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Executives

Alex Wellins – IR, The Blueshirt Group

Tom Tiernan – President and CEO

Kathy Bayless – CFO

Analysts

Raj Gill – Needham & Company

Rob Cihra – Caris & Company

Yair Reiner – Oppenheimer & Company

Blayne Curtis – Jefferies

John Vinh – Collins Stewart

Daniel Amir – Lazard

Jeff Schreiner – Capstone Investments

Steven Fox – CLSA

Ian Ing – Broadpoint.AmTech

Paul Coster – JP Morgan

Shaw Wu – Kaufman Brothers

Kevin Cassidy – Thomas Weisel Partners

Synaptics Inc. (SYNA) F1Q10 (Qtr End 09/30/09) Earnings Call Transcript October 22, 2009 5:00 PM ET

Operator

Good afternoon, ladies and gentlemen, thank you for standing by and welcome to the Synaptics first quarter fiscal 2010 earnings 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) As a reminder, today’s call is being recorded today, October 22, 2009. And I would now like to turn the conference over to Alex Wellins. Please go ahead, sir.

Alex Wellins

Good afternoon. Thanks for joining us today on Synaptics first quarter fiscal 2010 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 Tom Tiernan, the company's President and CEO, and Kathy Bayless, Synaptics’ CFO. In addition to the company’s GAAP results, management will 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 the press release issued after market close today for a detailed reconciliation of GAAP and non-GAAP results.

Additionally, 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, 2009, 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 Tom Tiernan. Tom?

Tom Tiernan

Thank you, Alex. And thanks, everyone, for joining us on the call today. Today, we are reporting the highest September quarter revenue level in our company’s history. Revenue of $119.6 million was above the high end of our guidance range and grew 4% sequentially and 3% year-over-year. Non-GAAP net income per diluted share of $0.48 was also above our expected range.

We experienced strong sequential revenue growth in the PC market during the quarter based on solid demand for consumer oriented notebooks, while on a year-over-year basis we saw decreased revenue contributions from multimedia controls, as expected. On the non-PC side of the business, mobile revenue grew more than 60% over the prior year period, driven by continued strong adoption of capacitive touchscreen implementations among major handset manufacturers and was down sequentially as expected.

Synaptics continues to benefit as OEMs turn to us for ways to differentiate their products with advanced user interfaces and unique industrial designs. Reflecting our continued commitment to enhancing shareholder value, we bought back 1 million shares of our common stock during the quarter. This is a strong indicator of our underlying confidence in Synaptics’ long-term prospects.

It’s been a pleasure meeting with many of our investors and analysts during my first quarter as Synaptics’ CEO. The markets we address are rapidly evolving and growing. We are the undisputed leader in delivering capacitive touch interface solutions to leading OEMs around the world and we continue to bring new innovations to market.

I’ll turn the call over to Kathy for a detailed discussion regarding our first quarter results and outlook. Kathy?

Kathy Bayless

Thanks, Tom. Revenue of $119.6 million represented a record level for our first fiscal quarter and an increase of 4% over the previous quarter. The revenue mix from PC and non-PC applications was approximately 62% and 38% respectively. On a sequential basis, revenue from PC applications increased 14%, driven by the continuing strong adoption of our multi-finger, gesture-enabled TouchPads and seasonal unit growth in the consumer notebook market.

On a year-over-year basis, revenue from PC applications declined 11%, as expected, due to the lower attach rate for multimedia controls. The attach rate in notebooks for multimedia controls in the September quarter was approximately 3% compared to 19% a year ago. Also compared to the prior year, our TouchPad unit volumes have increased commensurate with our notebook market share gains.

Revenue from non-PC applications declined 10% from the prior quarter, as expected. Strong demand for portable music players was offset by lower mobile phone revenue, primarily due to the timing of new program ramp schedules and product mix. Revenue from non-PC applications grew 39% over the comparable period a year ago, driven by 64% increase in revenue from mobile phones, partially offset by a decline in revenue from the portable music players.

Our non-GAAP gross margin was 40.8%, slightly above our gross margin of 40.6% in the prior quarter. The increase in gross margin was above our expectations and reflects our overall product mix for the quarter.

Total operating expenses were $33.7 million compared to $31.9 million in the preceding quarter, including non-cash share-based compensation charges of $6.6 million and $6.4 million respectively. Excluding share-based compensation, our operating expenses increased by approximately 6%, as we anticipated, due to our annual merit adjustments in additional staff to support our expanding product and customer base. Total headcount at the end of September was 534 compared with 524 at the end of June.

