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Synaptics Inc. (NASDAQ:SYNA)

F4Q09 Earnings Call

July 30, 2009 05:00 PM ET

Executives

Alex Wellins - Managing Director, The Blueshirt Group

Francis Lee - Chairman and Chief Executive Officer

Russ Knittel - Senior Vice President, Chief Financial Officer, Secretary and Treasurer

Kathy Bayless - Senior Vice President, Finance

Tom Tiernan - President and Chief Operating Officer

Analysts

John Vinh - Collins Stewart

Paul Coster - JP Morgan

Daniel Amir - Lazard Capital Markets

Adam Benjamin - Jefferies

Vijay Rakesh - ThinkEquity

Jeff Schreiner - CapStone Investments

Yair Reiner - Oppenheimer & Co

Steven Fox - CLSA

Robert Cihra - Caris & Company

Kevin Cassidy - Thomas Weisel Partners

Operator

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the Synaptics Fourth Quarter Fiscal 2009 Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for your questions. (Operator Instructions). This conference is being recorded today Thursday, July 30th of 2009. This time I'd like to turn the conference over to Alex Wellins of The Blueshirt Group. Please go ahead sir.

Alex Wellins

Good afternoon, and thank you for joining us today on Synaptics' fourth quarter and fiscal year 2009 conference call. This call is also being broadcast live over the web and can be accessed from the Investor Relations section of the company's website at synaptics.com.

With me on today's call are Francis Lee, Chairman and CEO of Synaptics, Tom Tiernan, the company's President and Chief Operating Officer, Russ Knittel, Chief Financial Officer and Kathy Bayless, the company's Senior Vice President, Finance.

We would like to remind you that during the course of this conference call, Synaptics will make forward-looking statements including predictions and estimates that involve a number of risks and uncertainties. Actual results may differ materially from any future performance suggested in the company's forward-looking statements. We refer you to the company's SEC filings, including Form 10-K for the fiscal year ended June 30, 2008, for important risk factors that could cause actual results to differ materially from those contained in any forward-looking statement. We expressly disclaim any obligation to update this forward-looking information.

And now I'd like to turn the call over to Francis Lee. Francis?

Francis Lee

Thanks Alex and thanks everyone for joining us on the call today. Before I provide an overview of our record annual results, I like to make a few comments about this afternoon's announcement regarding my retirement.

As of today I'll be stepping down as CEO and will be succeeded by President and COO of Tom Tiernan. Tom joined Synaptics in March of 2006 bringing a strong business background, general management capabilities and a focus on execution, which have served the company well. In about three years he has proven his ability to lead our global team, forge important customer relationships and expand our technology in the exciting new markets, all while delivering world class financial results despite dynamic market conditions.

Synaptics is stronger and better positioned than never before and for personal reasons I feel the time is right for me to make this transition and dedicate more of my time to my family, our foundation and other charitable and civic endeavors.

I will continue to serve as Chairman and will remain involved with the company as an advisor to the Synaptics management team. Tom and I have worked very closely to spearhead Synaptics growth and diversification over the past three years. And the Board and I have confidence in Tom's ability to lead the company through its next stages of growth. This transition is occurring under the succession plans that the company's Board of Directors established for executive management.

Now turning to our operating results. I am pleased to announce that the Synaptics team has delivered record financial results despite by challenging economic condition. I now would like to thank all of our employees for their tremendous contribution to our success over the past 12 months.

During fiscal '09, revenue grew to $473.3 million, an increase of approximately 31% over the prior fiscal year. Net income grew approximately 75% to $54.3 million and diluted earnings per share increased 94% to $1.53.

During fiscal '09, we continued to execute on our goal of revenue and customer diversification by expanding our presence within the handheld markets. At the same time we further entrenched our position in the notebook market where we continue to drive innovation through new features such as our Gesture Suite and the recently announced ClearPad.

We also firmly established Synaptics as a leader in a rapidly growing netbook category. Following on our commitment to enhancing shareholder value, during the year we opportunistically took advantage of market conditions to retire approximately 48% of our debt at a 7% discount to par.

Using the similar approach with our stock repurchase program over time, we've been able to hold our diluted share count essentially flat compared to March of '02, our first reporting quarter following our IPO.

The adoption of capacitive sensing technology across multiple markets is just beginning, and we're excited by the growing pipeline of opportunities ahead. Synaptics will continue to leverage its leadership position in the notebook and mobile phone market while driving innovation to further enhance the user interface experience in next-generation consumer electronic devices.

I will now turn it over to Russ for a detailed discussion regarding our fourth quarter results.

Russ Knittel

Thank you, Francis. In addition to our GAAP results, I'll also provide supplementary results on a non-GAAP basis which excludes non-cash share based compensation charges and certain other non-operational and non-cash items. Please refer to our press release for the fourth quarter of fiscal 2009 for a detailed reconciliation of GAAP and non-GAAP results.

Revenue of $115.3 million was at the high end of our range and represents a record level for our fourth fiscal quarter and an increase of 19.1% over the comparable period last year.

Revenue mix from PC and non-PC applications was approximately 57% and 43% respectively. On a year-over-year basis, our revenue from PC applications was roughly flat. The attach rate in notebooks for multimedia controls in the fourth quarter was approximately 5%, down as expected from 8% last quarter and compared to more than 37% in the comparable quarter last year, which as we indicated at the time, represented a peak. This was offset by increased revenue from TouchPads in traditional notebooks as well as the emerging and growing netbook category.

