Synaptics Incorporated (SYNA) Earnings Call Transcript & Summary

Good morning, everyone. I'm Krish Sankar from Cowen. I'm the analyst covering Synaptics and we are fortunate to have Dean Butler, the CFO; and Munjal Shah from IR team. So Dean and Munjal, thank you very much for your time.

Appreciate it.

So Dean, I think you wanted to share some thoughts initially before we jump into Q&A. So go ahead. The floor is yours.

Yes. Let me just maybe give an update on the company for people that are sort of maybe newer to the story, just a quick update. So Synaptics is largely focused on an IoT marketplace, sort of first order level, where about 70% of our revenue for the June quarter, the guidance that we gave in the June quarter, is expected to be from the IoT portion of the business, and about 30% from handsets and PC markets. So it's predominantly focused on sort of this broader IoT application. We do believe that there's going to be more and more sort of digital applications around us in our everyday lives, and these sort of things that can get smarter and smarter over time. And that's sort of been our focus for the last several years, try to get the company into sort of secular growth businesses, IoT, large TAM, diversified set of customers, diversified set of technologies. And that's really where we focused in. It's been a great payoff from what the company traditionally was focused on, traditionally focused a little more on the handset, PC. Now with this new focus over the last few years, has seen a pretty massive improvement in the company's financial and market exposure and diversity in many respects. And I think that journey sort of just begun and we've come a long way. Update maybe just in general terms, we did our earnings here a few weeks ago. We do acknowledge there's a little bit of softness on that handset, PC side of the business. Again, it's about 30% sort of rough first order. But the IoT growth that we're seeing is sort of outstripping any of that softness that we're seeing on the other side. So that's sort of the update on the company.

Got it. Got it. That's very helpful. And then clearly, I mean, you made the pivot from mobile to IoT. IoT in general seems to be like all-encompassing kind of a stuff where it's being used for many applications. So how to think about: a, the long-term growth rate of the business for Synaptics; and b, I believe it's a much better margin product. So how to think about margins -- gross margin between IoT and mobile?

Yes. I mean there's sort of 2 aspects to that. One is customer diversity. So there's customer diversity, there's technology diversity in an IoT application set versus a mobile set. What you might compare, and in sort of the mobile side of the world, there's really only sort of 5 OEMs roughly in the world, and they're buying billions of units per year, where you have sort of a different sort of pricing dynamic with such a concentrated customer base. In the IoT side of the world, it's actually 180 degrees difference, right? It's thousands of customers, which are buying a whole bunch of different technology types. And therefore, you actually are pursuing a much more diversified business, you actually don't have the same pricing dynamics between supply or customer. And therefore, the gross margins actually tend to sort of reflect that. So if you thought about what's the company's gross margin profile in the past, we run the clock 4, 5 years, where it was largely a handset business, that was sort of in the 30s. Today, largely being focused on IoT, that's we're in the 60s. So to give you sort of a rough order on how that shift happens.

Got it. And then how to think about the IoT growth rate? Is there a way to quantify it?

Yes. We haven't given sort of a specific IoT growth rate. I mean each of the sort of sub-applications grows at different rates. It's certainly strong double digit. And I think we've seen in all of the markets and applications that we participate in IoT, all of them are double digit. So when we sum up IoT, it's a sort of strong double-digit number. Even though we haven't sort of publicly said sort of an x range, but it's certainly a strong grower, and we don't see that changing anytime soon.

Got it. And then, so maybe within the IoT, if you can quantify, is there a way to like qualitatively say, is it like the LCD, TDDI or the Bluetooth combo chips, which do you think has the potential for the highest growth specifically?