Interest expense was $1.4 million, unchanged from the prior quarter. Both periods reflect a non-cash interest charge of $1.2 million related to the adoption of the new convertible debt accounting standard referred in our press release. Under this new accounting standard, we are required to include non-cash interest expense in our earnings on a retrospective and go-forward basis for the period December 2004 to December 2009.

In the September quarter, we received $700,000 from the redemption at par of certain auction rate investments and we recorded a $449,000 other-than-temporary write-down on certain other auction rate investments. The total carrying value of the auction rate investments was $28.9 million at the end of September and is included in long-term assets on our balance sheet.

Our GAAP and non-GAAP tax rates were 24.9% and 20.6% respectively compared to GAAP and non-GAAP tax rates of 9.4% and 20% respectively in the June quarter. Our GAAP tax rate for September included a one-time write-off of deferred tax assets in connection with long-term tax planning expected to reduce our effective tax rate. In addition, our GAAP tax rate for the June and September quarters reflect the adoption of the new accounting standard I discussed earlier.

Our non-GAAP net income for the September quarter was $17.2 million or $0.48 per diluted share compared with $17.2 million or $0.47 per diluted share in the prior quarter. Non-GAAP net income and earnings per share were above expectations, primarily due to our higher gross margin product mix.

Turning to our balance sheet, we ended September with total cash and short-term investments of $197.6 million, up from $192 million at the end of June. Cash flow from operations was $29.9 million for the quarter, and we used approximately $25.5 million to repurchase 1 million shares of our common stock. This stock repurchase represented close to 3% of our total outstanding shares. After the repurchase, shares outstanding are less than 34 million, which on a split adjusted basis is less than the shares outstanding after our IPO in January 2002.

Employee participation in our stock plans contributed $2.6 million for the quarter. Depreciation was $2 million and capital expenditures were $2 million in the September quarter. Capital expenditures primarily included test equipment, tooling and general infrastructure.

Receivables at the end of September were $91.1 million compared to $84.7 million at the end of June. The increase on receivables was due to the timing of sales during the quarter, which resulted in an increase in days sales outstanding to 69 days from 66 days at the end of June. DSOs are within our target range of 65 to 70 days. Inventories were $15.7 million compared to $15 million at the end of June. And our inventory turns were 18 as in the prior quarter.

Looking ahead to the December quarter, based on our current visibility, expected product mix, customer order patterns and backlog of $71 million exiting the September quarter, we anticipate revenue will be in the range of $128 million to $134 million. Using our current backlog as a proxy, we expect our non-GAAP gross margin to be similar to the September quarter.

As we selectively enhanced our engineering and technical capabilities, primarily at our local design centers around the world, we expect some increase in operating expense this quarter to meet the opportunities we see ahead. We anticipate that our non-GAAP tax rate for the second fiscal quarter in fiscal year to be in the range of 19% to 21%, down slightly from our prior guidance, reflecting the expected benefit from the tax planning that I previously highlighted.

We expect the FAS 123R charge to approximate $7.3 million, up $300,000 compared with the September quarter. Non-GAAP net income per diluted share for the December quarter is expected to be in the range of $0.52 to $0.59 per share. Our revenue outlook for the fiscal year of $495 million to $525 million has not changed. This outlook is based on current customer forecast, design wins, and current visibility into our pipeline of new business opportunities.

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

Tom Tiernan

Thanks, Kathy. I’d like to take the next few minutes to discuss our core markets beginning with PCs. In the notebook market, Synaptics TouchPad technology has been broadly adopted throughout the industry. And our preventability to innovate and deliver solutions has resulted in steady gains in market share. Our market share has grown over the past year and currently stands in the 65% and 70% range.

Drivers for our TouchPad business include the ongoing consumer migration from desktops to notebooks, a very strong presence in the growing netbook category, and the benefits of our industry-leading innovations, such as our multi-finger, gesture-enabled TouchPad. The adoption of multi-finger gesture expands the entire notebook sector across all form factors. And approximately 50% of the TouchPads we shipped in the September quarter were multi-finger, gesture-enabled.

Another example of our innovative leadership is our ClickPad. And I’m pleased to report that notebook OEMs around the world are now taking advantage of its benefits. ClickPad eliminates the need for its traditional, mechanical buttons typically located below the touchpad, maximizing the touchpad real estate, and together with our multi-finger gesture suite, provides a richer user experience.

Now I’d like to highlight just a few of our recent design wins featuring these innovations. Our ClickPad is shipping in the HP NV13 and 15 notebooks, and our TouchPad solutions are shipping in the Dell Mini 10v netbook, the Lenovo IdeaPad S12 netbook, the Acer Timeline PC, and the Sony VAIO W notebook. All of these models include our multi-finger gesture suite.