Revenue from non-PC applications grew $18.6 million over the comparable period last year representing an increase of approximately 59%. This strong growth was primarily driven by a 49% increase in revenue from mobile phone applications which represented approximately 39% of total revenue for the quarter.

For fiscal year 2009, total revenue was $473.3 million with 57% from PC applications and 43% from non-PC applications which is represented primarily by mobile phones and portable digital entertainment devices.

Our revenue growth of 31.1% for the year was solely attributable to revenue from mobile phone applications, which grew approximately 3.5 times and represented 35.1% of total revenue compared to 13.2% last fiscal year.

Revenue from PC applications represented 57% of total revenue and was down approximately 1.2% compared to last year, primarily reflecting increased market share in notebook TouchPads, offset by a generally lower priced product mix, the expected decline in the attach rate for multimedia control modules and the impact of the weak economic environment.

Revenue from portable digital entertainment devices was down 7.6% year-over-year, also reflecting the general economic weakness and the unique OEM competitive dynamics in the digital music player market.

Our non-GAAP gross margin for the quarter was 14.6% in line with our expectations and compared with 40.9% in the preceding quarter and 40.2% in the comparable period last year.

For fiscal 2009, our non-GAAP gross margin was 40.8% compared with 41.1% in fiscal 2008, a small change primarily reflection of overall product mix.

Head count at the end of June was 524 compared with 502 at the end of March. During fiscal year 2009, we increased our head count by approximately 25% which follows a 35% increase in fiscal 2008. We will continue to add staff in fiscal 2010, as we invest to further enhance our engineering and technology capabilities and to meet the opportunities ahead.

Total operating expenses were $31.9 million compared to $30.1 million in the preceding quarter, including non-cash share based compensation charges of 6.4 million and 5.7 million respectively. Excluding share based compensation, our operating expenses increased by approximately 5% as anticipated, primarily reflecting our increased engineering and staffing level in combination with the generally higher expenses related to our current business levels.

For fiscal 2009, non-GAAP operating expenses increased 21.4% to 99.3 million but declined to 21% as a percent of sales compared to 22.7% in fiscal 2008.

Net interest income was $218,000 compared with $304,000 in the prior quarter reflecting lower average interest rates, partially offset by higher average invested balances.

Regarding our investments in auction rate securities, during the quarter we received $3.3 million on the reduction at par of certain auction rate investments resulting in a $160,000 gain in other income. As of the end of the quarter, the par value of our auction investments was $42.5 million and the carrying value was $28.8 million, all of which are classified as long-term assets on our balance sheet.

Our GAAP and non-GAAP tax rates for the quarter were 11.9% and 20% respectively. For fiscal 2009, our GAAP and non-GAAP tax rates were 17.4% and 18.8% respectively compared to 36.3% and 31.1% in fiscal 2008, primarily reflecting a full benefit of the tax structure we implemented in 2005.

Our non-GAAP net income in the quarter was $17.2 million or $0.47 per diluted share, compared with $10.7 million or $0.30 per diluted share in the comparable quarter last year, representing increases of 60% and 57% respectively. Significant increase in profitability year-over-year reflects the combination of our revenue growth, strong operation performance and our more efficient tax structure.

Now, a few comments on our balance sheet. We ended the June fiscal year with total cash and short-term investments of $192 million, up from 174.5 million at the end of March quarter.

Cash flow from operations was approximately 6.2 million for the quarter and 81.6 million for the year. Employee participation on our stock plans and tax benefit from these plans contributed $7.3 million and $3.3 million respectively for the quarter and $16.4 million and $9.4 million respectively for the year.

In fiscal 2009, we used $55.6 million to retire $59.7 million of our outstanding convertible notes. Capital expenditures were approximately $2 million in the quarter and $9.3 million for the year, primarily reflecting investments in test equipment, tooling and general infrastructure. Depreciation was 1.9 million for the quarter and 6.3 million for the year. Receivables at the end of June were $84.7 million compared to 69.2 million at the end of March. The increase on receivables primarily reflects the higher quarterly revenue and a more typical DSO of 66 days which is up as expected from 62 days at the end of the prior quarter and within our target range of 65 to 70 days.

Inventories at the end of June were $15 million compared with 15.9 million at the end of March. Inventory turns this quarter were 18 times compared to 15 times during the March quarter.

Given the macro environment, we took a very cautious approach to managing inventory levels during the June quarter and anticipated increasing wafer starts to build our die bank to more typical levels.

I'll now turn the call over to Kathy who'll comment on our business outlook.

Kathy Bayless

Thanks Russ. I'm very pleased to be a part of the Synaptics team and I share our entire team's enthusiasm for our leading technology, innovative products and the expanding market opportunities we see ahead in multiple growing markets.

Looking ahead to the first quarter and a new fiscal year, as has been Synaptics' consistent practice in the past, we consider a number of factors to develop a reasonable outlook for investors. These include global economic conditions, the dynamic nature of the markets in which we participate, our existing design wins, current design activities and our identifying pipeline of opportunities based on our current visibility, expected product mix, customer order patterns and backlog of 62.8 million exiting the June quarter. We anticipate revenue in the September quarter will be in the range of 113 to $119 million.