Yes. So we outlined in our earnings call sort of 4 major growth drivers within the IoT business. And each of them, and I'll sort of give my sort of rough rank order in sort of the growth rates and growth potential. First one being wireless connectivity. So really, this we view as sort of a secular growth trend where many of the things around us in our everyday lives, the sort of standard to go to is wireless connectivity, Wi-Fi, Bluetooth, Zigbee, Thread, Matter, all these sort of different protocols wirelessly connected, that's been a super business. We've doubled that business in the last year. We've publicly said, by the end of calendar 2022, we hope to double it again. So since we've sort of been in that business, you're sort of seeing this double and then double again. So it's had a tremendous growth rate. And look, it's a secular growth area. It's an ever-expanding TAM. I think that's where the market is going is wireless connectivity. So sort of that I would rank as sort of #1. Number 2, I would rank is actually an automotive business. We have an automotive business. We classify it under this IoT bucket. This is, again, a secular growth driver where it's really around the digitization of the cockpit of the car. I think with the popularity in electric vehicles, sort of the expectation is electrified vehicles, you actually have an expectation of software, sensors, and that actually come together in the cockpit with the driver, screens, touchscreens, digital sort of infotainment. Our play there is largely in the display. So that's the touchscreens in the infotainment. We tend to sort of be the dominant player in a lot of these integrated circuits for display and touch simultaneously on infotainment. That's been a great business. It's a strong driver. And that one has a huge pipeline, actually, of design wins behind it. We've publicly said we have more than 20 OEMs that we have design awards with on more than 50 car models. So just really a really big pipeline around sort of the future potential on that business. So that would sort of be my #2, Krish. Number 3, which is a little bit of a wildcard, and I think many investors look at it as, hey, this could be sort of a wildcard upside to the company, it's actually around virtual reality. So we actually have a market leadership position in virtual reality for custom display drivers, which are really controlling the resolution and refresh rate for what basically the user's experience is, it's the image in front of them in virtual reality. We are shipping on more than 30 different models today. So we're by far and away sort of the #1 provider in these display circuits. And that has been growing rapidly. I think that one ends up being what does virtual reality look like 5 years from now? Is it up and to the right, almost a vertical hockey stick? Or is it sort of a more moderate growth? I think the industry is trying to figure that out. It's sort of early days, but that's been growing extremely fast. So that I rank #3. And then last one sort of within that and we talk about is a video interface business. This is the protocols that are transferring video data feeds between 2 different places. We do this in 2 ways. We actually have a SerDes capability, which transmits video display, high-resolution video over sort of a high bandwidth pipe, if you will, or a compression technology, where you can compress the data, send it over a skinny pipe, and then uncompress in over on the other side. And that's been a double-digit grower for quite some time. One of the big applications actually, interestingly enough, is a little bit more on the enterprise side of corporate IT in docking stations. So it's actually found this nice home and how to transfer video from a laptop into a doc into high-resolution monitors or multiple monitors. It does it extremely well, and that's sort of been a great business. So that's why I put it sort of #4, so top 4.

And this video interface, this is the one that you acquired from DisplayLink a few years ago. So if you roll it all together, is it fair to assume the long-term CAGR for Synaptics should be double digit? Or is it you think more like 10% is a conservative estimate to use?

Yes. I would say 10% will probably be lowballing it, if I'm just pretty honest about it. You mentioned DisplayLink was an acquisition we did in 2020, that's the compression side of this video interface. Synaptics historically had sort of the uncompressed sort of SerDes type technology. So put those together is actually what we call video interface today. When we announced that acquisition in 2020, we did disclose some of the historical financials from that company, which was private at the time we acquired it. Prior to COVID, so 2019 and prior, it had been growing at a 20% sort of CAGR rate. Obviously, work from home, it's sort of been a good asset to own. So we think there's at least sort of back to historical growth rates of 20% plus. To clarify, your question was for IoT and not the company?

Yes, yes.

So this was sort of for the video interface side, yes.

Got it. And then in those 4 segments, can you just briefly touch upon who are the competitors in each of those 4 segments? Like for video interface, do you compete with -- I think in some cases, you compete with Broadcom, so I just want to find out the comps there.

