Synaptics Incorporated (SYNA) Earnings Call Transcript & Summary

Okay. Let's go ahead and get started. Good afternoon, and welcome to JPMorgan's 50th Annual Technology Media and Communications Conference. My name is Harlan Sur. I'm the semiconductor and semiconductor capital equipment analyst here for the firm. Very pleased to have Dean Butler, Chief Financial Officer of Synaptics here with us today. The company has evolved from a PC and mobile-exposed company to a primarily IoT-driven company and is driving record revenues, record profitability and earnings. I'm going to let Dean kick us off with some introductory remarks, and then we can go ahead and kick off the Q&A. So thanks, Dean, for joining us today, and let me turn it over to you.

Okay. Great. Thanks, Harlan. Yes, it's a good -- actually, a quick intro on the company. So the company's most people know as mobile handsets. In fact, that's only about 14% of our business today. So we just ended our March quarter and guided into the June quarter. We ended about 64% of our business focused on IoT. We guided into the June quarter about 69% focused on IoT of our revenue. So largely, the company is focused on a much more diversified opportunity set than the company has ever seen in its past. And that comes with a lot of great benefits when 1 or 2 markets are down, being in a macro tailwind IoT-related market is able to offset. It also comes with customer diversification, technology diversification, and we've been able to drive the financials along with that, which have been just super. It's largely a new management team for those that are sort of coming up to speed on the story. Myself, CFO; Michael Hurlston, our CEO, joined in 2019. So this is about 3 years in, and a lot of work has been put towards this diversification strategy, which is what you see today at Synaptics.

Perfect. So we've gone through -- the team has gone through a year of challenging supply chain environment that has obviously, I think, held back some of the top line with all of the strong demand drivers in IoT. First, on the supply side, you said in your last earnings call that starting backlog was above the high end of your revenue guidance range, and you've already got most of the backlog coverage that you need for this year. In your own supply chain, where the constraints hurting you the most? And what steps is the team taking to mitigate the situation? And how do you see the situation evolving as we think about moving into sort of 2023?

Yes, it's a question I think everybody in semiconductors is dealing with. We're not unique in that respect. Luckily, our backlog has great coverage. So 2022, Harlan, as you mentioned, has good coverage. Our problem is one of growing demand, I think, which has been pronounced, especially in our IoT business. So IoT, which has been growing quite rapidly over the last 3 years, and specifically over this last year really has been an effort to gain more supply to feed that growth engine. So several of these come out of, say, our Wi-Fi business that's growing tremendously, an automotive business that's growing tremendously. And those supply constraints, as you might imagine, are compounded when the demand signal continues to increase. So what you might have needed 6 months ago is now outdated. When new demand comes in, you now need a higher output from your supply base. So that's been tremendously challenging. Unfortunately, many of our process nodes are in sort of trailing edge, which continues to have probably the most acute challenges from a supply chain's perspective, and it doesn't seem like 2023 has any magic alleviation. So we wish that weren't true and that 2023 would be significantly better. Unfortunately, we do think despite things probably improving, our demand continues to outstrip in 2023 from what we can see today.

Yes, you bring up a good point because when the market looks at total semiconductor CapEx industry, right, you see a pretty big number, and they see a pretty big growth number, right? Double digits CapEx growth, but we were recently talking with -- I believe they're even one of your foundry partners, a big foundry that's focused on sort of specialty and mature processes. And they did some work, and they looked at all of the mature and specialty CapEx spend for the next few years, and they turned that into sort of a demand profile -- supply side profile. And they said that looking out over the next 3 to 5 years, we can see wafer supply for mature and specialty growing low single digits when that demand is actually high single digits, which means that for this -- for the mature segment of the market, it's going to be tight for the foreseeable future. Do you guys share that view?

Yes, Harlan. I would say we share that view. I mean, I think when we look at some of our suppliers and people in that ecosystem, we see people building new fabs for high end, whole new fabs, huge expense. We see new tool technology coming in, again, at the high end. But we often don't see a whole lot of brand-new fab construction on the trailing edge. We see incremental sort of tool equipment sort of getting applied in the trailing edge, but not sort of whole new lines, if you will, which I think is a real travesty that most people overlook given that on the unit count, actually, I think the legacy trailing edge nodes probably produce more units on a semiconductor basis than sort of these cutting edge. But unfortunately, I think many of the foundries, the dollar value at this cutting edge is sort of asymmetric and therefore, that's where the CapEx goes.

Your 2 largest customers are distributors. How are channel inventories relative to historical target ranges? And if you could also comment on direct customer inventories as well?

