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Synaptics Inc. (NASDAQ:SYNA)

F4Q2012 Results Earnings Call

August 2, 2012 5:00 PM ET

Executives

Alex Wellins – The Blueshirt Group, IR

Rick Bergman – President and CEO

Kathy Bayless – Chief Financial Officer

Analysts

John Vinh – Pacific Crest Securities

Philip Lee – Lazard Capital Markets

Rob Stone – Cowen & Company

Dean Grumlose – Stifel Nicolaus

Rajiv Gill – Needham & Company

Charlie Anderson – Dougherty & Company

Shaw Wu – Sterne, Agee

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Synaptics Fourth Quarter and Fiscal Year 2012 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 questions. (Operator Instructions)

This conference is being recorded today, Thursday, August 2, 2012. I would now like to turn the conference over to Alex Wellins, of The Blueshirt Group. Please go ahead, sir.

Alex Wellins

Good afternoon. And thanks for joining us today on Synaptics fourth quarter and fiscal 2012 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 www.synaptics.com. With me on today's call are Rick Bergman, President and CEO; and Kathy Bayless, CFO.

In addition to the company's GAAP results, management will also provide supplementary results on a non-GAAP basis, which exclude non-cash share-based compensation charges and certain other non-operational and non-cash items. Please refer to the press release issued after the market closed today for 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 including predictions and estimates that involve a number of risks and uncertainties, these are including, but not limited to, statements regarding the company's future financial performance and outlook, including expectations of modest growth year-over-year, financial guidance for the fiscal -- first quarter of fiscal 2013, anticipated sequential changes in PC and mobile product revenues for the first quarter, anticipated expenses and expense trends associated to company’s recent acquisitions, the timing of ForcePad and ThinTouch product revenue, and the ramp and timing of when video product revenue will become accretive.

Also the company’s expectations for above market unit growth within the mobile market, including the impact of a higher mix of lower cost chip solutions, the company’s belief that its laying the foundation to capitalize on its target markets as never before, to lock in new incremental opportunities for expanded long-term growth, expectations of the pipeline for large touchscreen solutions expanding throughout the year, and the acquisition of its new video display capabilities further fueling future growth through touch and display integration opportunities.

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, 2011 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 the forward-looking information.

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

Rick Bergman

Thanks, Alex, and I'd like to welcome everyone to today's call. As you may have seen from our announcement this afternoon, we have a lot to cover today based on some really existing new products and acquisitions that expand the market opportunity for Synaptics. So let’s dive right in.

We are very pleased with our fiscal 2012 performance, particularly against the backdrop of challenging marketing conditions. Fiscal 2012 revenue was $548 million, down 8% from the prior year, as a revenue impact from module to chip transition for our mobile phone products more than offset strong unit growth.

On the eclipse side higher margin mobile chip products lifted the overall gross margin percentage 550 basis point from the prior year, increasing gross margin dollars by 4% and addition operating leverage to our business model.

Non-GAAP net income and earnings per share was $79 million and $2.28, respectively, reflecting our investment in research and development to enhance and broaden our product offerings and technology portfolio.

In fiscal 2012, we further entrenched our leadership position in our key markets, broaden our solutions portfolio and our ability to scale to meet opportunities in front of us, and continue to position a company for long-term growth. We maintained our majority share in notebook PCs and drove favorable ASP trends with the transition to Image Sensing TouchPad and ClickPad’s.

In the smartphone market we expanded our market share among a broader base of OEMs. We shift the industry’s first In-Cell enabled smartphone with the launch of the Sony Xperia P.

Additionally, we began sampling the world’s first integrated touch and display driver In-Cell solution with our ClearPad Series 4. In the large touchscreen market we were the first to market with the single ASIC solution, our ClearPad 7300, which is now shipping in the 10-inch Samsung Galaxy Tab 2 and its garnered design wins with other OEMs.

Having the broadest product portfolio in the industry enabled us to apply our system level engineering expertise to a wide number of solutions. This includes the recently announced ClearPad 2300 single-layer multi-touch solution that drives down the smartphone buildup material costs and supports all combination of sensors and lenses.

Series 2 solutions can also be found in the latest model from Huawei and DTE. Our Series 3 solutions have enabled us to build on our technology leadership position in the premier mobile touch market with our second In-Cell solution, the HTC EVO Design. Discrete sensor solution such as the well received HTC OneX and On-Cell solutions such the Sharp Aquos smartphone.

Our ecosystem relationships are stronger then ever as we continue to empower our partners with our industry leading support tools such as the recently announced SafeSense design tool which drives design efficiency while lowering system design costs.

ClearPad Series 4 In-Cell solutions clearly represent the next evolution of capacitive touch solutions as evidence by the recent media and industry coverage the technology has received.

