Synaptics' (SYNA) CEO Richard Bergman on Q4 2014 Results - Earnings Call Transcript

| About: Synaptics Incorporated (SYNA)

Synaptics Incorporated (NASDAQ:SYNA)

Q4 2014 Results Earnings Conference Call

July 31, 2014, 05:00 PM ET


Jennifer Jarman - Director, The Blueshirt Group

Richard Bergman - President and CEO

Kathleen Bayless – SVP, CFO, Secretary and Treasurer


Charlie Anderson - Dougherty & Company

Rob Stone - Cowen and Company

John Vinh - Pacific Crest Securities

Rajvindra Gill - Needham & Company

Andrew Huang - Sterne, Agee

Jeff Schreiner - Feltl and Company

Dean Grumlose - Stifel Nicolaus

Osten Bernardez - Cross Research

Liwen Zhang - Blaylock & Partners

Anthony Stoss - Craig-Hallum


Good day everyone, and welcome to the Synaptics' Fourth Quarter Fiscal 2014 Earnings Call Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Alex Wellins of Blueshirt Group. Please go ahead, sir.

Alex Wellins

Good afternoon and thanks for joining us today on Synaptics' fourth quarter fiscal 2014 conference call. This call is also being broadcast live over the web and can be accessed from the Investor Relation section of the company's website at

With me on today's call are Rick Bergman, President and CEO; and Kathy Bayless, the company's Chief Financial Officer.

In addition of the company's GAAP results, management will also provide supplementary results on a non-GAAP basis, which excludes share-based compensation charges and certain non-cash or non-recurring items. Please refer to the press release issued after the market closed today for a detailed reconciliation of GAAP and non-GAAP results.

Additionally, we'd like to remind you that during the course of this conference call, Synaptics will make forward-looking statements. Forward-looking statements give our current expectations and projections related to our financial condition, results of operation, plans, objectives, future performance and business. Although, Synaptics' believes our estimates and assumptions to be reasonable, they are subject to a number of risks and uncertainties beyond our control and may prove to be inaccurate. Synaptics' cautions that actual results may differ materially from any future performance suggested in the company's forward-looking statements.

We refer you to the company's current and periodic reports filed with the SEC, including the Synaptics' Form 10-K for the fiscal year ended June 29, 2013. For important risk factors that could cause actual results to differ materially from those contained in any forward-looking statement. Synaptics expressly disclaims any obligation to update this forward-looking information.

With that said, I'll turn the call over to Rick Bergman. Rick?

Richard Bergman

Thanks Alex. And I'd like to welcome everyone to today's call.

As we kick-off fiscal 2014, we expect that our leadership in touch will drive another great year of 20% top line growth. I'm pleased to say that we hopefully surpass that goal, posting a 27% revenue increase in our core business.

At the same time, we are exploring new opportunities that would help us sustain a strong level of growth over the long term while further strengthening our competitive position. With the successful acquisition of our new fingerprint ID business, we are able to far outpace of our growth objectives for the year.

Annual revenue was a record $948 million up in unprecedented 43% from the prior year. And we closed fiscal 2014 with an impressive 54% sequential revenue increase, as well as our first $300 million quarter, only one year after hitting the $200 million milestone.

Non-GAAP net income for the year was a record $158 million or $4.25 per share, up 37% over fiscal 2013 even after considering the additional shares issued for the Validity transaction.

Our vision to broaden our reach in technological advantage didn't stop with fingerprint authentication, as we announced an agreement to acquire Renesas SP Drivers in June. As a reminder, RSP is the leader for small and mid-size display drivers with revenue of over $650 million for their fiscal year ended March 2014.

We are very excited about the extended opportunities ahead of us by adding advanced display driver solutions, to our broad product portfolio while also accelerating our touch and display driver integration efforts.

I will now provide an update on our core markets. Then Kathy will review our fourth quarter results in more detail and provide a current outlook before opening up the call to your questions.

The Synaptics' team recently participated at COMPUTEX in Taipei displaying key design wins and forward looking solution to advance the next generation of human interfaces offerings. Our leadership position as the innovator for both touch and fingerprint solutions was evidenced with the excitement offerings generated.

The standing-room-only crowd at our media briefing served as solid barometers of our position as a leading human interface solution provider. This provides a good backdrop for a discussion of the notebook PC market, where we're starting to see a modest up tick in design activity and pockets of growth.

This increasing market stability was evident in our Q4 results which reflected the initial ramp of new platforms with growing penetration of our QuickPad products and incremental ForcePad revenue.

We head into the new fiscal year with a robust product lineup, with ClickPad 2.0, Precision TouchPad and TypeGuard as key technologies that put us a tier above the competition.

We are also excited about technology such as SecurePad, which integrates our fingerprint ID solution into the corner of the TouchPad and is expected to launch this fiscal year.

