Incorporated First Quarter Fiscal Year 2023 Financial Results Conference Call. All participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one. That's star one one on your telephone. You will then hear an automated message confirming that your hand is raised. Please be advised that today's conference is being recorded. Without further ado, I'll hand the conference over to your first speaker today, Munjal Shah, Vice President and Head of Investor Relations at Synaptics. Please go ahead, Munjal. Thanks, Eric. Good afternoon, and thank you for joining us today on Synaptics' first quarter fiscal 2023 conference call. My name is Munjal, and I'm Head of Investor Relations. With me on today's call are Michael Hurlston, our President and CEO, and Dean Butler, our CFO. This call is also being broadcast live over the web and can be accessed from the investor relations section of the company's website at synaptics.com. In addition to the supplemental site presentation, we have also posted a copy of the prepared remarks on our investor relations website. In addition to the company's GAAP results, management will also provide supplementary results on a non-GAAP basis, which excludes share-based compensation, acquisition-related costs, and certain other non-cash or recurring or non-recurring items. Please refer to the press release issued after market close today for a detailed reconciliation of GAAP and non-GAAP results, which can be accessed from the investor relations section of the company's website at synaptics.com. Additionally, we would 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 relating 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 our most recent annual report on Form 10-K for important risk factors that would 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. I will now turn the call over to Michael. Thanks, Munjal. I'd like to welcome everyone to today's call. We had solid results in our first fiscal quarter. Revenue increased 20% year-over-year and was slightly below the midpoint of our guidance due to weaker than anticipated sales in the PCs. We maintained our profitability levels with GAAP and non-GAAP gross margin above the high end of our guidance, benefiting from continued positive product mix in IoT. We delivered solid non-GAAP operating margin, and our non-GAAP EPS was above the high end of our guidance range. Before providing our business update, let me highlight the macroeconomic challenges we are facing, primarily due to a decline in global consumer spending. Never in my 30-year career have I seen such an abrupt change in the demand environment, with customers moving from shortage positions to excess inventory in the span of a few months. Given these macro uncertainties, customers are struggling to build confidence in their own forecasts and are instead focusing on depleting inventories. The challenges are most acute in our PC and smartphone businesses and in areas of the IoT portfolio that have consumer-facing customers, such as virtual reality headsets, wireless and broadband operators. A large portion of the slowdown in IoT is due to an accumulation of inventory that we believe will correct over the next two to three quarters. The slowdown in our PC business is a combination of customers working through inventory and a reset of the TAM as we exit the pandemic. Meanwhile, our smartphone business has been affected by selling patterns greatly impacted by continued lockdowns and economic concerns in China. Despite the macroeconomic headwinds, we grew our IoT business 67% year-over-year in the September quarter and had results in line with our prior guidance. Our automotive products performed well, and the long-term growth drivers for our automotive products continue to be promising. The shift to electric vehicles, larger screen sizes, and increased adoption of integrated infotainment are all tailwinds for us. We have a strong pipeline of design wins with nearly all major OEMs for center information displays and are gaining traction as the market conversion happens from discrete chipsets to our integrated solution. With increasing screen sizes, an additional semiconductor device is required to control timing between two or more TDDI devices. As these come online, our dollar content increases significantly. Our video interface products continue to see tremendous new design activity as our customers develop new applications such as wireless docking. At the upcoming CES, we will be showcasing our wireless docking solution, and we expect one or two marquee customers to have a similar product in their booths. In core docking applications, we are benefiting from growth, growing attach rates, and continue to win refresh products. Our protocol adapter business is also gaining traction, having won two new Intel reference design platforms. Finally, we continue to successfully move into new applications such as network displays, smart monitors, and conferencing systems. In wireless, our opportunities and design wins are increasing. Our large customers, such as Amazon and Google, are