Synaptics Incorporated (SYNA) Earnings Call Transcript & Summary

Good afternoon and happy new year. I appreciate everybody attending our JPMorgan Technology Conference, which is virtual again, unfortunately. I am John Ahn, I am part of the JPMorgan's semiconductor and semiconductor equipment equity research team. It is a great pleasure to introduce the representatives from Synaptics. I have Dean here from -- who is the CFO; as well as Munjal, who is the Head of IR there. So I think the way we want to start this off is, Dean, if you want to kind of give some introductory comments, maybe talk about some of the -- I know you have some new product announcements that you made earlier this week in conjunction with CES. So if you want to kind of launch to that. And then after that, we'll go into Q&A.

Yes. Certainly, John. So first, thanks for having us. It's good to sort of see everybody, again, virtually. One of these days, we'll pull this off in person, but today is not that day. For -- I think maybe I'll start off, John, on just getting people sort of caught up on Synaptics. I mean Synaptics is a company that's been going through quite a bit of transformation over the last 3-or-so years. And so people that maybe aren't as familiar with the story, I'll sort of just give the quick summary. So Synaptics today is quite a bit different than what people may know of Synaptics of the past. Of the past, the company was largely known for its mobile concentration and its early lead in PC. Today, it's actually largely focused on IoT markets. So it's actually pivoted quite substantially. When I joined and our new CEO, Michael Hurlston, joined about 3 years ago, about 2.5, 3 years ago, we really came in with the perspective that there is a much deeper IP capability inside the company rather than just a mobile phone-based company or a PC-based company. It had a number of processor assets that were inside the company that really gave great credence toward an IoT sort of application. So specialized applications for processing audio, video signals, connectivity assets, wired interface assets, really that were ripe for growing IoT opportunity in the world. So when I walked in, I think the portfolio was to a rough first order, 60% mobile. That has actually flipped almost entirely. It's now almost 60% IoT. So our guidance for the December quarter was 58% IoT. So the company has really flipped its mix on its head in the course of about 3 years. So it's IoT first. So I'll just give you first order, sort of 60% IoT. It's about 20% PC and about 20% in mobile. And that has really given a way to, one, a nice ability to grow in systemically growing markets; and two, extract sort of a better financial profile for the company going forward. All gross margins, all of profit margins, all the way to the bottom line, that has really changed the fundamentals of the company and what we stand for. So largely, the company is focused on these growing IoT opportunities. Here at CES, we've had a number of product announcements, both in some of the new IoT areas as well as some of the historical PC areas, on areas that we think we can still add innovation and engineering prowess to and that's what we continue to focus on.

Okay. Great. Yes. That's a great summary. Like I said, I mean, I think a lot of people who looked at Synaptics in the past haven't looked at it recently, don't realize what a drastically different company that it really is. And like you mentioned, IoT is -- that shift through IoT is probably the most precious thing you guys did when you guys first came in.

So yes, let's kind of talk about IoT. It's about, what, 55% of the revenues and stuff, and I think you're saying about 60% total. Trying to get an idea what are the various moving parts that you think, if you look out into 2022 because obviously, that's going to drive your growth, that's your biggest market strategy. What are some of the various moving parts that you see in 2022? What areas, what segments do you see the most growth? And if you could say, kind of rank -- start rank-ordering some of those?