Yes. Interestingly enough, they're different for all of the areas. So what we find is in each end application, we actually have different competitors based on the competitors' capabilities. Wireless is a number of providers that have Wi-Fi, Bluetooth. So we'll run into, like in NXP, a media type of Qualcomm, Silicon Labs and Nordic from time to time. So there's a whole slew of people sort of in the wireless realm. And that is -- sort of everybody focuses on different things. I think I would say it's a pretty big TAM, and each of the suppliers is probably focused on the things that they view as sort of their strategic priority. In the automotive realm, we compete with like a HighMAT or a FocalTech, which has some of the display and touch capabilities similar to Synaptics. We tend to take sort of the largest market share and then sort of they're the follow-ons. And like virtual reality, we compete with some of the people that also have display technologies, like a NovaTech sort of, of the world that will try to copy some of the customizations that Synaptics provides specific to that application. But it's pretty new, and I think that technology is evolving pretty fast. In the video interface, I mean, it's actually interesting because there are some people that can do the analog side. There's very few people that can do sort of the compression side. So if you sort of took it as a whole, there's, I think, relatively few competitors that can sort of do both sides of the coin.

Got it, got it. And then the other one is on the Wi-Fi 6, 6E. It's kind of been a pretty good revenue generator for you. Where are we in that penetration cycle? And how to think about Wi-Fi 7 and the opportunity there?

Yes. It's interesting. So many of our design wins are on Wi-Fi 6 and 6E. What I would say is for IoT applications, which is how we're applying sort of the Wi-Fi standards, is sort of just getting started. If you look at when Wi-Fi 6 sort of came out, the first set of technologies that you applied in is applications like access points, routers. It then moves into like cellphones and PCs. And then finally, it sort of moves into all these client devices, sort of IoT sort of in our world. So that sort of IoT side of Wi-Fi 6 and 6E is sort of just now happening. And so we have a good majority of our design win activity is on 6 and 6E. Eventually, the standards sort of always sort of keep moving. And I would say, as standards go to Wi-Fi 7 and 8 and 9 and sort of whatever comes next, it's the same sort of pattern repeats. It's, okay, first, you need APs and then routers and then IoT is sort of always the sort of follow-on. To give you a sort of rough ranging, I think kind of around 2016 was sort of the Wi-Fi 6 standard was set. And that's when some of the first APs started working on Wi-Fi 6. And that's 2016. Now here we are in 2022 and sort of IoT is sort of just now rolling around to sort of adopting that standard.

Got it. All right. Let me just pause for a second and see if anyone had any questions from the audience. Go ahead.

Just a quick follow-up. Should we assume like Wi-Fi 6 [indiscernible]?

Yes. I mean, generally, the pattern of Wi-Fi standards, going back in time, is generally a Wi-Fi standard is kind of like a 5-year sort of time horizon before the cut in of the next standard. So you're sort of early innings on kind of a 5-year time horizon.

And then on to the -- from a supply standpoint, obviously, IoT is more mature in our technology. And you've seen UMC, Global Foundries, all talk about adding CapEx, but kind of sold out through all of next year. So I'm kind of curious, from your vantage point, they're actually raising prices today. But a lot of investors do believe that you're going to end up with excess capacity in mature nodes, especially 28-nanometer and above, maybe past next year into 2024. So how do you look at foundry supply and how it impacts your planning?

Yes. I mean, foundry supply, I mean, it's been a problem for the last year, 1.5 years. Our observation has been largely the CapEx has been going to higher-end process nodes, 3, 5, 7-nanometer sort of realm. And only the small minority of CapEx, I think, is getting pointed toward sub-28. 28, I think, is having sort of okay CapEx sort of spend. Below that seems like there's not a whole lot of new CapEx going in. It's sort of fairly incremental. And I don't think there's sort of this at-risk of oversupply in some of these legacy nodes. I mean, we're looking for fab partners that want to sort of co-invest into their lines and their capacity for some of these legacy nodes. I think there's been some reticence from some of the fab suppliers to do that. We also look to sort of migrate our technology. Okay, if you're in 40, can you move to 28? If you're in 28, can you move to 12, 14, 16? So we actually look for, hey, can we move some of our technology into areas that have a little more capacity, that have more sort of CapEx backing from the foundry guys. Now the economics don't always make sense. We're a fairly analog, mixed signal company. The transistor shrink doesn't work the same as a pure digital sort of processor where you might just sort of chase the process node every time and get the economics of scale and shrinking transistor size. It doesn't work the same for analog mixed signal. So that move, we are very particular about which ones move and which ones don't. So I think you'll see still a fair amount of demand and demand-supply sort of imbalancing in some of these legacy nodes.