To provide a little more color on that range compared to the prior year, we expect solid growth from mobile phone applications while PC based revenue will decline primarily reflecting our planned decrease in revenue from multimedia control as well as the generally lower priced TouchPad product mix.

Using our current backlog as a proxy, we expect our non-GAAP gross margins to be around 40%. We expect our operating expenses to be up sequentially reflecting the impact of our ongoing staffing initiative, particularly related to our investments in R&D.

We currently anticipate our non-GAAP tax rate for both fiscal 2010 and the first fiscal quarter to be in range of 20 to 22%. We expect our FAS 123R charge to be approximately $7 million, up $200,000 compared with the June quarter.

Our non-GAAP net income per diluted share for the September quarter is expected to be in the range of $0.37 to $0.43 per share. Looking out to the remainder of fiscal 2010 is challenging given the macro uncertainty which is evident in the cautious order patterns we see from our OEM customers.

Considering that, our current outlook suggests revenue of 495 million to $525 million for fiscal 2010 with the first half roughly flat year-over-year. Fiscal 2010 outlook is more indicative of the existing general market conditions and the potential we see in our current pipeline of opportunities.

I will now turn the call over to Tom for a discussion of recent product developments and an update on general market environment.

Tom Tiernan

Thank you, Kathy. Last quarter, we noted increasing customer adoption of our multi-finger gesture enabled TouchPads for notebooks as well strong growth in netbooks.

Moreover, we recently announced high-profile phones that have hit the market featuring Synaptics's touchscreen solution. Our broad OEM customer base continues to grow and now I would like to highlight a sampling of some of the design wins within our markets over the past quarter.

In the notebook market, we introduced a ClickPad solution of COMPUTEX last month, an innovative touch pad for consumer and business users who desire a larger multi-finger, gesture enabled TouchPads particularly suited to smaller notebook design.

Our ClickPad eliminates the need for traditional physical button, enabling the entire TouchPads to act as a button that can be clicked to initiate a user action. We have many designs in development now utilizing ClickPad for OEMs throughout the world.

Synaptics Gesture-rich TouchPads are featured in the stylish Dell Demo and Lenovo G400 notebooks, both of which incorporate our two-finger scroll, pinch and rotate gestures. These notebooks are being shipped in the U.S.

Within the netbook category, Synaptics has been designed into the next generation of the Asus Eee PC. This quarter the Asus Eee PC 10.1 inch notebook and Disney branded Asus Netpal netbook were announced, both using our TouchPad. They are currently shipping in the U.S.

Turning to the mobile phone market, we recently announced the expansion of our industry leading ClearPad touchscreen portfolio with new solutions targeting both the high-end and mass market needs. Synaptics ClearPad 1000 Series brings high performance single touch capability to the mass market. Synaptics ClearPad 3000 Series brings advanced multi-touch capabilities across larger screen sizes to the high-end of the handset market where new usage models demand the most innovative solution. Both the 1000 and 3000 Series solutions combine our existing patented ClearPad technology with our exclusive end-to-end solution stack.

This makes it easy for designers of both mass market and high-end handset to integrate advanced capacitive touch screens into the products, bringing them to market faster and with less risk. We are working with every major mobile handset vendor in the world and have several new products to highlight this quarter featuring ClearPad Touchscreen solutions.

First, we're pleased to announce that Synaptics ClearPad is being deployed in T-Mobile's second-generation Android phone, The My Touch G3. This follows our design win in the original G1 Phone. The My Touch 3G is based on the HTC Magic touchscreen phone and has deep integration with Google and YouTube. The My Touch will ship in the U.S. at the beginning of August.

We recently introduced LG GD900 Crystal as a slider phone with a three-inch touchscreen and a transparent keypad that lights up when opened. Built as the world's first transparent design phone that features two Synaptics ClearPads.

Additionally, LG's new GD910 Watch Phone features a Synaptics ClearPad Touchscreen and is scheduled to make a big deal in the UK in August.

NEC's new N-06A dual-mode phone after by NTT DoCoMo in Japan features Synaptics ClearPad. This is a Wi-Fi enabled smartphone that allows the consumer to connect the Wi-Fi capabled device to the internet via the handset.

Finally, beyond our traditional markets, we have continued to see adoption of our Touch Technology in adjacent markets. This quarter our OneTouch Design Studio has enabled our penetration into market such as digital photo frames and advanced Bluetooth handsets.

We also had our first Touchscreen design win in the P&D space with a major OEM. This snapshot of a few of our new design wins reflects both the breadth of our product portfolio as well as our flexible business model in helping our customers fulfill their design requirements and supply chain goals.

With the capacitive sensing technology becoming more and more prevalent in today's rapidly evolving digital devices, Synaptics is the only vendor providing a full range of products and business model options for capacitive solution.

Getting back for a moment, since going public seven years ago, Synaptics has grown from 100 million to $473 million in revenue, representing compounded annual growth of 25%.

Fundamental to this growth is our ongoing commitment to invest in our business. This includes putting in place unique assets, such as our flexible business model and local design centers right next to our customers making our technology easy to implement and establishing Synaptics as the top choice of leading OEMs throughout the world, based on our unmatched innovation and support capabilities.