releasing new smart home products based on our technology. We continue to benefit from the transition to Wi-Fi 6 and 6E in IoT devices, which is ongoing and still in its infancy. Customers are choosing Synaptics solution for better power efficiency and higher throughput. We are shipping our wireless devices in Samsung's Matter-enabled smart home hub, highlighting our competitive strength in the next generation of products. Our wireless products for the security market are also gaining traction. The product ramps at ADT, which were launched last quarter, are doing very well. This quarter, we're proud to share that our focus on supporting the home security market has resulted in additional new wins with Verisure, Vivint, and others. Wireless connectivity is the right long-term secular opportunity for Synaptics, and has become the glue that pulls together multiple pieces of our portfolio. Finally, we continue to see more opportunities to cross-sell multiple technologies into different platforms across our customer base. For example, we are cross-selling our audio processors with video transport technology for docking applications. In UCC, two of the largest customers have introduced new voice-over-IP phones utilizing 2-5 different devices from us. We have many opportunities like this in our near-term sales funnel, and we continue to believe the ability to cross-sell will be a growth driver for Synaptics. Let me move to our two non-IoT product groups. Despite the recent near-term volatility in the PC market, we see a path to demand stabilization during the upcoming calendar year. After several years, our customers are now looking to innovate this platform to improve user experience. Certainly, the use of haptics and force in the touch pads is driving additional content opportunity. Long term, we expect increasing video conferencing performance expectations on the laptop to unlock voice and video opportunity for us. In our smallest business, mobile, we had forecasted a sequential decline in the September quarter, and the customer pull was weaker than we originally predicted with an acute demand issue in China. As we look into the December quarter, we have several new handset launches that will likely drive marginal incremental demand, but we do not believe the underlying trends in the market have changed. Now let me update you on the Emza acquisition we announced last week. We acquired a small Israel-based team of engineers focused on algorithms for computer vision. The first application is for presence detection in PCs, and the solution is already shipping at an existing Synaptics tier 1 customer. We will offer the solution to additional PC customers, but also expect to sell into different areas such as automotive and smart home applications. Before I conclude, let me share our perspective on our plans to navigate through this environment. Our customers have become cautious, and there is inventory of varying degree in several pockets of the market. We are seeing requests for pushouts and cancellations of previously placed orders, and we are working with customers to find a mutually beneficial solution. Our visibility into the macro issues is limited and unclear, but we believe the current quarter already reflects a material change in our business. Assuming there is no further economic deterioration, we believe the magnitude of change going forward will likely be small, with the recovery and growth to resume in the second half of calendar 2023. During this period, we plan to stay true to our capital allocation priorities. We'll manage our expenses and prioritize money toward growth areas of the portfolio, such as wireless and automotive. We will shift our inorganic focus to smaller, accretive tuck-in acquisitions that seem to be coming on the market. With excess profits, we will continue our plan to buy back shares and pay down debt. By continuing to reshape our portfolio and focusing on internal execution, we expect to emerge from the current downturn as a stronger, growth-driven company. Now, let me turn over the call to Dean to review our first quarter financial results and provide an outlook. Thanks, Michael, and good afternoon to everyone. I'll start with a review of our financial results for the recently completed quarter, and then provide our current outlook. Revenue for the September quarter was $448.1 million, below the midpoint of our guidance due to weakness in the PC market. Revenue from IoT, PC, and mobile were 76%, 15%, and 9% respectively. Year-over-year, consolidated September quarter revenue was up 20% as our IoT products continued to deliver strong growth. September quarter IoT product revenue grew 67% year-over-year and was up 3% sequentially despite the weakness in virtual reality, as we discussed in our last earnings call. Growth of IoT during the quarter was led by products for automotive, video interface, and wireless, all growing strong double digits year-over-year. In PC, our September quarter revenue was down 20% sequentially and down 26% year-over-year, below our expectations due to a