We also expect penetration of our touchscreen-enabled notebook offerings to increase with new models in the market by the holiday season.

As we saw with the recently announced Microsoft Surface Pro 3, our TouchPad solutions are being adapted into new device category such as Type Covers. And the convergence of solutions is taking place with our notebook OEM customers such as Dell with the Venue 11 Pro 7139.

This new Pc Magazine Editor's Choice for high-end business tablets features our ClearPad touchscreen solution with active stylus support, our ClickPad solution, and our fingerprint ID solution all contributing to the human interface.

Further few points of the convergence of our technologies include the adoption of both our fingerprint ID and ClearPad solutions in the Samsung 8.4 inch and 10.5 inch Galaxy Tab S tablet devices.

We are happy to further our momentum in the tablet segment to see Samsung rolling out their fingerprint ID solutions broadly across its platform another example being the Galaxy S5 Mini smartphone.

We are very excited about our growing participation in the mobile fingerprint ID solutions. We continue to expect our fingerprint touch sensor to be in the market in the second half of the calendar year and to see further adoption of our solutions in the next wave of flagship phones to launch around Mobile World Congress.

We are also excited about Alipay's recent selection of a FIDO-based authenticator for the roll-out of our mobile payment services in China, used in our fingerprint ID solution on the Samsung S5.

This highly integrated security solution provides a compelling feature set as proven in the S5 and is ready for deployment in China.

Key members of our mobile team also attended the SID event in San Diego, where we delivered a presentation on a trend of display integrated solutions for smartphone displays. We've been discussing this trend for some time and believe as evidenced by our recently announced acquisition of RSP, that the industry is on the verge of widespread adoption in smartphones at every performance level.

The acquisition of RSP is marching the plan and we expect to formally close the transaction prior to our November Analyst Day. We will provide an update on our fiscal 2015 outlook for the combined business at the appropriate time following the close, when we're in a better position to provide a more comprehensive view of our go-forward operations.

I can say that initial post-close priorities will center on integration, required investments and infrastructure and customer support as we transition RSP out of its current JV structure, as well as incremental R&D investment as we accelerate our TDDI efforts.

We have a tremendous opportunity ahead of us with the strengths of the combined companies, innovative technology, market leading products and scales to drive revenue in operating profit growth.

Continuing on the topic of display integration solutions which account for over 40% of our designs, Motorola has selected our Single-Layer On-Cell solutions for its 4.3 inch E and 4.5 inch G models, significantly raising the performance bar for entry level smartphones.

We are also proud to announce the Nokia Lumia 630 and 635 at the world's first Single-Layer On-Cell solutions to hit the shells with our face detect capability. Face detect is a technology that replaces traditional infrared sensors and turns out the LCD during phone operation lowering the total BOM cost.

This is not to suggest that our discrete business is going away, as the Nokia Lumia 530 also incorporates a Single-Layer discrete solution from Synaptics'. Our solutions portfolio allows us to closely partner with leading OEMs across a range of product implementations. A case in point is LG, who recently selected our ClearPad family as a touch solution for its latest flagship smartphone, the 5.5 inch G3.

LG also selected Synaptics' as a touch interface towards G Watch, it's a latest entry into the extending variables market.

Building on our inclusion in the Amazon Kindle Fire Tablet with our ClearPad solution, as Synaptics' In-Cell solution is now deployed in the Amazon Fire smartphone, another example of display integration within the high-end models.

With multiple OEMs going to market later this year with display integrated solutions and every major LCM engaged, we're more confident than ever that our RSP acquisition was the right decision to accelerate market option of our technology.

Meanwhile we continue to expect Synaptics' initial TTDI solution to be in production within a smartphone this calendar year.

Turning to the China mobile market, we garnered multiple new designs with OEMs such as Huawei, ZTE, Oppo, BBK and Gionee. I wanted to note a few models that are significant because they highlight the industry's move towards display integration and models at each price point in each region.

First, the Huawei ultra slim flagship the Ascend P7 features our In-Cell solution as does Huawei Honor 6. I also wanted to call out the 6-inch ZTE Grand Memo II and the Vsun Hexa, which both feature a Single Layer On-Cell solution.

Our penetration in the China mobile market has been gaining traction over the last 12 months, driven by our infrastructure investments with the most knowledgeable local technical support in the broadest set of human interface solution offerings available.

Local OEMs such as Gionee continue to grow in popularity and as the company planned its international extension, we continue to partner on industry leading solutions and devices such as the Redmi Note tablet. We expect additional small and large touchscreen Gionee devices with our solutions to begin shipping later this year.

While we expect to provide more details during our November Analyst Day, I'm happy to provide some year-end data on our share and our various markets excluding the main captive supplier as usual.