As part of this commitment, we are investing heavily in value engineering and material science, working with our partners to aggressively take costs out of capacitive Touchscreen in order to bring prices down and to fuel mass market adoption. We experienced the same dynamics in the early days of our TouchPad business and we are managing through this dynamic today for capacitive Touchscreens.

Continually pushing the innovation envelope, coupled with strong value engineering efforts and a flexible business model is what attracts the customers to Synaptics and it's what keeps them coming back.

With the adoption of capacitive technology and mobile phone still in its nascent stages, we expect the competitive landscape to remain dynamic in fiscal 2010. We believe that with the increasing convergence of applications and more sophisticated user interfaces in mobile devices, unique customer interface solutions will remain vital to OEMs' abilities to differentiate their products.

Our global customers who include virtually all of the leading PC and major mobile handset makers in the world, trust Synaptics to deliver the most advanced technology and innovative design. With close to 40% of our employees located outside of the U.S., our engineering capabilities are closely aligned with our customers design cycle and time to market requirements.

Combined with our system engineering know-how, history of innovation and proven track record of over 600 million solutions shipped to date, we believe this approach continues to be our key competitive advantage.

Looking ahead, we plan to continue to add staff and invest in the company to support our long-term growth objectives and lay the ground work to capitalize on additional opportunities beyond the markets we serve today. The fact that we continue growing our team is a good indicator that our design activity remains robust and is indicative of the leading position we hold in both markets we serve today.

In closing, I'd like to thank Francis and the Board for their confidence in me as Synaptics CEO. I'd like to personally thank Francis for the guidance and support he has given me and on behalf of the rest of the Synaptics family, thank him for his leadership and invaluable contributions to the company's outstanding growth and success over the years.

It's been an honor working with Francis over the past three years as we have scaled the company into what it is today. I look forward to continue to work closely with him in his advisory role. Those of you who know me, know the passion I have for this company and for the businesses we're in. The facet of touch technology has just begun to revolutionize the way we interact with intelligent devices.

What we see in the market today represents just the beginning of what will continue to develop into a major opportunity for the company. As I look ahead, Synaptics' prospects have never been brighter. My team and I are highly motivated to continue advancing Synaptics mission of innovating and deploying intuitive touch interface solutions across multiple market.

Our goal is to build on the solid growth and profitability that Synaptics has achieved since its IPO. And we will maintain a strong focus on enhancing shareholder value as we move forward.

Kathy and I have had the opportunity to speak with many of you over the past several months, and we look forward to continuing to connect with our investors in the near future. We will be presenting at a number of financial conferences and investor events over the coming weeks, and we intend to remain as engaged with the investment community as Francis and the rest have been in the past.

I would like to conclude by thanking our employees, partners, customers and investors for their steadfast support over the past 12 months. We look forward to updating you on our progress during the coming year.

With that said, I'd like to turn the call over to the operator to start the Q&A session. Operator?

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, we'll now begin the question and answer session. (Operator Instructions). And our first question comes from the line of John Vinh, please state your company name followed by your question.

John Vinh - Collins Stewart

Hi, it's John Vinh, Collins Stewart. First question I have for you guys is, you've talked about first half of 2010 being flat, I would anticipate that with the significant growth in the smartphone market that you'd still see growth there despite some macro headwinds. I was wondering if you could maybe comment on what your assumptions there and maybe reconcile kind of the flat growth with sort of the strong growth in smartphones. Are there some product push-outs, share loss that's impacting your guidance there in the first half?

Tom Tiernan

Yes John actually in that space -- in the smartphones and mobile we remain quite bullish. In the context of the first quarter as was mentioned in the prepared remarks, we expect continued good growth on a year-to-year basis there. We do have a bit of a tough compare in the second quarter fiscal quarter of the year given some very, very strong ramps that we had in the previous year. But the numbers that we're projecting overall for the entire fiscal year with a lot of growth coming in the second half reflect a very strong adoption, continued adoption of capacitive touchscreen technologies and Synaptics solutions in these customer accounts.

John Vinh - Collins Stewart

And then your a follow up in your outlook, slightly you were kind of below consensus, is there any further impacts from maybe customer product delays or any sort of share loss that's impacting that?

Tom Tiernan

Well, what we see is the competitive landscape really hasn't changed. Whenever you see our market position remaining quite strong and we continue to win more than our fair share of designs, in terms of the profile of our revenue associated with that category over the coming four quarters, we are taking into account, of course, all the design wins that we do have in the current schedules and forecast that our OEM customers are providing to us. And overall, when you look at the numbers we've put together for the year, we're still being a bit cautious, given all the macroeconomic uncertainty. That does exist still out there across both categories, both notebooks and handsets.

John Vinh - Collins Stewart

Okay and then just one more question if I may. If I look at your fiscal '10 guidance, you normally in the past have given some EPS guidance. Maybe help us with that a little bit. If I look at your, the midpoint of your fiscal '10 guidance you are up 8%. You are indicating that you plan of growing OpEx next year, continue to invest in R&D. That doesn't seem like to me that maybe EPS is pretty much going to say flat. Maybe also just help us with some of the other moving parts there like gross margin assumptions, product mix things like that. That will be great.