Yes. So channel inventory, we would say, tale of two cities. If we're honest about it, there's -- our channel distributors that are servicing sort of IoT customers, that doesn't seem to have any significant channel inventory build from what we can see. We have limited visibility beyond sort of what those distributors might provide. That signals more inventory level and then replenishment, sort of the kanban style of supply chain management, hey, when one comes out, does one come back in, right? So we do see a set of orders that come in that replace inventory when inventory gets depleted at the channel for IoT. Some of our channel partners actually service our other 2 businesses, our mobile and PC. And those do seem like they have a little bit more inventory than perhaps over the last 6 to 12 months. So that's been sort of a recent change. I think we talked about that in our last earnings. And there, we can actually see a little step beyond distributors. Here, we have a little more OEM engagement. We have contract manufacturer engagement in some cases, and we can sort of see one level in. And sort of the PC mobile side has probably got a bit of inventory, which I don't think that would surprise many people which is different from sort of our IoT side.

Perfect. And I apologize. I forgot to introduce your colleague. So we have Munjal Shah here with us, he's Head of Investor Relations for Synaptics as well. Let's talk about the demand side. So IoT, right, clearly, the growth engine for the team. It's nearly 65% of your business as of the March quarter. I think it's approaching 70% this quarter. I like that you broke out the segments that are drivers of growth for IoT in the last earnings call, right, Wi-Fi, Bluetooth, combo chips, display drivers in VR headsets, TDDI in automotive and video interface products. You had previously, I think, provided TAMs for each of these markets, maybe a couple of years ago, I think. So perhaps you could just update us on the numbers there. And how would you rank order these 4 segments in terms of growth?

Yes. So these are our 4 probably strongest drivers within the IoT bucket. What this set of business is, is really a business where we focused on the last several years getting the portfolio aligned to a systemically growing set of TAMs. So when I look across sort of these 4 subareas of IoT, they are, in our opinion, huge TAM growers over time. You touched on Wi-Fi, Bluetooth. That is just about everything I look around, my home, my office, things that my kids have, everything is connected wirelessly today, Wi-Fi, Bluetooth. And we really believe that, that's a huge long-term opportunity. That TAM, the last time we sized it was sort of in the $3 billion range. I think that's expanded sort of ever since we gave that update. That's about sort of a 2-year old number. And so that one we would see is that's a long-term strategic growing TAM that we're really happy to be in and participate. The second that you mentioned is actually an automotive business that we participate in. This is, again, what we would call a long-term strategic TAM growth area. It is powering all of the displays for infotainment and vehicles. I think with the advent of the electric vehicle [indiscernible] that many of the cars that are going electric, most consumers actually want sort of a digital experience in the cockpit, right, meaning, "Hey, I want my electric vehicle, but I want my software and my sensors. Actually, I want that on display." You don't see a whole lot of FM radios and push dials these days. Most of these things come with sort of display interfaces. And that is sort of a sweet spot for Synaptics and [indiscernible] interactive displays for automotive purposes. This one, I would say, we've not done a good job at actually sizing. In fact, the last size we gave, which was about 2.5 years ago. We said this is probably about a $250 million market. I think that we've way undercalled that. I think it's multiples. Our revenue in this business, we publicly disclosed in our December call, that it's surpassed $100 million in revenue now. We think that, that doesn't end anytime soon. So I think the revenue side and the TAM side is sort of multiples of this $250 million that we had previously estimated. I think we undercalled that one previously. AR/VR, it's also an area that we're in. This is a wildly explosive area that could be sort of an unbounded TAM, if you will. That business is new in the world, right? So these are new applications that are gaining steam and popularity. And if you think back to the early generations of virtual reality, the experience wasn't that great. People complained of lag, and there was sort of motion sickness. Now they've gotten actually pretty tremendous. A lot of that's on the back of the display. And so we're providing the display driver customized for this application, high resolution, ultra-high refresh rate to make sure that latency sort of isn't there. We have, by far and away, the top market share. We're shipping on more than 30 models today, so that's shipping, not designed. So we're actually a big contributor to that market. I would say what is the ultimate market size? I think that's yet to be determined. But look, it's exciting. I think as the software content sort of evolves, that's going to drive the hardware side. And sort of being in a leadership position is pretty enviable here. And then the last one that you touched on and we sort of brought it up on our last call is video interface. This is the transporting of high-bandwidth video data feeds. The biggest end market is actually in a PC docking application. So this is driving outputs from PC laptops onto high-resolution monitors, multiple monitors. We have a really good share of the market in this area, that before sort of COVID, we had acquired this company called DisplayLink in mid-2020. They were private, but we actually disclosed their financials at the time that we did the acquisition. And we had disclosed that in the prior 3 years before COVID, so 2019 and before, that business has been growing 20% CAGR. Now if you might imagine, that's a great business to own during work-from-home, learn-from-home environments. And we would expect that business to continue to grow at that rate or sort of greater as resolutions continue to change and evolve, 1080P, 4K, 8K, et cetera and beyond.

