Synaptics Incorporated (SYNA) Q2 2008 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the second quarter DSP Group earnings conference call. My name is Lisa, and I'll be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. If at any time during the call you require assistance, please press star zero and an operator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Ofer Elyakim, President of Southeast Asia Operations. Please proceed sir.

Thank you. Good morning ladies and gentleman, I am Ofer Elyakim, President of Southeast Asia Operations for DSP Group and welcome to our second quarter 2008 earnings conference call. On today’s conference call we have with us Mr. Eli Ayalon, Chairman & Chief Executive Officer; Mr. Boaz Edan, Chief Operating Officer; and Mr. Dror Levy, Chief Financial Officer. Before we begin, I would like to remind you that during this call, we will be making forward-looking statements about our financial projections for the third quarter of 2008 and fiscal 2008 and prospects relating to our new multimedia product line including our hope to secure design wins for consumer home products in the second half of 2008 with deliveries beginning in the second half of 2009. We assume no obligation to update these forward-looking statements. Actual results or trends could differ materially from our forecast for a variety of factors including a greater or lesser than anticipated decrease in sales of 5.8GHz products or growth in sales of our DECT 6.0 products; the risk that the revenue potential and gross margin may not be fully realized or may take longer to realize than expected; slower than expected change in the nature of the home communications domain and unexpected delays in the introduction of new products or failure of such products to achieve broad market acceptance. For more information, please refer to the risk factors discussed in our 2007 Form 10-K and other SEC reports we have filed. Now, I would like to turn the call to Eli Ayalon, Chairman & Chief Executive Officer of DSP Group. Eli, the floor is yours.

Thank you, Ofer, and thank you all for joining us today. I am glad to open this discussion on the results of the second quarter of 2008. I assume that you have the opportunity to read our press release. It was released earlier today. In a short while, Dror Levy our CFO will go through the details of our financials. In the second quarter of 2008, we met all of our financial projections. There has been no change in market trends in the cordless telephony market as reported to you by us in our last conference call. We continue to see a decrease in sales of 5.8GHz and 2.4GHz models on the one hand while on the other hand seeing an increase in sales of DECT 6.0 in the US market. DECT 6.0 products for the US market accounted for 26% of our total revenues in the second quarter of ’08 as compared to only 19% in the first quarter of ’08. On the other hand, 5.8GHz products accounted for 5.5% of revenues in the second quarter as compared to 7.5% in the first quarter of ‘08 and the 2.4GHz products sales went down from 14% of total revenues in the first quarter to only 10.5% in the second quarter. The worldwide sales of DECT, and by worldwide I mean all models both for the US end market and the European market, accounted for 70% of our revenues in the second quarter of ’08. What we see here really is that the cordless voice market is stabilizing on DECT products rather than the other frequencies. Having taken these trends into account in our report to you in the first quarter this year, we leave at this stage our first quarter and full-year projections unchanged. Later on, Boaz Edan, our Chief Operating Officer will give you our detailed projections for the third quarter and the full year of 2008. Regarding our new multimedia product line, we are fully engaged in advancing projects with OEMs and operators. The process is long but very promising. Prospects cover two separate markets. The first is what our customers call an interactive base that connects to the residential gateway over WiFi and runs all the multimedia applications that we offer on a tablet [ph] type of terminal with a large color screen, this interactive base also serves as a base unit for DECT handsets for wireless voice communication over DECT in the residence. To remind you that our new chip includes on the same piece of silicon the DECT protocol, the WiFi protocol and the processor that runs all the applications including the CODEC for audio, voice and video. The second segment here is the consumer product sector at home. This includes products like wireless Internet radios and wireless picture frames, we anticipate securing design wins for these products in the second half of ’08, to begin deliveries in the second half of ’09. During the second quarter, our stock repurchasing activity continued under the plan adopted by the company in compliance with rule 10b5-1 under the United States Securities Exchange Act of 1934. During the last four quarters, we repurchased 4.4 million shares of our common stock for a total consideration of $56.7 million. Now I would like to turn to Dror Levy, our CFO. Dror, the floor is yours.

