Synaptics Incorporated (SYNA) Earnings Call Transcript & Summary

All right. Let's get started. Good morning, and welcome to JPMorgan's 52nd Annual Technology Media and Communications Conference. My name is Peter Peng, small mid-cap semiconductor analyst here at the firm. I'm pleased to have Michael Hurlston, President and CEO; and Munjal Shah, Head of IR at Synaptics here. I've asked Michael to start off here with an overview of Synaptics, a summary of the March quarter and June quarter outlook, and then we can kick off the Q&A.

Sure, Paul. Thanks for having us, right. Appreciate the opportunity to come in and chat. So Synaptics is a broad-based semiconductor provider. We service almost every different market that there is. We break our business down into 3 distinct lumps to help people understand it a bit better. One is mobile. And in our mobile business, primarily, it's touch controllers that get sold into high-end Android phones. The second business that we talk about is enterprise and automotive and that, as the name would imply, we have semiconductor solutions that go into enterprise-class goods, whether that be PCs, enterprise telephony, docking station. So we've got a multitude of different businesses in there. And then, of course, we have exposure to automotive. Our automotive business is primarily today the solution and that drives the displays in cars. And then the third business that we talk about is core IoT. Core IoT is made up of a processing piece that we spend a lot of time on this particular call talking about. We've branded it Astra, looks like Google is now out talking about Astra. So we'll have a little dispute with them on that. And then our wireless business, which is predominantly Wi-Fi. So we've got a bunch of different technologies in our wireless basket, but really the most important to us is Wi-Fi. Paul, you asked about the last quarter, I think it was in line with expectation. What we saw was our core IoT, this basket of processors and wireless doing quite well and our enterprise and automotive sort of bubbling along at what we would consider a bottom level. And into the guide, we showed, again, more growth in core IoT with enterprise coming up a bit, enterprise and automotive. I'd say, in general, we've been a little bit surprised by the lack of recovery, I would say, in our enterprise and automotive business. We would have expected had you talked to Munjal and I probably 3, 4 quarters ago, we would have expected that to pick up a bit more strongly. It hasn't. And then our core IoT business is performing largely as we expected. It's grown very rapidly, albeit off a small base but it's grown nicely, and we'd expect that business to continue to grow.

Got it. Okay. Let's kind of just turn to the near-term stuff because there's a lot of emphasis on the recovery profile. So if we look at the consensus estimates. TheStreet is forecasting sequential growth through the second half of the year and into 2025. Just given your visibility orders and new product ramps, how are you thinking about the recovery profile?

Yes. I mean I think that TheStreet has taken down the numbers over the last couple of cycles, and I think that's fair. I think that our -- we definitely see a recovery. It's been slower than we would have expected, as I said, primarily driven in that enterprise and automotive business, the enterprise and automotive business, we don't see anything sort of structurally wrong, but the demand profile has been weaker and the recovery less strong. And that's predominantly driven by spending in the enterprise -- IT spending in the enterprise and IT spending in the enterprise that I think is growing, albeit relatively modestly. But for the most part, it's going towards data center, server spend and not toward the things we play in, the gadgets and PCs that the sort of hardware, small hardware that sits in the enterprise. So I'm still -- Munjal and I have talked about this, we feel like there is -- the recovery is there. We're putting that into our numbers. It's just been the slope of that recovery that's probably not quite what we would have expected had you talked to us 2, 3, 4 quarters ago.

Got it. And after several quarters of under shipping consumption trends, I think the team noted that inventory levels are sort of normalizing across multiple product areas. It's always hard to gauge your inventory levels at your end customers. So what's -- I guess, what's -- I mean the best way is probably to monitor the booking trend. Are you seeing positive booking trends out of your kind of direct customers?

Yes. No, I think bookings have definitely improved. We had, again, 4, 6 quarters ago, we had really very, very weak bookings. Bookings have definitely improved. We feel good about the order rate that's coming in. Do we feel like that's consistent with what we would call the real demand, no. It's still not there. The bookings are not consistent with what we would call pre-pandemic demand and pre-pandemic demand for us is quite a bit higher than we are today but I don't believe we have an inventory problem anymore. I think there's pockets here and there. But for the most part, inventory has been cleared out. And now we've got an order flow that's much higher than it was 4, 6 quarters ago, but not where we would expect it, were we at sort of our fundamental levels of demand.

