Synaptics Incorporated (NASDAQ:SYNA) Q2 2024 Earnings Call Transcript

Synaptics Incorporated (NASDAQ:SYNA) Q2 2024 Earnings Call Transcript February 8, 2024

Synaptics Incorporated beats earnings expectations. Reported EPS is $0.57, expectations were $0.46. Synaptics Incorporated isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to the Synaptics Inc. Second Quarter Fiscal Year 2024 Financial Results Conference Call. At this time. All participants are in a listen only mode. After the speakers presentation there will be a question-and-answer session [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Munjal Shah, Vice President, Investor Relations.

Munjal Shah: Thank you, Josh. Good afternoon, and thank you for joining us today on Synaptics’ second quarter fiscal 2024 conference call. My name is Munjal Shah, and I’m Head of Investor Relations. With me on today’s call are Michael Hurlston, our President and CEO; and Dean Butler, our CFO. This call is being broadcast live over the web and can be accessed from the Investor Relations section of the company’s website at synaptics.com. In addition to a supplemental slide presentation, we have posted a copy of these prepared remarks on our Investor Relations website. In addition to the company’s GAAP results, management will provide supplementary results on a non-GAAP basis, which excludes share-based compensation, acquisition-related costs, and certain other non-cash or recurring or non-recurring items.

Please refer to the press release issued after the market closed today for a detailed reconciliation of GAAP and non-GAAP results, which can be accessed from the Investor Relations section of the company’s website at synaptics.com. Additionally, we would like to remind you that during the course of this conference call, Synaptics will make forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. Although Synaptics believes our estimates and assumptions to be reasonable, they are subject to a number of risks and uncertainties beyond our control and may prove to be inaccurate. Synaptics cautions that actual results may differ materially from any future performance suggested in the company’s forward-looking statements.

We refer you to the company’s current and periodic reports filed with the SEC, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q for important risk factors that could cause actual results to differ materially from those contained in any forward-looking statement. Synaptics expressly disclaims any obligation to update this forward-looking information. I will now turn the call over to Michael.

Michael Hurlston: Thanks, Munjal. I’d like to welcome everybody to today’s call. Synaptics delivered earnings that were largely in line with expectations, a small achievement in a period marked by industry-wide uncertainty, reduced overall demand and an accumulation of inventory. We recognized these issues about a year ago and took actions to align ourselves to the market environment. While that resulted in significantly lower top line revenue, we intend to use the downturn to position ourselves for the future by investing in our Core IoT products. In fact, we can now see a path to sustained growth in Core IoT, particularly in wireless. We continue to believe we’re at the bottom of our cycle and do not foresee further decreases from this point forward.

However, the shape and timing of the recovery remains uncertain. Turning to the December quarter, revenue was slightly above the midpoint of our guidance range and flat compared to the prior three months. Our gross margins were at the midpoint of our guidance despite an unfavorable product mix, headlined by mobile performing better than initially forecast. Our spending was lower than we originally expected, resulting in non-GAAP EPS toward the high end of the guidance range. For the past few quarters, we’ve been consciously working down inventory throughout our supply chain. As a result, in our PC, wireless and mobile product areas, stocking levels are at or very near historic norms. On the other hand, we still have some work to do in enterprise, where inventories are moving slower than expected.

We continue to attribute this to a slowdown in enterprise IT spending, which has impacted higher-margin areas of our business such as docking stations, enterprise telephony and high-end headsets. As we outlined last fall, we are focusing our investments in Core IoT, which contains our wireless and processor products. We’re seeing the first signs of success in our wireless area with the normalization of channel inventory. We now expect to see consistent sequential revenue growth in wireless, starting with the nearly 20% growth reflected in our March guidance. While processors will be a longer road to measurable success, we are coming off CES where we had increased customer engagement around both our general-purpose low-end MCUs and higher-end MPUs, both of which feature AI engines, which enable customers to deploy their own computer vision use cases.