Thank you, Eli. Good morning everyone. I will now review the income statement for the second quarter of 2008 from top to bottom. For each line item I will provide the US GAAP results as well as the equity-based compensation expenses included in that line item and the expenses related to the acquisition of the cordless and Voice-over-IP business lines from NXP. Revenues for the quarter were $74.1 million. Gross margin for the quarter was 35%. Gross margin for the quarter included $0.2 million of equity-based compensation expense. R&D expenses were $18.9 million, including $1.9 million of equity-based compensation expenses. Operating expenses for the quarter were $34.8 million, including $3.3 million of equity-based compensation expenses. Operating expenses also included amortization of acquired intangible assets of $5.7 million. Interest income for the quarter was $0.9 million. Income tax benefit for the quarter was $0.6 million. This figure includes $0.1 million of tax benefit relating to equity-based compensation, and $0.8 million of tax benefit associated with amortization of acquired intangible assets. Net loss was $7.4 million, including the net effect of $3.4 million associated with equity-based compensation expenses and $4.9 million associated with amortization of intangible assets, net of tax benefits. Non-GAAP net income, excluding equity-based compensation expenses and amortization of intangible assets, was $1 million. Loss per share was $0.26. The net negative impact of equity-based compensation expenses on the EPS was $0.13. The negative impact of the amortization of the acquired intangible assets net of tax benefit on the EPS was $0.17. Non-GAAP EPS, excluding equity-based compensation expenses and the amortization of acquired intangible assets was $0.04 on a diluted basis. Please see the current report on Form 8-K that we filed with the SEC this morning for a reconciliation of the non-GAAP presentation to the GAAP presentation. Now, to the balance sheet. Accounts receivable increased from last quarter by $1.9 million to $46.6 million, representing a level of 57 days of sales. Inventory increased by $1.9 million from last quarter to $19.5 million, representing a level of 37 days. Our cash and marketable securities at the end of the quarter were $121.9 million, representing a decrease of $13.5 million during the quarter. Our cash position during the quarter was affected by the following $0.7 million of cash generated from operations, $2.5 million of cash used for purchase of property and equipment and $12.8 million of cash used for repurchase of 1.1 million shares, at an average price of $12.1 per share, In addition, during the first three weeks of the third quarter, we purchased additional 560,000 shares at an average price of $6.93 per share total of $3.9 million. After the most recent repurchases during the first three weeks of the third quarter, 1.3 million shares remain available for repurchasing the aggregate based on our board of (inaudible) repurchase program. Now, I would like Boaz Edan, our Chief Operating Officer to present our forecast for the third quarter and the full-year ’08. Boaz, please.

Thank you, Dror. Good morning, everybody. I'll now provide you with our projected plans for Q3 '08 and the full year of 2008. Based on forecasts received from our customers, and our own assessment, our Q3 2008 projections, including the impact of equity-based compensation expenses and acquisition-related amortization expenses, are as follows. Revenues are expected to be in the range of $82 million to $88 million. We expected our gross margin in the third quarter to be between 36% to 39%. R&D expenses will be in the range of $17.5 million to $19.5 million. Operating expenses will be in the range of $33.5 million to $35.5 million. Interest income will be in the range of $800,000 to $1 million. Income tax is expected to be in the range of $0.4 million to $0.6 million. Shares outstanding are expected to be in the range of 27.5 million to 28 million shares. Our Q3 2008 projection including the following amounts forecasted for acquisition-related amortization of intangibles, operating expenses $5.5 million to $6 million, income tax benefit of $0.3 million to $0.5 million. Our Q3 2008 projection includes the following amounts forecast for equity-based compensation expenses cost of goods sold $0.15 million to $0.25 million; R&D expenses $1.6 million to $1.8 million; operating expense of $3 million to $3.4 million; and income tax benefit of $0.1 million to $0.2 million. Our full-year 2008 projection, including the impact of equity-based compensation expenses and acquisition-related amortization expenses are as follow. Revenues are expected to be in the range of $300 million to $320 million. We expect gross margin to be between 36% and 39%. R&D expenses will be in the range of $74.5 million to $77.5 million. Operating expenses will be in the range of $138 million to $141 million. Interest income will be in the range of $3 million to $5 million. We do not expect to have any tax expenses on the US GAAP basis for the year 2008. Shares outstanding are expected to be in the range of 28 million to 29.5 million shares. Our 2008 projection includes the following amounts forecasted for the acquisition-related amortization expenses. Operating expenses of $22.5 million to $23.5 million and income tax benefit of $2.1 million to $2.3 million. Our 2008 projection includes [ph] following the amount forecasted for equity-based compensation expenses, cost of goods sold $0.9 million to $1 million, R&D expenses of $7 million to $8 million; operating expenses of $12 million to $14 .5 million; and income tax benefit of $0.4 million to $0.5 million. Thank you for your attendance, and we will now open the floor for questions.

(Operator instructions) Your first question comes from the line of Daniel Amir with Lazard Capital Markets. Please proceed. Daniel Amir – Lazard Capital Markets: Thank you, thanks a lot for taking my question. A couple of questions here, first of all, can you guys talk about what you are seeing in terms of dynamics I guess in the US cordless market, in the European cordless market? And also, how do you see the global slowdown if at all impacting the cordless market at all here in the second half of the year?