Over the past 12 months, we've seen our position in the PC market tick-up slightly and expect to exit fiscal 2014 with over 65% market share of TouchPad among the top-10 OEMs.

We maintained our strong share in mobile phones of over 40% based on our continued leadership in high performance smartphones as well as ongoing strength in execution in the China market. We believe that our solutions account for a majority of the rapidly growing fingerprint ID market.

And lastly, we achieved our target of growing our large touch screen revenue by 2x to 3x over the prior year moving from a low base to market share in the mid-teens and we're starting to layer on additional designs for touchscreen-enabled notebooks.

As we look forward to fiscal 2015, we see some signs of stability in notebook PCs along with strong but moderating growth rate to smartphones. With continued strength in our core focus areas and fingerprint ID solutions now successfully incorporated into our platform, we feel confident we can achieve another year of very strong top line growth excluding RSP in the mid 20% range.

To conclude my formal remarks, we had a stellar fourth quarter and a phenomenal year, a strong performance in our core TouchPad business - core touch business, coupled with big contributions from our fingerprint ID business with it's first two quarters of operations.

We are clearly executing on our key growth levers with the adoption of our fingerprint ID platform, expanding penetration within large touchscreens, growing to action and display integrated solutions and a successful expansion in China.

We are very excited to accelerate our leadership in mobile display through the acquisition of RSP, which we believe will further solidify our competitive advantage and enhance our ability to deliver and sustain strong profitable growth.

Those of you who have attended my presentations in the past, remember that my focus has always been growth, growth and growth. As we close at the year, I'd like to thank our dedicated employees around the world who are instrumental in delivering that growth in what will be remembered as a transformational year for Synaptics.

With that, I'll turn it over to Kathy for review of our financial results.

Kathleen Bayless

Thanks, Rick. Fiscal 2014 was an excellent year both revenue of $948 million and non-GAAP net income per share of $4.25 represent records for an annual period, an increased 43% and 37% year-over-year respectively.

We are also extremely pleased with our June quarter results as both revenue of $315 million and non-GAAP net income per share of $1.46 represent records for quarterly period and substantially exceeded our initial guidance range.

June quarter revenue increased 37% year-over-year and was up more than 54% sequentially. We achieved strong revenue growth across all of our product lines in Q4, both year-over-year and quarter-over-quarter.

While the revenue mix for mobile and PC products was approximately 77% and 23% respectively. Revenue from mobile products was up 40% year-over-year and up 61% quarter-over-quarter, while revenue from PC products was up 26% year-over-year and 35% quarter-over-quarter.

Fingerprint ID product revenue which contributed to both mobile and PC revenue represented approximately 22% of total revenue in the June quarter, an increased 122% over the March quarter. Non-GAAP gross margin of 45.3% was within our guidance range and primarily reflects overall products mix.

Non-GAAP operating expenses were $74.3 million, up $7.5 million from the prior quarter. The increase in non-GAAP operating expense was primarily due to our continued investment in technical and customer support personnel to expand market adoption of our new fingerprint ID solutions.

Our display integrated products including TDDI, ongoing investments in our touch product portfolio and incremental incentive compensation expense associated with the strong financial performance this year.

GAAP operating expenses in the June quarter were $100.5 million and includes an increase of $13.1 million for change to contingent consideration and $9.1 million for share base compensation.

The change to contingent consideration primarily takes into account our current and anticipated post acquisition success with our biometric fingerprint solutions.

In addition, GAAP operating expenses in the fourth quarter included approximately $3.6 million of incremental transaction related expenses associated with our pending acquisition of RSP. These costs have been excluded from our non-GAAP results as one time non recurring costs.

Total transaction related cost included in our GAAP operating expenses for the year were approximately $5.6 million, including costs associated with the Validity acquisition earlier this year.

We anticipate changes to the fair value of contingent consideration could continue to result in volatility and our GAAP operating results as we go forward through the earn-out period.

The strong sequential increase in revenue and gross margin dollars in the June quarter drove a 140% increase in our non-GAAP operating profit dollars and increased operating margins to 21.7% from 13.9% last quarter. Our non-GAAP tax rate was 17% in the June quarter, while our GAAP tax rate was 13.6%.

Fourth quarter non-GAAP net income was a record $56.8 million or $1.46 per diluted share compared with non-GAAP net income of $48.9 million or $1.39 per diluted share for the fourth quarter of fiscal 2013.

Turning to the balance sheet. We ended the quarter with $447 million of cash. Cash flow from operations was very strong at $131.6 million. Employee participation in our equity incentive programs including the associated tax benefits provided that cash of $91.1 million for the year.

We used $19.6 million for the acquisition of Validity and we used $70.3 million to repurchase approximately 5% of our shares outstanding, similar to levels repurchased in each of the past several years.

I'm also pleased to report that our Board of Directors has increased and extended the authorization for stock repurchases by $110 million for total current authorization of $200 million available through July 2016.