Yes. Maybe if I had to pick like the top few sort of growth potentials or businesses that we have in our IoT basket, largely, what we've been trying to do, John, is really get the company's technology anchored into right systemically growing end markets or systemically growing end applications. And as I go through the rank order, you'll sort of see why that's pretty prevalent in what we've been doing. We've been taking assets and getting them into sort of growing markets. The first one I would say is wireless connectivity. Really, I think this is we're hitting the market in IoT at right place, right time, right set of products. Almost everything I know that's in my house, I'm sure everyone on the phone can walk around their own home and find dozens of things in our homes that are wirelessly connected either Wi-Fi, Bluetooth or different capabilities. That's been a huge growing asset for the company. To give you an example, over the last 12 months, that business, the wireless connectivity part of IoT has doubled, actually doubled over the last 12 months. We've publicly stated, we think, it doubles again over the course of about the next 18 months. So it's on an extremely fast growing cadence. You can sort of walk around and get any example, like Munjal and I generally joke, at my house, I have this stove that's wireless, I have Wi-Fi on my stove. Do I really need Wi-Fi on my stove as a consumer in my home? Does it add a whole lot of value to me? Not really. I mean there are some limited use cases. My wife likes to turn it on, when she picks up the kids from school, it's preheated by the time she gets home. Not sure the fire department likes that all that much. But it's just an example that just sort of everything around us is getting connected to the network and a large part of these are wireless. Now, right now, there's sort of the super cycle in Wi-Fi, given Wi-Fi 6 and 6E, that's opened the door to a whole set of customers that are redesigning their end applications or upgrading their end products to be Wi-Fi 6 and 6E compliant. And we've just seen literally a deluge of design wins and opportunities coming from that set of technology. And it's really pretty core to an IoT-related device, that these things have some amount of network connectivity. We've also recently announced on our last earnings call, the first what we're dubbing the triple combo, which is Wi-Fi, Bluetooth and 802.15, which is like Zigbee, Zigbee and Matter protocols that run on that engine. So you actually have a super set of capabilities across all of the major sort of consumer-grade wireless connectivity. So I'd say that's probably our #1 grower, John. Doubling and then doubling again, it's sort of a really nice hit rate. The second one I would say inside of our IoT basket is an automotive business that we have. So this is an example of we've taken some of the technology that Synaptics has historically have done extremely well at and apply that into new markets that are systemically growing markets. And automotive, I think, is a great example of that, which has taken screen display, touch technology borrowed from the mobile PC world and applying it into the infotainment inside of automobiles. So this is really at the age of EV, electric vehicles. Generally, the expectation from a consumer, if you're going to buy a new EV vehicle, that the internal cockpit that the driver sits in is also sort of digital, right? So this means digital touch screens that are controlling infotainment, touchscreens that are controlling maps in navigation. And so Synaptics has had a big play in moving into automotive, specifically in infotainment and sort of digitizing the cockpit. That we've publicly said it is on track to be a $100 million business run rate for us by the end of the fiscal year. So we're a June fiscal year end, so we're coming up getting close on that. So that's a nice sizable business. As you can imagine, it's been growing nicely. It's an example of a systemic market that is going to continue to grow into the future as automobiles, EV and the digitization of the cockpit trends continue. So that I'd probably put -- probably a #2 basket there. Number three is actually a relatively new area. I mean it's not that new to Synaptics, but it's new to sort of us giving the investor base the exposure to it, is actually virtual reality. Interestingly enough, Synaptics has the #1 dominant position in custom display drivers, specifically for virtual reality headsets. These are custom display drivers that have high level of integration between driving the screens, the apps processor/GPUs and then doing what's called focal eye tracking. So really, when it comes to virtual reality, I don't think anyone knows exactly where this market goes, but I think what most people agree, it has huge potential going forward. The main issue for virtual reality is really around the display resolution. So the virtual reality of a few years ago, people would get nauseous, disoriented and it's really around most people call it the lag, but in display technology, it means the refresh rate. So can you get high resolution, the human eye, 2 inches away, can pick up single pixels. Can you refresh those pixels fast enough that you don't have any lag between the processing time and image rendering time? And Synaptics has, by far and away, the undisputed leader in doing custom silicon to solve for all of these high-end VR displays. So that's probably #3 on the list. And then from there, there's a whole bunch of different processor technologies, audio processors, video processors, wired interfaces that we actually use to transfer video protocols and sort of this whole basket around how do you connect the device network, allow it to communicate with people, either video, audio, microphones and then process this information in some manner, either locally or transmit to the data center back and actually make these things more intelligent going forward. So maybe I'll just pause there. That's sort of top 3, John.

Yes. Yes. No, that's a good rundown of IoT. And obviously, that VR thing is -- especially with people talking more about the metaverse and all that stuff, I mean that kind of plays in a lot more. It's kind of going beyond just playing video games, right? So...

Yes. I mean I think my take is it's really going to be about a content development. I think that's where a big bulk of the dollars are going, content development now. It's sort of like 4K televisions of 10 or 15 years ago. It was all about that's great, but where is the content. And I think that's what the people are moving quickly toward is the metaverse content, and that's super exciting.

Yes. Yes, definitely exciting times. So yes, so we talked about IoT and then we can kind of -- I'd like to dive more into products a little later, but let's talk about some of the other portions of your business that like I said, it's kind of flipped right? It used to be kind of a more a PC-centric company or a mobile-centric company before actually a mobile-centric company. So if you want to kind of -- let's kind of walk through those other stuff, right? I mean how does it fit into your company at this point? What are the prospects as it goes forward? So in particular, to the PC and the mobile, it also gives us a good read and all investors want a good read into what it looks like in 2022 as you look out. But if you can just kind of start with what your strategy are for the 2 other segments? And then what kind of demand drivers do you see looking into 2022?

