Synaptics Incorporated (NASDAQ:SYNA) Q3 2024 Earnings Call Transcript

Synaptics Incorporated (NASDAQ:SYNA) Q3 2024 Earnings Call Transcript May 9, 2024

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. Third 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 first speaker today, Munjal Shah, Vice President of Investor Relations. Please go ahead.

Munjal Shah:

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‘: Additionally, 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.

‘: Additionally, 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.

‘: I will now turn the call over to Michael.

‘: I will now turn the call over to Michael.

Michael Hurlston:

‘: Running AI models on-device rather than in a data center gives devices security, power and latency advantages. Synaptics differentiates by incorporating AI in every part of the flow from chip development to software to the tool chain. In addition, with a novel gearing approach, we can deliver more inferences at any given system power level than competition. We believe that the totality of our approach will make Synaptics the absolute leader when it comes to delivering AI processing solutions for IoT devices.

‘: Running AI models on-device rather than in a data center gives devices security, power and latency advantages. Synaptics differentiates by incorporating AI in every part of the flow from chip development to software to the tool chain. In addition, with a novel gearing approach, we can deliver more inferences at any given system power level than competition. We believe that the totality of our approach will make Synaptics the absolute leader when it comes to delivering AI processing solutions for IoT devices.

‘: The Astra platform includes a family of processors, an open software platform, an AI development toolkit and model framework as well as seamless wireless connectivity. The SL-family of processors are AI enabled MPUs targeted for the edge and are our first products to be released under the Astra umbrella. Two and four core versions are now sampling. The SR-series of processors are AI enabled MCUs and incorporate our pioneering gearing technique which actively manages power as inferencing requirements increase or decrease. A flexible, innovative software platform extends across both product families and supports Linux and Android as well as leading RTOS offerings. In addition, both families leverage the deep institutional knowledge at Synaptics around computer vision and audio machine learning algorithms.

The launch of the Astra family of processors at Embedded World was a great success with customer interest from a broad-based set of industries including automotive, consumer, industrial, security and home appliances. Thousands of customers and developers visited our showcase, and the team generated a significant number of qualified customer leads. We hosted multiple technical presentations and a first of its kind hands-on embedded AI workshop for product designers, creating strong demand for the Astra development kit. To top it all off, Synaptics SL-series embedded compute processors received the Best in Show award ahead of solutions from several incumbent suppliers and competitors.

‘: While Astra grabbed the headlines, our wireless products delivered the news, driving Core IoT revenue 26% higher compared to the prior quarter. Wireless product inventory has been worked down, except for a couple of SKUs. Design wins in wearables, security systems, home automation and action cameras are starting to ramp. We expect these trends to continue, driving sequential revenue growth in Core IoT next quarter. In addition, we remain on track to sample both our first broad market device and Wi-Fi7 device later this year. The Enterprise & Automotive products were roughly flat on quarter. However, next quarter, we expect to see growth in this piece of our business. The volume of our docking station products is beginning to increase again though demand is off historic norms.

In addition, our PC touchpad and fingerprint solutions are tracking to normal seasonal patterns, and we have opportunities to take some market share. Our HPD solutions are performing as expected and we continue to see opportunities to increase share as platforms start to refresh. Demand across the rest of the enterprise products is suppressed as IT spending on hardware and accessories continues to be at historically low levels with no signs of an uptick. Further out in the calendar year, we keep hearing talk of a refresh cycle and new AI-PCs driving unit volume higher which would be good for us. However, we have yet to see orders consistent with anything like this. In Automotive, our TDDI products are seeing strong demand and performing better than expected.

Our design-wins at several OEMs in North America and Europe including Audi, Chevy, Ford, Porsche, and Volkswagen are starting to ramp. Additionally, some other OEMs are extending their current models for another 1-2 years, which benefits us given our high market share in these designs. The strength in our TDDI products is somewhat offset by a slowdown in legacy DDICs. Longer term, we would expect to increase content per car with SmartBridges and Wi-FI/BlueTooth combos. Our Mobile products performed largely in line with our expectations and revenue was down from the prior quarter driven both by seasonality on our touch products and by a decline in revenue from our large legacy DDIC customer. As that product finally goes to zero, which we would expect at some point in the next fiscal year, it will present a headwind to fiscal 2025 Mobile revenue.

Aside from that, we expect our shipments to track seasonality for high-end Android phones. We see potential opportunities for further growth as the adoption of OLED technology expands into mid-tier phones. To summarize, we continue to be excited about our Core IoT business. For the first time, Synaptics is selling differentiated general purpose products into large potential markets. Meanwhile, our traditional product lines, where we have leadership positions in smaller more defined markets, are beginning to recover as inventory burns off and demand slowly returns. The combination of the two gives us confidence as we enter our next fiscal year. Before I pass the baton, I wanted to update progress on our CFO search. We have had discussions with dozens of highly qualified internal and external candidates.