Our wireless success is driven first by a return to normal inventory levels and a resumption of shipments to existing customers, but should be further bolstered by new design wins. For example, our lead module partner has begun shipping our first wireless automotive design win for in-car infotainment systems. While initially hesitant about automotive as an end market for Core IoT products, we’re getting pulled into customer engagements and see perhaps more opportunity than we thought. Our wireless sales funnel continues to increase, and we have new wins for our high-performance products in audio equipment, consumer security and action cameras. On the product front, our new cost-effective, high-performance 1×1 device, the 43711, is enjoying initial success in home appliances, smart speakers, industrial qualified modules and security cameras.

We remain on track to sample both the first Wi-Fi 7 device for IoT applications and our first broad market chip by the fourth quarter of 2024. In addition, we have ramped our second module partner, one that we discussed on the last call, and they have already begun taking product from us and are shipping pre-production quantities to their customers. In Core IoT processors, we recently announced our Astra platform. Astra encompasses a family of processors ranging from high-end MCUs to octa-core embedded MPUs. The platform also offers a full-featured software toolkit, designed with the intent to simplify AI adoption in various IoT devices. It accepts commonly used customer frameworks to speed developers’ AI integration in IoT products. At CES, there was tremendous interest in Astra, particularly from customers and partners that want to deploy simple AI use cases at the edge of the network rather than relying on models running in the data center.

We are extending our customer reach beyond our core processing customers and into deeply embedded applications such as appliances, industrial and video conferencing. Near term, our processor products are seeing traction in our traditional operator space, and we expect those wins to translate to revenue in fiscal year 2025. As stated earlier, our enterprise products have been largely characterized by persistent inventory and weaker-than-expected IT spending. As we look at the different products that compose enterprise, two are worthy of further discussion. In our historic touchpad and fingerprint devices for client PCs, we have worked through customer and channel inventories and believe we are shipping on par with end demand. While the notebook PC market has normalized, predicted growth has yet to materialize.

There is some optimism around both a 4-year COVID refresh and AI PCs driving market increases in the second half of the calendar year. We have yet to see anything that would indicate strong resurgence but continue to control what we can by driving share, particularly at the high end of the market. The second area to touch on is our user presence detection technology. Some of you were able to see this in action at CES and its potential for ease of use, privacy and power savings. We are set to deliver our first chip for this application, which is specifically designed to drive our differentiated suite of AI algorithms at extremely low power levels. With both the tuned device and the latest set of algorithms, we expect to increase share at our current lead customer, penetrate additional PC OEMs, and drive the application into accessory devices.

Automotive products are continuing to do reasonably well as the transition from discrete touch and legacy DDICs to TDDI plays out. Adoption of TDDI-based solutions is still a tailwind, but we’re seeing a sharper fall-off in legacy DDIC products than initially forecast. Our aggregate automotive revenue will likely be choppy as the two curves cross over in the next couple of quarters. We continue to do well with our TDDI products, having recently won at multiple OEMs, including new models at Toyota and Porsche. Although early in the design cycle, our new SmartBridge product is central to our automotive strategy, adding a second product to the portfolio, giving us additional differentiation and delivering system cost savings, while also helping defend our TDDI position.

Our mobile products had a strong quarter, driven by improved demand across our Chinese customer base, as well as the ramp of our new design win for the Samsung Galaxy S24. With the GS24 win, we solidified our leadership position in touch controllers for the high-end Android handset market. As we look into the future, we see opportunities to maintain our differentiation at the high end. Customers are looking to introduce new displays that are even thinner, driving higher signal-to-noise ratios, which our precision analog circuits can resolve. In addition, we are seeing opportunities for our touch products in areas outside handsets such as gaming. In general, we believe our mobile inventories have normalized, and we expect our shipments to align and track end market demand.