Got you. But I mean, isn't it good for you if there's oversupply in mature nodes?

Well, I mean, look, we'll take whatever supply we can get. But at least from what we can see in some of our conversations, I don't think there comes a time anytime soon where there's sort of an oversupply in legacy nodes. At least that's sort of not our viewpoint.

But are they still raising prices on you?

The price change on the input price has been moving around for quite some time. I think it actually will probably continue to change is sort of my viewpoint. Look, I think it's economics 101, change input price, measure demand elasticity, change again, measure demand elasticity. Look, there's more semiconductors that are going to ship tomorrow than ship today, which are more than shipped yesterday. So I think the semiconductor world sort of everything has semiconductors in it these days. Legacy nodes actually tend to be a good majority of the number of units of semiconductors produced and consumed in the world. So I really think that the input prices are probably going to keep changing and the demand is going to continue to be there.

Got it. Got it. Then I just want to touch upon a little bit on the mobile side. How to think about the ramp of the OLED display driver story for Synaptics in 2022 and even 2023?

Yes. So that's a relatively new area that we've gone after. So we view our mobile business as fairly opportunistic, right? I mean, our stated strategy is opportunistically pursue premium businesses within mobile. This is pursuing sort of premium display drivers for handsets at sort of the flagship level. This area, we've started to ship into sort of our newest set of products. It's very supply-constrained. So this is one of the more supply-constrained areas. And when we have competing supply constraints, we will tend to dial the supply for IoT relative to mobile. And so in this area, you will sort of feed this business to the extent we can, but we will not sacrifice sort of our limited supply capacity for IoT ahead of mobile business. So I think if you're thinking about, hey, what does the ramp look like in '22, '23? I think it's going to be relatively muted because we're going to sort of continue that bias.

Got it, got it. And one other question on the mobile side. Apple, obviously, is a customer of yours. But it seems like you're more, correct me if I'm wrong, on the iPhone SE. Is there an opportunity to grow that beyond the SE? Or do you think it's limited only to like a specific Apple product today?

That's sort of a legacy position that the company has had for quite some time. We are not looking to pursue more models with that customer in any meaningful way. Look, that's a great customer. They're like one of the largest silicon buyers of the world. But again, in the vein of handsets, it's sort of opportunistic. We would much rather pursue IoT opportunities relative to pursuing additional handset opportunities. So I think what you'll see from us is probably continue to focus on IoT relative to sort of a handset opportunity.

Got it. Got it. And then just one other question I wanted to always ask on the IoT side. Clearly, you articulated like double-digit growth rate, which kind of makes a ton of sense. Is there a content growth story for Synaptics in IoT? If so, how to layer that on top of the underlying industry growth?

Yes. I mean, I think the really underappreciated forward opportunity for Synaptics is sort of the bundling, the cross-selling on sort of multiple technologies together within these IoT applications. I think about 3 quarters ago, roughly, we sort of released a statistic that I'll give sort of everybody just sort of the repeat on is, of our top 10 customers, actually half are buying 3 or more distinct product technologies from us, meaning they might be buying a Wi-Fi, they might be buying a display technology, and they might be buying like an audio processor. So very sort of different technologies that we're able to cross-sell in the customers. I think we're sort of early innings on sort of our potential to cross-sell. That to me is sort of the really sort of hidden factor within Synaptics sort of going forward is the ability to cross-sell. And that ends up being content, right? So that ends up being greater ASP content per customer per platform. And I think there's sort of a big potential of that in the future.

Got it. Got it. We'll just pause to see if there's any other questions. Then just shifting gears a little bit to like capital allocation. You have about $700 million in cash, $1 billion in debt. How to think -- and you have pretty good free cash flow generation. So I'm kind of curious how to think about capital allocation on a go-forward basis?

