Synaptics Incorporated (SYNA) Earnings Call Transcript & Summary

Okay. Good afternoon, and welcome to the first day of JPMorgan's 51st Annual Technology Media and Communications Conference. My name is Harlan Sur, semiconductor capital equipment analyst for the firm. I have my colleague here, Peter Peng, who helps me cover the semiconductor space. Very pleased to have Michael Hurlston, President and Chief Executive Officer; and Munjal Shah, Head of Investor Relations at Synaptics here with us today. I've asked Mike to start us off with an overview of Synaptics. Summary of the March quarter, June quarter outlook, and then we can go ahead and kick off the Q&A. So gentlemen, thank you for joining us this afternoon. Let me turn it over to you.

Harlan, thank you. 51 years, that's a pretty long time.

51 Years, yes?

Not too bad. Okay. Just a quick recap of the Synaptics story. We're obviously a fabless semiconductor provider. We've got 3 businesses that we talk about. One is mobile, and that's primarily touch controllers that go into handsets. We talk about a PC business and our PC business is largely characterized by the touchpad and fingerprint sensors that go into client devices. And then the third business and the largest portion of our business, the one that's getting the most attention is what we categorize largely as IoT. That's made up of a collection of smaller businesses. We've got an automotive facing business. We've got a collection of assets that are wireless in nature, Wi-Fi, Bluetooth, thread. And then we've got some assets that we sell into docking stations and audio. So there's a broad collection of products that sell into what we largely call the IoT market space. That's been our fastest-growing business over the last couple of years. We've certainly hit an air pocket here in the last couple of quarters, and our guide is reflective of that. Munjal, do you want to give some color on the numbers?

Yes. So if you look at it from our guidance, what we've seen is we've articulated our guide to be sequentially down on a revenue basis. And it's primarily driven by inventories that we are seeing in the channel and at our customers and what the approach that we've taken to that is try to bring those down to a normal level. And as a result, you're seeing a little bit of a sequential decline in our top line.

Perfect. Well, I appreciate that. And maybe that's a good place to start off with is first few questions on sort of the near to midterm, and we certainly want to delve into the mid- to longer-term profile of the company. But if we look at consensus estimates, the Street is forecasting June quarter, this quarter to be the bottom and sequential improvements as we move through the second half of the year and into next year. You guys have already noted that you're under shipping end demand by $75 million to $125 million. So it does set the stage for a potential inflection at some point, right? Even in a slower macroeconomic environment, you're working down customer excess inventories. At some point, you should be starting to move back up towards more normalized consumption levels. So given your visibility orders, new product ramps, how are you thinking, Mike, about the recovery profile of the business over the next few quarters?

I think you got it right, Harlan. I think it's going to take a couple of quarters to work through the inventory. Right now, we're undershipping demand, as Harlan said, somewhere between $75 million and $125 million. And we expect that to normalize in early calendar 2024. So we expect to start to climb out in early 2024. And by the end of our fiscal year, which is the June of [ 2020 ] quarter, we'd expect to be relatively close to that $225 million-plus, let's say, $100 million at the midpoint, $325 million, $330 million type of run rate. The inventory that's built up in the channel is appreciable. We were first hit by an accumulation in kind of consumer-facing businesses. And then the second shoe that dropped in our last quarter guidance, as you know, was to do with enterprise. We also had an accumulation there. And then somewhere lumped in with all of that good news is a decline in overall demand, somewhere in the neighborhood of 10% to 15% in sort of overall demand. So our number, this kind of $325 million at the midpoint, kind of our natural run rate does account for the decline in demand. So we'd expect as demand normalizes, that number too would grow.

And during these periods in these type of weak environments and all you've been through, you've been through many down cycles. There's a period of extreme volatility, customers wanting to push out, customers wanting to reschedule, customers canceling orders. And then you go into a period of sort of stabilization for a few quarters. And then as the demand comes back as you worked on excess inventories, the shipment profile begins to improve, right? Are we -- is the team at that point in time where I'm not asking you to quantify absolute dollar value of backlog or orders, but is the activity level of pushouts and cancellations, has that activity sort of become more muted? Or is it still pretty volatile? Are you still seeing a lot of customer pushouts rescheduling and so on?

