ecosystem who are now talking about sustainability at these new levels, we're starting to come around to that viewpoint as well. But we've got a business now that's kind of at a new base and one that's sustainable over multiple quarters at that base. And then to your point, we have to figure out then how to grow it. And I think off what now is a larger base, our opportunities are twofold: one, in our core commercial business, we think that there are interesting opportunities in these full C deck, full top of laptop touchpads that increase content and complexity for us. In our fingerprint business, you go from this, we call the C deck, the front of the PC, you can go now into key caps and into the sides, which are higher content because they're smaller and higher degree of difficulty. So we think we -- in the core commercial business, we think we can expand our footprint and our dollar content. But then in consumer and education, which have been the segments that are really run, we have virtually no presence there today. We've been able to use this time period to rejigger the cost profile of that business. And we think now that we have a cost that can go and attack consumer, attack education, the Chromebooks without sacrificing gross margin, so we're going to reopen that front. And we think over the next, call it, 3 to 4 quarters, we can start to pick up meaningful share and start to grow off of what we consider an expanded base.

And Michael, how leverageable is the interface docking business to this PC strength? What's the strategy there?

A great question, and I think that's been an underappreciated point of our docking business. The docking business is certainly the same customers. The large majority of it is Dell, HP, Lenovo. We added strength to that business with the DisplayLink acquisition. So even though DisplayLink is largely considered a consumer play where you have dock any laptop and create a multi-monitor environment, the real strength of DisplayLink is that it also sells through the same Dell, HP and Lenovo channel. So we have become a much more meaningful supplier to the big 3 by virtue of our strong docking station business, which has expanded in the whole work-from-home and hoteling environment. And our goal now as a more meaningful supplier is to leverage that back into the touchpads and fingerprints where we do see more competition and see if we can somehow get some more share by virtue of the fact that we're a larger supplier, a more strategic supplier, somebody that they really care about because we are in a very, very good position in the docks.

No, that's helpful. Just kind of turning gears a little bit towards the mobile side of the business. I mean, I think clearly, that's an overall market that's somewhat fully penetrated. We're right at the beginning of kind of a nice refresh cycle driven by 5G. I'm kind of curious how you guys think about the outlook of that business over the next couple of quarters. And I know on the last conference call you talked about some design wins for flexible OLED. Maybe you can weave that into the answer as you talk about kind of growth there.

Yes. Our opportunity, John, is kind of less 5G tied and more tied to display type. And typically, a 5G handset is going to ship with the best display possible, and that display is a flexible on-cell OLED display. And what the flexible on-cell OLED display does is it's very thin, it can create these wraparound effects that you see where you've got edges and tops and things of that nature. We've got a great position in flexible on-cell OLED displays, where the touch -- on our touch circuits. We've done a great job winning in China. A lot of the wins we talked about in our last call were Chinese handsets. We have a bit of a headwind in that we had a great relationship with Huawei. We continue to do what we can to find ways to partner with Huawei. But obviously, those numbers are out of our guide on a go-forward basis. But we see OVX, right, the Oppos, the Vivos, the Xiaomis backfilling. They're still early innings in deploying these flexible on-cell OLED displays. But as they do, we are the partner of choice, and we feel like we're going to grow share and as they grow share and move these higher-end displays down their SKU stack, we're going to do really, really well. So that's kind of how we're thinking about it. I think the missed opportunity for us, John, has been on display driver. We've been -- as you said in your opening remarks, that's been how people think of us. We acquired a display driver company in 2014. It was Renesas and that was really a huge boon to us as we thought about our revenue, particularly with Apple. But on a current -- we look at it through a current lens, our display driver business in OLED handsets, in high-end handsets, is 0. And so we've got to go figure out as a company how we can revitalize that. We just brought in a new engineering leader who's got great ideas in that regard. And we think we've got some differentiators we can bring to bear in our OLED DDICs. And to stimulate more growth in mobile, I think we've got to be more meaningful in display driver.

Well, on that front, Michael, with some of the changes you're making, what time line should investors be thinking about on the OLED DDIC opportunity for you guys to get back in? Is this 12 to 24 months? Or is it beyond that?