significant weakening of PC demand and as a result, an increase in inventory held by customers. Although commercial notebooks are not immune to economic downturns, we still expect Synaptics to outperform the overall PC market because of this higher commercial mix. As we look ahead, while demand visibility is limited, we expect the PC market pressure to continue through mid-2023. Our September quarter mobile product revenue was down 36% sequentially and declined 49% year-over-year, lower than our prior expectations. Android-based smartphone sell-through continues to be weak, prolonging the clearing of inventory. We expect the December quarter to marginally benefit from the ramp of several customers' new flagship products. Given the economic concerns in China, we expect this market to have a delayed recovery. During the quarter, we had one customer greater than 10% of revenue at approximately 13%, a distributor servicing multiple OEMs. For the September quarter, our GAAP gross margin was a new company record at 57.1%, which includes $23.5 million of intangible asset amortization and $1.1 million of share-based compensation costs. September quarter non-GAAP gross margin was also a new company record at 62.6% and above the high end of our guidance range, driven by a 100 basis point benefit during the quarter, which is not likely to repeat along with strong product mix. GAAP operating expenses in the September quarter were $143.7 million, which includes share-based compensation of $31.5 million, acquisition-related costs of $9.5 million consisting of intangibles amortization, and amortization of prepaid development costs of $2.5 million. September quarter non-GAAP operating expenses of $100.2 million were down from the preceding quarter and below our guidance, primarily due to lower than expected personnel-related costs as we began to meter our hiring. Our GAAP tax rate was 37.7% for the quarter and non-GAAP tax rate was 17%. Both our GAAP and non-GAAP tax rates were impacted by the tax law changes becoming effective in our fiscal 2023. In the September quarter, we had GAAP net income of $64.6 million, or a GAAP net income of $1.59 per diluted share. Our non-GAAP net income in the September quarter was $143.1 million, a decrease of 9% from the prior quarter and a 32% increase from the same quarter a year ago. Non-GAAP EPS per diluted share of $3.52 was above the high end of our previous guidance range as strong gross margins and lower operating expenses flowed directly to the bottom line. Now turning to the balance sheet. We ended the quarter with $912 million of cash equivalents and short-term investments on hand, an increase of $36 million from the preceding quarter, with cash flow from operations of $78 million, partially offset by $31 million of cash used for payroll taxes related to our equity compensation program and $13 million of cash used under our share repurchase program. Cash paid for capital expenditures and depreciation for the quarter were both $6.2 million. Receivables at the end of September were $284 million, and days of sales outstanding were 57 days, down from 61 last quarter. Days of inventory were 96, above 82 days last quarter, and ending inventory balance was $179 million as our inventory turns have slowed. We are working with our supply partners to adjust to the current demand environment, but in the interim, we expect our inventory to increase again next quarter before beginning to bring these levels back down. We restarted our share repurchase program in September and bought back approximately 120,000 shares in the quarter for an aggregate cost of roughly $13 million. As we highlighted last quarter, with sufficient cash reserve dry powder available for tuck-in acquisitions, we plan to use excess cash flow toward the repayment of debt and share buybacks. We plan to continue to repurchase shares and at the quarter end, have $564 million available under our current authorization. Now let me turn to our December quarter outlook. As Michael mentioned, we're facing headwinds across our three product groups as customers have turned cautious with their orders. There are multiple requests for customers and channel partners for push-outs and cancellations of existing orders to reduce their inventory. As a result, we anticipate revenue for the December quarter to be in the range of $350 million-$380 million, a sequential decline of approximately 19% at the midpoint. We expect our revenue mix from IoT, PC, and mobile products in the December quarter to be approximately 73%, 15%, and 12% respectively. Unless the macroeconomic environment further weakens, our expectation is that many of these customers will have depleted much of their inventory and be in a position to return to normal consumption levels by mid-calendar 2023, and therefore resume growth in the second half. We expect to maintain our strength in gross margins, with GAAP gross margin for the December quarter expected to be in the range of 53%-56%. We expect non-GAAP gross margin in the range of 60%-62%, which at the midpoint of 61% would be