In addition to adoption of multi-finger gestures in TouchPads and ClickPads, we see other trends that could fuel incremental growth for the PC market and for Synaptics. First is the launch of Windows 7, which could potentially spur consumer and corporate upgrades. While we have not factored a meaningful uptick in corporate notebook demand into our current outlook, this would be a positive for Synaptics.

Additionally, we are well positioned to compete with solutions capitalizing on Windows 7 support for main screen touchscreens. While the various usage models that will drive consumer adoption will come sometime after the launch of Win 7 devices, you should expect that our offerings will provide compelling value that will be exciting to our OEMs.

The first technology release for these larger touchscreens is targeted for calendar Q1 2010. We are excited about this opportunity, as we believe that main touchscreen adoption in notebook and slate form factors could increase to double-digit unit penetration over the next couple of years.

Turning to the mobile market, we continue to see very healthy design activity. We believe every major handset maker is now actively designing capacitive touchscreens into their product lines. While it seems that touchscreen phones are now everywhere, it is important to remember that this is still a very young and developing market. And many of the existing touchscreens on the market are the older generation resistive technology.

We continue to show strong performance with the largest mobile handset makers in the world. A few of the recent mobile design wins we are at liberty to mention include LG’s latest Black Series Chocolate Touch, the LG VL40, the HTC Hero phone, and two new Huawei phones. Additionally, we are pleased to report that we have been designed into two new Samsung phones to begin shipping this quarter. And notably, we have begun our first production shipments into a major European mobile provider.

Our vision is Synaptics’ participation in the mobile market spans well beyond smartphones, where less than 10% of the entire billion-plus cell phone market has adopted capacitive technology and touchscreen devices. We see significant opportunities to implement capacitive offerings within lower end phones, allowing us to address the far greater share of a global cell phone market.

These include solutions such as our FlexPad, which fit underneath keymats in Internet-enabled phones, enabling intuitive navigation, gesturing and character recognition. Every handset OEM is looking to differentiate their product lines through unique user interfaces, usage models, and industrial designs.

With our reputation for constantly pushing the innovation outlook and our proven track record is supporting our customers’ design cycles and production ramps, we have demonstrated our ability to help them achieve their goals. We are the only company in the market providing solutions to customers in any way they want, whether the final solution we deliver is transacted as a fully integrated sensor module, a chip, or something in between.

OEMs desire innovation, creativity, and flexibility from their suppliers, and that’s exactly what Synaptics is uniquely positioned to provide now. This flexible approach to meeting our customers’ needs does add complexity to our business model, evidenced by a wide range of average selling prices and gross margins, both of which are influenced by the amount of third-party content in the solutions we provide.

I’ll note that the blended ASP for the handset side of our business is within the $2 to $6 range that Synaptics has historically seen for over 90% of its products. As always happens in the technology world, as markets evolve, both costs and ASPs are coming down. Synaptics has a long track record of effectively managing and driving strong results in dynamic markets.

While these dynamics add additional variables to the way we forecast our business, we believe our portfolio approach results in a competitive advantage that will enable us to further leverage our leadership in the mobile market. As you would expect, our focus is on servicing the primary markets that are driving our revenue growth, namely notebooks and mobile phones.

That said, there are other opportunities to deploy our solutions within the portable consumer electronics markets, including handheld gaming, digital still cameras and remote controls, to name a few. As we move forward, we will invest to take advantage of these new market opportunities to further our diversification strategy.

Our long track record of market leadership, innovation, and ability to meet the needs of the top OEMs globally will continue to propel our business and we cannot be more excited about our market position and future prospects.

With that, let’s turn the call over to the operator to start the Q&A session. Operator?

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) And our first question comes from the line of Raj Gill. Please state your company name.

Raj Gill – Needham & Company

Yes. This is Raj Gill from Needham & Company. Congrats on the good quarter. Just a question on the December outlook. Any sense of what you could provide for the rev mix between the mobile phone and the PC business? Any sense of what the traction in going quarter-over-quarter? And if you could also comment on some of the competitive dynamics – you know, clearly probably you’d be hearing a lot of noise out of your other major competitor. Wanted to talk about market share relative to the overall growth of the markets.

Kathy Bayless

Hi, Raj, this is Kathy. I’ll start with the first part of that question. In looking at the December guidance, what we are looking at is really solid growth from the mobile side of the business within the entire non-PC segment of the business. And also when looking at the PC side of the business with our leading share, we expect to track with market trends.