Yes. I think we've got opportunity at sort of, call it, 12 months and perhaps just inside 12 months. Fortunately, we've had the technology. It's not like something we need to reinvent. We have some new architectural approaches that our new engineering leaders come up with that, I think, gives us some differentiation. But obviously, the core technology there and typically with anything to do with the panel, the touch is a longer design cycle. The display driver is typically a shorter design cycle. And so we think we can start impacting top line right around the 12-month mark.

And then going back to the touch side of things. I'm just kind of curious, as you are seeing handset providers try to differentiate more on screen with things like wraparound, how do you think about that as a content ASP booster for your touch business?

Yes. I mean the -- our intersection point, John, is right with those flexible on-cell displays, the wraparound, so I wouldn't think of it as a meaningful content dollar, right? Our ASPs, I don't think, are going to move. We get good gross margin there because we really think we have a differentiated solution. We're kind of the only game in town that can provide into that market. However, we do think we can gain share as it pertains to the number of models that shift with this type of display. And we see that coming on the horizon. We see more and more companies moving to a very small toe in the water on these flexible on-cells to multiple models to tens of models. And as that happens, we think we're going to pick up share within the SKU stacks.

And you mentioned in your comments that some of the OEMs in China. I'm kind of curious how do you look at the opportunity at Samsung and the growth potential there over time?

Again, super question. We have 0 share at Samsung. And we think Samsung is supplied largely by an internal solution on both their touch and their display drivers. We think -- because of the performance advantages we bring on touch, we think our opportunity there is real. We think we can enter Samsung at some point in the not-too-distant future. Our display driver opportunity, even with these architectural changes, honestly, is probably more limited. At Samsung, we think we will do better in China with our display driver with the architectural changes that we're proposing. But we do think we have a near-term opportunity with Samsung to intersect their flexible on-cell displays with our touch controller.

No, that's helpful. If I can go back to the acquisitions you made earlier, the Broadcom IoT business and then the display line, both in July. On the IoT business from Broadcom, where are you winning? Why do you think you're winning? What do you bring that's differentiated to that part of the market?

I think it's a focus. It's interesting. You look at that market. Obviously, I've played in that for the better part of 20 years, so I understand the wireless connectivity market. I would argue better than anybody. And what you see is a bunch of different segments. And there are segments of this market where we have no shot. In mobile, frankly, our agreement with Broadcom precludes us from going in there. But there are segments of the market that are highly consumer-driven where big players with great solutions like Broadcom, like Qualcomm, like NXP have no interest, and they're not playing there. So it turns out that the consumer end of the market is relatively underserved. We've got a pretty greenfield opportunity. The only one that ostensibly plays there is Cypress. But I think that they've kind of retooled their focus a bit toward automotive. They've done really well in the automotive market, now under the Infineon umbrella. We'd expect them to continue to focus on automotive and expand their franchise there, trying to compete with NXP. And so on the consumer market, it's an area that hasn't got as much focus. We've got a great go-to-market strategy, given some of my past experience in this market and given the guy that we were lucky enough to bring in to run the business. And right now, we kind of have a greenfield. We are the only ones that have a Wi-Fi 6 component for the IoT market. We're the only ones that have a GPS solution for the IoT market. So we feel like we have the complete solution, and nobody else is really as focused on it as we are.

You might have just answered my next question. But the obvious sort of concern I get from investors is given that Broadcom sold this IP to Cypress and now Infineon, how do you differentiate yourself from those guys? And it sounds like it really is market focus. I'm kind of curious when you think about that consumer market, are there some buckets that you think are most attractive? And how big do you think that potential SAM can be for you guys over time?

Yes. Maybe the second question first. I mean I don't see any reason -- I think the SAM, TAM is $0.5 billion for us. It's a significant one. It's a real needle mover. And it potentially is significantly higher than even that. But our differentiators are, number one, we've got the complete solution, we've got Wi-Fi 6, we've got GPS. We've got a set of road map products that are -- that's sort of an underappreciated part of the story that are actually coming from Broadcom. So we're running the super OpEx-light model where we're lucky enough to get, what I think, is the best R&D team on the planet to generate solutions for us and our next 2 road map products that are IoT driven, IoT purpose-built come from them. So we have a high likelihood of first-time success in being able to go-to-market on time and on schedule. But you asked a question about which subsegments we see the growth in, it's wearables. We think we've got the right solution given the fact we have GPS for wearables. Video cameras, we think we've got a great solution there for the doorbell cams or for the kind of the lightweight home surveillance cameras. We think we're going to do well there. And then there's kind of a bag of other consumer products that we have a unique purview, drones, golf range finders, e-bikes. I mean we're kind of getting into a bunch of cats and dogs. But it's a business that where we've been able to develop module partners that put together the Wi-Fi chip with the RF front-ends, the power amplifiers, the switches, put those into an integrated package. And then we're able to go and deliver those as a complete solution through a module provider. That module provider is almost like a distribution arm for us, John, where they're able to sell into this long tail and augment our sales channel as we think about the market.