approximately 150 basis points higher than the same quarter one year ago. We expect GAAP operating expenses in the December quarter to be in the range of $141 million-$146 million, which includes intangibles amortization, prepaid development costs amortization, and share-based compensation. We expect non-GAAP operating expenses in the September quarter to be in line with our September results and be in the range of $98 million-$102 million. We remain committed to funding our focus markets and technology roadmaps through these volatile times, and with an expectation of resuming our investment expansion as revenue growth resumes. As a result, GAAP net income per diluted share for our December quarter is expected to be in the range of $0.55-$0.85, and non-GAAP net income per diluted share is anticipated to be in the range of $2.15-$2.55 per share on an estimated 40.5 million fully diluted shares. We expect non-GAAP net interest expense to be approximately $8.5 million in the December quarter, and we expect our fiscal 2023 and long-term non-GAAP tax rate to remain in the range of 16%-18%. Lastly, we do not believe that the newly imposed U.S. export controls has or will have any material effect on Synaptics revenue or supply chain. This wraps up our prepared remarks. I'd like to now turn the call over to the operator to start the Q&A session. Operator? Thank you very much. Yes, we will conduct the question and answer session. As a reminder to all of our listeners, to ask a question, press star one one on your telephone and wait for your name to be announced. Please stand by while I compile the Q&A roster, please. Our first question comes from Rajvindra Gill at Needham & Company. Rajvindra, please go ahead. Your line is open. Yes, thank you for taking my questions. Maybe some more details on the IoT business, if I can. The guide implies IoT down about 22% sequentially. I'm wondering if you could talk a little bit about some of the subsegments. I know Michael and Dean, you mentioned kind of broad weakness across consumer inventory accumulation that's being burned off. Are there any kind of specific acute areas that were more pronounced, whether that was video interface? You've talked about VR in the past. Is wireless slowing down? I'm just curious if you could maybe elaborate a little bit further within IoT. Yeah, Raji, let me take that. I mean, I would say that the biggest problem is probably in the VR glasses area. I would think we've seen some pretty acute issues there. We do have problems in other areas, you know, consumer-facing businesses, but they're not nearly as acute. I'd say on the upside, in the areas you touched on, automotive and video interface continue to do relatively well. Wireless is choppy, and that's one where I think we've had some more significant inventory issues, but our design traction there is really strong. So we're pretty confident that that one is more of a temporal issue. Thanks for that, Michael. On the gross margins guiding to 61%, you know, despite revenue coming down 19% sequentially, gross margins are 61%, which is very good to see. I would imagine this is a kind of a disciplined approach in terms of margins. Are you walking away from business because it's not meeting a certain margin threshold? I'm just curious, how are you able to kinda maintain those high margins when revenue is coming down at these levels? Yeah, I mean, I think there's maybe three parts to the answer, Raji. I mean, number one is we continue to be disciplined. I don't know if we're necessarily walking away from business, but we continue to be pretty price disciplined in our approach. Maybe it's, as we've talked about before, not attacking certain sectors of a given market is more apropos to what's going on. Having said that, I would say we are seeing price pressure for the first time in a while. That's a conversation that we're getting into our customers more than I'd like. You know, I think over the long term, the gross margin will be in the zip code, but you know, I don't imagine it going up much from here. Appreciate it. Thank you. Okay, stand by for our next question. That next question comes from Gary Mobley at Wells Fargo. Gary, your line is open. Please go ahead. Hey, guys. Thanks for taking my question. Dean, I appreciate the comment that you perhaps see a bottom or a completion of the inventory flush by the mid part of calendar year 2023. If I look at the guidance that you're providing for the December quarter, it's off roughly $85 million sequentially and about the same amount from prior expectations. How much of that is inventory drawdown? How much of it is representative of a new baseline for the markets that you serve? How much of it is pricing related? Then as well, how do you see all those factors playing into sort of the progression of the first half of calendar year 2023? Yeah, good question, Gary. There's a lot of pieces there. What I would say in broad terms, really what we've been hearing mostly from customers about inventory drawdown, and in fact, you know, the sequential decline, we're actually