Tom Tiernan

Yes. Just to add to that, Raj, and to give a bit more color on market share, in notebooks, let me start there, as I mentioned in the prepared remarks, our share has grown over the past number of quarters and we are now hovering in the 65% to 70% range. We obviously are going to track the market at that level of share and have modeled that into our December guidance and beyond. In terms of the handset category and the competitors you are mentioning and all the noise out there, frankly we don’t see a major ship in the business models. Our strategy has been and continues to be to offer a portfolio of ways of engaging with us in terms of how we fulfill a product. And we’ve accommodated that and built that into the guidance, both in the December quarter and into our second half outlook.

Raj Gill – Needham & Company

Okay, excellent. And just one quick question on the pricing, any comments on what you saw pricing quarter-over-quarter or pricing – what pricing was, say, six months ago on the modules? And was there a – any mix shift to chip only in this quarter and what you are seeing in kind of the next couple quarters?

Tom Tiernan

Sure. Let me start with notebooks. I’d characterize pricing there is very moderate and rational. So, no real change in the pricing landscape there. In handsets, remember, when you rewind in time to five or six quarters ago when we first broke out in this category, most of what we did, chip or modules at that point in time. And over the past number of quarters, we have been offering our customers different ways of engaging with us and doing business. So our mix has shifted. We have a healthy balance between chips, between modules, and what we call tail solutions. And that is factored in to the numbers that we’ve talked about today.

Raj Gill – Needham & Company

Okay, thank you.

Operator

Thank you. Our next question comes from the line of Rob Cihra with Caris & Company. Please go ahead.

Rob Cihra – Caris & Company

Hi. Thanks very much. You had mentioned, Tom, you got into the large screen entry – sorry, you didn’t get into – you've been talking about large screen entry for Synaptics. And I think you said that you actually start – you would start in calendar Q1 of 2010. Is that the type of market where you think that you guys could actually see material revenue anytime soon? For example, would there really be anything in that fiscal ’10 revenue guidance that you had given for the large screen? Or is it still kind of a just dip-your-toe-in-the-water type market? Thank you.

Tom Tiernan

Yes. Thanks, Rob. So first of all, in terms of the outlook that we had put together previously, there is no material large touchscreen revenue comprehended in that. We are in the first calendar quarter of the year releasing our technology to the OEMs. That’s for sampling purposes. We fundamentally believe that it’s going to be a while before the applications and the uses models develop until it becomes a larger, highly adopting market. So, we are not comprehending that in our current outlook. We see that as in FY ’11 and beyond.

Rob Cihra – Caris & Company

All right, great. Thank you very much.

Operator

Thank you. Our next question comes from the line of Yair Reiner. Please state your company name.

Yair Reiner – Oppenheimer & Company

Yes. Yair Reiner from Oppenheimer & Company.

Tom Tiernan

Hey, Yair.

Yair Reiner – Oppenheimer & Company

Hi, how are you? So, on the guidance for December, I think it may be a little bit short of what you had been forecasting three months ago. I’m wondering what pieces of business may have fallen off the table or gotten pushed out that were perhaps previously in your forecast?

Tom Tiernan

Well, again, Yair, when we had commented on our first half outlook, the half we are in now, we had said to roughly flat a quarter ago. We over-delivered in Q1, coming in at close to $120 million. You take the midpoint of our numbers now, and we are showing just a minor shrinkage for the year. Fundamentally, it’s the function of the mix that we are shipping products across both categories and the forecast that we’ve got from our customers about what’s ramping and when and aggregate volumes.

Yair Reiner – Oppenheimer & Company

Okay. Fair enough. In terms of ASPs in the mobile side, clearly those are kind of going down for you for a number of reasons. When do you think that that ASP shrinkage stops being significant headwind in terms of year-on-year comparisons?

Tom Tiernan

Well, the ASP, from our perspective, is primarily a function of the mix of what we are shipping across those different models. We have also commented before that particularly on the module side with the sensors that the cost, the fundamental cost of the sensors are coming down in the plastic and glass substrates. That continues to come down. And we have been passing those cost savings along to our customers, and we think that’s a good thing for the market, a good thing for us in terms of stoking adoption. I do not expect the same rate of decrease in sensor costs on a go-forward basis. There will still be reductions, but not at the same level that we’ve been seeing over the past 12 months, as more suppliers have come online and yields and volumes have increased.

Yair Reiner – Oppenheimer & Company

Great. Maybe if I can just throw in one more. Clearly, if you are seeing an uptick in year-on-year growth for the first half of the calendar year, I’m wondering if you can give us some insights into what you might have brewing in the pipeline. And I’ll get back in queue. Thank you.