If all goes according to plan, we should have someone in place well before our next earnings call. Now, let me turn the call over to Matt for a review of our third quarter financial results and fourth quarter outlook.

Matt Padfield: Thanks Michael, and good afternoon to everyone. I will first review the financial results for our recently completed quarter and then provide an outlook for our current quarter. Revenue for the March quarter was $237.3 million which was slightly above the mid-point of our guidance. Revenue from Core IoT, Enterprise & Automotive, and Mobile were 20%, 57% and 23%, respectively. Year-over-year, consolidated March quarter revenue was down 27%, but flat compared to the prior quarter, which reflects continued stabilization in our business. Core IoT revenue was up 26% sequentially, but down 49% year-over-year. We believe inventories are now at normal levels in this product sector and we expect to continue to see sequential growth in our fiscal fourth quarter.

In Enterprise & Automotive, March quarter revenue was down 1% sequentially and down 30% year-over-year. Several enterprise products are stabilizing though there are still pockets of excess inventory, which we expect to work through in the coming quarters. For the March quarter, our Mobile product revenue was up 33% year-over-year, but down 12% from the prior quarter mainly due to seasonality in our touch controller products for the Android ecosystem.

‘: During the quarter, we had one customer greater than 10% of revenue, at approximately 12%. For the March quarter, our GAAP gross margin was 46.5%, which includes $14.3 million of intangible asset amortization and $1 million of share-based compensation costs. March quarter non-GAAP gross margin was 52.9% in line with the mid-point of our guidance range. GAAP operating expenses in the March quarter were $127.7 million, which includes share-based compensation of $28.9 million and intangible asset amortization of $4 million. March quarter non-GAAP operating expense of $95 million was within our guidance range and up $3 million from the preceding quarter. Our prior quarter had a benefit from a partial reversal in the accrual for our bonus program.

We continue to maintain tight discipline around our operating expenses. During the quarter we recorded a GAAP tax benefit of $5.2 million and maintained our expected non-GAAP tax rate of 17%, creating a $4.3 million expense. March quarter GAAP net loss was $18.1 million or a GAAP net loss of $0.46 per basic share. Non-GAAP net income in the March quarter was $21 million, a decrease of 7% from the prior quarter and a 72% decrease from the same quarter a year ago. Non-GAAP earnings per diluted share of $0.53 was above the mid-point of our guidance range. Now turning to the balance sheet. We ended the quarter with $829 million of cash, cash equivalents, and short-term investments, a 2% sequential decrease. Cash flow used in operations was $13.2 million due to approximately $27 million of tax payments associated with prior fiscal years.

Capital expenditures were $9 million and depreciation for the quarter was $6.8 million. Receivables at the end of March were $144.7 million and days of sales outstanding were 55 days, an increase of 7 days from the last quarter. Ending inventory balance was $114.1 million, down $11 million as we continue to cautiously manage our inventory purchases. Our calculated days of inventory on our balance sheet also declined to 91 compared to 99 at the end of the prior quarter. Now, let me turn to our June quarter outlook. Our business is seeing stabilization as we have worked down channel inventories across multiple product areas. However, we are seeing a slow recovery due to curtailed spending by enterprises on hardware products. At a consolidated level we anticipate revenue in the June quarter to be in the range of $230 million to $260 million, an increase of approximately 3% from the March quarter at the mid-point.

Our Core IoT products are expected to benefit from the normalization of channel inventory levels, improving demand, and ramp of design-wins. We expect double-digit sequential revenue growth to continue in the June quarter. Enterprise & Automotive products in aggregate are expected to improve slightly in the June quarter. Mobile is expected to decline due to seasonality and declines in legacy products. Given these dynamics we expect our revenue mix from Core IoT, Enterprise & Automotive, and Mobile products in the June quarter to be approximately 22%, 57% and 21%, respectively. We expect GAAP gross margin for the June quarter to be in the range of 44.5% to 46.5%. We expect non-GAAP gross margin in the range of 52.5% to 54.5%, a small improvement from the March quarter.

We expect GAAP operating expenses in the June quarter to be in the range of $127 million to $132 million, which includes intangibles amortization and share-based compensation. We expect non-GAAP operating expense in the June quarter to be in the range of $97 million to $101 million. GAAP net loss per basic share for our June quarter is expected to be in the range of $0.45 to $0.85. And non-GAAP net income per diluted share is anticipated to be in the range of $0.35 to $0.75 per share, on an estimated 39.9 million fully diluted shares. We expect both GAAP and non-GAAP net interest expense to be approximately $6 million in the June quarter.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Christopher Rolland of Susquehanna.