John Vinh - Collins Stewart

Well, John, it's consistent with past guidance that we've given. We've never given an annual guidance for gross margin or EPS, and nor are we this year. We are intending to continue our investment, primarily in R&D and engineering, that would be both in design centers around the world, which we are expanding over the coming four quarters as well as in our fundamental technologies, our chips, our software, algorithms the materials that we use and that's a direct reflection of the design funnel that we have, the opportunities we see. And at the end of the day, it's a direct reflection of the optimism we have in this business as adoption of this type of technology in these massive markets like handsets which today are between 1 and 2% growing much, much higher than that over time.

John Vinh - Collins Stewart

Great, anything that you are seeing in your pipeline that would suggest that, that gross margins would be tracked either to the upside or slightly below your long-term gross margins target of 48 to 45%.

Tom Tiernan

Well yeah and our long-term target is still the same. It's 40 to 45% that's not changing. And over the last couple of years or so we've been hovering towards the low end of that range between 40, 41 slightly north of that. We don't expect any change to that. The key for us, of course, is managing the entire mix within our portfolio and driving our business in a way that the drives that kind of value and we see no reason at this stage to change that.

Operator

Thank you. Our next question comes from the line of Paul Coster, please state your company name followed by your question.

Paul Coster - JP Morgan

Yes, JP Morgan. I guess a number of us are going to be asking the same question different ways but you've experienced 25% CAGR growth for several years. I mean here we are facing a sort of flat to slightly up year. Is that purely cyclical? Once we're through the cyclical headwind, do you expect growth to return to double-digits?

Tom Tiernan

Yeah Paul, we see no reason to change our growth trajectory. We're still highly confident in maintaining that growth rate over time, that 25% CAGR that you're talking about. In notebooks I mean if you listen to most of the market analysts out there like IDC and Gartner and those guys are projecting roughly a 14 or so percent increase, calendar year '10 and in units, our share in notebooks frankly has been increasing over the past quarter, quarter and a half. We expect that continue, that's mainly driven out of the innovation we would bring to market with the multi-finger gestures and that type of product.

We do have a tough compare this half in the notebook category, because of the much lower connect rate of MMBs which this time last year contributed non-trivial revenue, but we're still very optimistic about that.

In terms of mobile as I mentioned before, adoption in the market is 1%, 1.5% maybe 2% at best right now, it's been growing incredibly rapidly. We're engaged with all the customers out there, and we're able to engage with these guys in all different kinds of business models based on how they want to get designed in, to this technology and how they want that technology to be fulfilled.

So for us, we're still consumed and over-subscribed frankly in servicing all the designs out there, which is one of the reasons we're continuing to make the investments. And that's all reflected in our outlook. And if you run the profile of course, of the numbers, you'll see that we're getting back to the growth rates that have been historical for this company in the second half of the fiscal year.

Paul Coster - JP Morgan

Maybe another sort of frustration that's expressed in the fact that it's growing about 20% in the aftermarket is that -- you are increasing your operating expenses at the time when you said a slowdown, and many companies out there are using the slowdown as an opportunity to really ratchet it down on expenses. Could you not recount the growth whilst also pulling down on expenses aggressively and must at least deliver to invest this EPS upside your expectations in the first half?

Tom Tiernan

Well, let me respond to that, Paul, in a couple of ways. One is, we're investing for the future. We see very large growth opportunities out there in this market, and we think the future is bright. Not just in the primary markets we compete in today but in many other adjacency and brand new markets that we haven't even scratched the surface of today. So, our view is throttling back on the engineering investment which is where we are -- have the primary plans for increasing our head count would be the wrong thing to do.

Paul Coster - JP Morgan

Fair enough.

Tom Tiernan

And again Paul, the near term outlook in the context of this quarter and the following, is we're taking into account the kind of cautious macroeconomic environment. We see that in our accounts, in our customers and we all lived through the world last year and we're setting ourselves up for continued growth in the out months.

Operator

Thank you. Our next question comes from the line of Daniel Amir, please state your company name followed by your question.

Daniel Amir - Lazard Capital Markets

Lazard Capital Markets. And first of all, good luck Francis in your next life I guess.

Francis Lee

Thank you, Dan.

Daniel Amir - Lazard Capital Markets

So a few questions, I hate to beat this guidance question. But I feel that in your commentary there is somewhat of a disconnect between how bullish you are on the end market and the opportunities and how fast the mobile phone market's growing and the notebook -- netbook segment as well. But your guidance doesn't really reflect much growth here. I mean is there a shift here in terms of the breakdown of your module versus chips in your mobile phones, are you actually getting more design wins but they are actually more chip related and not module. So maybe you can help us, give us a little more clarity on kind of the guidance here.

Tom Tiernan

Sure Dan, couple of things. One is our near term outlook as I mentioned is more a reflection of the micro-economic concerns out there. We see that in our cautious order patterns, our customers fluctuating forecast and what have you. And as you point out in the prepared remarks, the growth for the year we don't think is indicative of the potential we see in our pipeline.

Mobile is going to continue to grow and continue to be a big contributor to this company as is notebooks as we kept out of this tough compare period. And we think the strength of our business model in the company is being a portfolio player in the market able to fulfill, not just touchscreen designs but any kind of implementation of capacitive technology in the way that our customers want to procure, in the way they want to incorporate in their unique supply chains is a critical and unique need asset for this company and something that differentiates ut from the competition.