As we said last quarter, our business has hit the bottom of the cycle and continues to stabilize. To a large extent, inventory has now cleared, and we believe some of our businesses are at or near steady state. However, enterprise spending has been significantly reduced, which presents a new impediment to our higher-margin products, keeping our overall top line revenue flat and margins below our outlined targets. Near term, we will see puts and takes in enterprise and automotive before it returns to steady state and tracks to sustained growth. The good news story was our Core IoT business, led by our wireless product line, which will increase nearly 20% quarter-on-quarter and should show sustained growth from this point forward. Overall, we’re still confident in the long-term targets we outlined at our Analysts Day in September.

Now, let me turn the call over to Dean for a review of our second quarter financial results and third quarter outlook

Dean Butler: Thanks, Michael, and good afternoon to everyone. I will first review the financial results for our recently completed quarter and then provide our current quarter outlook. Revenue for the December quarter was $237 million, which was slightly above the midpoint of our prior guidance. Revenue from Core IoT, enterprise and automotive, and mobile were 16%, 58% and 26%, respectively. Year-over-year, consolidated December quarter revenue was down 33%, but more importantly, we continue to stabilize the business sequentially. On a consolidated basis, our distribution channel inventory continued to decline in the quarter, although some products continue to experience high stock and slower inventory turns, while other products are beginning to see new restocking orders.

Core IoT revenue was roughly flat sequentially and down 46% year-over-year. Over the last three quarters, we have worked tirelessly to deplete excess inventories where possible and believe we are finally reaching the point where we can expect to return to growth in our third quarter fiscal 2024. In enterprise and automotive, December quarter revenue was down 12% sequentially and down 40% year-over-year. Here, many customers began their slowdown two to three quarters after we began experiencing declines in our Core IoT products, which leads us to believe that enterprise may require some additional patience. Mobile product revenue was up 42% sequentially in the December quarter and up 10% year-over-year. This marks one of the strongest mobile quarterly sequential increases since our fiscal 2022.

We are experiencing strength across the Android ecosystem in China, as well as ramps from new flagship smartphones. At this point, it’s unclear whether the strength is due to fundamentally strong end market demand or if it’s merely channel restocking ahead of the Chinese New Year. We continue to expect our mobile sales to remain subject to normal seasonality patterns. During the quarter, we had two customers greater than 10% of revenue at approximately 13% and 10%. For the December quarter, our GAAP gross margin was 46%, which includes $14.4 million of intangible asset amortization and $1.1 million of share-based compensation costs. December quarter non-GAAP gross margin was 52.5%, which was the midpoint of our guidance range. GAAP operating expenses in the December quarter were $126.9 million, which includes share-based compensation of $28.1 million and intangible asset amortization of $3.9 million.

December quarter non-GAAP operating expense of $92 million was down $4.7 million from the preceding quarter and below our guidance range. We continue to maintain vigilant expense control. And given our expectations that return to a more normal sales level will likely take longer than previously expected, our cash bonus program now reflects a reversal benefiting operating expense in the December quarter. During the quarter, we recorded a GAAP tax benefit of $15 million and maintained our expected non-GAAP tax rate of 17% or $4.6 million expense. December quarter GAAP net loss was $9 million or a GAAP net loss of $0.23 per basic share. Non-GAAP net income in the December quarter was $22.5 million, an increase of 11% from the prior quarter and a 75% decrease from the same quarter a year ago.

Non-GAAP earnings per diluted share of $0.57 was near the high end of our guidance range. Now turning to the balance sheet, we ended the quarter with $849 million of cash, cash equivalents and short-term investments on hand, a 3% sequential increase. Cash flow from operations was $39 million. Capital expenditures were $10.4 million, and depreciation for the quarter was $6.8 million. Receivables at the end of December were $126.6 million and days of sales outstanding were 48 days, an increase of six days from last quarter. Ending inventory balance was $125.1 million, down $6.6 million as we continue to cautiously reduce our inventory purchases. Our calculated days of inventory on our balance sheet also declined to 99 compared to 105 at the end of the prior quarter.