Perfect. So for your Wi-Fi/Bluetooth combo chip solutions, I know you said in the last call, your primary exposure is into over-the-top, so OTT, traditional operators, their gateway boxes, but you're expanding into other areas like video conferencing, right? Because video conferencing can either be wired or wireless. Talk about some of the new application areas that you're getting traction besides that? And I get questions around more sort of consumer-ish type segments, like, for example, home routers. So do you guys have a good footprint in home routers? Well, I know you guys have a strong position in gateway, service provider gateways, but what about home routers? But any when you talk about some of the other applications that you guys are designed into?

Yes, maybe specifically on Wi-Fi and Bluetooth, it's super broad. I mean just about everything that we know and touch around us is wirelessly connected. You mentioned overtop and streamers, that's a market that we do extremely well at, but there's many, many applications that we're in. If I had to summarize sort of the next piece, I would sort of call this smart home. Many of the sort of applications are video doorbells, thermostats, video surveillance cameras, garage door openers. There's a whole plethora of sort of devices around the smart home that we're designed into. We're designed into a whole bevy of environments around fitness, whether that's home fitness equipment, stationary, whether that's wearable fitness equipment that might be sort of a watch type application. And then we're in sort of what I would say, enterprise sort of things. You mentioned video conferencing. We're in a number of applications that really go very wide. In some cases, we don't even know all of the end application, we sort of hear about them from our value-add resellers or from our distributors, "Hey, Synaptics, can you help with this piece of software. By the way, the customer is doing an e-bike right?" So we're like, "Okay, that's sort of news to us." But it really just shows the great TAM that the Wi-Fi connectivity has. And in many cases, we will sell into sort of module makers where people can take a preset module, load it into their piece of hardware, load on the Synaptics software and you're sort of up and running in a fairly straightforward way to have a wirelessly connected device.

Perfect. Do we have any questions in the audience? If you have any questions, just raise your hand, and we'll get a mic over to you. Let's talk about the AR/VR headsets, you mentioned it as being a growth driver. And I think on the last earnings call, you obviously have big market share in this space. But you specifically mentioned that there's actually a lot of adoption in the China markets. What's the reason for the bigger adoption in the China markets you think? And obviously, we, at the same time that you're seeing good traction there, we've got a whole bunch of lockdowns going on as well. So does it feel like that you're seeing any weakness in that market? But I wanted to get your views on why China, why is China adopting AR and VR? And are you seeing some of the demand perturbations because of the lockdowns?

Yes. So by far and away, the largest shipper of AR/VR is actually not the China companies. It's actually U.S. companies today. There, we continue to do extremely well in U.S. companies. I think our comments in the earnings call really are focused around the design activity. So many of the China-based customers are looking to put their own VR hardware onto the market. One of the things that they really benefit is they actually own content. They're significant content providers, whether that's gaming providers, which have now owned some of their own hardware; or if it's you think like TikTok, right, so some of the TikTok creators actually building their own hardware to create their own full ecosystem similar to some of the U.S. players here. We see that the China customer sort of going that same route. And by the way, both are using Synaptics hardware.

So one of the big differentiators for your solution is the architecture of your product, right? Can you just describe a little bit about that, something having to do with you're able to optimize the pixel density at the focal point of the eye, right, which gives the user a much better experience because it's more clarity, better resolution? Is that kind of the way to think about it?

Yes, there's a few technical advantages that the team has employed in these custom display drivers. So what is sort of needed to be successful in virtual reality is, one, the resolution has to be very good. So literally, when something is 2 inches from your face, you can -- the human eye can detect individual pixels. So there's certain methodologies that the Synaptics team employs that actually optically blends pixel. So you actually can't -- the human eye can't detect individual pixels, so we have this sort of blending technique. We also have a technique that refreshes the display extremely fast. One of the ways that we sort of employ a custom feedback loop is to have a feedback to the GPU and requesting faster frame refreshes where the eye is focused. So this is called focal rendering. So where the eye is focused the most, we actually request the GPU send more frames faster, faster, faster. Please deprioritize peripheral frames. So what we'll do is we're sort of overdrive the CPU request and basically optimize, where is the eye looking to give the best experience for the user, which ends up being a real home run in this application.