Daniel Amir - Lazard Capital Markets

So, on the chip versus module, I mean is your mix actually or you expect that mix to change compared to what it is right now?

Tom Tiernan

Well, Synaptics continues to win a lot of designs, and as I said, there are some designs we can’t even go after right now because we're just over-subscribed. Right now, our chip if you look at our total business, the mix of chips contributing to our total business is around 5% or so. We see our flexible business model as a strength, and as we've been saying for many quarters now, for us it's a game of chips and modules and we will service the accounts our customers in the way they want to be serviced.

Operator

Thank you. Your next question comes from the line of Adam Benjamin, please state your company name followed by your question.

Adam Benjamin - Jefferies

Jefferies. Thanks guys. Just want to talk about the confidence level in the December quarter, that's a pretty decent size snap back after a flat September quarter. So, want to understand what's baked in there. And then, if you can talk a little bit more, people have asked this already, but you clearly, you're little bit of a canary in a coal mine here with the fact that everyone is seeing significant snapback in PC orders as well as netbooks.

So can you talk about the, some of your end customers have inventory, is there something to explain why you are such an outlier here specifically with PCs? Thanks.

Tom Tiernan

Sure, so again, in the notebook space, there's two things going on; one and this is a near term phenomena, we have the multimedia attach rate going quite a bit down, last year to this year, in this quarter and next. So, we have had that headwind that we're managing through right now. That's just a function of what OEMs are doing in their product mixes where some of them are not moving forward with continuing the multimedia control lineup. They're either incorporating them into the TouchPad or into the function keys on the notebook itself. So the actual market there itself in that attach rate itself is going down. The second thing is that as we've said before and we continue to...

Adam Benjamin - Jefferies

Tom, can I interrupt for one second? I mean you indicated that it was 8% this prior quarter and 5% this quarter. I mean that's a very small percent. I'm having trouble understanding how that's a headwind?

Tom Tiernan

Well I was comparing the year-on-year. The year-on-year this time last year was something like close to 20%. Okay.

And the second comment I'd make is that netbooks as a percentage of our mix have been increasing fairly substantially over the past couple of quarters and netbook is a -- definitely still a growing part of the market within the overall notebook segment. And as we said before, TouchPads that are smaller generally are lower ASPs and so that's a factor we've incorporated into our guidance as well.

Operator

Thank you. Our next question comes from the line of Vijay Rakesh. Please state your company name followed by your question.

Vijay Rakesh - ThinkEquity

From ThinkEquity. Hi guys, just couple of questions. I was wondering how Synaptics -- I know you mentioned all the feature sets on the handset side that you have. Just wondering how you guys are planning to differentiate yourself going forward with a lot of competition coming in from the side, Apple and SAP and Elan and all the guys.

Tom Tiernan

Well on a number of levels, Vijay and thanks for asking that question. First of all, Synaptics history and our current reality and our R&D pipeline is one we've always pushing the technology envelope, always pushing the innovation. And fundamentally at the core, what we see in the markets across not just the handsets space but all of our customers is an intense desire for those customers to differentiate their products with compelling user interfaces, different usage models, interesting industrial designs and such and we play right into that, that's the nexus to what they are trying to do to differentiate their products.

In terms of other elements of our value preposition in this market. Our view is that being able to offer a design-in engagement and a supply engagement that fits in to the business models of these customers is actually a competitive advantage. And we continue to drive our local design centers based on that and our supply capabilities and our partnering capabilities to drive this technology in a way that will get mass adoption in the market.

Our recent product announcements that we made a week or two ago with our ClearPad Touchscreen, the series 1000 is focused on the mass market, the mid range of the market. To date most of the adoption has been at the very high end feature phone, smartphone area, there is a huge other market out there which we are driving into to capitalize on that.

Vijay Rakesh - ThinkEquity

Got it and my second question was, now smartphone is almost 40% of your revenues here and you have the lead obviously in that market. But smartphone market is anything but cyclical now, it's very strong growth and probably going 100% year-on-year as soon as we get next year, and if that's 40% of revenues, why are you guiding so conservatively like 8% year-on-year, and that's so far based on past growth too, and you're just in the cusp of the handset market, so, what am I missing there?

Tom Tiernan

Well, couple of things there, Vijay. First of all, if you look at the number of designs that we have, shipping in any particular quarter in the handset category, it's still in the range of 15-20, low 20's. And so, these typically are very high volume designs, they are very fast ramps. Sometimes, very short life cycles, the impact on the categories overall results can be influenced. It varies on the upside and the downside on these ramps of these products, because a few of these products drive a lot of revenue.

In terms of the adoption rate in smartphones, you are absolutely right, there is very strong adoption there, more and more accounts are expanding their lineups. With our portfolio approach to our business model there is a large and wide ASP range. We have for example, some accounts that ask us to -- not just deliver an entire module with a substrate and chips and flex and firmware and software and all that but they also ask us to deliver a module with lens -- laminated to a lens or attached to an LCD.

And then we have other accounts who ask us to deliver some portions of our module, whether it be our tail solutions or chip solutions into parts of their supply chain. So wide ASP range and that's what we are taking into account in the guidance that we have issued.

