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Synaptics, Incorporated (NASDAQ:SYNA)

Credit Suisse Annual Technology Conference Transcript

November 29, 2012 11:00 AM ET

Executives

Kathy Bayless - Chief Financial Officer

Analysts

Randy Abrams - Credit Suisse

Randy Abrams - Credit Suisse

[We are happy to have] Synaptics, with us we have Kathy Bayless, she is the CFO. I am Randy Abrams, head of our Taiwan research from we covered US semis as well. So we are going to start with a presentation, to go through Synaptics, a leader in touch and a lot of exciting things going on. So she'll start going through the presentation. And we've got some time for fireside chat and audience questions, with that I'll hand it over to Kathy.

Kathy Bayless

Great. Thank you, Randy. Really happy to be here with you this morning, so I'm always excited to be able to talk about Synaptics and the great things we have going regard – around touch in the markets that we serve.

So just a brief background, okay I won't go through that slide. Let's move on to the next one. Synaptics, we are the leader in capacity of touch technology and that we really created – if you think about capacity of touch we created the first touch pads for your notebook computer, we also created the first touch screen for mobile devices and a couple of the more recent advances that we introduced recently were, we were the first basically to launch In-Cell solutions into the mobile market for touch screen phones. So we've two phone shipping in the market today with our Intel technology.

We also have introduced, we introduced the first single chip solution for large touch screens up to 12 inch into the market and that's shipping today in the Galaxy Tab 2 [thin H] solutions. So we are very focused on our innovations. We have a global product and highly advanced design group and engineering group, so we really focus on helping our customers advance their product portfolios and differentiate their solutions into the markets we serve.

The primary markets that we serve are the notebook computer markets, the smartphone markets and also larger touchscreens in PC's that are just emerging as well as the tablet market.

From a market standpoint we still see strong penetration of touch solutions and smartphones into the mobile markets. So we still expect basically to see over 50% of all mobile phones to have touch screen within the next year or so and we see capacity of touch continuing to penetrate very rapidly in this market.

As far as the product segment, I mean we are very excited about our product segment for mobile phones. So we really have the broadest product portfolio in the market today. So our solutions serve the premium solutions in the market as well as the fast growing lower end cost optimized solutions for emerging markets. We also have the most advanced solutions in the market as I mentioned earlier with our In-Cell solutions. So we are extremely happy about the product portfolio and we are seeing continuing increasing opportunities based upon our solutions.

Display integration, I mentioned, again one of the things has been, we have been talking about for quite a while is display integration and In-Cell technology. So I talked about in the first couple of slides, the capacity of touchscreen solutions would in over 50% smartphones in the market, but when I look at the other big trend is really display integration.

So what we're really pushing is changing the whole dynamics on how touch is delivered into the OEM customers. So by display integration, what we are doing is now we're starting to deliver touch solutions our LCD manufacturing partners. So the LCD manufacturers are in this quite supply chain already and have been for years. What we are doing is we are working with them to optimize their processes to deliver On-Sell, In-Cell and our most advanced TDTI touch and display solutions into the market through the display manufactures. So we see this is really starting to pick up momentum in calendar '13 and we expect within the next several years some solutions delivered through the display manufactures again could be 50% of the touch solutions delivered into the market.

So just stand to go back and talk a little bit about why do you care about In-Cell and display integration is. The first couple of things is if you look at it on this stack up over here typically for a touchscreen. The full touch solution is a separate discrete touch solution it's either glass or plastics, as well as the flex cable and the touch controller chip. So when you are looking at a cell phone stack up, you have the LCD screen on the bottom, you have adhesive, you have the separate touch sensor that sits in the middle, more adhesive and then the cover alone.

So when you move to the advanced, more advanced In-Cell type solutions which we deliver with the LCD manufacturing partners. The first thing is you get is thinner stack up. So the phones today are getting thinner and thinner. With In-Cell technology you can get a thinner stack up also you are eliminating the discrete touch solution and a layer of adhesive that fits in between the LCD layer and the cover a [lengthy] so you get brighter screen. Then we got a lower cost supply chain, because we're simplifying the delivery of touch solutions into the market. This again, this is just an example of the first two solutions that we have started shipping a couple of quarters ago into the market with our first In-Cell solutions.