trying to get out ahead of it, working with customers and channel partners to find a mutual beneficial way to draw down the inventory so that we can work back from a sustained level. I would say it's a little different in each kind of market area. For example, in PC, I honestly think we're probably under shipping the market at this point. And I think the drawdown will probably happen relatively quickly. If we rewind the clock, in fact, we're probably shipping into the PC market, less than pre-COVID levels. I think that market actually is seeing a pretty, you know, significant shift, and I think they should be able to get through it pretty fast. In IoT, it's so broad, you sort of have, you know, different inventory corrections that will happen over the next couple of quarters. Then lastly, I would say there's probably an insignificant amount that I would attribute to pricing. You know, while there's some pricing conversations, I don't think that's a significant factor here. All right. Thanks for that color, Dean. There's, I guess, some talk out there about some increased foundry quotes. I'm wondering if you're seeing that from your foundry partners and if that's the case, I'd love to hear, you know, your view on whether or not you'll be able to pass along those higher quotes onto your customers this year. Yeah, Gary, I mean, yeah, it's a mixed bag. We've actually, for the first time, seen some reductions from our supply chain. Our operations team has worked pretty tirelessly. In fact, our operations lead is in Taiwan right now, and we've seen some supply pricing reductions, not significant, but movement in the negative direction for the first time in a long, long time. Having said that, you're probably alluding to a fairly significant supplier who's sort of telegraphed a mid-single digits increase at the end of the calendar year. We're still working on that. At this point, I don't know if we'll be successful in watering that down to any degree. As we have in the past, we're gonna work with our customers to see if they will take on the additional price increase that we get from our largest supplier. I think it'll be more difficult this time than it has been in the past. I mean, to be very fair, I think it's gonna be a bigger challenge than we've had in the past to pass on that pricing increase. We're trying to work with that supplier to tamp that down a bit. Again, not sure that we're gonna be optimistic and successful in any way there. We're gonna have to navigate that in the first half of next year. Thank you. Okay, stand by for our next caller. Krish Sankar at Cowen is our next caller. Krish, your line is open. Please go ahead. Yeah. Hi. Thanks for taking my question. Appreciate it. I have two of them. First one for Dean. Dean, it's about the gross margin sustainability. You mentioned gross margin should be in the same zip code. I'm just kind of curious, based on your comments on things maybe bottoming around middle of next year, if revenue declines in March and June quarter, how should we think about gross margins into the first half of calendar 2023? I had a follow-up. Yeah, Krish. Michael had alluded that, you know, we worked pretty hard for the last three years to get our gross margins in this 60% range. We've been pretty disciplined on, you know, selling sort of, you know, premium devices, you know, getting our mix right, improving our cost structures. You know, quite honestly, we've done a tremendous job. We just ended the quarter at 62%, guiding at midpoint 61%. We think we're staying there for sort of the near term. You know, with the question just a minute ago about foundry prices with customers being a little bit more sensitive to ASPs, I do think there's probably gonna be a little bit of pressure on the margins, especially as we continue to go through kind of volatile times in the macroeconomics. That being said, look, if you wanted to think about what could be a downside pressure, it's not all that significant. Look, just to remind everybody on the call, our long-term gross margin target for the company, you know, longer term and sustainably is 57% or better. It's, you know, kind of low 60s%, high 50s% is probably the way to think about it, Krish. Got it. That's super helpful, Dean, for the color. I just wanna have a long-term strategic question for Michael. You know, you have focused a lot on IoT, and a quarter of your business is in mobile and PC. Do you think it makes sense to find a better home for the mobile PC assets and become 100% IoT, or is it something not under consideration? Thank you. Well, Krish, it's definitely something that we get asked almost every quarter, so it's a fair question. I would say the following. You know, first of all, I think our mobile business is a local minimum, so selling now is probably the economics are very difficult on our end. We continue to be optimistic that we can make progress in that business. A lot of the headwinds are not of our own making. I'd say the second issue that we would have is the buyer, right? Mobile, our mobile business, you know, is