Michael, I just got an e-mail question in going back to the core touch business. For a point of clarification, which is quite simply, how do we think about Samsung making the decision between internal versus external when they go to OLED on the touch? And I guess the question also, how do share shifts at the panel guys affect your attach rate with OLED touch?

Yes. Good -- again, a fair question. I mean, I think, that of all the suppliers that can generate a touch solution that competes with us, Samsung System LSI, the Samsung internal group, is close. So there, from a performance standpoint, they have the analog capability to deliver performance that is certainly not on par with us but close and close enough that Samsung has been able to ship with it for their first instantiations of these flexible OLED on-cell models. Now we think that we have some differentiators that we can bring to them. We're putting some artificial intelligence into our solutions that Samsung has come to appreciate, that helps with predictiveness around touch, predictiveness around how to turn the display on and off as it's nearing your face, for example. So we've got some nice additional features and then there's the performance step up. So I think those are the angles that we're going to use to capture share at Samsung. If nothing else, I think Samsung is a company, whereas Apple, for example, will pretty much sole source. Samsung is open to second sourcing. So at worst, we get in a second source position, and Samsung System LSI is a pretty rational competitor. They're not going to price this so that gross margin is in the dirt. We think we can get good gross margin. But we think we can compete on our own merits, and we can actually drive sole source position. But look, all of this is still movie to be played out. We haven't won anything at Samsung yet. And it's a socket that we're optimistic about, but we haven't done it yet.

Well, talking about gross margins. As Jason pointed out, on your most recently reported quarter, you guys did a great job increasing gross margins year-over-year. And if you look at the guide for the December quarter, you're already above kind of the target margins that you've given to investors. I guess one of the questions I get asked is, are you leaving room to be more price aggressive in future quarters? Or do you need to revise higher kind of your target margins? How should we be thinking about from here, gross and operating margins over time?

Yes. I think, John -- and we just had a discussion with another investor in the small room, right? I think that the knock on us has been that our revenue has really come down, frankly, from a peak of 1.7, 1.8, now into the 1.3 range. So we've dropped a lot of revenue. Under my tenure, we've dropped that purposefully. I think under the previous administration, some of that was not foreseen. We've been intentional about dropping low gross margin business and we -- some of the benefit we've seen in the gross margin line has been as a result of backing away from substandard business. I think that our task over the next 4 quarters is to get the growth line moving again. You've talked about the knock on us. We appreciate that from the investment community. We said over and over again, we kind of don't feel like we've been rewarded for all the good work we've put in. We've -- all of the stock expansion has been driven on our earnings, right? It's been earnings expansion. We've got 0 on the multiple line in spite of moving the gross margin up by 1,000 basis points, in spite of taking a ton of cost out of the business. We all kind of know the story, but we feel like it's been an under where the cheapest stock arguably out there in the semiconductor landscape. So I think to address the critics, we've got to get gross -- we've got to get the top line moving again, and our intention is to do that. So I think we're going to see gross margin, certainly the second derivative, is going to tail off. We're not going to be growing at 2.5% a quarter. We're going to be growing something. We still think that there's room to grow. We're not going to retreat. So as we grow top line, I'm not going to go back to 30% land or even 40% land. We think we can hold 50%. We think we can grow -- incrementally grow 50%, but our task now is to get the top line moving again. And we think that we can do that consistent with the current growth margin profile of the company.

Well, Mike, your commentary around multiple, I think, is correct. I guess one of the questions I'll ask you is, I think, one of the things that's probably been hurting your multiple is the perception that a big chunk of your revenue comes in really relatively short duration assets where design cycles are always churning. And so while you might be successful today, who knows, a year from now, 2 years from now? I'm kind of curious to get a better understanding of the consumer IoT business around those design cycles. Should that be viewed as sort of a longer duration asset play in the sense that, that once you get these sockets, there could be revenue streams for multiple years to come? Or how should I think about that?