As I mentioned Daniel, we left our (inaudible) of the second half as given in the last quarter and the reason for that is that we slowed the trends that we described in our last conference call continuing. And I gave some figures that reflect this in terms of increase in sales of DECT 6.0 that is very fast replacing the 5.8GHz and 2.4GHz in the US. And as I mentioned in the last conference call, when if you remember we reduced our guidance which was almost the reason. In terms of units there is no significant change here but in terms of dollars DECT we sold for less dollars and this put pressure on the rather new envelope in this domain in the US market. We continue to see some increase, and to expect some increase in units in the non-US market due to the addition of the Eastern European markets that adopt the DECT protocol and begin to equip themselves. These are the trends as we described the last time. So, there is no change here and we really do not expect to see significant changes until we shall begin to see deliveries of the new equipment, the new interactive bases and consumer electronic products that we expect will begin to unlock this tough situation in the traditional cordless market. Daniel Amir – Lazard Capital Markets: Okay thanks. And related to the NXP integration, etc, where do we stand in terms of potential cost savings? Could you remind us what the plan is still, whether it has changed at all since the last quarter in terms of your expectations into next year on this?

In terms of operating expenses, we expect to remain until the end of the year, quite stable at the level of operating expenses that we run now. We shall see additional synergies implemented in ’09 as a result of completion of projects that (inaudible) engaged with in the past. So, we expect to see additional synergies implemented in ’09. But we are really are not yet prepared to give specific figures for operating expenses or any kind of figures for ’09, it is still cut away. So, you will have to wait a couple of quarters for this. But in principle, I can tell you there will be additional synergies in home. Daniel Amir – Lazard Capital Markets: Okay thanks. And then the final question is on kind of the new products that you mentioned I guess kind of on the call here, what are you most excited about, where do you think is kind of the biggest opportunity here for something that – for a product that will impact your revenue growth in the back half of ’09?

What we see enthusiastic here is the fact that when we talk to operators, we see that most of them reached the same conclusions in terms of specifying the next generation independently from each other. So, I don’t know if you say great minds think alike or it’s just a, I don’t know, it’s a hazard or whatever, but when you talk to operators, operators provide a lot of content today through their broadband connections to the home. And they have a very strong drive to have this content efficiently distributed inside the residence. So, we believe that the sector that they call interactive base that I described in a few words when I talked earlier, this section which is a pure replacement to cordless. This is if you want the modem of the next generation of cordless telephony which will involve not only voice but also music and pictures and data. And operators are defining this unit as a unit in which they can push weather forecasts, information about stock, yellow pages, advertising and all kinds of things like this which are very, very simple to operate. It is a screen, you push a button you have very clear icons and you have it. You can also play music. And all of this is contained in the plan get home through the network. When you talk to them you see that in slight variations from each other, they all talk about the same thing. And we believe that this section is going to be driven by the operators not the OEMs. The operators are pushing this. Of course they provide OEMs with RFQs, request for quotation, and the OEMs will have to reply to this and build up the systems from them. But it is clearly driven by operators, they have a strong interest to do so. And as I say, what we see is that they talk the same language without discussing with each other what they are going to do. On the contrary they are very nervous about keeping very confidential what they want to do. The other part is the consumer electronic products, these are stand-alone, Internet radios or picture frames, there is already a market for this. People are buying picture frames and using them at home. They insert the memory card of the camera in the picture frame and they view their pictures. There is a very high appeal to have this unit to operate wirelessly so that you can not only get the local pictures from your own camera but you can get pictures from the net that someone else put on the net. This is one product for which we have already a solution and we are offering. The second product, our Internet radio. Today, most of them are connected with a wire to the Internet and here we provide the wireless capability having inside our chips. I want to remind you usually solutions like this would be dealt from three or four separate sheets. One sheet is the communication protocol, in the case of Internet radio it is a WiFi protocol. The second sheet is the DSP or a strong processor that runs the application itself. The decompression of the code for audio, music, or voice or pictures or whatever the application is. And the third chip will be if you want to have for an interactive base, also to use it as a base for cordless a kind of DECT solution. And here our advantage is really that we provide all of this on one piece of silicon. So, we feel quite good with the compact that we have. One of our problems, and it is really a pity but we have to respect it, these customers do not like to disclose in early stages what they have in mind and what they are going to develop. So, when we shall be ready and we shall convince them to speak about it, we shall of course make it public because it is our interest to share with our shareholders this information. But I can tell you we have many such contacts not all of them will turn into real projects but I believe a reasonable percentage will turn into real projects and as I said we hope very much to secure design wins by the end of this year so that we can believe deliveries in the second half of ’09. Daniel Amir – Lazard Capital Markets: Okay, thanks a lot.