Tom Tiernan

Sure. So – again, we haven’t given a quarterly breakout of the categories for the second half of the fiscal year. But fundamentally, we expect a good chunk of the growth to come from the handset category, the mobile category. It’s a function of the designs we are in today. The designs we’ve already locked and loaded that are forecasted to ramp next quarter. That’s the bulk of the growth. And then on top of that, most of the analyst reports that we see in the present forecast, a pretty reasonably good growth rate for the basic notebook business next year. And so the combination of that results in the range that we’ve given you.

Yair Reiner – Oppenheimer & Company

Thank you.

Operator

Thank you. Our next question comes from the line of Blayne Curtis. Please state your company name.

Blayne Curtis – Jefferies

Jefferies. Good afternoon, guys. Tom, you indicated that you are shipping chip solutions today. I just wanted one clarify. You’ve been shipping OneTouch for a while. Are you now shipping chips for touchscreen applications? And as you go forward, it seems like some of your new wins, your European win you referenced, there is one in Canada, seem to be chips. So can you talk about the mix in Q4 and then how you expect that to progress for the fiscal year?

Tom Tiernan

Good clarification. So – yes, we were talking about OneTouch. We are talking about the simpler button applications, scrolling applications, and plastic applications, which, as you know, we’ve been shipping for many quarters now. In the context of chips of touchscreens, yes, we are shipping chips for touchscreens. We have been doing that over the past couple quarters. And that part of the business with some of our accounts has increased. And that’s reflected in the numbers that we’ve given. I can’t comment in any more detail on the specific accounts. But we are seeing a good mix within our model between chips – what we call, tail solutions and modules. And sometimes the modules even include lens and lamination, which is additional service that we provide to our customers.

Blayne Curtis – Jefferies

Right. I know there is a lot of different permutations. But as you progress, if you look into the back half of next year, is it possible you’d be shipping more chips than modules?

Tom Tiernan

Well, we are not seeing a major shift in the market, including in the present, between the different ways of fulfilling products. So again, we expect to have a healthy balance of shipments across the three forms of fulfillment.

Operator

Thank you. Our next question comes from the line of John Vinh. Please state your company name.

John Vinh – Collins Stewart

Yes. Collins Stewart. Hey, Tom, one thing I was wondering if you could comment on is, what are you seeing – obviously with the yields improving pretty significantly on the touch sensors and you’ve gotten some more meaningful costs down there, what are you seeing in terms of design opportunities on capacitive versus resistive? Can you give us a little bit more color? Are you seeing some of your customers wanting to push these designs down to more kind of mainstream models? And what do you think the mix of in terms of design opportunities between resistive versus capacitive is? And where do you see that going forward and looking like?

Tom Tiernan

Yes. Great question, John. So there is no doubt that as volumes, yields have increased, costs have come down over the total solution for capacitive that we are now getting into price ranges from an OEM perspective where it’s economically viable to switch out the more legacy-resistive oriented technology. I think if you look at the screens that are being shipped today in the market, the dominant share is still shipped with resistive technology. That’s been going down, of course, over the past six quarters or so. And we expect it to continue that downward trend with capacitive making up more than the difference, because in addition to replacing resistive technology, we are also just seeing more net new phones, particularly at the high end with these new user interfaces adopting capacitive technology. So it’s an evolving game. There is a lot of puts and takes out there, but in general, we see customers with plans to replace resistive over time as costs continue to come down.

John Vinh – Collins Stewart

Can you help us quantify there a little bit? Do you have a sense of what that mix is roughly between resistive and capacitive is?

Tom Tiernan

Well, it’s hard to judge it right now because there is really no third-party data to go from. But overall, we think capacitive today is roughly 10% to 15% of the touchscreen market and growing from there.

John Vinh – Collins Stewart

And then just one other question on the guidance. I just wanted to follow-up with the previous question. So, kind of year-over-year you had originally guided flat for the first half. It looks like you are maybe softer than that by about 7 million. And then on the full –

Tom Tiernan

We said roughly flat, yes.

John Vinh – Collins Stewart

Yes. And on the full year, you’ve got a – your range is about 30 million. So obviously you’re still within the range there. So, are you still kind of tracking to the midpoint there, do you think? Are we still kind of within the range maybe at the slightly lower end of the full year range, or what’s your sense there?

Tom Tiernan

Well, we are still putting that range out there. The range that that represents what we’re going to deliver next year and I’ll leave it at that.

Operator

Thank you. Our next question comes from the line of Daniel Amir. Please state your company name.

Daniel Amir – Lazard

Thanks. Daniel Amir from Lazard.

Tom Tiernan

Hi, Dan.