Capital expenditures for the year were $38.7 million and included $10 million used for the purchase of two buildings adjacent to our San Jose headquarters.

Depreciation was $14.2 million for the year. Receivables at the end of the June were $195.1 million and DSOs were 56 days. While inventories were $83.3 million and inventory returns were $8 million.

Now we will make a few comments regarding our quarterly outlook. Please note that the projections provided on the call today exclude the impending closure of the RSP acquisition. Our outperformance in the June quarter reflected a steep ramp of some new designs and while we expect to post a record in September quarter revenue, we will be down on a sequential basis from the June quarters all time high revenue level.

Based upon our backlog of approximately $132 million entering the typically backend loaded September quarter, customer forecast, product sell-in's and sell-through patterns, as well as expected product mix, we anticipate revenue to be in the range of $275 million to $295 million, an increase of 24% to 33% over the prior year.

Our expected revenue range reflects strong year-over-year growth in mobile product revenue including significant incremental contributions from our fingerprint ID products. We expect the revenue mix from mobile and PC products to be similar to the preceding quarter.

As we move through the year, we expect our business to reflect strong year-over-year growth trends including expending momentum for our fingerprint ID products. Taking into account our overall revenue mix, we expect non-GAAP gross margin for the September quarter to be approximately 45% to 47%.

With this steep ramp of our fingerprint ID solutions, we have incurred some initial start-up costs and expect to have opportunities in the supply chain to achieve some savings beginning this quarter.

We expect non-GAAP operating expenses in the September quarter to increase modestly from the June quarter. We anticipate the FAS 123R charge in the first quarter to be in the range of $9.6 million to $9.9 million.

GAAP expenses will also include non-cash charges of approximately $6 million to $9 million related to intangible amortization and change to contingent consideration. However, the change to contingent consideration could vary depending upon the changes to assumptions that drive the accounting value for the contingent consideration earn-out.

We anticipate our non-GAAP cash base tax rate for fiscal 2015 to remain in the range of 16% to 18%. Weighted shares are expected to be approximately 39.5 million shares. Non-GAAP net income per diluted share for the September quarter is expected to be in the range of $1.06 to $1.28 per share.

In closing, we are extremely pleased with our record financial performance in fiscal 2014, and believe we are well positioned to achieve record first quarter revenue and non-GAAP net income to kick-off fiscal 2015.

We believe we continue to be very well positioned to capitalize on the opportunities in front of us, as the number one human interface company. And we look forward to another year of strong growth in fiscal 2015.

With that, we'll turn the call over to the operator to start the Q&A. Operator?

Question-and-Answer Session


(Operator Instructions) And your first question will come from Charlie Anderson with Dougherty & Company.

Charlie Anderson - Dougherty & Company

Good afternoon. Thanks for taking my questions. I wonder if you could talk a little bit about the underlying basis for the guidance Rick for fiscal 2015. What are some of your assumptions for market share in your core markets?

And then also poll-through for fingerprint in terms of penetration for swipe and also for small-area touch?

Richard Bergman

Okay. We're getting a value out of your own question. Lot of ground cover there. So, we call it in classic core touch market as I articulated earlier in the script Charlie, our share is pretty good given the competitive environment and so on.

As I noted, we expect to gain some further traction in the [LTS] (ph) area and TouchPad at 65% is pretty good and we'll kind of take that on a ongoing basis. And then smartphone directly in the 40% neighborhood, also that's pretty good. And then of course we're helped by the underlying growth of those markets going forward.

On fingerprint our share is very high right now. And it's not going to go higher given that its purchase is somewhere really high as competitive solutions in the marketplace. But what will help there certainly is, is the tremendous growth that I talked about in the last call going from 30 million roughly units in calendar 2013 to north of 500s a few years from now.

And we're seeing that trend so we're certainly not going to backup those projections, very strong adoption, we virtually every mobile customer or PC customer out there, is looking at additional biometric or fingerprint solution.

So, it's kind of that mix of trends. I don't know if I totally hit on all your questions there but please ask if you need further clarification.

Charlie Anderson - Dougherty & Company

Just on the – maybe for poll for smaller area touch, how much are you thinking a few flagship devices or you think going to pretty broad poll-through for that type of a product?

Richard Bergman

No, clearly touch is poll-through touch type of fingerprint solution. And as we said we'll have our solution out there in the marketplace later this calendar year.

It really depends on a higher end phones I'd say in general of the poll very touch type of solution as you get more into the mainstream or more value the swipe continue to be popular as you look forward in the 2015.

Charlie Anderson - Dougherty & Company

Great. Thank you so much.


And next we'll hear from Rob Stone with Cowen & Company.