At Qualcomm’s partner event UpLink, we demonstrated our TDDI solution on the Qualcomm Dragon Board which is used as evaluation platform for the snap dragon reference design and received overwhelmingly positive feedback across our ecosystem partnerships.

In PC notebook space products that began shipping during the quarter include the latest Ultrabooks model from HP, Dell, Lenovo, Samsung, Sony and Toshiba with our latest ClickPad.

A few noteworthy models in the market today include the HP Spectre XT and this Sony Vaio S, T and E models. The Vaio S features the largest ClickPad on the market as the two align to Microsoft modern TouchPad recommendations, and we already see positive claim from the leading industry PC reviewers. With imminent launch of touch first based Windows 8 devices Synaptics is well-positioned to deliver our comprehensive and intuitive touch solution.

We made a lot of new today. Now let me give you some of the details. First, Synaptics launched ForcePad, this is the most significant development of the TouchPad since we introduced it 17 years ago. Due to addition of pressure ForcePad delivered industry changing usage model that will revolutionize the human computer interface in notebook PCs.

ForcePad delivers everything today best ClickPad offers and much, much more. It provide consistency and performance across OEM models through its design intelligence and self collaboration. Ideal for thin and light Ultrabooks it achieve a 40% thinner component advantage over today’s conventional Ultrabook TouchPad. We expect notebooks incorporating ForcePad technology to begin shipping mid-calendar year 2013.

Next, we acquired Pacinian, giving Synaptics a ThinTouch keyboard technology that is 40% thinner than a conventional keyboard. With the addition of ThinTouch technology and the capabilities of our ClearPad Series 7 our partners can achieve a better together integrated experience that only Synaptics can deliver. ThinTouch keyboard samples are available today and product revenue is targeted for early fiscal ’14.

Third, we expanded our ClearPad Series 7 portfolio leveraging the single ASIC ClearPad 7300 solution that is design to meet Microsoft Windows 8 and Windows RT touchscreen requirement up to 12 inches. The new line can now support up to 17-inch touchscreens, all of this ClearPad solutions are sampling to select OEMs today.

Lastly, I’m very pleased to reveal that we recently acquired the video display operation of Integrated Device Technology Incorporated adding highly experience analog and mix signal panel to our engineering team and adding key technologies such embedded DisplayPort and Panel Self Refresh to our portfolio.

This acquisition underscores Synaptics’ commitment to leadership in the emerging large screen market for notebooks, Ultrabooks and tablets within expanding technology platform for next-generation touch enabled video and display applications.

Several video display timing and interconnect products are currently available and in development. We expect revenue from these products to begin to ramp in the second half of fiscal ’13 and anticipate they’ll become accretive towards the end of the fiscal year.

We expect more meaningful revenue in fiscal 2014 and beyond. While some incremental expenditures will required to leverage full potential of these new products and technology, we believe we are making the right investments at the right time, we are increasing our market opportunity by continuing our strategy by expanding our offerings and solutions while broadening our share of the product real estate and capitalizing on the evolution of new and different form factors.

As we look ahead of fiscal ’13, we expect to return to modest annual revenue growth weighted towards the second half of the year as we continue to navigate through near-term macro and product transition based headwinds in our markets. While we remain optimistic regarding opportunities around the launch of Windows 8 and the ongoing shift to favorably priced large TouchPads and ClickPads. The broader near-term outlook for notebook PCs remained uncertain.

In the mobile business above market unit growth is expected to be offset by higher mix of lower cost chip solutions for the rapidly growing lower end segment of the smartphone markets, while additional high-end advance solutions begin to ramp. And while we have done a great job expanding our customer base in fiscal ’12 our growth remained tailored to the self-through levels of our mobile customers.

At the same time and looking back on the year based on today’s announcement, you can clearly see that we are strengthening our position as the world’s number one human interface company. We are laying the foundation to capitalize and our target markets is never before, so we are locking new incremental opportunities for expanded long-term growth, in a notebook market we maintain our leadership position by wide margin. The addition of ThinTouch in ForcePad will enable us to deliver a better together solution across the keyboard, touchscreen and TouchPad while continuing to leverage the trend toward thin and light.

We see the pipeline for large touchscreen solutions expanding as we progress through the year and the acquisition of our new video display capabilities were further fuel our future growth through touch and display integration opportunity. When all these technologies are combined Synaptics looks to own the human computer interface within the PC delivering a superior uniform user experience.

Finally, in the mobile our leadership in In-Cell and TDI capability gives us confidence in our technology roadmap and we expect more activities around the any solutions in calendar. We look forward to return to growth in another year of meaningful progress and execution as we continue Synaptics track record of innovation and market leadership.