Your next question comes from the line of Matt Robison with Pacific Growth Equities. Please proceed.

Hi gentlemen. I wanted to see Eli on one of these new products such as this interactive base, if you are stimulating from new types of customers who have come to market with these type of products or if you happen to go to the same old group that has been trying to make a living selling telephony products for the last several years. Also I would like to get a little flavor for how things are going in Japan and what the bookings pattern is like in terms of how far into the future your order book goes and if there has been any change from the recent commentary in that regard? Robison – Pacific Growth Equities: Hi gentlemen. I wanted to see Eli on one of these new products such as this interactive base, if you are stimulating from new types of customers who have come to market with these type of products or if you happen to go to the same old group that has been trying to make a living selling telephony products for the last several years. Also I would like to get a little flavor for how things are going in Japan and what the bookings pattern is like in terms of how far into the future your order book goes and if there has been any change from the recent commentary in that regard?

The new products that we are talking about address many new customers not ones that we had with them direct business in the past, but also some of the existing customers. With respect to the Japanese market, we have a couple of very interesting Voice-over-IP and two additional projects that I cannot disclose because of confidentiality of these customers in the new area and the bookings as we explained in the last couple of quarters, traditionally DSP Group had a very good visibility for a full quarter because of the lead time of supply of our chips and the practice that our customers ordered their products from us with that lead time, it was 12 weeks or so which gave us a very good visibility into the next quarter. In the last year, as we have explained it in the past, visibility is lower because some of the new customers that we acquired with the acquisition of NXP of which we are very happy because these are important customers, the practice was different. They were usually giving an umbrella forecast. Production began based on this umbrella and the lead times they had was lower than the manufacturing process in the fabs. Therefore they put orders during the quarter to be delivered in the same quarter. But having been in this kind of environment for the last three quarters, I can tell you that looking at our bookings we feel quite comfortable with the projection we gave you for Q3.

Thank you very much for taking my question.

Your next question comes from the line of Elrad-Jakoby with Susquehanna. Please proceed. Elrad-Jakoby – Susquehanna: Hi, thank you for taking my question. So, going back to the new multimedia platform and the two markets that you are targeting, can you give us a little more color on what you expect to see in the second half of ’09 and would you expect that given the design win rate which you are seeing now, we will see already meaningful revenues?

Yes. You see, we are here in a transition period and we are patient. We are very thankful I must say to our shareholders that share also a high degree of understanding to this situation. Now, I am confident that by the end of this year, we shall have design wins with commitments to begin deliveries in Q3 and Q4. But like every new product usually, the ramp up at the beginning is slow. So, we do not build on any significant quantities. In the first two quarters of deliveries, this was the same for all the new products that we have launched in the past. But it is very important for us to actually begin deliveries in the second half of ’09 because we believe that when the market will begin to see the pile up of new products, it will attract and it will really catch all the other OEMs and so on that you will have to match and provide the same kind of equipments. So, in terms of volume, we do not expect big volume of the new product in the second half of ’09 but we definitely expect beginning of ramp ups of new products. Elrad-Jakoby – Susquehanna: Then in your discussions with operators and with the consumer electronics, OEMs and ODMs, what is your sense in terms of how sensitive are these initiatives to macro slowdowns?

I am afraid I missed your second part of the sentence. How what? Elrad-Jakoby – Susquehanna: How sensitive are those initiatives on the part of operators and as well as consumer electronics, OEMs and ODMs to potential macro slowdowns or caution in the macro environment?

I think that these are two things that deserve a separate consideration, I’ll tell you why because if the macro environment will be such that the consumer will buy less products, the envelope will go down. Here we do not speak about the envelope. We speak about a change of the mix of products inside the envelope. By itself, they see it as a very positive move because this change inside the envelope will definitely cause a better position into the products with new features, with new staff, with more revenues from the content they are providing not from the equipment only and this is the essence here. So, this is with respect to how they see the project. With respect to the macro environment in the economy, really no one of the people we are talking to really knows and can say what will bring the next year in terms of the consumer market in the US, in Europe and in other places. If there will be a slowdown it will affect everybody, it will affect the envelope of our market also. But we are concentrating on the change of mix inside that envelope. This is what we are trying to drive here. So, we do not have control over the macro. I really cannot comment on the macro but the essence here is of what debt macro is comprised? Elrad-Jakoby – Susquehanna: Okay, that’s very helpful. Thank you.