Yes. We've been clear on sort of capital allocation. And we think the best use of cash flow is actually to pursue M&A opportunities. "Hey, where can we accelerate our IoT growth, where can we add sort of accretive assets, where can we bring a better bill of materials to our customers that we either know or technologies that we know well? So that's sort of our bias right now. So our publicly stated sort of organic investments were very profitable, that's sort of never really an issue for Synaptics. We do look to do sort of debt management. I mean we always want to keep some leverage on the business. Like you said, our net leverage is actually extremely low today. I do think in this current environment there's a number of high-quality assets that, if you're a little patient, actually might turn out to be good buying opportunities for companies that have really good cash flow, that do have dry powder. So we sort of have the viewpoint that we would prefer to sort of sit on a little dry powder and look for high-quality assets that we might be able to bring into the fold under Synaptics. Absent any M&A activity, if that sort of doesn't end up working out, then we sort of opportunistically look at share buybacks sort of programs. So that would be sort of the priority.

And then on the M&A side, you said, I mean, obviously, it makes sense to do more on the IoT side. But it seems like -- with the whole market correction, it seems like anything related to mobile is trading at a discount; anything related to IoT is not necessarily as cheap as you might think it is. So I'm just kind of curious like, when you look at M&A target, is it driven by, is it an inexpensive asset? Or is it more driven by margin growth potential, margin expansion or earnings growth, free cash flow generation? What is like the metric?

Yes. I mean, to a large degree, we simplify it into accretion, right? So hey, what assets can be sort of the most accretive for our shareholders. And that can come in many different flavors, which is maybe the accretion comes from revenue cross-selling opportunities that we can do or maybe the accretion comes from gross margins. Maybe the accretion comes from, hey, we can actually just purchase it correctly and sort of the right structure. So bottom line, we sort of look for max accretion opportunities over the long term. So that's sort of, if you simplify, sort of what we sort of then look for.

Got it. And then I asked this question to many of my company and management. And obviously, many of them are on the equipment side versus semis, but they all say they lose sleep over supply and which is kind of obvious because of all the constraints. But no one seems to be losing sleep over demand. And Dean, you seem to be worried about demand. So I'm kind of curious, from your vantage point, is supply still the biggest issue? Or do you worry about demand? Because I understand, demand is far exceeding supply. But when you look at some of the folks in the -- like Microsoft preannouncement, and we are seeing slowing in hiring, it looks like there are signs of concerns popping up in tech. But semis seem to be immune to all of that so far.

Right. Yes. I mean, good question. I mean, I think a lot of people are trying to suss that out on what is the balance. Right now for us, supply is still the sort of the biggest thing that we worry about. For us, sort of there's an ever-increasing sort of demand pool that we've been chasing. So look, the supply that we required 1 year ago was a different number than the supply we required 6 months ago versus supply we require now. So the sort of bar has been moving for us. And that's why it's sort of been a challenge. That's why that's sort of top of mind for us. I mean, we do see pockets of sort of demand softness. We talked about in our earnings call, mobile handsets in China sort of not doing as well. It looks like some of the PC units is probably slowing down a little bit. But that being said, our systemic growers in IoT are sort of offsetting all of those things. So we sort of look at it as, for the time being, we don't see signs that sort of there's an underlying sort of demand issue specifically for our IoT businesses, which have been sort of by far and away, outstripping any noise in the other 2 sort of older legacy markets.

Got it. And maybe then just like a final question from my end. Clearly, like you highlighted, smartphone has slowed, PCs have slowed. Data center is holding up pretty well. Investors do worry about consumer slowing, and IoT is primarily consumer-driven. So if that does happen, where do you think you'd see it first amongst your business lines?

Yes. I think a lot of people do worry about sort of the generalized consumer electronics sort of slowing. For us, just going back to the floor, Wi-Fi, automotive, VR, and video interface. Like Wi-Fi is probably the most consumer exposed, but it's also the largest TAM with the most diverse of applications and also growing very rapidly. So I think we would sort of look at it as one that's probably the most consumer-exposed. But it's also growing the most rapid, so I don't think you would see sort of this reversion to sort of x growth. I think you would sort of still see growth and perhaps a little more muted. Automotive, I don't think you have sort of that same exposure. In VR, I would say you probably do. It's fairly consumer-facing. And then on video interface, it's sort of corporate IT is a lot of what is that attached to. So not exactly consumer, but corporate IT does have its own cyclicality in these sort of cycles.

Got it. All right. Thank you very much, Jean and Munjal, appreciate your time. And there's good insight. Thank you for that.

Absolutely. Thanks, Krish.

Thank you.