As we close out the year, I’d like to thank our dedicated employees around the world and also welcome the new employees, joining us through our recent acquisitions. We look forward to seeing many of our analysts and investors at the upcoming Analyst Day next Tuesday, August 7th where we will provide more color regarding our markets as well as further details on our new products and technologies.

With that said, I will now turn the call over to Kathy.

Kathleen Bayless

Thanks, Rick. We are very pleased with our June quarter results, as revenue of $137.6 million was slightly above consensus and in line with our guidance. The revenue mix from PC and non-PC applications was approximately 56% and 44% respectively in the June quarter.

As a reminder, revenue from large touchscreen product including tablets is included in revenue from non-PC applications along with our other ClearPad solutions. Revenue from PC applications was down 1% from the prior year and up 18% sequentially, primarily reflecting seasonality and the timing of our sell-in verus sell-through and heading back-to-school season.

Synaptics continued to lead the markets for notebook, TouchPads and ClickPads and design activity continues to be very strong. With new Ultrabook designs ramping this quarter, ClickPads were greater than 15% of our TouchPad unit shipments.

Revenue from non-PC applications in the June quarter was down 8% year-over-year from 9% from the March quarter. Mobile unit shipments increased significantly from the same quarter last year and were up modestly sequentially, reflecting the macro environment, customer market share dynamics and product mix.

The mobile product mix was tailed and shipped this quarter, while higher priced integrated module solutions represented over 30% of the mobile revenue in the year ago quarter. As we’ve mentioned on prior calls, tail and chip solutions have lower average selling prices that carries higher gross margin percentages than full module solution.

Non-GAAP gross margin was down sequentially at 46.2%, but up 380 basis points year-over-year. The gross margin percentage drifted towards the lower end of our expectations as PC products were higher portion of the overall product mix than previously expected.

Non-GAAP operating expenses were $39.8 million, up $1 million from the prior quarter. The increase was primarily due to expenses associated with the acquisition previously discussed and increased investment in chip design activity.

GAAP operating expenses were $48.1 million including $8.3 million of share-based compensation in the June quarter.

Our non-GAAP tax rate was 22.7% in the June quarter compared with 25.5% in the March quarter, primarily reflecting our geographic profit mix. Our GAAP tax rate was 21.1%.

Fourth quarter non-GAAP net income was $18.6 million or $0.54 per diluted share, near the high end of our guidance range.

Turning to our balance sheet, we ended the quarter with $305 million of cash. Cash flow from operations was $21.7 million. Overall cash was down $19 million from March, reflecting the repurchase of 1 million shares of stock for $28.2 million and $14.6 million for the purchase of Pacinian.

For the fiscal year, cash flow from operations was very strong at $101.4 million and we used $61.7 million to repurchase the total of 2.4 million shares of our stock or over 7% of our shares outstanding.

Employee participation on our equity incentive programs provided $34.9 million for the year. Capital expenditures and depreciation were each, $10.4 million for the year. Receivables at the end of June were $104.1 million, reflecting 68 days of sales outstanding.

Inventories at the end of June were $31.7 million and inventory turns were $9 million. As rick mentioned earlier, we acquired Pacinian Corporation late in the first quarter. The purchase included the initial cash payment of $14.6 million, with up to $15 million of contingent consideration.

The contingent consideration is reflected on our balance sheet in non-current other liabilities at a discounted carrying amount of $11.9 million. We expect to incur additional costs associated with bringing this product from markets over the next 12 months.

In addition, as just announced, we acquired the Video Display Operation of IDT. Technology and IT were acquired for $5 million and we hired the engineering team. Both of the acquisitions include purchased intangible assets, which will be charged to GAAP earnings over their economic lives as non-cash amortization in our financial statements. But will be excluded from our non-GAAP results.

In addition, non-GAAP results will exclude non-cash interest expense associated with the contingent consideration. As previously disclosed in the Form 8-K subsequent to the end of the year, we completed the purchase of land and buildings for $12 million in Santa, CA for the relocation of our corporate headquarters after renovation. We expect to market and sell our existing headquarters building in Santa Clara during fiscal 2013.

Now, I will make a few comments regarding our quarter outlook. Looking ahead to the September quarter, visibility and end demand in our markets continues to be impacted by the global macro economic environment.

Based on our backlog of approximately $50 million entering the quarter of customer forecast and expected product mix, we anticipate revenue will be in the range of $120 million to $128 million. Specifically, we expect both PC and mobile revenues to be down on a sequential basis. This outlook reflects a soft PC environment and the timing difference between our sell-in and OEMs sell-through.