Questions from the audience? Hold on for a second. Let me just -- let's just get the mic over here to you. Okay. Go ahead.

Can you just talk about like the moats around the business? Yes. Can you just talk a little bit about the moats around the business and sort of some of the barriers of entry that you guys have in the markets that you selected?

Yes. So the moats around the business, one, the business is actually pretty dynamic. It's pretty broad these days. Let me just start off, usually when people ask about moats of the business, they want to go back to sort of the old Synaptics, right, and sort of what were the moats there. Let's just say in PC, like the company has been in PC for 35 years and been a leader there, so that we don't see changing anytime soon. On the mobile side, actually, the company divested in 2019 some of the more commoditized mobile things. We focused on really only high-end, premium value propositions. So we'll do flagship-level touch controllers, flagship-level OLED display drivers, things where the actual experience that the consumer has really matters where the Synaptics engineering can make a difference. And that's sort of on the 2 sort of legacy businesses, if you will, the 30%. On the 70% on the IoT side, we have a number of moats around the type of processor technology that we employ. We employ a number of analog mixed-signal front ends on reading signal through noise and applying DSP engines. So many of these things actually are focused on application-specific. So we don't make sort of general processors. We don't make sort of general Wi-Fi. We don't make general VR/AR. We make application-specific things that are sort of tailored for doing the best job, the best form and feature for that application. So Wi-Fi, for example, we have one of the lowest power consumptions versus any competitor. In AR/VR, I talked about some of the customizations. We're, by far and away, the leader in those spaces. And some of the other automotive applications, we're doing automotive infotainment. We have the highest quality output. We have the best longevity of these displays, which in automobile, you need 10, 15 years of longevity, if not more. So we sort of focus on each subarea what is sort of needed and we'll build our engineering toward that vein.

[ So there's obviously one ] business?

There's a lot of focus on analog, and then many of them apply a DSP, a digital signal processing, sort of back behind that analog. So that tends to be where much of our value proposition comes from.

Any other questions? So in terms of what you just talked about, right, you've got compute. You've got DSP. You've got some pretty sophisticated voice, vision-based algorithms, right? And you kind of put all of this together and you target specific applications. Talk about -- within the context of that, talk about your new low-power processor technology, where it's got AI and machine learning capabilities, the Katana processor. Help us understand what kind of applications are getting designed? My understanding is this is more of an edge processor influencing image detection, natural language processing and things like that. Help us understand what kind of design win traction you're getting? What kind of customers are you winning?

Yes. I mean this is around our edge processor for AI. I mean this is probably the long-term TAM for the company. What today is sort of a burgeoning sort of AI end market. Really, I think if you're going to be in semiconductors or you're going to be a system player, you're going to need capability on understanding AI, machine learning going forward. Our main thesis is all these IoT sort of digital applications that are around us in our everyday lives, we'll get sort of smarter and smarter over time. It doesn't mean that you're going to go have a whole conversation with your refrigerator. It really means that these digital applications around us understands sort of the environment they're in, they can make machine-to-machine or for machine consumption decisions that can make our lives simpler, easier, more intuitive, better controlled by human beings or autonomously controlled that way human beings sort of don't have to necessarily control every single piece of our environment. Some of the early things that we're working on actually are applying simple acoustic monitoring of the environment. So I think -- I mean, a pretty good example, I think most people can resonate with is you think about security cameras that you might have at your home. When the mailman comes and drops off the mail, is that a burglar coming to your house, right? So look, to fire up a wireless surveillance camera, it actually burns a lot of battery power. So if you -- many homeowners don't like to drill holes in their walls and sort of connect them all to AC power. If you have surveillance cameras that can employ more than one sort of monitoring of their environment, here, we're applying sort of acoustic monitoring, meaning that's a car driving by, don't boot the camera. That's glass breaking. Oh my goodness, boot the camera, actually start recording, there's high likelihood that there's a sort of burglar detection. And this isn't necessarily object detection, not hey, that's Tom, that's Sally, that's Sue. This is, "Hey, is there a high correlation that an event has happened that needs now more compute power that perhaps we need to connect to the cloud to sort of do compute on? Perhaps there's something we need to turn on a video surveillance cameras to sort of make a decision on. Another example might be sort of simple visual monitoring of the environment. Unfortunately, I was actually in the hospital about a year ago. And the nurses, unfortunately aren't real fast to respond. You push the button, they actually don't come that quick. Well, in the reality, if you actually envision a very simple IoT, video surveillance, in the hospital there's a lot of HIPAA issue. You don't want to sort of be recording people in the hospital. That's sort of no, no. But what you do want to know is, hey, there's an object that is almost always in that bed. And all of a sudden, that object is now on the ground, high correlation that I need to call an emergency personnel to come in right away. So this is sort of machine consumption. It's not for human consumption. It's not to say who's lying in that bed. It's to say an event has happened that now needs to trigger another event. And so a lot of that is sort of examples of what we want to apply.