Rob Stone - Cowen and Company

Hi, I wanted to ask about the China market. If I can get some mileage out of one question to Rick, if you could comment on what you see in trends as far as featured set versus pricing and price really for the phones and for your product and also any comment on fingerprint design wins besides the ones with your largest customer.

Richard Bergman

Okay. So, let's start up with the China market first with feature set versus pricing.

To me a bit of a misunderstanding in general that China is all about low-end in price. It certainly isn't true. There is a number of high-end phones that come out or sold in China. And we see that with our engagements with Huawei and Nokia, and other vendors, that are based there or ship phones into those marketplaces.

That being said, a lot of the growth in China is for phones at - or at least at end user level, or priced at - lower prices than we historically see in North America or Europe.

But a lot of that is they truly have optimized their supply chain and or to go to market methods. So we continue to see demand for just a few months ago was high-end features like glove and moisture performance and as I mentioned the face detect on the call, those type of things.

But price plays a big role too. So it is actually a balance getting that right set of features and then you get a bit of a premium on the price.

In terms of additional fingerprint design wins clearly we've done quite well with Samsung on a various platforms that they have rolled out and those are certainly high volume. Of course all the PC guys utilize our stuff as well.

You will see additional design wins from other customers later this fall. And then expect to see a number of design wins come out in the first half of 2015.

Rob Stone - Cowen and Company

Great. I'll jump back in the queue. Thanks.


And from Pacific Crest Securities, we'll hear from John Vinh.

John Vinh - Pacific Crest Securities

Hi, thanks for taking my question. Rick, I was wondering if you could just talk about your assumptions in fiscal 2015 in terms of what the mix of swipe versus area is going to be?

Also the other question I had was on the competitive fronts, there has been some concerns about some new competitive entrance particularly at the high end? Is that having any sort of impact in terms of your positioning in the high end smartphone market?

Richard Bergman

Okay. So, let me take these two questions in order.

So, swipe versus area for the fiscal year. Obviously, from our perspective swipe has a role on that race because here in the second half of the year there is multiple platforms that use swipe. So, I haven't actually full done the math for our fiscal year but I think it will be hard for touch sensors that overcome that lead.

So in our fiscal year I would clearly say that the swipe sensors will be the higher volume. But our Q4 that would –maybe it would be reversed where we're shipping more touch sensors than swipe sensors.

And then – I've lost your second question. New entrance in smartphone. So, John you thought us for a while, you know that there has been new entrance continuously. I've been at the company now almost three years and there is different major player that pops up every so often or maybe a new start-up. At one point of course there were 30 different players in the touch controller market.

So we’re going to continue to innovate and continue to drive and we believe with the breadth of our technology, the team that we now have in place, we number over 1,200 employees totally focused on touch that really nobody else can bring that level of capability or we're going to have 100% share of customers is absolutely no way with the volumes they drive.

They want to have multi sources. And however when they look for the number one strategic partner, that can provide the best discrete solutions, the best display integration solution and at now and the future the best TTDI solution. There is just one and only one clear answer, which is Synaptics.

John Vinh - Pacific Crest Securities

Got it. Thank you. And then just a follow up question on the fingerprint revenues in the quarter, can you give us the split between PCs versus mobile?

Kathleen Bayless

Hey, John. On the fingerprint revenue the, as I said the total was, total percentage of revenue was like 22%, so, very, very strong.

The PC side, the revenue stream is, as we said for a couple of quarters, it's still in the low, the mid, single millions of dollars. So, nice run rate but the majority is the mobile side of business.

John Vinh - Pacific Crest Securities

Great. Thank you.


And next we'll hear from Rajvindra Gill with Needham & Company.

Rajvindra Gill - Needham & Company

Yes, thanks and congrats on solid results. Your fiscal year 2015, mid 25%, mid 20% revenue growth rate, I was wondering if you could provide a little bit additional - little bit of color on some of piece parts, the segments. Where do you see the growth coming from, from fingerprint, mobile phones, PC, notebooks, you can maybe just quantitatively talk about it though? That'll be helpful.

Richard Bergman

I'll take it, and then Kathy if she wants to fill anymore details. So, I don't think of our business in three areas, TouchPad, ClearPad and fingerprint. Actually fiscal-year-over-fiscal-year, we're seeing growth in all three of those.

And on the two former ones, it's a little more modest, given obviously that we have a full year of fingerprint performance. And it’s still a ramping business. The majority of our growth will come from the fingerprint business going forward.

Rajvindra Gill - Needham & Company

As a follow up on that, could you talk a little bit about the attached rates that you think you’ll be able to achieve in the overall market, or what's your expectations of the attached rate for fingerprint sensors and the overall market fiscal year 2015 example? Are you seeing this being adopted outside of Samsung and Apple to other customers?

Richard Bergman

Well clearly in the latter part of your question absolutely as I mentioned I think at this point every mobile notebook customer is looking at increasing their attached rate. Some are coming from zero.