On the mobile side, our outlook reflects the soft macro environment and customer market dynamics. Taking into account our overall revenue mix, we expect non-GAAP gross margins for the September quarter to be in the range of 46% to 47%.

We expect non-GAAP operating expenses in the September quarter to be up from the June quarter, primarily from engineering investments associated with the acquisitions and some incremental engineering and go-to-market headcounts to support our expanded product portfolio.

Non-GAAP operating expenses related to the two acquisitions is expected to be around $3 million to $4 million per quarter. Starting at the lower end of the range and increasing over the next several quarters.

GAAP expenses will also include non-cash purchased intangible amortization as well as non-cash interest expense of approximately $440,000 and $300,000 per quarter respectively.

We anticipate the FAS 123R charge in the first quarter to be in the range of $8.6 million to $8.8 million, inclusive of the recent acquisitions. We anticipate that our non-GAAP tax rate for the September quarter and for the year will be in the range of 24% to 25%, reflecting our expected geographic profit mix combined with no assumed benefits from the expired R&D credits.

Non-GAAP net income per diluted share for the September quarter is anticipated to be in the range of $0.30 to $0.38 per share. Diluted shares outstanding for the September quarter is expected to be around 34 million shares, reflecting our stock purchased activity during the June quarter.

In closing, I’ll note that as Rick mentioned previously, we anticipate modest topline growth this year with Q1 the low, as our markets and our opportunities grow with our expanded leading edge product portfolio.

With that we will now turn the call over to the operator to start the Q&A. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from the line of John Vinh with Pacific Crest Securities. Please go ahead.

John Vinh – Pacific Crest Securities

Hi. Thanks for taking my question. First question on the full year outlook, you talked about modest growth. Can you help us understand what sort of revenue contribution you are expecting from the recent acquisitions and are you still expecting growth excluding those acquisitions?

Rick Bergman

Thanks, John for the question. The answer is yes. We would still expect growth without the acquisitions going forward. But we are not going to tell you exactly, how much the acquisitions are going to contribute in the latter part of the year?

John Vinh – Pacific Crest Securities

Got it. Okay. And then my follow-up is on In-Cell, can you talk little bit about kind of what your design pipeline and activity is for In-Cell and how do we think about kind of the contribution from In-Cell revenues in fiscal ’13?

Rick Bergman

Sure. In summary, let’s talk about calendar years, first. So, to think of calendar year ’12, when the innovators in the marketplace are bringing In-Cell forward and obviously, you saw the Sony phone I mentioned that earlier and the HTC phone are couple of examples of those companies that are out there, they are ceding as a marketplace.

But we’ve seen a tremendous surge in activity in design and type of traction within In-Cell Technology. So, through calendar ’12, you’ll continue to see kind of, is just the innovators pop-up. But we expect a fairly substantial shift in large number of additional phones that come to market with In-Cell Technology in calendar ’13.

John Vinh – Pacific Crest Securities

Okay. And then there has been a lot of concerns out there about kind of where, kind of the yield rates stand on kind of In-Cell. Can you just give us your perspective on kind of where you see it currently and when do you expect to get to kind of reasonably material yields where we can see much more, much higher commercial volumes?

Rick Bergman

Yeah. I’ve seen in the press too, John. It’s kind of interesting. I see the press but when I talk to the manufacturers, especially there is one that is shipping millions of units right now and they seem comfortable with the yields of In-Cell Technology and the others that are earlier staged of the ramp are comfortable with what In-Cell would mean to the manufacturing process. So, we don’t see any fundamental reasons why, a risk approach that we are taking with In-Cell Technology would impact manufacturing yields.

John Vinh – Pacific Crest Securities

Great. Thank you.

Operator

Thank you. The next question is from the line of Daniel Amir with Lazard Capital Markets. Please go ahead.

Philip Lee – Lazard Capital Markets

Hi. Thanks for taking my question. This is Philip Lee on behalf of Daniel. Regarding the Pacinian acquisition, this is slightly different than your existing markets. Are you about to leverage your current customer base, what are the revenue opportunities here and what kind of margins do these products have versus your current corporate total?

Rick Bergman

All right. So lots of questions, they are all great questions. There are questions we ask ourselves when we look at the acquisition. It absolutely leverages our current customer base. All the PC OEMs that we currently sell are TouchPad solutions into our LTS solutions, all looking for the same thing right now; thinner, lighter solutions.

And so the Pacinian technology, which we now called ThinTouch maps directly to that market requirement and we are seeing a tremendous interest and it is new market segment in some ways. But another ways as you heard kind of working better together type of thing. If you think about there is a TouchPad and right next to it course is the keyboards.

So there is a lots of opportunity there for innovation on how, we can get those different technologies to be combined together, and as you might have seen from our press release using capacitive type of technology as well within the keyboard.