Now, let me turn to our March quarter outlook. We are seeing stabilization at the current levels and plan to further reduce distributor inventories, particularly in enterprise-focused products, given the slow corporate IT spending. While we remain hopeful of a return to higher and more normalized run rates, the timing and shape of recovery remains uncertain. At a consolidated level, we anticipate the revenue in the March quarter to be in the range of $220 million to $250 million, similar to the December quarter. Inventory appears to have largely bottomed for our Core IoT products, and we expect the March quarter revenue to be up nearly 20% sequentially. Enterprise and automotive products have not yet fully bottomed and we believe will continue to decline into the March quarter.

Mobile is expected to decline due to seasonality and lack of customer ramps in the coming quarter. Given these dynamics, we expect our revenue mix from Core IoT, enterprise and automotive, and mobile products in the March quarter to be approximately 19%, 57% and 24%, respectively. We expect GAAP gross margin in the March quarter to be in the range of 43.5% to 46.5%. We expect non-GAAP gross margin in the range of 52% to 54%, a small improvement from the December quarter. We expect GAAP operating expenses in the March quarter to be in the range of $130 million to $135 million, which includes intangibles amortization and share-based compensation. We expect non-GAAP operating expense in the March quarter to be in the range of $94 million to $98 million.

GAAP net loss per basic share for our March quarter is expected to be in the range of $0.80 to $1.10, and non-GAAP net income per diluted share is anticipated to be in the range of $0.35 to $0.65 per share, on an estimated 40 million fully diluted shares. We expect both GAAP and non-GAAP net interest expense to be approximately $6 million in the March quarter. This wraps up our prepared remarks. I’d like to now turn the call over to the operator to start the Q&A session. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Quinn Bolton with Needham & Company. You may procees.

Quinn Bolton: Hi, guys. Thanks for taking my question and thanks for all the detailed sort of segment by segment in terms of where you think you are in the inventory process. I guess, first question, trying to get a sense of, in a number of your product segments, you’ve said you think you have kind of reached normalized inventory levels, and you’ll start to ship in line with consumption. I guess my question is, do you think you’re currently shipping at end consumption? Or does that return to end consumption imply growth over the next some number of quarters as you come back to shipping in line with consumption? And I guess a sort of related question is, just as you look across all of your businesses, do you still think you’re under-shipping consumption rates by, say, much as $100 million a quarter down here at the roughly $230 million, $235 million a quarter revenue level?

Dean Butler: Yes. Quinn, good question, and I’ll take a stab and let Michael to add on. I would say, in general, there’s — it’s actually a mixed bag across the different product groups. Look, I think, overall, we’re probably still under-shipping overall consumption. However, it differs across the different groups. For example, Core IoT really was plagued with a lot of inventory. We’ve been working that for three straight quarters. This is our fourth quarter now. Guiding into the March quarter up. It looks like we’ve depleted a large portion of that. There’s still pockets within individual products even within Core IT. For example, in mobile and kind of PC-related customers, largely that inventory is resolved. Now we’re just shipping back to end demand.

As you know, PCs may be a little choppy, mobile seeing more recent strength, and then probably enterprise, which is the most unclear at this point, is there’s certainly still inventory in channel. We’re probably under-shipping. But I think the demand has sort of fundamentally shifted there, just given corporate IT spending is down, and it looks like — at least in the near term, it’s unlikely to come back up in any sort of rapid pace. I hope that helps, Quinn.

Quinn Bolton: Yes, it does.

Michael Hurlston: Go ahead, Quinn. I don’t have a lot to add to what Dean said.

Quinn Bolton: I was just, I guess, going to ask, it sounds like, especially on the enterprise side of things, that if demand has sort of softened with a slow corporate IT spending environment, that prior thoughts that you may be under-shipping demand by as much as $100 million. It sounds like we may need to temper that, just given the sort of weaker macro environment as we think about where the revenue run rate might normalize as you finally clear the inventory in enterprise. It sounds like that’s probably the way we should be thinking about it.