Daniel Amir – Lazard

Hi, how are you? So, a couple questions here. First of all, with relates to the chip and module mix, I mean, last year was kind of in the single-digit range. What’s the best guess here in kind of fiscal year ’10? What that mix might be in terms of chip and module?

Tom Tiernan

It’s hard to predict, frankly, with all the puts and takes of the designs. But again, we think our strength is our ability to service all of those opportunities out there. And when we model our business, we are basically assuming a balance mix over time across the different fulfillment models. We don’t see a big change in what we are seeing in the market today. And we think that a portfolio approach really differentiates us in the market. And we think we’re going to be able to continue to lead the market like we are today with that ability to address all those different approaches out there.

Daniel Amir – Lazard

Okay. And related to – in your previous call, back in July, you spoke about that some of the guidance was impacted by product push-outs by some of your mobile phone customers, et cetera. I mean, has that pretty much resolved at this point, kind of how you give guidance of December that you feel comfortable that by March your visibility has actually improved on the smartphone side compared to what it was three months ago?

Tom Tiernan

Good question. I mean, we still see puts and takes, push-outs, sometimes pull-ins across the total SKU base in that category. So I would never say that it’s – it's fixed and will never change. But what I will say is that the number of SKUs that we’ve got in production right now is increasing. I think in previous calls we’ve – the last couple quarters we said we’ve been shipping between somewhere between 15 and 20 SKUs depending on the quarter into the handset market. Now it’s between 20 and 25. So we are seeing a good take-up there, and we expect that trend to continue. So our view is, the mobile market itself is a pretty dynamic market. And what will help the company over time is just continuing to increase the number of designs that we are in, the number of SKUs that we are shipping. So, over the whole mix, we are better able to manage the peaks and valleys of the business.

Operator

Thank you. Our next question comes from the line of Jeff Schreiner. Please state your company name.

Jeff Schreiner – Capstone Investments

Yes. Capstone Investments. Thank you very much for taking my question.

Tom Tiernan

Hi, Jeff.

Jeff Schreiner – Capstone Investments

I was wondering if you could help us out a little bit to just understand maybe what you guys are expecting right now on a year-over-year growth basis, maybe in the netbook, notebook sector on a calendar year ’10 basis? And can Synaptics really remain in line or grow above the rate you provide?

Tom Tiernan

Well, when you look at the notebook market overall, inclusive of netbooks, at our share level, Jeff, we expect essentially to track whatever the market does. I think that from an overall revenue point of view, as I think I mentioned in the prepared remarks, we have not factored in a great corporate upgrade in our numbers. So if that were to happen just in the industry, that would be an assist for us. But I think we are basically going to grow with where the market is, subject to the design that we are in and the end sell-through of those products. And I think our offering in that TouchPad space truly is best-in-class in the industry, and we think that’s what’s going to keep the share levels that we have on a go-forward basis.

Jeff Schreiner – Capstone Investments

Okay. Thank you very much for that. I was also just wondering kind of when we look at the last two quarters roughly, when you look at the percentage of the forward quarter revenues that are booked in backlog, it’s roughly been around – somewhere around in the 50% range versus when you look at last year, heading into the last December, you were around 70%. I’m just trying to maybe wonder what are some of the changes that maybe have occurred year-over-year that are driving that.

Tom Tiernan

Well, yes, you’re right. I mean, normally we are – our backlog going to a quarter is 40% to 60% on average, meaning the flipside is true on the turns business within the quarter. That’s our typical range. And of course, entering into this quarter, I think we had $71 million going into there. So we are well within that range. Last comparable quarter a year ago, you may recall that notebook – the expectations for notebook markets were quite strong. The market fell through, I think, we saw it in mid-November. And frankly, we were running – ramping a couple of very high volume handset designs during that point in time, which we were loaded for going into the quarter. So we are not worried about the difference in relative loadings quarter-to-quarter. A lot of things have changed. The markets are different now, and the mix is as it is.

Operator

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

Steven Fox – CLSA

Hi, good afternoon. CLSA. Can you just go back – Tom, you mentioned that some of your material costs for modules were going down. I was curious – is that a meaning – was that a meaningful headwind on the revenue side? And also concurrently, was it a meaningful tailwind on the margins? How much did that impact the reported numbers?

Tom Tiernan

Yes. Steve, thanks for the questions. So, as we’ve said before, it’s really the sensor cost, which is part of the module that has been coming down over the past, frankly, a year or more. And so that does, module-to-module basis, create definitely a headwind for us. And the rate of decrease, we think, in the present is less and go-forward is less than what it has been. But you’re right. The flipside is true, generally speaking, that higher the third-party content that we have – or the lower the third-party content, the better our gross margin percentages would typically be. And so, across the mix, we are still managing it to the target model for the company and are able to drive the operating leverage based on that.