So, as you can tell, I am really excited about this particular acquisition. Because from the market size, which is your -- last part your question, if it’s literally a multi-billion dollar market, so really opens up opportunities for Synaptics not next year as I said in the prepared remarks but in the fiscal '14 when we will have that in full production.

Philip Lee – Lazard Capital Markets

Great. Thanks, Rick. And as a follow-up, your annual guidance says modest revenue growth year-over-year. This implies selling growth for the December quarter, if we have normal seasonality in the back half of the fiscal year. So assuming that there is strong December quarter what’s driving the growth there?

Kathleen Bayless

Well, in the back part of the year, as we talked about on the call, there -- as we have the expansion of our product opportunities. So, with this particular quarter as we move into October and beyond with Windows 8, the notebook opportunities there, large touchscreen pipeline is expanding and we are also broadening our portfolio for our mobile customers. So we have a lot of things that are going to be rolling into expanding the product offering as well as the new video operation product opportunity as well.

Rick Bergman

And just add a little bit on that, so in our Q4, of course, you saw a strong PC business and a lot of that just call it almost the channel spill, because of the nature of our TouchPad, it’s one of the first thing that’s assembled because that’s right part of that notebook chassis. As you move into Q3, of course you don’t have effect, plus of course Windows 8 is getting announced in latter part of 2012.

So, we certainly expect a couple of those factors to move away as we go into Q4. And I am very excited about Windows 8 of course in all the possibilities, which certainly can help our business.

Philip Lee – Lazard Capital Markets

Yeah. That’s definitely a positive catalyst. Thanks for the color, Rick. Thanks, Kathy.

Kathleen Bayless

Welcome.

Operator

Thank you. The next question is from the line of Rob Stone with Cowen & Company. Please go ahead.

Rob Stone – Cowen & Company

Hello. Lots of interesting stuff going on, glad to see you deploy some cash for something other than buying that stock.

Kathleen Bayless

Thanks, Rob.

Rob Stone – Cowen & Company

I wanted to touch on the potential value opportunity of putting these things together the ThinTouch and the ForcePad, and is the ForcePad in fact, in a particular way that the motion associated with the ClickPad and replacing that with force -- what is the force viewed as different?

Rick Bergman

Yeah. Let me start up with kind of your opening comment there, Rob, yes. Your first questions when you came on board with the question of how we are going to deploy capital. Actually I think we did multiple way to look at the past, its call 100 days. A couple of acquisitions obviously and we did find our shares is I am sure everybody saw we wanted. Some assets and new buildings so we have a world class headquarters for our world class engineering team.

And we continue to invest in some early compelling internal technology like In-Cel and TDDI, because ultimately we think for us, this smartphone market were very well-positioned there as well. So our three target markets in effect we made two external acquisitions to shore up the notebook space one for -- those was for LTS space and then internal investing for the smartphone based.

So sorry, I got so excited what was that other ForcePad in that area is a very busy quarter for us. So ForcePad finally bring in the light. We’ve been working on this for several years, but don’t think of it instead, I think it as an addition. It’s really adding their third dimension to a ForcePad. Right now, if you click it’s a digital type of things yes or no.

With ForcePad, there is actually 256 levels of force in a very precise of high precision. So just one example that you can think of, you probably got us to a lot of long spreadsheets or documents. Today, you got to go find the page down button and click rapidly our title down with your mouse.

In the future, you’ll just be able to push harder to move faster through that document. So one of this type of human interfacing that’s really hard to explain over our conference call. But I certainly hope you’re here next week and we set you in front of a notebook and you will immediately get it and say, wow, this is just a much more natural experience that you would expect, push harder to go faster as an…

Rob Stone – Cowen & Company

So, in terms of the revenue opportunity, we know a basic TouchPad these days a couple buck two or three, the high-end ClickPad of course worth more than that. But on a notebook, we insight for a moment, the big increment for was full touchscreen three, seven or something. But if you get the same keyboard plus ForcePad, can you put some range of revenue per box on that?

Rick Bergman

We consider it to be a premium solution over our ClickPad. But its also a balance that we recognized -- we’re in that the notebook PC space. And it is a space that although now high evaluating human interface technology there, I don’t want to this miss that. We’ve going to competitive as well.

So it adds -- certainly adds a bit of ASP. I don’t think we are going to give an exact figure how much ASP, but it certainly add more opportunity of course. It also involves a larger ClickPad technology that we talked about in the past, because you have force. It’s such a fun experience as you want to deal with a larger surface area. So it’s a combination of that allows us to nice upside with our current ASPs.