The attached rates we're seeing in smartphone, that's probably a good question that we will save for our November Analyst Day.

Rajvindra Gill - Needham & Company

Okay. Great, thank you.

Kathleen Bayless

I think overall Rajiv as Rick mentioned before, the market growth rates are definitely there, so, we’re still seeing, the calendar 30 million fingerprint. And as Rick mentioned earlier within the next couple of years, $500 million or 500 million unit cam opportunity for fingerprint. So, very rapid growth. Every customer is definitely interested in it.

Rajvindra Gill - Needham & Company

Great. Thank you.


And from Sterne, Agee, we'll hear from Andrew Huang.

Andrew Huang - Sterne, Agee

Thank you. I was wondering if you could talk a little bit more about your TDDI solution coming out this year. Would you consider that a high-end solution or a low-end solution? And then maybe quantify some of the benefits to the customer of using TDDI?

Richard Bergman

Sure. So, today we're positioning in TDDI actually it's more of a mid-range solutions. So the high end of the market will be discreet. TDDI will be more in the mid range and then lower end, you'll see some of the other On-Cell or just low-end discreet type of solutions down there whether factors come into play around the supply chain.

So, what will be the benefits to the end users? Well, typically or not typically, in every case we've seen as the TDDI as an In-Cell type of solution. So, the consumer benefits from that approach because you get better clarity of the display, you get a thinner display and typically over time it'll translate to a overall lower cost solution.

Andrew Huang - Sterne, Agee

So, as a follow-on to that, do you think longer term - could TDDI become a high end solution as well? Could it get adopted by the high end as well?

Richard Bergman

Over time, potentially we're looking at here is what we call one plus one equal three type of solutions, which is what you're getting at. So, we don't see TDDI, as just slap into chips together and that's your value proposition going from two to one, no. We see some other benefits there around power potentially and around some interesting feature implementations that we could put in place.

But that say may more of a three year time horizon. Next couple of years, it will be a mid-range. That said the resolutions and so on that we’re targeting with TDDI.

Andrew Huang - Sterne, Agee

Thank you.


And our next question will come from Jeff Schreiner with Feltl and Company.

Jeff Schreiner - Feltl and Company

Yeah, thank you for taking my question. I want to ask just kind of about the roughly – if you take the midpoint of September guidance of roughly $30 million sequential revenue decrease versus what we saw around $8 million last year, is some of this due to the fact that more revenues were pulled into June or what's some of the underlying factors impacting the current September quarter guidance?

Kathleen Bayless

Hey, Jeff. As far as the September quarter goes, we did have a very steep ramp in the June quarter, multiple customers including a lot of China. And so as far as what we're seeing in the September quarter, there is – we do a lot from the Cell-In standpoint, the September quarter this year is more of an effective some of the cell through patterns out there in the marketplace.

So, overall our particular solutions, we've had this a very, very strong product pipeline. So we feel very good about the entire fiscal year. So, but it is a pattern where we had strong selling in the June quarter, some timing overall in the September quarter and just again strong part of portfolio overall.

Richard Bergman

I'll just add a little bit Jeff as you know, we had - for Q4 we had guidance and actually in the same range that we now have for Q1, 275 to 295. Then we got to reset it to 300 to 310 when we announced the RSP acquisition on June the 11th. And we're still off. Even though we had just a couple more weeks to finish up the quarter, we need to plan on 315.

A lot of our customers want to be positioned to see the upside in their markets as well and sometimes they make sure that they don't want to touch controllers to be in short supply. So, they make sure they're well stocked and then the market doesn't quite translate as strong as they have thought and so there is certainly that factor as well.

But frankly I will take the Q1 guidance that we gave. I think if you'll get the two quarters, that's a heck of a six months for Synaptics.

Kathleen Bayless

Q4 plus Q1 by two, 300 each, that's pretty good.

Jeff Schreiner - Feltl and Company

All right. Thank you. Just wanted little color. Thank you. I appreciate it.


Next we'll go to Kevin Cassidy with Stifel Nicolaus.

Dean Grumlose - Stifel Nicolaus

Well, this is Dean Grumlose calling in for Kevin. Thank you very much for taking my question. I was hoping you may provide some color on whether you're seeing customer interest activity in the area of wearable and Internet of things. And perhaps can you elaborate a little on whether these particular applications may represent another wave of opportunity for you?

Richard Bergman

Hi, Dean. Certainly, in the script we mentioned one, so the LG smartwatch that was announced utilizes our touch controller. And we're seeing multiple other opportunities in the wearable area for our touch solutions and actually for our fingerprint solutions.

So, quick answer is yes. Of course volume wise, it doesn't compare to the 1.2 billion to 1.4 billion smartphones that are going to ship this year. So, it's quite a couple of magnitudes lower than that.