Okay. On the gross margin, you have a target of 57% longer term, but just help us understand how you get back to those levels? And what are the drivers for getting back to those levels?

Yes. The gross margin for us has sort of bottomed out at 52%. I mean we were at 62%, 63%, maybe 2 years back, it fundamentally fell off because of mix. Our enterprise and automotive business is, by far, our highest gross margin segment of the business. That has been where we've seen significant demand problems and as such, the gross margin has been greatly impinged. With that said, it's come up about 50 basis points over the last couple of -- 50 basis points a quarter over the last couple of quarters. So we've seen quite a bit of improvement. I think our guide is to 53.5%, if I remember correctly. So we've come off the bottom from a gross margin perspective as the mix has improved. But in order for us to get back to 57%, we really need to see our enterprise and automotive business get back to a level that would drive the gross margin up. It is by far our highest gross margin. That's well above that 57% type of target and we expect it to get there, but I think it's going to take a little longer than we would have forecast.

Okay. On your our design win pipeline has been pretty strong in 2023 and missed a pretty severe semiconductor downturn. I think it's pretty reflective of your differentiated technology and product portfolio. Do you continue to see strong design activity into 2024? And how are you seeing the different end markets behave from a design win perspective?

Yes. I think we're doing well in 3 areas Paul, one is our wireless products. I mean we are coming off a small [ broad-based ]. We don't have very significant market share. And we feel like we're winning at an outsized rate in the wireless business. So we've positioned it well. Wi-Fi, there's a lot of different competitors, but it doesn't take a lot of movement in the share profile for us to have a significant impact on the company. And we think we are generally taking share in that business. Longer term, we're excited about our processors and where we have differentiation there is on the AI component. I mean, what's AI. Nobody knows, but everybody wants to future-proof these devices that are at the edge. And our play, as you know, is not having AI in the data center, the NVIDIA, Intel, AMDs of the world that have done so well in that business. It's more now running models at the edge of the network and having the ability to do inferencing on chip rather than depending on the data center itself. And there are just a ton of emerging use cases that are coming up with that type of product. And our customers are kind of innovating alongside us. We feel like that's going to be something that is a very, very differentiated part of the portfolio, one that won't hit for some years. It won't hit probably for 2 years. But we -- given our design trajectory there, we feel really, really good about that being a meaningful contributor. And then the third area, and I know you've got some questions about that later, is our TDDI, right? Our automotive business. Our automotive business has some puts and takes. But on the put side, is the drive to have more larger displays and have an integrated touch and display technology that goes into those larger displays. So we are winning at an outside right rate there. We feel really, really good about our pipeline in automotive, and it's just a matter of seeing those designs through and getting them into production.

Okay. Switching to your business, the core IoT. So within your core IoT segment, the wireless business represents the largest portion of the revenue mix and is one of the fastest-growing opportunities. You have a solid position in the high-performance segment on the IoT market with your Wi-Fi/Bluetooth combo chip. You have the Wi-Fi 6, the 6E upgrade cycle and then you have some new products like your Wi-Fi 7 and then your broad market chipset later this year. So as you emerge from this downturn, how well positioned is this business?