Yes. I mean good question. Just to give some just quick high-level sort of first-order context. Today, we're sort of roughly 60% IoT, roughly 20% PC and roughly 20% mobile. So just we're talking about the 20% and 20% pieces. Really, the strategy around those 2 pieces are a specific strategy to stay in their swim lanes, right? And so when you talk about PC, this is a business that Synaptics has been a leader in for 35 years. It is really where the company started, PC. For us, it largely was around touchpads, fingerprint biometrics on laptop computers. We hold the leadership in all of the commercial SKUs across all of the major PC providers. So our main position is on first commercial laptops. We share some -- split share in sort of the consumer side of the world. But our stated goal is continue to drive commercial laptop leadership. We think the reliability, the engineering and some of the innovation that goes around these solutions actually are best fit for commercial solutions. And so our goal there is maintain, call it, this somewhere around 20% of the business in PC and specific commercial PC. That business, historically, if you look across the last 10 or so years, is sort of a modest grower, maybe a couple of percent up every now and then, a couple of years, a couple of percent down. It's sort of flat-ish business. When I look into '22, '23, I think it's a low-digit grower. I don't think PC is really ever going to be a double-digit grower outside of these sort of onetime events where you might have the sort of COVID step-up as an example. We sort of see it as relatively flat going forward, maybe single digit. On the mobile side, the strategy is you're really clear around providing high-value products for flagship level class mobile phones. Mobile phones, it's actually a good business. There's billions of mobile phones made every year. The consumers at the high-end flagship value innovation, value the features that Synaptics are good at. And therefore, we're going to continue to pursue flagship level devices. And that means touch controllers, and that means display drivers, really isolated to flagship. And we have no intention to let that be 60% of the company again. So we're likely to continue to price high, price our engineering for the value we think we're creating for these customers and to continue to run that as sort of a minority share of the portfolio. But a share that, hey, we can be defensive about that, again, is sort of a single-digit grower, but is a nice profitable business sort of going forward. The real focus is, as you might guess, on the largest part of the portfolio and really the highest growth potential, is on the IoT side.

Great. Actually, I have a question from an investor that just came in. They were asking, what are your key advantages versus probably your most comparable would be, SLAB, versus Silicon Labs?

Yes. I mean, so one, I think in each application of technology, we have a different set of competitors. For example, I mean, if you use SLAB as sort of the example, SLAB, what they do very well are Bluetooth-connected devices and providing some level of low level sort of MCU processor capabilities to mate with Bluetooth devices. Largely, we're seen as sort of the premium play. We generally are providing customers Wi-Fi 6, 6E, so higher level connectivity, faster bit rate, bigger throughput. We also have sort of higher-end processors, where a SLAB or others might have MCUs, we would have specialized processors that are specialized to move video, audio signals, process these things in real time, they add, in many cases, like an NPU, a neural network processing unit, to do some AI algorithm functions sort of on chip. So we sort of tend to specialize a bit more at the high end relative to that competitor. We also provide sort of many other components, right? We have Wi-Fi, Bluetooth and processors just like they do. But again, at the higher end, we also do things, where you can add touch and displays, you can add various different flavors of processors. If you want to do the microphone processing, if you want to drive speakers, and a whole host of sort of software that goes with that, including all the protocols that a SLAB or others in that IoT space would have as well.

Great. Let's talk about you made a recent acquisition or last year, towards the end of last year, of DSPG Group. And I wanted to see, well, for one, how is the integration going? I mean is it progressing as you had thought when you initially went into the deal? And what does DSPG Group -- what do they bring to the party here at Synaptics?