a business that people have inquired about. Most of those are not people that we can sell to. They might be Chinese buyers, which presents a significant problem. We've certainly considered it. It's something that comes up all the time. I would say for us right now, we're in a position of stand pat. It's a business that throws off a good amount of cash. As I said, we expect it to continue to grow. It's a small part of our portfolio, as you know. It's less than 10%. In that context, it's something that doesn't cause us to lose sleep like it did four or five years ago when it was a big portion of the portfolio. Got it. Thanks a lot, Michael, and thanks, Dean. Really appreciate the insight. Yeah. Thanks, Krish. We have one last caller for today coming in from Christopher Rolland at Susquehanna. Christopher, your line is open. Please go ahead. Hey, guys. Thanks for the question. My question, I guess, is around Wi-Fi. Seems like, you know, consumer Wi-Fi is moving pretty quickly from shortages to excess. So I know you guys didn't have wafers for a while. I don't know how that position is now in terms of supply. But perhaps you can talk about the outlook there, what you guys are seeing. Is that part of the pushouts and cancellations? Any expectation for pricing there as well would be great. Yeah, Chris, all fair questions. I think that the Wi-Fi business is one where we've seen some pretty significant inventory buildup. If you remember, one of our largest customers in that business is a module supplier, where they take our die, put together a bunch of the other RF components, and then ship it to a whole host of end customers, some of which are consumer, some of which actually are industrial or even enterprise customers. I think what happened was they were expecting to ship as part of a matched set. A customer may have been missing one component. There were orders on them to build out the wireless module. Then as those other components came in, enabling a finished goods sell-off, they had some difficulty then shipping out. The module guy had some difficulty shipping out to the end customer. There's been a relatively appreciable inventory buildup on our wireless business. That said, as Dean said, we expect that to work through quickly, primarily because we continue to win there. If you look at our opportunity funnel for Wi-Fi, it's the strongest in the company. Our design wins, we have a measure where we record design wins, that's the strongest in the company. I think this one, as I said to a previous questioner, I think is a very temporal issue. We feel really, really good about this business. We've got a number of new design wins, both in GPS and in Wi-Fi and in Bluetooth, and we continue to feel positive about the business. I think, Chris, it's mostly around some inventory buildup that had happened at our module maker. Thank you very much, Michael, for that. I guess my next question's around IoT and DisplayLink or dock PC docking products overall. It looks like the TAM's been reduced there by, call it a quarter, maybe even a third. How would you expect your docking stations and your PC products to kind of trend versus that overall TAM reduction? Is it about the same? Is it better or worse? Would love those thoughts. Yeah, I'm not quite sure where you get the TAM reduction. Certainly the PC TAM has reduced. The docking station TAM has actually gone up or at least remained flat because there's been an offsetting event. The attach rate of a dock to a PC has gone up pretty considerably, offsetting or bettering the reduction in the client shipment. So we feel continue to feel good about docking. I think I said at the top, Chris, that the two areas in the IoT portfolio that we're seeing strength are automotive and dock, and that continues to be true. We have opportunities now to build on our docking momentum. We're going into other applications like smart monitors, like video conferencing, and that is a different TAM, but increases our opportunity size. That asset of, you know, that asset and obviously the Wi-Fi asset that we got from Broadcom are two that we're particularly pleased with and continue to believe that we have some long-term secular growth drivers ahead of us. Yeah, that's exactly what I was asking, the relationship between the PC TAM and your markets, and it sounds like they'll outperform. Thank you very much, guys. I appreciate it. Thanks, Chris. Are there any more questions out there from our audience? As a reminder, you'll just need to press star one one on your telephone, star one one on your telephone to ask a question, and we'll stand by, for a few moments just to see if there's any more questions. Okay. I think at this time, I'd like to turn it back to Michael Hurlston, President and CEO at Synaptics for closing remarks. I would like to thank all of you for joining us today. We look forward to speaking to you at our upcoming investor conferences during the quarter. Thanks for your time and attention and continued support of the company. This concludes our program. You may now disconnect. Thank you.