But nevertheless it represents a new wave of potential growth and opportunities as we go out in couple of years. So, we're certainly working with our strategic customers on wearable type of solutions.

Dean Grumlose - Stifel Nicolaus

That's very helpful. Thank you.


And from Cross Research, we'll hear from Osten Bernardez.

Osten Bernardez - Cross Research

Hi, good afternoon. Thanks for taking my questions. I guess, would you be able to give me, sort of line of sight as to where you are, what inning you think we're in with respect to your Chinese and Taiwanese go-to market strategies from a market share perspective?

What is the share, I don't think you provided of that business, is of your total revenue. And how we should we be thinking about the profitability that's coming out of that? Thank you.

Richard Bergman

I'll take the [broad strokes] (ph) and hope Kathy can give some of the specific questions you asked.

So, as noted in the script, I'm quite pleased with the progress we made over the past 12 months in China. We talked about this at our last Analyst Day that we had to setup, for us really the first time is a distribution and capability to address the broader set of customers than we historically have had. We've been a top 10 OEM customer in China. The market is a bit more fragmented.

So, we greatly stepped up in China more than 2x from where we started at the beginning of the year. And that's just not false sales, but it's also we put in some developments, individuals in China, FTEs, as well as establishing close relationships with buyers and distributors.

And it really paid off in Q4. That was one of our key drivers, was the amount of business that we are able to do with the China customers in Q4 maybe softened some of the slowdown, relative slowdown of course in the strong market from other customers.

So, again, we're quite pleased. And are we done in China? No, there is other customers we can go after and other opportunities we can see it on. Our lower end penetration in China isn't quite where we want it to be. So, we continue to work on solutions there for that part of the marketplace.

Kathy, you want to talk about China?

Kathleen Bayless

Yeah, I was just going to say from a revenue standpoint what we've talked about for a few quarters is, China has been growing rapidly with our overall business. So, the numbers that I’ve given out for the last several quarters has been, China handset revenue is - domestic handset revenue as a percentage of our total revenue is been kind of in the low teens.

And as you move, as we think about that for the fourth quarter with total revenue of 315, that's a big chunk of revenue. And then actually - the percentage actually kicked-off a couple of points, got to the mid-teens.

So, we are definitely picking up in China. And one thing that we've talked about as well is, when you think about China, display integration is a big activity there for us. So, the Single Layer On-Cell activity, last quarter and this quarter we've talked about how we're really starting to gain momentum in Single Layer and then also with In-Cell

So, that activity combined with some of the bars that we've taken on recently, the broadening of our customer support services over there, we are really picking up significant traction in the China market that we're really pleased about that.

Osten Bernardez - Cross Research

So, is there a way for us to be thinking about sort of what the profitability trends out of China can be, let's say over the next six to 12 months? Or is that something you're willing to discuss?

Kathleen Bayless

We haven't broken it out. The one thing – the only thing that we've said really about China and the China market in general is, just if you think about smartphones is - the smartphone market, the most of the growth is going forward or a lot of the growth anyway is the mid range and the emerging side of the market.

But with our solutions, Single Layer solutions are targeted customer set that we're going after. We have very strong profitability similar to lot of the rest of our business. So, again we feel very good about the business overall.


And your next question will come from Liwen Zhang with Blaylock & Partners.

Liwen Zhang - Blaylock & Partners

Hi, thank you for taking my question and congratulations on another record quarter. So, your revenue results actually - the high end of the raise the guidance – however the gross margin came a little bit lighter than the midpoint guidance. So, what factors are where is the gross margins pressure?

Kathleen Bayless

Well, the, in the gross margins, again it was within the guidance range couple of ticks little bit below the midpoint. But gross margin is a mix of all the products that we sell and one of the things I just talked about is, as we move to the China market we set throughout the year, that's - has been a little bit lower.

And the fingerprint business, again I mean it's fairly reflective of the midpoint, the last couple of quarters from a gross margin standpoint. And when I talked about in the outlook section, I said that we'd actually had incurred some start-up cost associated with the initial ramps that we expect to see some improvement there as we look at this quarter.

So, again it’s a mix of the business. We have a broad range of gross margins. And just a mix overall and we do it. We expect to a see a little bit of improvement coming into the first quarter of the fiscal year.

Liwen Zhang - Blaylock & Partners

Thank you. And, Rick mentioned the relationship with the distributors. Do you have percentage of sales from distributors for the June quarter versus a year ago?

Kathleen Bayless

I would say a year ago, it was nominal. The activity with distributors, it is picking up but it’s still not material to the overall business that we're doing in the China market.

Again, a lot of what we're doing you go back to thinking about the strategy in China. Number one is, we work with the international brands, on their product solutions, our customers. We’re also working broadly with the big brands in the China market. The Huawei, ZTE, the Oppo, XiaoMi, the Lenovo's. That's all direct activity. And then the distributors is – we're starting, - we're working with them more on to reach further to some of that smaller guys out there.