Yes. So you're right, John. We announced this acquisition of DSPG, DSP Group, in late August. It closed in early December. So December 2, it actually closed. So what DSPG is and has is they have a number of leadership products around audio processors, a different type of wireless technology. And then they also have a legacy business that most are not excited about. But just about every semiconductor has some level of legacy business. What we're going after is our basic investment thesis, John, for Synaptics, is the amount of digital devices that are going to be around us going forward is going to grow from here to the next many years. So there's going to be a lot more digital devices around us and these things are going to get smarter and smarter over time. So therefore, sort of IoT has sort of been our pick application. DSPG provides a set of smart audio devices. We think when these IoT devices become more intelligent, adding AI to them, probably the first step along their journey is not necessarily that, hey, you can have a full-on conversation with your refrigerator. It's probably that these applications know more of their environmental surroundings, right? So DSPG has a set of audio AI that has processors that acoustically know what the applications environment it is. So it's sort of listening in environment, sort of knows what's happening around it acoustically. We think that is probably coming first. We think that's probably the earliest adoption into AI for IoT. The second leg of that AI for IoT is likely video environmental monitoring. So computer vision for lack of a better term, to understand, hey, am I outside, am I in a room, am I in a hospital, what area is sort of interesting to track and gather data on as an IoT end device. So DSPG has this leadership in AI for acoustic environmental monitoring. They also have a wireless standard called ULE. So ULE is a great set of wireless capabilities, specifically tailored toward smart home security. So how does all of the security apparatus in your house sort of communicate in a secure manner, in a very time-sensitive manner, to video doorbells, to security cameras, to window ajar, door ajar sort of sensors? And this ULE standard actually is really great in sort of a smart home security application. So those two, we think, actually are really nice growing businesses. Home security, it's already in a sweet spot of what Synaptics is going after. And then adding these intelligence to IoT from an acoustic standpoint, we think that's got a nice long-term trajectory out in front of it.

I see. Now is this the new Katana solution that you have, what you announced the other day and the Lenovo Yoga Tab 11, right? Does that utilize DSPG technology?

That doesn't. So Katana is the platform for the vision side. So the organic Synaptics AI engine. So that's a vision-driven engine. So that particular design win that we put out a PR on is actually in, is attached to the camera on the tablet, so that it actually can wake up, perform some AI functions and then hand certain things off in low-power modes for that specific tablet application.

I see. I see. Okay. One more investor question that just came in. One question here is OLED TDDI still on track for first half of '22 launch?

So there's two things. They sound very similar. So let me just make sure it's clear. OLED TDDI, which is the integration between a display driver and a touch controller, is beyond FY '22. What is still on track to launch in the spring of calendar 2022 is OLED DDI. So the display driver integrated circuit, so just make sure that everybody has the terms correct. So we're still on track for a spring launch of a flexible OLED display driver in the spring.

Right. Yes, we're almost out of time, but I just wanted to hit at least one of the financial questions. I know you're -- as for your capital allocation strategy, right, I mean, you've been pretty clear that M&A is always going to be the highest priority for your capital allocation strategy. So the question is, what technologies, what products do you think would strengthen your portfolio through M&A? I mean what areas are you kind of actively looking at that would bolster your advantages?

Yes. I mean, good question. We've been pretty clear that we do think M&A is probably the best use of capital sort of going forward. Right now, I think the company is focused on executing its growth plans, moving the road map forward on what we have, things to add into the portfolio. One, we look for things that are sort of relatively small size, that sort of can fit in and tuck in quite easily. DSPG, although it was a whole publicly-traded company, it's sort of $500 million, sort of give or take, enterprise value. That tucks in, it fits rightly in our IoT space, add similar customers, add some new adjacent technologies, similar with Wi-Fi acquisition 1.5 years ago, a video interface acquisition called DisplayLink also 1.5 years ago. All of these things are sort of in this, call it, ballpark $250 million, $500 million range. Those sort of tuck-ins, we think we've been pretty successful at. So we would look for things either that, hey, there are adjacent technologies that we can cross-sell. I think that's really the big opportunity for Synaptics in front, is its ability to cross-sell. So adjacent technology we can cross-sell, where we can be more concentrated in the customers' bill of materials. So for example, many of our customers in the IoT sphere, some use our sort of specialized processors, some of use sort of generalized processors. We're probably not looking for generalized processors, but actually lightweight processor capability that has either really low power or other sort of nongeneral applications, we think are interesting. Many of our customers are very sensitive to power consumption. So low power processing capabilities or battery management, like PMIC sort of technologies are always interesting. Other interface technologies are interesting as well. But I do think there's an ability to continue to build more ability to cross-sell within the portfolio, and that's what we would look for.

Okay. Great. I think that just takes us right to the 30-minute mark. So I really appreciate Dean and Munjal joining us, and sharing your story. And I wish you guys the best for a great 2022.

Absolutely. Thanks for having us, John.

Okay. Thanks, guys.