Yes, this is -- I would say this is our best positioned business. We're -- we've invested in this. We've -- as you know, the history of that business was taking a design database from Broadcom and repositioning and retargeting what Broadcom had done very well, which is executed in the mobile phone space and move it to the IoT and we did that, I think, very, very well. And now on top of that, we are starting to take and bring to market our own designs. So for the first year, 1.5 years, 2 years, we were simply taking Broadcom devices and then reselling them into a new market. Over the course of the last year, we've started introducing our own products. And those are much more geared toward the IoT market, you have to take cost out of those chips for it to really make sense. And so we've got a much better cost point, as you correctly said, in this high-performance area. High performance typically means distributing video. So you're moving video over a wireless link and that ideas for that market segments are security cameras. That's a big segment for us. The other segment is a good one is like set-top boxes, OTT streamers. We've done super well in that segment. But really for us to expand the wireless business, we need to go into the broad market. And broad market or appliances, home automation, industrial applications. And for there, you definitely need a much lower cost point, which we think we can bring. Our engineering team has been working on this now for the better part of 2 years, and we think we can redesign, rearchitect the Broadcom database and bring its cost point down to a level that makes sense and we can get gross margins that are consistent with this 57% gross margin target you mentioned a second ago. So we feel really good. I mean, I think we've done a good job from an engineering perspective. Those chips, the broad market chips, the first ones will sample at the end of this calendar year, and we would expect those to start contributing meaningfully at the very end of our fiscal '25. As you know, our -- we're on kind of midyear but more meaningfully in 2026. And then the other initiative that we have going is Wi-Fi 7. So Wi-Fi 7 will give an ASP uplift will create a new design cycle around the high-performance area, the security cameras, set-top boxes, things like that. We think we're first to market with a Wi-Fi 7 device for the Internet of Things. And that, too, will be sampling to customers at the end of the calendar year, and we'd expect that to contribute again in late fiscal '25, early fiscal '26.

And kind of leads to my next question is you're taking costs down as you leverage for core technology and high performance to go into the broad markets. It's also a more fragmented customer base, more distribution. So maybe help us some of the initiatives that you're trying to build out in your broad market channel business.

Yes, that's definitely, I think, our challenge. We have the right products, both in the processor domain and the wireless domain. What we don't have is a channel. We've not done as well as some of the broad-based microcontroller guys and even some of the wireless competitors that we have, have done a much better job building out that sales channel. We are -- historically, we've been structured to go after very large customers, Amazon, Google, things that companies that service the Internet of Things, but are much, much larger. That's the way our sales force is set up. So we have kind of a multitiered plan to get into the channel. The first is on our wireless products, module makers, people that take the semiconductor solution, package that up with power amplifiers, other RF circuitry and even some passives and put it into a package. It's like a system in package type of approach. They -- interestingly enough, they also have a pretty big channel. And they have customer support, software support engineers that can go and service that channel. So we've actually, on the wireless side, spent a lot of time over the last couple of years developing module partners. We've had one that we've talked about that represents a big, big chunk of our revenue, and they've done a super job for us selling into a diversified customer base, but we're in the process of bringing it up a couple of more, and those will help us with the scaling problem. As we build behind it, the necessary infrastructure for the channel. On the processor side, it's a bit different. Again, we're going to market first with ecosystem partners and helping them and they help us sort of leverage the technology and go broader. We are going to need to move more quickly there to build up a channel. So intersecting this sort of 2-year time horizon that we've talked about with our AI processors, we need to build up the structure of a larger sales channel. And we've started working on that now. We're already talking to distribution partners. More importantly, we're taking care of the things that we can control, a unified SDK that's very easy for customers to use, a lot of the collateral, a lot of the self-help that they go to the web to go get answers so they don't have to come into our support team directly. We feel like we're building that out in parallel. And when we land and get really, really ready to go broadly with our process or our AI processor products, we should be in good shape from a channel perspective. But for sure, you called it out right, Paul. That is something that's a work in process for us. We figure we've sort of solved this in reverse where we have a very, very good handle on the products but we need some work on the go-to-market piece.

Okay. Before we kind of move on to some of your AI initiative, take a pause and see if there's any questions from the audience. Just raise your hand and we'll pass the mic over.

Yes. Thanks, Mike. Thanks, Munjal, for joining us today. As we cover a lot of semiconductor companies, much like yourselves, many of them are coming from the bottom of the cycle. And the question for a lot of our companies is there's still some inventory correction, inventory burn with some of your customers, some of your customers have stabilized. Some of your customers are starting to drive you guys to ship to consumption. So I know it's always difficult when we're at this part of the cycle, but I'm just wondering if you have a sense of -- you guided for, I think $245 million in revenues for the June quarter. I'm wondering, as you talk to customers, look at distribution, sell-through and so on, what do you think -- where do you actually think that the normalized level of demand sits relative to that sort of $245 million guide in the June quarter?