We talk about the notebook market. In the notebook market, the two big trends that we are very interested in is Windows 8 and Ultrabook. So, we do expect notebooks to, you know to continue to grow some but the big trends out there are thin and light. It's driven by the Ultrabook in the market as well as Windows 8. Windows 8 is all about touch first, so we are very excited about having the Windows 8 machine in the market driving another surface area per touch. So we are starting to see some Windows 8 machines in the market, Ultrabooks with not only nice big click pad surfaces for gesture activity, but also touch screen. So we are seeing more expanded opportunities again with Windows 8 and Ultrabooks and our product portfolio fits really well there.

So in the notebook side of the market I mean the things that we are really driving is more content into the notebooks. So we can now address through our large touchscreen portfolio, larger touchscreen and the top part of the notebook computer we can also address you know our traditional touch pad, click pad, force pad type solutions for gesture capability on the keyboard deck and we also just acquired a small company with what we called our ThinTouch keyboard technology which we'll be introducing into the markets next year.

So our real focus is really on the entire human interface. The products that we have, we have an expanded product lineup and we're also looking at being able to deliver really optimized product solutions for the entire human interface in this market. Thin types as I mentioned this is just a picture, but it is a full, thin touch is a full functioning keyboard technology, mechanical keyboard technology that we'll be able to utilize in an Ultrabook and notebook form factor, drop in full mechanical functionality. So also optimized for to be able to the covers, convertible type keyboards, because you know it's very, even though it's a full functioning highly usable keyboard its 40% thinner than today's mechanical current keyboard technology. So we're very excited about the thin touch technology as the big opportunity for us to expand our TAM into notebooks as well as keyboard covers and other types of nice thin keyboard opportunities.

Video products this was another small acquisition that we did. The primary focus behind it is about the – when we talk about In-Cell technology and Sway integration that activity today is focused around the mobile side of the a business, mobile TouchScreens, the mobile phones, but as we go forward and there is more and more large TouchScreens what we are looking at is how to provide more optimized solutions to really drive more large TouchScreens into notebooks and also even TouchScreens into larger type surface areas. On a more cost optimized more performance based solutions.

So we are using some of this technology that we acquired through this acquisition to help us establish that roadmap for the larger TouchScreen solutions and in the interim their technology really we have separate chip solutions that we'll be selling their technology is around touch around TCON controllers for displays. They have very strong panel self refresh ability in the TCON controllers, which really helped power management in the displays and also as we move. They also have embedded displays technologies that we have a line of embedded chips for EDP. So for example it's going to become more important as the (inaudible) platform doesn't really have that technology embedded anymore in the chips. So if you want to be able to hook up a separate miniature device you will be dock or support multiple monitors these type of solutions will be important for that.

Moving in large TouchScreens, if we look at large TouchScreens, our large TouchScreens in the notebook market as well as also the additional tablet opportunities, so again very large markets and for us at this point of time is all really it's great growth opportunity for us. We are very, this is all very new, additional tablet opportunities are materializing all the time and the penetration of TouchScreens in the notebook is just starting.

So our product portfolio again is we have complete product portfolio to support the TouchScreen side of the equation for tablets also keyboard deck with our TouchPad and new ThinTouch technology.

From a financially standpoint again we have – our Company is very strong financially, we have grown substantially over the last several years, last year in fiscal '12 revenue dipped down, because we did a big transition from selling full modules for the mobile segment of the business to selling chips, so we also generated more gross margin dollars last year as a result of that and saw our gross margin percentage go from 41% up to 46%. So the real focus this year in fiscal '13 is returning to top line growth.

And again strong consistent profitability over our history, we generate strong cash flow from our operations, the primary focus for use of cash has been investing in our core businesses, whether that's internally or externally to promote our long-term strategic objectives and we also have done – do some share repurchase on an opportunistic basis on a fairly consistent basis.

This is the model that we typically run historically, so I think as I mentioned if you hover into the column for Q1 and also fiscal '12 you can see that you know, we've changed our gross margin profile to moving from the low 40s up to the mid 40 – 45 to 47 is our target range. Operating margin wise we've typically been running at high – upper teens, first quarter with the new, with the additional expenses associated with the new acquisitions, we dropped down, from an operating margin standpoint, but as revenue continues to grow this year and into next we expect to continue to push, our operating margin back up to mid teens and then further back up to the historic ranges.