Michael Hurlston: Yes. I think that’s — generally, that’s right, Quinn. Look, I think we’re — there’s two factors in enterprise. One is that there is still inventory. I mean, we’re still seeing inventory in pockets. And then two is, as we’ve kind of worked through the inventory, we realized that the demand is lower than perhaps we thought. So those two factors are kind of leading us to where we are. I still think that demand is going to return, and obviously, we’re going to clear out these inventory levels. So I think the statement remains consistent, but it’s tied to that increase in enterprise spending. And once that happens, I think we’re back in business.

Quinn Bolton: Got it. Understood. And then, you guys, I think in the script, said a couple of times, you think you’ve reached the bottom for revenue, which is great to hear. I understand that the pace of recovery is uncertain. But I think at least you’ve put the line in the sand that you don’t think sales go down from here. So we’ve got the bottom in revs. But gross margin also looks like you may be bottoming your 52.5% in December, guided to 53% in the March quarter. Can we also sort of infer that you think you’ve probably hit the bottom in gross margins in this range of, call it, 52.5%, 53% that you saw December-March?

Michael Hurlston: Yes, I think that’s right, Quinn. Look, at 52.5% we ended December. We’re guiding up into March. So we do think that, that even on the margin front hit its low point. It should work up from here. Again, as enterprise sort of recovers, it may take a little bit longer. But I think the worst is behind us on the margin front.

Quinn Bolton: Excellent. Thank you guys.

Operator: Thank you. One moment for questions. Our next question comes from Christopher Rolland with Susquehanna. You may proceed.

Christopher Rolland: Hi, guys. Thanks for the question. You had some nice commentary on wireless IoT. And so, I’d like kind of your thoughts more longer term here. Is this really — this kind of snapback we’re seeing, is this kind of inventory-related? Or is there — through your visibility on design wins or engagements, is this a bona fide bottom? And would you expect a strong, sustained rebound from here?

Michael Hurlston: Yes, Chris, we think we bottomed and we think that we have a sustained rebound. So the snapback, I think, is almost entirely due to getting the inventory out. We’re not all the way there. There are actually — Dean said it in one of his comments. There’s still even pockets in wireless, but I think we’re largely through that. So the snapback that you characterized is largely a resumption of shipping to end demand. I think on top of that, as I said in my remarks, we are seeing a bunch of design wins. We’ve characterized at Analyst Day, the size of the funnel. The funnel is very, very strong here. And we’ve actually converted a bunch of design wins, one of which we alluded to in the prepared remarks around automotive.

So we feel like there’s going to be another layer here, right? We’re building toward this $1 billion target in wireless. And I think that there’s — right now, it’s almost entirely just return to normal demand. But I think we’re going to start soon seeing a layering in of all the design activity that we’ve had for the last year to 18 months.

Christopher Rolland: Thank you, Michieal. And then, mobile, obviously, a great quarter here. It looks like it takes maybe a small step-back next quarter. But longer term, are we getting something going here? Can you broaden it? Samsung, beyond the GS24, how are the other OEMs and engagements there? I think Novatek has been talking up this market a little bit. I don’t know if you have a similar kind of thought for the rest of the year.

Michael Hurlston: Yes. I would say, we — not a lot of upside opportunity. We are — one of the things, I think, that I alluded to is sort of areas outside mobile. We’ve done a good job, I think, capturing the high end of the market. We do see, Chris, some opportunity in mid-tier, and we’re looking at that to see what we can do. And we think we can do that at appropriate margin levels. But I’d say, generally speaking, we don’t see a heck of a lot of upside in mobile from where we are today.

Christopher Rolland: Understood. Thank you, guys.

Operator: Thank you. One moment for question. Our next question comes from Peter Peng with JPMorgan. You may proceed.

Kaykin Peng: Hi, guys. Thanks for taking my question. Just on the enterprise and automotive, so just based on the mix guidance, it’s kind of implying a low-single digit Q-on-Q decline. So if we kind of factor in the PC seasonality, your traditional enterprise, that seems like it’s kind of bottoming or declining at a slower pace. So do you think that we’re kind of at the bottom for the March quarter, and so it’s more stability going forward? Or how should we think about the puts and takes in that?