Operator

Thank you. Our next question is from the line of Jeff Schreiner, please state your company followed by your question.

Jeff Schreiner - CapStone Investments

Yeah. Jeff Schreiner, CapStone Investments. Thank you very much for taking my question. Tom, could you kind of help us, you've talked a lot about the multi-media kind of attaching, some of the impact and headwinds that's being caused in the company at least in the near term with the September guidance. Could you reconcile for us, though, if we look back to prior year September, wasn't there some incremental benefit on the notebook side of the TouchPad side with the growth explosion in netbooks which at the time allowed for more of a sole source opportunity as other competitors didn't have a solution. And has that now changed, when we look year-over-year going into the September and maybe is that causing some of the headwinds that we're seeing in the guidance which you provided for the September quarter?

Tom Tiernan

Yeah, netbooks, as you know it has been growing part of the market, definitely been the sweet spot that was true last year. It's true in the present as well. Our view of our market position in netbooks is that it has started out strong and is actually even growing. So we think we continue to be at an incredibly strong position over there.

Relative to September quarter of last year, what the market went through in September and in December is very well documented. It was a very strong overall September quarter for us last year particularly in the notebook side. And so you could argue that there is a bit of tough compare there as well but has nothing to do with any change in share position.

Jeff Schreiner - CapStone Investments

Okay, and just to follow up kind of, I think people have touched in this a lot of different ways but I just like to ask you, because you referenced kind of macro and that's being -- because you need to be a little bit more cautious here in the near term, cautious with your guidance yet. Because some of competitors have come out and that they are very, very bullish with what they are seeing in the market, what they are seeing with design win traction, that includes the TouchPad base as well as the handsets. Can you help us understand why competitors who are now entering the market can see some traction are feeling that there is no real macro concern for them in this particular market and you guys are referencing macro as a concern for maybe a more conservative guidance at this point? Thank you.

Tom Tiernan

But again Jeff, we don't see the competitive landscape as changing and the dynamics we're dealing with now are the same dynamics we dealt with last year and we'll continue to deal with. We're still very, very bullish on the prospects for both these markets and others. Our final, our design pipeline is still overflowing. We are very bullish on the prospects here going forward. And we think that the way we engage with our customers, the system engineering capabilities we bring with them and our ability to engage them in their supply chains to guarantee rock solid products ramping quickly in volume with good quality and all the know-how that's behind that continues to separate us from the competition.

I am not going to comment on the accuracy of our competitions messaging over the past many quarters but what I will say is that the market itself is at a very early stage of adoption, the number of opportunities are expanding. No one company is going to be able to capture every single design. So, I am not surprised if other companies do when they design here or there but to us, it's all about pushing the envelope in the technology, getting the prices, the costs right and driving adoption. And we think with the assets we've got in place and the model we've got that will do more than our fair share of business in this market as we go forward.

Operator

Thank you. Our next question comes from the line of Yair Reiner, please state your company name followed by your question.

Yair Reiner - Oppenheimer & Co

Yes, Yair Reiner with Oppenheimer & Company. First, congrats Tom on the promotion.

Tom Tiernan

Thank you.

Yair Reiner - Oppenheimer & Co

And Francis, we'll obviously miss you and you've done a great job for the company over the years.

Francis Lee

Thank you Yair.

Yair Reiner - Oppenheimer & Co

So, my first question here is in terms of the R&D investment obviously, very big both on a year-on-year and on the quarter-on-quarter basis looking out to next quarter. Can you just give us a little more of a deep dive about where that's focused on? Is it more in the supply chain of trying to drive the costs down and what's the context for that or is it more about focusing on potentially new applications like mid or other devices?

Tom Tiernan

Well, good question Yair, I'd say, I believe, there's three main buckets that our R&D investment is going into, all three of which frankly are growing in terms of our increased investments. One is, we are still overflowing in the number of design opportunities that we see. And so we continue to put local assets, local head count in place around the world to service the customer needs in time zone and language and so on, and that's something we think is mandatory for us to truly entrench ourselves in these markets as go forward.

The second big area and it is a big area, is our capability in platform development that means the chips, ASICs, the algorithms, the software, the materials that we use to design what we think are best in class, highly innovative solutions. And as this market continues to evolve as this market grows, a single offering isn't enough. There is a big difference if you're an OEM, if you're selling a smartphone for a couple hundred bucks in user price point versus a $50 price point phone. So they require different types of engineered solution and we're making sure our portfolio of products enable that type of investment.

The third big area is in value engineering that it's related but there's a lot of partners in this market that are delivering different pieces of the solution. We've commented before that if you look at the phone for particularly Touchscreens whether you're using glass substrates, plastic substrates or any other kind of substrates, there is a lots of opportunities there to drive costs out, prices down and of course adoption up. And that's where we're spending our energy, that's where we're spending our investment. We think that's the right thing to do for the company, both in the short and the long term.

Yair Reiner - Oppenheimer & Co

And then the follow up is, when do you expect to see the real return from that and when do you think we might expect to see, operating margins come back to what you've started as your long-term target of about 20%?

Kathy Bayless

Hi Yair, this is Kathy. As far as long term target models for operating income, we typically have said that our long term target models for operating income is in the mid to upper teens. And we have been operating above that but we've typically never said that we would model up at the 20% range.