Rob Stone – Cowen & Company

Okay. My follow-up question, if you will as on the December quarter. This is an odd-year prior transition-wise with Win, do design wins at this point shed some light on what would be typical seasonality for December, do you expect to see (inaudible) factor is competition with tablets and economic headwinds, so how do you feel just broadly about December quarter seasonality this year?

Rick Bergman

That’s kind of $64,000 question. We know what design wins we have for Windows 8 and Ultrabooks and yes, they are very strong and we are very optimistic. But ultimately it’s what our consumers is going to buy to create that sell through. And I don’t know if you have any grade more insight than we heard over the past month little bit upon in Q -- calendar Q2 in terms of PC or notebooks sales in general. And there is a bit of hope. We’ll go through a slower period in Q3, but then Q4 will pick up nicely after quite frankly couple full years. Excuse me.

Rob Stone – Cowen & Company

For fiscal Q2?

Rick Bergman

Fiscal Q2 correct.

Rob Stone – Cowen & Company

Yes. Okay. Great. Thank you.

Operator

Thank you. The next question is from the line of Kevin Cassidy with Stifel Nicolaus. Please go ahead.

Dean Grumlose – Stifel Nicolaus

Hello, this is Dean Grumlose calling in for Kevin. Thank you very much for taking my call. I have a question and a follow-up. A number of touch suppliers have been optimistic about potential share gains with Windows 8 coming out. I was wondering if you could give us your view on whether you feel the Windows 8 cycles increasing your market share, decreasing or neutral?

Rick Bergman

Well, I mean the great part of our Synaptics as we participate in the couple pieces if the Windows 8, one is certainly the TouchPad. And they were very comfortable that we are holding our share in that particular area. And that is as you move to the LTS large touchscreen portion of it, I think everybody still wait, how much tax rate will we see with notebooks.

And then we’ve picked up some share there, but it’s the open success, a big greenfield for us. We deal very little LTS revenue. You heard about our Samsung design win and that’s it at this point. But now we have a technology. We are taking that really leadership technology we developed for the smartphone and taking into our channel that we have with the PC OEMs and its really going to open up some great possibilities towards the end of this calendar year and certainly through calendar '14 to participate in that marketplace.

Dean Grumlose – Stifel Nicolaus

Okay. Thank you. That’s very helpful. As a follow-up what is your view on the potential for industrial and automotive markets. If you have not focused on those in the past, but going forward with the somewhat more, I guess scalable technology is, are these markets now attractive to you and how may you view them?

Rick Bergman

It’s certainly an attractive alternative market. As I mentioned we’re very focused on a notebook, the tablet/LTS market and smartphone. There is a three core markets. And we see -- still see it a kind of opportunity. They actually talk to this next week at the analyst meeting. They really give you picture of how big that market can be with Synaptics.

Especially and in light of these two acquisitions that we just made, which I really what was I mentioned a little bit earlier, really open the door to a much bigger high force to plane. That being said, we are looking at these other markets. Touch is going everywhere. And ultimately we talk about display integration with our In-Cel and TDDI. That’s one key area, how we’re going to leverage into those marketplaces. We win the design at the LCD manufactures. They actually will bring it into those markets themselves and we benefit of course.

Dean Grumlose – Stifel Nicolaus

Okay. Thank you very much. Very good.

Operator

Thank you. The next question is from the line of Rajiv Gill with Needham & Company. Please go ahead.

Rajiv Gill – Needham & Company

Yeah. Thank you. On the guidance for the mobile businesses in the third quarter, you are guiding it to be down. Your competitors at Mount Cypress are seeing some sequential growth, primarily driven by the non-Apple tablet build. Can you describe what’s happening in the smartphone market a little bit more. Are you -- is there a share loss situation just kind of very broad about it in general customer dynamic, because there is share loss. Has the average dollar per unit gone down and kind of what your thoughts for mobile in the third quarter?

Rick Bergman

Rajiv, I will start off and then Kathy will add some additional comments. Overall, we believe we’re the best position company for smartphone, breadth of solution whether either discrete sensors or integrated displays, In-Cell and TDDI. Nobody else has that rapid solution, nobody has that type of technology that we have.

Again the OEMs out there will say Synaptics has got the best stuff for smartphone. And that being said, it depends on our customer in OEM sell through and obviously some of those results have varied wildly from our expectations. If you look back six or 12 months.

So, we are being cautious there to wait to see what happens in the different markets and where the OEMs, we are really strong. And then obviously we need to add a couple of additional OEMs as well to our roster and we are -- working really hard. Obviously the Samsung tablet is a good indication that we are back in at that OEM and we can expand from there.