(Operator instructions) Your next question comes from the line of Daniel Meron with RBC Capital Markets. Please proceed. Daniel Meron – RBC Capital Markets: Hi guys. A question more on the strategic outlook for the company, you are waiting for these shipments to start rolling but are you also looking at M&A right now and also considering the fact that you have been buying shares and looking at the stock being so cheap on enterprise value to sales level of these, any other thoughts on where you want to take the company?

You see Daniel, our expertise in DSP Group is in developing efficient IC chips for short trans [ph] communication. I think that we have reached a high value of software integration on small pieces of silicon and also in the digital RF or Siemens RF chip technology. This chip technology is taken by us now to the staff that I have described but it has additional potential. It could be taken to additional areas. One example is the M to M area. Machine to Machine is an area that expands very fast in the world today with many different applications. We are looking at this domain also in various segments of the M to M domain where our technology can play a very nice role going forward because we spend a lot of money to develop technology and I think it is our minimum duty to see how we can use it to expand the company. So, answering your question, if we are looking for M&A, yes we are looking but only in areas that are really in synergy with what we have spent already in order to make better use or extensive use of the money we have already spent. With respect to the share repurchase plan, we lost this share repurchase plan mainly because of two reasons one, because of the fact that we are now in a transition period between these two waves of technology in the residential domain, and I invite you to look at the financial report of our customers, some of them are public companies, you will see that they also operate under the same environment and they have difficulties with their gross margins and so on and due to that the stock is low. We wanted to do something for our shareholders and we have some cash. I do not think we have too much cash. Our cash today is less than half of our sales but it is a reasonable level of cash that will allow us to do repurchasing at reasonable price levels and also to pursue opportunities of the type that I have described to you. Daniel Meron – RBC Capital Markets: Okay, that’s fair. And then on the currency, if at all can you relate to that, I assume that you guys already reflect that but how hedged are you given the currency fluctuations and (inaudible) have come down a little bit the last couple of weeks, but Levy can you just relate to that.

The focus (inaudible) provided is basically based on the current rate. As you say in the last couple of days we saw an increase of (inaudible) to where it was placed a week ago. And we are hedged, I would say, something between 30% to 50% out of it. Daniel Meron – RBC Capital Markets: That hedging is what level?

The level is about the current levels. Daniel Meron – RBC Capital Markets: Which is 3.45?

Something like that. Between 3.30 to 3.50 [ph] I would say. Daniel Meron – RBC Capital Markets: Okay, great thanks.

(inaudible) Your next question comes from the line of Robert Katz with Senvest. Please proceed. Robert Katz – Senvest: Hi Eli, how are you doing?

Good, thank you. Robert Katz – Senvest: I have a question about the stock-based compensation. It seems to be a pretty large part of the GNL mail [ph], and now that the stock price has come down, how does that translate into number of options that are being issued on a quarterly basis and I guess if you look at the options for now, how many options are outstanding and what is the average price to those options.

Drov already gave you all the data here but we do not issue options on a quarterly basis. Usually we issue options only once a year and our practice is we do this in the board that approves the financials of the year in general. So, except for new employees, very small amounts, we do not issue options in the middle of the year. Robert Katz – Senvest: What is the stock-based compensation made up of?

The way it is calculated is basically it takes into account the strides that were in place when the options were granted. So, most if not all of the options today are under water and still the expense is being calculated on what was the share price on the date on which the option was granted. This is the way the US government calculates it. So, the fact that the share price decreases does not change the oil expense in the P&L. Robert Katz – Senvest: How many options are outstanding?

I’ll need a second to check this. Something in the range of $7 million to $8 million, if I am not mistaken. Robert Katz – Senvest: Every year you issue roughly how many options once a year?

It is not a fixed amount, it depends. It depends. We do not have a fixed amount that we issue every year. Robert Katz – Senvest: I guess options expire after a certain amount of time so is it just replacement that options are expiring or has that number been growing?

The lifetime of the option – Drov, correct me if I am wrong – is seven years from the day of a grant. And by nature, like people die, options also die when they get to the age of seven. The amounts are not so equal every year.

The number by the way is $6.4 million, this is more or less the number in the last couple of years. So, I don’t think there is a big change here. Robert Katz – Senvest: It hasn’t changed. Thank you.

There are no additional questions at this time. I would like to turn the presentation back over to Mr. Ofer Elyakim for closing remarks.

Thank you everyone for joining today’s call and we look forward to report back to you in 90 days.

Thank you for your participation. You may now disconnect.