Steven Fox – CLSA

Tom, would you describe it as tens of basis points of an issue or – because I guess you also have the issue that modules as a percentage of total is going down. So I’m just trying to understand if this is something meaningful that we should pay more attention to or maybe (inaudible).

Tom Tiernan

You know, Steve, I wouldn’t pay too much attention to it at that level, because at the end of the day, the margin we are going to – performance we’re going to post in any given quarter truly will be a function primarily of the mix of products we are shipping across all the categories that quarter.

Operator

Thank you. Our next question comes from the line of Ian Ing. Please state your company name.

Ian Ing – Broadpoint.AmTech

Hi, Broadpoint.AmTech. Thanks for taking my question. Could you comment more on the priorities of the near-term goals of your chip solutions in the pipeline, you know, goals such as maybe cost reduction, power reduction, feature enhancements, process migration? And given that you are competing against some MC road maps – MCU road maps from your competitors, would you ever move to communicating more of a silicon road map of current and announcing upcoming products?

Tom Tiernan

Good question, and thanks for asking. So, we are – our company focuses on the entire human interface solution, which is made up of chips, sensors, firmware, software, and everything in between, usage models, usability. And so when we present ourselves to our customers, if that’s a total solution provider, and that’s what the services we offer through our designs, we do our own chips, we seek to have the best fit-for-purpose chips that enables fundamentally the best performance in the technology and the application. We continue to invest in our chip road map. But it is just one element of our value offering to our customers.

Ian Ing – Broadpoint.AmTech

Great, thanks. Maybe a little more on this healthy balance between chips, tails and modules? Is it possible to say that each one is over 10% or less than 50%? I know last quarter you gave the chip revenue.

Tom Tiernan

No, I’d just stick with the comments I had made earlier.

Ian Ing – Broadpoint.AmTech

Okay. So, healthy balance and a stable mix. Okay, sure. You mentioned that material costs for modules are going down. Is there any impact on LCD component pricing and supply, given this power outage at Corning glass?

Tom Tiernan

We have not seen that.

Ian Ing – Broadpoint.AmTech

Okay. Okay, great. And then lastly –

Tom Tiernan

I guess the one thing I would add, though, is that just relative to glass, we do believe that there is going to be more sources of supplies, glass sensors coming online of the ITO pattern glass sensors, which we think is favorable for the industry, for availability and then ultimately more competition and price reduction and cost reduction in that part of the bomb.

Operator

Thank you. Our next question comes from the line of Paul Coster. Please state your company name.

Paul Coster – JP Morgan

Thanks. JP Morgan. So, Tom, you have the solutions approach. You’re still recruiting apparently people to service your customers. Can you talk a little bit about this market develops and the handset market in particular, what the value proposition is for companies with very large range for SKUs versus those with a more narrow focus, those – for the larger companies versus the smaller handset companies and what those relative value propositions are there?

Tom Tiernan

So, Paul, you are asking from an account level there?

Paul Coster – JP Morgan

Yes. I’m trying to – you know, clearly those companies are having narrow number of SKUs, seem more ready to go to a chip-based solution, maybe even sort of doing much of it themselves, whereas the companies with a large number of SKUs seem to be ready to adopt modules. I’m just trying to get an understanding of how that dynamic is playing out.

Tom Tiernan

You know, I wish I could – I wish I could communicate to you guys a pattern or a trend because we don’t see it yet. At the end of the day, what goes incorporated into a phone, into a phone assembly, is a module, which includes the sensor, the chip and everything in between. That’s what gets designed in independent of who is – of which competitor in the market you are dealing with. And we truly believe that this portfolio approach that we are offering does cover the market and covers all the needs in the market across the account base that we have. We even see, Paul, in the same accounts different phones – you know, different design-in engagements resulting in different engagements for the company. So it’s not one size fits all. It’s a mix. I think a lot of it is dependent on the economics of the phone and the supply chain of the companies that we are dealing with, and we are just being as flexible as we can to manage that across that business to position ourselves to win more than our fair share of designs.

Paul Coster – JP Morgan

Okay. Kathy, from a repurchase program perspective, how much are you authorized to repurchase moving forward? Do you intend to continue doing so?

Kathy Bayless

Hi, Paul. Yes. You are referring to the stock repurchase?

Paul Coster – JP Morgan

Yes.

Kathy Bayless

Okay. Yes. We still have available about $57 million under our authorized stock buyback program. And as we’ve done in the past, we would continue to look at repurchasing our stock, as opportunities present themselves to us.

Paul Coster – JP Morgan

All right. Thank you.