Kathleen Bayless

So, I was just going to say, I mean that the key for us is look at the customer base and so one of the big objective this year was to broaden the customer base. So -- and we said about really doing that as Rick mentioned, we have the Samsung Galaxy tab now. And we are also moving making more progress in that particular space.

So, as we’ve seen in the market, there has been some concentrations among the top two guys, which is put pressure on some of the other guys and just overall from a market standpoint, the smartphones have -- they are just a little -- seem to be a little bit softer right now and what we’ve seen before.

Rick Bergman

And just one other comment to add there, Rajiv, I mean interesting dynamic maybe specifically see Synaptics as you know, we sell tails and chips and there is a mix there, what we have and if you look at the lower end smartphone market place, they tend to be just chips. And obviously that’s the place that’s growing rapidly now where some of the mid range of phone growth is slow. So in a fact, that’s impacted our ASP because we are pretty happy with the unit growth that we’ve enjoyed over the last couple of years and what we can see going forward in fiscal ’13.

Rajiv Gill – Needham & Company

Right. So I mean, you have about five quarters in which mobile revenue has been down on a year-over-year basis. December might reach the inflection point but who knows. But the transition from a module that chip and tail has happen, now, you are saying there could be another transition from chip and tail adjusted chip.

So I mean, are we -- should we be looking at more ASP pressure going forward. And can you give us any insight of where your ASPs are now, where they should be trending?

Kathleen Bayless

Yeah. I think, just following up on what Rick was talking about, I mean, if you really drill down, I mean, I talked about this before. If you look at the market growth for smartphones, the bigger periods for growth are really in the lower end segments. And so as you talk about adding new customers and the growth in that particular market, those are lower costs, low ASP chip solution.

So as we continue to move forward that is -- we will continue to have some ASP pressure but units continue to grow rapidly. We’re extremely well positioned in the market. And we’re really excited about where we’re going from here.

Rajiv Gill – Needham & Company

Just last question from me on the OpEx. Your competitors are implementing big restructuring efforts, Cypress and Atmel, in light of a very -- what they see as a tough or more challenging environment, you’re adding a whole bunch of expenses going from $3 million to $4 million. And then you said it is going to increase even more.

I guess, if you could talk a little bit about the rationale for that. Where do you see -- what is the rationale for that? Is it more defense mechanism in the PC side with the ForcePad acquisition that you have to do this? I can understand the investment from the In-Cell. That makes a lot of sense but the other stuff is, we’re struggling with.

Rick Bergman

Rajiv I want to be real clear. So obviously, we went to that top processes that you’ve talked about. What strategy should we adopt in terms of managing the overall finances of the company. As I mentioned, for example, at CES, when I addressed a lot of the crowd on the phone is we are really focussed on growth.

We think we are in the right market. We had the right technologies. We are well positioned. So certainly, there is a little bit of turbulence in this current quarter whether it’s the notebook, dynamics that I talked about with Windows 8 or bit of a transition issues with several of the smartphone manufacturers.

And as we wait to some of our premium technologies like In-Cell ramp next year. So it’s the not the right time -- now cut back on investment. We want to make sure that growth happens and it happens aggressively.

The one clarifying point I did want to make, ForcePad was internally developed. We didn’t acquire ForcePad. We’ve been working on that for several years. Yeah, certainly ThinTouch, it just did a fantastic synergy with our current products. And it really gives us a base to offer complete solution to our OEMs in the Ultrabooks space. And then likewise with video acquisition.

It’s right in the direction we’re heading with the same customers and so on. It really strengthens our hand. Certainly, the growth that we’re talking about through the course of this year and subsequent fiscal years.

Kathleen Bayless

So both of those, I mean, from the acquisition standpoint, I mean, those are totally both incremental expansions of our CAM opportunity within our target markets. And also we’ll continue to develop those into the next generation of product serving those markets.

Rajiv Gill – Needham & Company

I appreciate that. Thanks for that.

Operator

Thank you. The next question is from the line of Charlie Anderson with Dougherty & Company. Please go ahead.

Charlie Anderson – Dougherty & Company

Good afternoon. Thanks for taking my question. I want to start off with the acquisition out of IDT, this video display operation. It sounds like that’s targeted toward sort of the -- large touch using the display port channels. I wondered if you could talk about, are you going to integrate that with your own chipset. Will it run on its own and it was ready to ship now, just kind of, your outlook for that and the market that it’s going to find?

And then secondly, I was -- if you’re going to just, kind of, talk about the Chinese market right now for smartphones. You’ve historically been pretty dominant there, just kind of the competitive backdrop right now will be helpful. Thanks.