Operator

Thank you. Our next question comes from the line of Steven Fox. Please state your company name followed by your question.

Steven Fox - CLSA

Hi. Steve Fox of CLSA. First of all, just a clarification when you look at to the December quarter, you say that's the tough comparison. Are you only speaking about the PCs or when we look at the handset comparison that looks tough Q2?

Tom Tiernan

Well when we look at the December quarter, we actually are in our overall guidance modeling back to hopefully normal industry seasonality patterns as it relates to notebooks. So we are not expecting the same weirdness that we had in the market last year as all you know about.

What we really see is headwinds in Q2 fiscal Q2 is actually more related to our mobile space and making sure that a year ago, our revenue profile there was highly, highly oriented toward high end ASIC based modules that we were shipping on several designs and between then and now, we have driven costs down, prices down. And that's more of the dynamic that we've got going on in the second fiscal quarter.

Steven Fox - CLSA

Okay and then secondly, can you just discuss the potential of that, some of your customers may be acquiring or developing some of the skill sets that you've been providing, with some of them bringing certain of design capabilities in-house, is that potential still out there or would you discount that and why?

Tom Tiernan

Well, we haven't seen any evidence of it. We see all the same reports you guys probably see, but we haven't seen evidence of that in any way, frankly, we are still engaged with all the accounts across the board in design activity for soon to be launching products as well as longer term roadmap products. I think what all customers are interested in and everybody is participating in this eco-system that's interested in, is how to get costs down because some of the OEMs from the customer point of view, they’d love to be able to deploy this technology across a much broader cost section of their product line. And but just with the cost and the prices the way they are today it's not financially viable for them to do that. So you will see across the supply chain experimentation particularly with new substrate technologies and to try to get costs out. So that this technology can be implemented in many more products as we go forward.

Operator

Thank you. Our next question comes from the line of Rob Cihra, please state your company name followed by your question.

Robert Cihra - Caris & Company

HI, thanks very much, from Caris & Company. I guess I won't try to ask this guidance question about the 4 millionth way here but I wonder, you gave on a year-over-year basis of the September quarter you said obviously the PC would be down and mobile phone would be up pretty substantially on both accounts probably. On a sequential basis, do you feel as though one PC versus mobile phone is going to be dramatically different going June quarter to September quarter on a sequential basis in terms of revenue up down?

And then my follow on which I get asked by anyone possible, I am just curious, with the multimedia and you've talked about multimedia attach rate particularly with things like netbook obviously coming down and obviously there is more competition now too but now down to 5% of attach rate, I mean, is that basically going away? Or does it actually go back up one day, do you think or is it almost just down to next to nothing, it was great what we had it but really just isn't much of a market anymore? Thanks.

Tom Tiernan

Well, let me start with the last question first. What we see is the markets moving away from discreet MMB, so when I say discreet I means the legacy pattern of bringing the MMBs upon the spine below the keyboard. And we see the market moving to other ways of implementing that functionality in lower cost ways. And one of those is through the TouchPad itself through what we call dual-mode technology. So it's discreet solutions we do see a general trend and don't expect a change of reduced discreet MMBs.

In terms of your earlier question, your first question about sequential growth, we do see sequential growth in both categories, both handset and notebooks with mobile being a bit higher than notebooks.

Operator

Thank you. And we have time for one final question and that comes from the line of Kevin Cassidy, please state your company name followed by your question.

Kevin Cassidy - Thomas Weisel Partners

Hi, Thomas Weisel Partners. On the gross margin line, they are 40% now but the range is between 40 and 45%. Can you tell us what dynamics that will help you get backup into the higher part of that range?

Tom Tiernan

Yeah, great question. As you know we haven't changed the range 40 to 45%, really what's going to swing at higher is the mix. As we continue to build out our funnel and continue to increase the number of designs particularly that we've got on the handset side. And you look at the ways we are delivering that product. You'll have delivery of full blown modules, high ASPs very good gross margin dollars, probably a bit lower. Gross margin percent offset by very strong shipments of what we would call tail solutions or chip solutions with the firmware and software which will have very favorable and very strong gross margin contributions.

Kevin Cassidy - Thomas Weisel Partners

Okay, great. And as a follow up, just as the market trends from I guess smartphone to a smartbook somewhere in between a netbook and a smartphone, you think that would be higher gross margins?

Tom Tiernan

Well, that's one of the areas, somebody asked earlier about where we are investing our engineering dollars, and we see the promise in the opportunity of larger phone factor Touchscreens and the notebook category and larger handsets as well. And our view is that as we continue to push innovation in areas like that, the way customers will buy, the way customers will engage with us will probably not be very different from what it is today, which means that we will continue to supply them at these solutions in the way they want to buy it and we'll manage our own portfolio accordingly.

Operator

Thank you. And sir, at this time I'd like to turn conference back over to you for any closing remarks.

Francis Lee

It was another remarkable year for Synaptics with record revenues and profits. We continue to have a promising future ahead of us as opportunities to leverage our capacitive technology continue to expand. Thank you for being on the call with us today. Bye-bye.

Operator

Thank you, sir. Ladies and gentlemen that does conclude our conference for today. Thank you very much for your participation and for using ACT Conferencing. You may now disconnect.

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