So these are some of the priorities that we've laid out for this year, but again we're really focused on growth in the drivers for growth are Ultrabooks, Windows 8, Larger TouchScreens, Tablet opportunities, mobile phones broad portfolio of products are really expanding position in the mobile phone market. And then the introduction of our newer technology and product with the video product have been such in fiscal '14.

So again, very excited about the market, they're nicely solid growth markets, expanding products line up that we have today. We're much better positioned today from current product portfolio standpoint and also the expanded portfolio that we see so. We really think we've got some great opportunities for growth going forward.

With that, I'll turn it over to Q&A.

Question-and-Answer Session

Randy Abrams - Credit Suisse

We've kind of about 10 minutes, we'll start with (inaudible) here. Well, Kathy thanks for the introduction. You've put up a slide that had historical CAGR, about 20% just until this last transition, maybe if you could do a forward look at overall market, given all these opportunities what type of medium term market growth and what do you expect for Synaptics, especially with the focus turning back to top line growth?

Kathy Bayless

Again the focus is turning back to top line growth and I do – I think with the combination of all the markets that I talked about between the expansion of the product portfolio and the market growth for the markets that we're in, we do expect to see basically see additional growth. We haven't set out any particular target, but I do expect as we continue to look forward – it's not unreasonable to get back into double digits in the – fairly near term, and then we'll see beyond that.

Randy Abrams - Credit Suisse

At the conference a lot of companies presenting I think if you like to drive Windows 8, we need touch, and more touch notebooks. Maybe if you could give your expectations for touch penetration in notebooks and then your own position just how, I mean win activity is shaping up?

I'm coming out of Taiwan [Intel] had a bit of share, but maybe how you see competitive landscape, as you go into those solutions?

Kathy Bayless

Yeah, so in the notebook market in mean, again I think the one thing that's very important in Windows 8 and it's really touch first, right. I mean that's Microsoft's focus, it's touch-first application. And so for notebooks, I mean, I kind of go back and I look at our pipeline of opportunities, Intel's talked a lot about their pipeline of new ultrabooks and Windows 8 machines. We have a very – we've talked about our pipeline and it's very strong.

And we say from a percentage standpoint I mean, the pipeline is very strong with click pads for larger surface and gesture opportunity. The first round that we're seeing, you know we're looking, the pipeline that we're seeing is – maybe a 10 more like a 10% penetration for touchscreens. And I think that's just it's the first wave, everybody is going to be trying out different models and different form factors.

You know, you'll see different form factors whether it's you know, the convertibles, the flipovers devices and or devices that you can pull apart as we've been seeing. But I do think it's really going to start picking up, one of the things that we really have to do is you know, we have to focus on the cost of a touch solution and also the performance so that's a lot of work that's on-going right now with us because we're looking at how do you – when you look at large touchscreens, today it's like you kind of have to look at the mobile market, three years ago, and all the work that's happened since then is far as improving bringing up the supply chains improving materials, improving performance, reducing costs, moving to display integration like we're doing for mobile touchscreens. So there's a lot of work that's now started with larger touch screens and I think the adoption, we've got it really push, going from the early designs to better performance lower cost solutions the next generation, the next generation as we go forward.

So that's really what we're focused on is how we improve the solutions and really drive the touch adoption in the notebook devices as well as other types of devices, even larger touchscreens, so there will be mini Windows 8 machines where you have Windows 8 on your notebook and you want to dock it, you want to use the monitor so there will be opportunities to use touch and even monitor devices, but that also creates additional opportunities for nice thin keyboards, external click pads, because you really want nice gesture surfaces.

So lots of opportunity there, I think as far as today goes, I mean our – what we're looking at as far as penetration for these type of devices is – I mean we're very – our penetration is very strong and the touchpads and the clickpads today, the first round of the devices, I mean we got our single-chip solution out in thin market, I mean we weren't the first guys out, with the original tablet. So some of the guys that we're out with the first round tablet a couple of years ago, and with they had more of the designs that's first go around and we expect we – our pipeline is expanding but we expect to see most of our activities start in calendar year so and then increase after that.

Randy Abrams - Credit Suisse

And I guess that – I mean you think about second round then, what's kind of the timing or how should investors think about ramp up of that business? And maybe just go back to like content – like how much content you'd get as you start getting into notebook versus traditional smartphones?