Rick Bergman

Sure. So let’s talk about the acquisition of the video group, first. So one thing, we didn’t put a whole lot in that press releases or my comment, but they actually had a leadership position in a technology called embedded display port. So you think about notebook platform and for the keyboard where the actual system is. And then there is interconnection between that system and the panel. And the technology that we have is on the other side of that connection or inside of that panel.

And one of the key inflection points, it’s now beginning to occur in the notebook or PC space is we were moving from a technology called LVDS to embedded display port at a fairly rapid rate.

Folks like Intel and AMD drop support for LVDS in their chipset. So in fact, you don’t really have much choice to move to it. Fortunately, this group has a greater leadership position. So now you think about that when we have that chip on the other side of it, inside of the panel and we have a touch controller.

And what you are alluding to is the opportunities to some interesting technology in combination and so on. Yes, absolutely. What that is will be a discussion of future product launches and so on. But immediately, it’s just interface device that’s just there.

And then the other next benefit is that has another feature called panel self-refresh which basically means you can shut off that system that I talked about. Actually because of it self refresh, the screen continues to maintain the same image and theoretically stays power, obviously pretty important in today’s market place, actually very similar to what we can do with our TBDI implementation as well.

Second part of the question. Sorry.

Charlie Anderson – Dougherty & Company

It’s okay.

Rick Bergman

China market. Competitive market, we are well aligned with a couple of the great players that are with Huawei and ZTE. We continue to do well with both events and they are certainly continuing to put out interesting solutions. So what’s happening now is a growth of a number of other players in China market place.

And we are working with them and you heard me talk about the Qualcomm reference design. We’re doing those type of activities to support now, it’s certainly broader customer base out there but we have a strong China team. We feel pretty comfortable where we are.

Charlie Anderson – Dougherty & Company

Great. Thanks so much.

Operator

Thank you. Your next question is from the line of Shaw Wu with Sterne, Agee. Please go ahead.

Shaw Wu – Sterne, Agee

Okay. Thanks. I’ve got a couple of questions tied to margins, also the guidance. So the first question, just on gross margin, you guided 46% to 47% and that’s despite a pretty sizable sequential decline in revenue. So just want to understand, why is the reason for that. Is it because of the greater mix towards chips. That’s the first question?

Kathleen Bayless

Hi Shaw. Yeah. As far as the gross margin goes, it is a strong gross margin, this quarter as you noted or as I mentioned, gross margin was down around 46.2% and that was because the PC mix was a little bit higher. If we go onto next quarter, there is a stronger -- I mean, there is a stronger chip mix and also the PC side of the equation with the -- some newer products in there. We just have a better product mix overall. So it should be very good gross margin quarter.

Shaw Wu – Sterne, Agee

Okay. And then tied to that, with the two acquisitions, where do you see that heading. Is it kind of -- is it, any color you can share there?

Kathleen Bayless

Yeah. In the -- in both of those areas, we’re looking at something that’s similar to the range where we are today. Our best view is kind of we talked about before, the kind of, 45% to 47% range. And I think over the next several quarters and with those acquisition, that’s probably still the right way to look at it.

Shaw Wu – Sterne, Agee

Okay. And then the last question, tighter margins, just on the operating margins, just taking your guidance for this current quarter, I guess, kind of the midpoint, terms of topline and also the earnings, it looks like your operating margins will be around -- roughly around 13% and with the increase expenses et cetera. I mean, that’s down a bit from the 18.6% for your fiscal year just ended.

I mean, that’s down quite a bit. I think that’s -- that's earlier, with the increased investments, where do you see that going. I mean, can you go back to those kind of high-teens level, sometimes in fiscal ‘14 or I mean, how should we think of that or should stay at these kind of lower levels over the next couple of quarters?

Kathleen Bayless

Yeah. That’s a good question, Shaw. Because of the revenue profile this quarter, the operating profit will be lower than it has been, especially considering the additional investments with the acquisitions this quarter end and the range of expense that I talked about. As we move through the year and then into the next year, I mean, we’re not changing our target models there.

The target model will be to continue to improve the operating margins as we go forward and get back to the upper mid -- mid-to-high teens of that range.

Shaw Wu – Sterne, Agee

Do you think that’s something that you’re going to accomplish in the fiscal ‘13 or is that probably more further up?

Kathleen Bayless

Again, we expect to make progress towards those levels, exactly where we end up by the end of the year, we’ll see.

Shaw Wu – Sterne, Agee

Okay. Thanks for the clarifications.

Operator

Thank you. There are no further questions at this time. I will turn it back over to management for any closing remarks.

Rick Bergman

All right. Thank you for joining us on the call today and I look forward to see many of you on Tuesday, or if not, updating you next quarter. Thanks very much.

Operator

Ladies and gentlemen, this does conclude the conference call. You may now disconnect and thank you for your participation.

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