Yes. I think it's become more muted. I would say that's partly to do with the fact that we ripped the band-aid off, and we've been characterizing in some of our discussions during the day. We have, as I think many of our competitors do, these long-term agreements, and we've got a significant amount of backlog that we could be shipping. But we've sort of proactively made a decision to reduce inventories to normalized levels as Munjal said and use some of that pushout and cancellation type of activity that you just characterized to win future designs. And so we've kind of taken some short-term pain in order to improve our long-term outlook. And that obviously has resulted in a substantial decrease in the top line, sort of peak to trough. I think we're in much worse shape than a lot of people, but we think that, that will result in a better long-term outlook.

Given the weak industry environment, I think industry capacity is [ loosening ] and we're starting to hear of the potential weakness in pricing. So what are your pricing expectations for second half of the year? And are you concerned about pricing pressure?

Yes, Peter, we are. It certainly increased. I mean there's portions of our business, as you guys know, that -- where we have pricing power, and we're in a fairly good situation relative to market share and our ability to control the market. And then there are other areas of our portfolio that are more subject to pricing pressure. The area -- our enterprise business is very strong. And there, I think we have more pricing power. Our automotive, our Wi-Fi business and our mobile business to a certain extent, is subject to more transactional type of behavior and more pricing pressure as a result. So those are the 3 businesses where we see the pricing pressure. And as we think about our gross margin, as you both know and you've spent a lot of time talking to us, we've run our gross margin from the high 30s to 60%. And Munjal has signaled, I think, through all of that, that we expect to operate the business at 57% gross margin. And that takedown from 60% to 57% accounted for an element of pricing pressure and then continued input pricing increases, which we're still seeing from some of our suppliers.

Okay. Let's kind of shift to some longer-term questions. So beyond some of the near-term industry headwinds, the IoT segment is one of the fastest subsectors in semiconductor industry. And your IoT portfolio is expected to grow double digits. So Synaptics is a broad and diversified customer base in IoT that targets applications across consumer, enterprise, automotive and wireless connectivity. I think the team highlighted that you have a $4.3 billion IoT opportunity. Kind of help us rank order some of the big growth drivers for the team over the next 3 to 5 years.

Yes. Again, I appreciate the question, Peter. I think you look at our big 3 growth drivers. Number one is wireless. And we have a pretty strong short-range wireless portfolio. We've got Bluetooth assets. As I said, we've got ZigBee and Wi-Fi. We tend to lead with Wi-Fi. That's the strongest part of our short-range wireless portfolio. And we tend to be on the high-performance end of the spectrum. And so what we think we have in front of us is an opportunity to further capitalize on that. We're still a relatively small player when you think about the Broadcoms, the Qualcomms. They have a very high market share. We still are very modest. And we think we've got a significant runway in front of us on high-performance Wi-Fi. But the other thing that we're trying to do is move our cost basis down a little bit, simplify our solution and get into the industrial, the medical, the home automation segments. And we have a big initiative underway to open that TAM up as well. So wireless kind of has those 2 fronts and really is a big growth driver for us. Second area is automotive. As you both know, we're in the early innings of a shift from discrete touch in these panels in cars and discrete display drivers that actually light up the panels to an integrated solution that combines both, touch and display. Today, we're the leading provider of TDDI circuits as we call them in cars. And as these large displays become greater and greater, there's more and more of them with the advanced infotainment systems that are coming online. Our opportunity grows. It grows by virtue of the screen size is getting bigger, and it grows by virtue of the shift from discrete to an integrated TDDI solution. On top of that, some months back, we announced a second component that we can sell into the car; a smart bridge component that sits between this touch and display circuit and the applications processor that drives the infotainment unit. So that's a pretty significant piece of content that we can ship into the cars as we look forward. The final growth driver for us is this idea of wireless workspaces. We talked about our franchise enterprise businesses. One of the big franchises is in docking stations, oddly enough. We have a very strong position in that market. What we think we can do is capitalize on that and make it wireless to increase our ASP per unit, but then also to attach wireless to monitors into video -- in-room video conferencing systems that you see in the workplace and really make anything that has video, videos like Zoom conferencing and things like that. And we're having to transport that video over a wireless link. We think we can do that uniquely well and open up a third area of growth for the company.

You talked about the wireless portfolio, it's probably one of the fastest product categories under the Synaptics' umbrella. You've got a great design win pipeline on Wi-Fi 6, Wi-Fi 6E. Help us sort of level set the stage for the next generation, which is Wi-Fi 7. We hear maybe gateways, access points end of this year, beginning of next year, mobile and IoT, maybe 2025. But obviously, the team obviously should be positioning itself for Wi-Fi 7. So help us understand, give us an update on the Wi-Fi 7 development efforts. And as it relates to your target markets, when should you intercept the market with your Wi-Fi 7 chipset solution?