If we talk about some of your other products that you just recently announced, so you guys brought out a Triple Combo wireless solution, right, Wi-Fi 6E, Bluetooth, Thread and Zigbee, right? When I think about -- I'm not as familiar with Thread, but I am familiar with Zigbee. Zigbee is more sort of industrial focused. So is this sort of your wireless connectivity solution that maybe you start to penetrate industrial applications like factory floor or edge computing at the factories or home building automation and things like that?

Yes. I mean there's a number of applications here and some are in the smart home and some can be in factories. But all of these wireless protocols, Wi-Fi, Bluetooth, ZigBee, by the way, Matter, right, for some of the smart home items. They all have one different distances that they can drive. They have different payloads that they can drive, so how much data can they carry. And then they all have different software protocols that they operate on. So for example, a Wi-Fi protocol might be really good for a network. So basically, you think about, Harlan, your example in sort of an industrial application, you might have a backhaul network that actually meshes together all of these nodes and that somebody at the factory floor can sort of operate at the command control center and sort of operating this network of devices. Well, those devices actually may need to talk to individual robots, right, and that individual robot likely is connected through sort of a Zigbee sort of protocol. Think about actually -- perhaps you have people that are walking around on the factory floor that want to run diagnostics or want to change the setting on one of the robots or one of the zones. That might be connected by Bluetooth, right? So you have these different protocols that are specialized to do different things at different distances and different workloads. And that actually exists in the factory, actually also exists in the home, right? So it's like a video surveillance camera might be holding a lot of data on a Wi-Fi network, where you might want to just talk to your Bluetooth-connected light bulbs, if you will, that you can sort of turn on off, that doesn't require really just about any data to be carried. So you have these multiple sort of use cases on all these different clients that you're connected to. And by the way, it all runs on one software, right? So that's one of the big value props for the people that are building it.

On the financial side, your gross margin exceeded 60% for the first time in the company's history last quarter. You guys [ drove ] 61%, and you're guiding for 61% in the June quarter. IoT has been the driver of your margin. So if IoT continues to go faster than your PC and mobile business and looking at the mix of the new products that you have in your pipeline, many of them which we just talked about, does the team believe that they can sustain 60%-plus gross margins going forward?

Yes, we actually have a high degree in confidence in 60%. I mean, look, IoT is growing fast. We have good visibility into our backlog, at least on the balance of the year. And therefore, that business is sort of a long-term runner for the company, and we think that continues to hold a 60% gross margin at a growth rate, right? I mean this is not 60%, let's slow the growth down. This is the growth rate that we've been growing for quite some while to sort of generate these gross margins continually going forward.

You guys closed the acquisition of DSP Group end of last year. The business adds an incremental, I think, $3 billion of SAM opportunity, $2 billion of that is IoT SAM, right, in the low-power edge markets. Can you just give us an update on the progress you've made on integration of the team as well as the cross-selling opportunities that have already started to come about?

Yes. Just a quick integration update. So integration is largely complete at this point. So there's sort of -- everything is completely -- we closed that on December 2, for anybody that wants a quick update. So we're only really just about 6 months in, and integration is wholly complete. All the back end is done, all the software integration between the design environments, the sales team, the engineering teams are now sort of working together. What we've been pleasantly surprised at is some of the opportunities that we thought for cross-selling have started to happen. And in cross-selling, we're finding real opportunities in some of the DSPG's Voice over IP, which largely sells into sort of enterprise class customers to cross-sell many of the existing Synaptics devices into it. And then sort of vice versa, we've found a few opportunities where Synaptics was perhaps the processor, and we're sort of selling an accompanying device and from the DSPG side. So we're optimistic on sort of the go forward on how to increase those revenue synergies. And just to be frank, we never count on revenue synergies when we do a deal. We sort of want them to stand alone and then revenue synergies are sort of upside when we execute to them.

Perfect. Well, we're just about out of time. Dean, Munjal, I appreciate you guys' participation today, and thanks for joining us.

Super. Thanks, Harlan.