Kathy Bayless

So I mean as far as second round goes, I mean this is - we're in the holiday season right, so the first round is kind of - have been targeted around the holiday season specifically from a notebook – in the notebooks business than it's as you go through spring and then you start seeing the ramps for back-to-school season, so that's when you get back into kind of a the June quarter timeframe, when you start to see the second round starting to come out again.

Randy Abrams - Credit Suisse

You talked a bit about that keyboard like the thin-touch and you have surface touch, which I a ton of advertising around it, and actually that's come out with some level of activity you're seeing from customers for that solution and what kind of ramp do you expect on that?

Kathy Bayless

The keyboard solution, again, I mean what we've talked about is we've got a targeted, we've target it really for the - again back to school, next year, so I mean the – the desire and the activity from the OEM is very high. And because it's a new technology and I mean what we're doing is, we're targeting a few of the OEMs, a few SKUs for the back to school timeframe next year.

The other thing is because of you the fast ramp of the tablet and again the different formats that we're seeing is – there's a big market now you know for the keyboard covers or the – the thin keyboard that you pulled apart like in the surface type device, so a lot more interest in those types of devices as well so we're definitely again targeting a couple of the aftermarket manufacturers for those types of devices, as well as the PC OEMs themselves they want to introduce tablet with a keyboard type device, so we will – I think that it's going to be a great opportunity, again we're focusing on it's a – it's a new mechanical type technology but we're really focused on getting a good typing experience but again at a much thinner technology form factor than you get today in a traditional keyboard.

Randy Abrams - Credit Suisse

If you take the smartphone which is the big category for you, how do you see your market share or position, you've got a couple of tiers, you've got Apple, Samsung at the high end, you've got these Chinese [white box] and you've got these other tier-ones, how do you see within those three buckets, your share and also your position and design activity as you go into next year.

Kathy Bayless

Yes, I think our positioning today especially with in the – kind of the middle group that you're talking about – I mean some of those customers I mean we've been strong and in the past, we've also gained back some share within that group, within the last year and if you look at the product line up that's coming into market right now, I mean if you look at all the Windows 8 phones I mean we're in lead position on all of those phones.

So the new Nokia phones, we're the guys, I mean we introduced – we basically introduced the glove and fingernail with them, I don't know if you saw their launch but it was kind of fascinating, and their snowglove, and I had the snowgloves on when he was introducing that phone, but that's has generating a lot of activity because everybody else is now asking for well, when do I get glove. But so we're in the Nokia phones, as well as the Windows 8 phones, a lot of the advertising that I saw over the holiday season I was really please to say, to be able to see, okay, Synaptics inside, Synaptics inside, Synaptics inside.

LG Optimus G, the LG - has an [xis] phone you know, we're in all of those phones this year. So I think you know, product positioning within that holds to your customers very strong also Sony is doing well in and of itself.

China guys, our focus has really been the top guys, top tier guys in China and so Huaweis, and [CEE] we are now really expanding into the second tier so within the China phone market, so we do still see good growth opportunity within China and as far as the other guys, Apple has their own capacity of touch technology and a couple of quarters ago, we started shipping again the Samsung with our – with the Galaxy Tab II, 10 inch so that was very important because we've to be able to actually get back in the door and we think we've got some really good – we've made some really good progress on the phone side of the equation there as well. So we think that's a good opportunity.

Randy Abrams - Credit Suisse

I just have one more question. How would you think – just given all the activity going on just underlying tone of the business where you're seeing you've got a good perspective both handset, PCs and you're talking about coming back to top line growth next year, do you think we'll start to see that as far as that seasonality going into first half, maybe you could give us where the seasonality is that you could actually outgrow seasonality given some of these ramps?

Kathy Bayless

Well, I think we have again, we're at this – we've got an expanded product portfolio and we've got a very nice good positioning within the product portfolio that we have today. So I mean we haven't said anything specifically about the back half of our fiscal year, or the first half of '13, on a quarter-by-quarter basis, but we do feel again – good about the product portfolio and the positioning, and I think we have more – different legs of strength as we continue to go into that portion of the year with additional clickpad adoption with some larger touchscreen penetration and with additional penetration within the mobile side of the business.

And also some incremental contributions from the video display products so. Again there's a little – it's a combination of factors so we think we're moving in the right direction.

Randy Abrams - Credit Suisse

Okay, and I think we've past time, we have to wrap up. But yeah, thanks everyone for coming out and we hope you have a good rest of the conference.

Kathy Bayless

Thank you.

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