Liwen Zhang - Blaylock & Partners

But do you have percentage of the sales from the distributor for the June quarter?

Kathleen Bayless

No, we're not breaking that out. As I said it's just not, it's not really material to be overall.

Liwen Zhang - Blaylock & Partners

Okay. Thank you. And then my last one is, what percentage of sales you have from Samsung? Thank you.

Kathleen Bayless

Well, the large customer for this quarter, I would say we had one customer that was over 10% for the quarter and that particular customer came in at - I think it was 35%.

Liwen Zhang - Blaylock & Partners



And next we'll hear from Anthony Stoss with Craig-Hallum.

Anthony Stoss - Craig-Hallum

Hey Rick, I am curious, now that you have your [finger] (ph) and you see on the fingerprint sensor side, is any detail you can give us in terms of design time, how that's shortening and how much quicker your new customers are able to do get products out to the market.

Also, do you think that the biometric ASPs will follow a similar curve to what you saw in the early days of touch? And then lastly Kathy, if you don't mind giving us a view, you talked about 2015 revenue growth, if you can give a sense of kind of gross margins overall? Thanks.

Richard Bergman

Okay. So, the first question was, basically the design win cycle. It actually is a similar patter that we see on touch controllers and again this is called the median and those guys are on either end of the extreme.

But roughly speaking, we started to see for Mobile World Congress launches. We see the design win activity begin during the summer timeframe, end of the summer ish, people start to make decisions and go forward.

And then of course they ramp either late in the year, calendar year or early in the calendar year for the Mobile World Congress launches.

We won - China do difference, they're both at different challenges on the touch controller side, the challenges is working with the display and each OEM has kind of unique displays and requirements.

On the fingerprints, you're not part of the physical ID. So for example, the Samsung phone or fingerprint sensor of course is in the button. And that activity needs to start fairly early on because they want to make sure of course the look and feel is consistent with the phone.

So, that's a dynamic that we're used to from a touchpad perspective but from a mobile phone perspective, it's a new dynamic.

In terms of the ASP curve, that's a challenging one because we have a touch solution coming in which actually is going to drive the ASPs higher than the traditional swipe solutions. So, you'll see this pop. And then I would expect the curves on the fingerprint solutions to come down certainly more aggressive than we're seeing on touch controllers today, probably somewhat consistent with, call it the old days of touch controllers where there was a steeper price decline than there is now.

Kathleen Bayless

Yeah, you had a question on gross margins going forward. For fiscal 2015, we haven't changed the target model. So, we're looking at 45%, 47%.

Anthony Stoss - Craig-Hallum

Great. Thanks guys.


And from Cowen & Company, we'll go to Rob Stone.

Rob Stone - Cowen and Company

Maybe just a quick follow up. You talked about some signs of strength and firming in PCs when you are up nicely on a year-over-year basis more so than the market. Any color you can provide on what's behind that mix of consumer versus business, or these feature set, what accounts for better revenue versus units?

Kathleen Bayless

Well, one thing Rob is if you look at the, in the June quarter we get the first round of some of the newer platforms for the back-to-school and holiday season.

So, what we're seeing for the new round of the platforms is, we've talked about our ClickPad penetration for several years. We were running in the 30%, 35% for ClickPads. And the new platforms we're seeing our percentage of ClickPad business is actually go up to 50% or more and so we started seeing that affect in the June quarter.

So, that's good for the blended average ASP. The other things just in general for - in the PC side of the house. For notebook, we don't classify it there but we do expect to see some additional designs for our larger touchscreens and notebook computers going forward as well.

Rob Stone - Cowen and Company

So, the strength is more about new design wins as opposed to this business, refresh cycled based on withdrawal support for XP?

Kathleen Bayless

No, we do, there is units volume increased because of that. So, as Rick said, we are starting to see some lift actually in the PC side of the business.

So, again it seems like the market is more stable, there is, we are getting some uplift for that. And then again we've got this, the move to a higher concentration of ClickPads.

So, also….

Rob Stone - Cowen and Company

Is the consumer versus business that you see on the poll going forward?

Kathleen Bayless

Consumer versus commercial?

Rob Stone - Cowen and Company


Kathleen Bayless

Both sides are looking pretty good right now.

Rob Stone - Cowen and Company

Okay. Thank you very much.


And with no other questions, I would like to turn the conference back over to management for any additional or concluding remarks.

Richard Bergman

Okay. Well, thank you everyone for joining us on the call today. And we certainly look forward to seeing many of you at our Analyst Day in November. Thank you very much. Bye, bye.


And with that ladies and gentlemen, that does conclude today's presentation. We do thank everyone for their participation.

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