Thanks, Harlan. Again, a good question. So I think you characterized it correctly. Wi-Fi 7 to me, for IoT is a 2025/2026 type of intersection point. However, segments of our market, this high-performance video transfer segment may need Wi-Fi 7 sooner. And so we are trying to get on an accelerated timeline relative to our Wi-Fi 7 road map, while continuing to prosecute this opportunity to go a little bit down market and service these industrial, medical and home automation types of applications. So we have a bit of a bifurcation on our road map. I think it's really, really important for us to maintain relevancy in the short range wireless space. So we plan on introducing Wi-Fi 7 as early as 2024 to try to get a little bit ahead of the phenomenon you just characterized. And frankly, for us, for video transfer, I think it will be somewhat important for us to be ahead of the general IoT market landscape.

Then within the automotive markets, you touched on it a bit. You guys are benefiting from the long-term trend of increasing infotainment content, the digitalization of the cockpit, you're attacking the auto markets in several areas; connectivity, discrete touch, integrated display and touch. Help us understand the design win pipeline, the forward revenue pipeline. And how should we think about it on a normalized basis, right? If auto production is flattish given your pipeline, given content growth of your products, how should we think about the auto business growth profile over the next, call it, 3 to 5 years?

Again, I appreciate the question. I think that we have -- as you know, I come from a short-range wireless background, and through a lot of the semiconductor downturns, we just drove right through it, because the market itself was just growing faster than any headwind was coming from the macro. I think that's going to be very similar to what we see in auto. Right now, the -- I don't even know about flattish. I continue to worry that there's going to be a bit of a downdraft in the automotive space. But I think our design win pipeline and what we have going on relative to this conversion of discrete to an integrated solution and then larger and larger panels, which leads to more TDDIs per car. Today, maybe we're at 1.5 TDDIs per car. I think that number bumps up to 2, 2.5 here with larger and larger screens. So we have that content tailwind plus we have this addition of a Smart Bridge. That certainly won't be a 2024 type of thing, just given automotive design cycles, but I think you start to see that tip in 2025. And so those 2 things together I think, offset any sort of headwind that we'd see from the unit decline, I'd expect unit flatness to potentially even decline into 2024.

You've built a strong portfolio of products and funnel around the consumer, automotive, enterprise IoT markets, the other big market segments that require strong connectivity, edge processing, video process is the industrial markets. Like factory automation, building automation, for example, your Katana platform is a good example of utilizing Edge AI Solutions, which is optimized for ultra-low power use cases in entice like office buildings, retail factories, warehouse. I guess how is the team thinking about leveraging more of the technology like your connectivity portfolio into more stable infrastructure-focused end markets like industrial?

A good question, Peter. I think -- look, for industrial, today, we're a nothing player. I think that Katana is our first foray into those markets and what that does for us is bring in 2 elements that I think are going to be important going forward. It's got a neural network. So there's an element of AI in that device. It's a very unique device in that you can actually compile a machine learning model and wholly run it at the edge of the network. So people talk about Edge AI. This is AI on a chip, right? So you really have the entire system running on this particular Edge device, a semiconductor itself. So we take a machine learning model, we train it, we then compile it into the device itself and run it there. It can't do gene sequencing or anything complicated like that, face ID, anything complicated. But it can do inventory tracking, meter reading, even some of this predictive maintenance that we talk about that's so, so important in Industrial, Industry 4.0 or whatever the nomenclature is. So that's element #1. Element #2, as you said, is the connectivity. And I think if you look at our connectivity today, it's not super well suited to industrial. It's high performance, and high performance in this particular vein means probably too high a cost. So what we have over the course of the next year as we talk about introducing Wi-Fi 7, another vector is really taking the cost of our solution down, simplifying the solution, making it easier for customers that don't have a lot of wireless experience to adopt it. And we think we can execute our -- we've already introduced a chip, or we are set to introduce it this summer that takes the cost basis down very significantly from our traditional Wi-Fi, which is based on a Broadcom database. We expect a second chip to come online in early 2024 that takes the cost down another significant step. And that's going to be an important piece as we think about this industrial market. Having an MCU, a little processor that can do some Edge AI and has a neural network, and then have a more cost-effective wireless connectivity solution, be it Bluetooth, Wi-Fi, Zigbee, we're doing all 3 together, is going to be the second element. So we think we now have a much better portfolio to take into industrial, into medical, into home automation, things that are -- tend to be stickier that we think stabilize the business a little bit better and don't subject to these fairly significant swings that you guys know about.