Operator

Thank you. Our next question comes from the line of Shaw Wu. Please state your company name.

Shaw Wu – Kaufman Brothers

Yes. Kaufman Brothers. First, great quarter, great guidance. So just a question, I think it is more for Kathy. On the expense side, kind of excluding the one-time items, it looks like your R&D spending was kind of – the rate was kind of a bit more than usual. What we can expect the kind of expenses going forward? I mean, should we kind of expect that to kind of grow at this rate or can we expect that to moderate? Thanks.

Kathy Bayless

Hi, Shaw. Yes. As we – as I said on the script basically, we continue to do some selective enhancement of our engineering capacities. And particularly, at the local design centers that we set up around the world, we think this is really a key advantage for the business. If we are looking at headcount as far as numbers of people, in the fiscal year 2009, we added headcount of around – I think it was 25%. And for the current year, we are definitely not looking to add at that same rate. We do look at what we need to do to invest for the long-term because we are very excited about the opportunities that we have. But as you can see from our past history and also our Q1 results, we do manage our operating expenses very prudently. And as in Q1, we delivered another strong quarter, a very strong operating profit above 18%.

Tom Tiernan

The only thing I’d add to that, Shaw, is that overall for the company, we are managing an R&D reinvestment of about 12 to 14 points and an SG&A, 8 to 10. And that’s not to say that every single quarter will be exactly and precisely in that range because most of the investment we make is in people. And you hire people as you find the right people for the company. But on an overall basis, that’s what we are managing to.

Shaw Wu – Kaufman Brothers

Okay. And if I could squeeze in an extra one. Just a question for you, Tom. Can you talk about kind of the new market opportunities out there? Obviously, you have these – you have the PC business and you have the smartphone business. What about the newer areas like monitors, printers?

Tom Tiernan

Yes, it’s a great question. There are many opportunities out there. And I don’t think I mentioned it in the script, but we, believe it or not, continue to be design constrained on a design-in basis, which obviously is one of the reasons we are continuing to make those selective investments there. I think I’ve mentioned before. Beyond the two main categories that we are in now, we see big opportunities in handheld gaming, we see them in digital still cameras, remote controls. We think that’s going to be over time a good growth engine for the company, both by the way in ClearPads and TouchPads. And we are in various stages of market development there. And beyond that, you’re right. There are other – many other consumer electronic device categories that are right for adopting some form of capacitive technology. And as we are able to scale the company and meet the needs of our customer base in the markets we are in and move on to the next, we will do that.

Operator

Thank you. And our final question comes from the line of Kevin Cassidy. Please state your company name.

Kevin Cassidy – Thomas Weisel Partners

Thomas Weisel Partners. Thanks for squeezing me in. When you mentioned that you may not be adding as many engineers, I guess as you did in fiscal year ’09, can you give a little more description of that? Does it take less engineers with chip designs or –? Maybe if you could – or are you moving engineers from one project to another?

Tom Tiernan

Yes, sure. So, Kevin, thanks for the question. Let’s put this in perspective first. So, in ’09, we roughly hired 25% of our headcount into the company. A huge investment we made primarily in our engineering teams around the world. And of course, over that period of time, as those people have been trained and become familiar with the company, our customer base, the technology, of course, the effectiveness and efficiency has definitely gone up. That said, even with that and the continued selective hiring, we are still constrained, especially relative to the markets that we have talked about in the previous question.

In every case, Kevin, of our design-in engagements, it’s pretty much independent of the fulfillment model. That is, we work with our customers to design the full solution. It is a technical solution, independent of how it’s fulfilled, that cuts across the sensor, the chip, the firmware and the unique touchscreen of the unique phone. And so we provide that service and price for that service with every design engagement that we’ve got.

Kevin Cassidy – Thomas Weisel Partners

Okay, great. And I guess some of the people you are hiring, can you say their locations?

Tom Tiernan

Generally, it’s overseas.

Kevin Cassidy – Thomas Weisel Partners

Okay.

Tom Tiernan

Mostly – and generally speaking there, it’s in Asia.

Kevin Cassidy – Thomas Weisel Partners

Okay. Understood. Thank you.

Operator

Thank you. At this time, I would like to turn the call back to management for any closing comments.

Tom Tiernan

Yes. Thank you. So, thank you everybody for being on the call with us today. We look forward to seeing on the road and updating you again on our next quarterly call. Thanks.

Operator

Ladies and gentlemen, this concludes the Synaptics first quarter fiscal 2010 earnings conference call. Thank you for your participation. You may now disconnect.

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Source: Synaptics Inc. F1Q10 (Qtr End 09/30/09) Earnings Call Transcript
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