Yes. I mean, look, I think, first of all, let me comment on kind of the knock, right? The knock is very much -- I can understand it. But if you actually look under the hood, the big issue with us has been the display driver with our largest handset customer. And it's not like we've lost that socket. That socket has been there since we acquired the Renesas assets in 2014. It's just that the mix has changed. So the socket itself was sustainable. I think that, that customer actually is a great partner, generally speaking, for us or for anybody else who understands how to work with them. As long as you're working with them in a fashion that's consistent, you hold sockets. They're not going out. The impression is that they go out, throw out their suppliers every week. That's not the case. You can absolutely maintain. I've done that in multiple businesses as we supplied to them. And this business, in particular, has been a sustainable socket. Now as you look at kind of us going forward in our IoT businesses that we have a bunch of different businesses, but most of those are characterized by longer cycles, docking stations, those refresh every 3, 4 years, right? They're up for refresh. Automotive, we've got a business where we've leveraged our mobile assets, we've repositioned those into automotive. We're just beginning to see our first wins come out now -- or our first production come out as we've applied a TDDI, touch and display solution to automotive, those have longer life cycles. In our SoC, our video asset, we've gotten into set-top boxes, long lead upcycle, but a very long life cycle as we start thinking about operator-driven set-top boxes. So I would say our IoT business, where we've shipped in, is definitely characterized by what you said, longer cycles, less churn, more predictability. But even in some of the other set of places like our PC business, which arguably is a year-to-year thing, we've been a duopoly there for a long time. There's been -- we've had the #1 market share in touch for 15 years. We've had the #1 market share in fingerprint for 15 years. It's not like we've lost share, but that -- or lost our market position. But somehow this seems to be getting lost in the chatter and concern. Can't explain it, but we'd certainly like to see multiples even a modest expansion of the multiple would be a wonderful thing. I mean we've done all the work at this point, we're kind of not rewarded for it.

No, that's a great answer. We're running up to the end of the time here, but I wanted to ask kind of 1 more question in the session and that is really around M&A. I mean it's pretty clear that it's too early to say that you've gotten the full benefit of the 2 recent acquisitions. But usually or oftentimes when you acquire a company, you're working to try to get their margins up to your corporate average. And clearly, you're already running above your target model. So how do we think about kind of M&A as an adder on to your organic growth? What are you thinking about doing? How aggressively are you thinking about being on that front?

Yes. I mean, I like it, right? I came from, obviously, a world with Broadcom and Hock Tan, and I saw how effective he was in doing that. I arguably watched that movie from a front-row seat, and it was great. We think we have an opportunity to continue to bring in meaningful tuck-in acquisitions that are going to be accretive on gross margin and accretive on earnings. We're happy, and you talked about it, I think, fairly so. We're kind of a consumer-centric company that can be a knock, but I think it gives us an opportunity to collect assets that people who want to be industrial or who want to be automotive or who want to be in the data center and in communications, it gives us an opportunity to pick some of those up, pick them up relatively cheaply as we did with the Broadcom asset, as we frankly did with the DisplayLink asset and make hay with it. So I'm happy. And then I think longer term, John, we'd like to be a consolidator in this space. There's a collection of companies that are in this $2 billion, $3 billion, $4 billion market cap area. Right now, we're the smallest of those companies, we're the cheapest of those companies. We've got to do our own work first. But ideally, I think, given our model and our track record of being able to operationalize, we think we can do a good job consolidating in this consumer space.

That's great. Guys, with that, we're coming to the end of this session, but I want to thank both Michael and Jason and everybody who's dialed in. I also want to just pass along our wishes. Michael, Jason. I hope you guys directly, your immediate family, but more importantly, the broader Synaptics family stay safe and healthy in what's been a pretty trying 2020. I'm sure we're all looking forward to a vaccine in 2021. And hopefully, we can do this next year in person in Scottsdale.

The only thing we'll miss, John, is your beautiful ambience. But yes, absolutely. I really appreciate it. Great questions, and I appreciate the time you put in. All the best in the holiday season to you and the rest of the folks at Crédit Suisse. We really appreciate the time and energy you put into this.

Happy to help. Thanks, guys. Have a great day.

Thanks, John.

Thank you.