Christopher Rolland: I guess my question is inventory, I guess, for Core, you described it as more normal level. Would love to know kind of what you see as the overhang going forward and then where inventory has most challenges and least challenges. That would be great to start.

Michael Hurlston: Generally speaking, I would say that as we said on the last call, inventory has been worked down. We feel that the challenge that we’re largely facing, particularly enterprise is more demand related. As we were working through the inventory, I think demand fell and we have this challenge that we highlighted in the prepared remarks around enterprise spending for accessories and kind of small hardware, which is largely where we play. There are still pockets of inventory. A couple of notable examples is in our audio headset business, our enterprise headsets, a little bit in our docking station area, particularly around our DisplayLink product line. But generally, I would say we’re kind of out of inventory jail and we feel good and as demand returns, we should see a pull up in the numbers.

Christopher Rolland: And then just so we can kind of understand the legacy DDIC drag. Roughly how big was it in ’24 and how big would you expect it in ’25?

Michael Hurlston: I mean, I think we called, Matt said in his remarks sort of a mid to low percentage of revenue. I think that we’ll see a good part of that continue for the next couple of quarters. But probably by the second half of the year that will go down to a de minimis level, Chris. I mean it probably hits zero by the some part in the fourth quarter. So it’s a drag, not a big one, but it’s something that we thought we should call out. I think everybody’s been aware of it for some time and it hasn’t gone into our thinking around the numbers because we knew it was eventually going to go to zero. But I thought the time was right to highlight that it’s coming off the table.

Operator: Our next question comes from Quinn Bolton of Needham & Company.

Quinn Bolton: Just thinking about the puts and takes between inventory kind of normalizing and soft demand. I mean, several quarters ago, I think you guys thought you might be under shipping end consumption by $100 million or more. Now that you’re at the tail end of the inventory correction and guiding revenue up a smidge. It feels like consumption must be down meaningfully and I’m wondering if you had any updated thoughts on consumption. Should we be thinking something the $245 million is indicative of where consumption is across a good part of the enterprise IoT base? Or do you think consumption is higher than that given there are still some pockets of inventory out there that you just mentioned?

Michael Hurlston: No, look, I think that the natural demand is something significantly higher than where we are. I mean, we stated that a bunch of times. I think what sort of surprised us is we had 2 pieces moving in parallel. We had inventory and as we were working through the inventory, we also hit a low point in demand. And so right now we think we’re at a very low point in the natural demand and as enterprise spending returns, as automotive returns, we would expect to see a pull up in the numbers. So we don’t believe by any stretch that sort of 245, 250, 255 is where we should be. We think that when demand normalizes and we think demand is still quite a bit lower than it would naturally be, we’re going to see a pull up in our numbers. So I think the surprise again is as we work through the inventory situation, we hit a point where the current demand is far lower than we’d expect natural demand to be.

Quinn Bolton: And then I guess just thinking about signs of a recovery, what things are you sort of tracking that might point to a recovery? Is it kind of things like bookings backlog? Are the customers particularly interest rate sensitive and you think the demand might not turn until we get a rate cut hopefully later this year? What do you think the biggest factors might be, to kick start the demand in especially the enterprise segment, which seems to be softest?

Michael Hurlston: Yes, I think the first thing is obviously IT budgets going away from sort of AI and to big compute, these large language models that are running in the data center and back toward PCs, monitors, docking stations, places where we have a presence. I mean, I think we talked about it with you in the last call. It seems a little bit counter because IT spending is flat or even slightly up if you look at the numbers. But the underlying detail is that the spending on gadgets, on PCs, on docking stations, on headsets, on enterprise telephony is clearly way down and the balance of the budget is going towards IoT. I’d say that’s one thing. I think the second thing for us too is we’ve got a bunch of new product introductions that are beginning to kick in.

We used as we talked to you about, we used the downturn to invest in the business to start running on our wireless platform. Some new docking station products are beginning to kick in. So we’ve got different parts of the portfolio that are going to start to ramp and that should even if demand remains soft, our NPI introduction should help us pull those numbers up.

Quinn Bolton: Maybe last clarification for me. The core IoT growing double-digits in June, I know it’s still fairly low base. Do you think that double-digit growth rate continues in the back half of the calendar year?

Michael Hurlston: Yes, certainly it’s going to grow. I mean, we’ve been growing obviously very hot. We talked about double-digit growth in that business over an extended period of time. We’re kind of outgrowing that right now. So I would say it will grow. It certainly is going to grow. The growth rate is TBD and we haven’t provided that guidance.

Operator: Our next question comes from Kevin Cassidy of Rosenblatt Securities.

Kevin Cassidy : As long as we’re on the topic of wireless connectivity, the Wi-Fi standards, can you say what your revenue split is right now? And how quickly is Wi-Fi growing? And then my follow-up question will be around Wi-Fi7 and what are the forecasts for that as far as the adoption rate?