Good day and welcome to the Synaptics Third Quarter 2016 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Jennifer Jarman. Please go ahead, ma'am.

Thank you, Alyse. Good afternoon and thank you for joining us today on Synaptics' third quarter fiscal 2016 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 Wajid Ali, CFO. In addition to the company's GAAP results, management will also provide supplementary results on a non-GAAP basis, which excludes share-based compensation, change in contingent consideration, and certain non-cash 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. 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 conditions, results of operations, plans, objective, future performance and business. Although Synaptics believes our estimates and assumptions to be reasonable, they are subject to a number of risks and uncertainties beyond our control and may prove to be inaccurate. Synaptics cautions that actual results may differ materially from any future performance suggested in the company's forward-looking statements. We refer you to the company's current and periodic reports filed with the SEC, including the Synaptics Form 10-K for the fiscal year ended June 27, 2015, for important risk factors that could cause the actual results to differ materially from those contained in any forward-looking statement. Synaptics expressly disclaims any obligation to update this forward-looking information. With that said, I'll now turn the call over to Rick Bergman. Rick?

Thanks Jennifer. And I would like to welcome everyone to today's call. By now, you've seen in today's press release that we experienced a sizeable revenue shortfall during the March quarter that will also carry over into fiscal Q4. While we provided our best financial outlook at the time of our last call, towards the end of fiscal Q3, we saw a precipitous drop in order levels within the smartphone market, specifically centered around our display driver customers. This occurred within the context of ongoing macroeconomic issues in the high end smartphone market. In addition, our PC business was weak as anticipated and I'm sure you've seen softness across the PC supply chain reported by other companies and in the media. Revenue for the third quarter was $402 million, while non-GAAP net income was $46 million or $1.21 per diluted share. We executed well in our OpEx goals despite headwinds from the end. And gross margins were slightly above the mid-point of our guidance range. Given the magnitude of the demand reductions we saw late in the fiscal third quarter, the current macro environment and existing supply chain inventory, we have taken a cautious approach to fiscal fourth quarter guidance in anticipation that the level of product currently in the supply chain will be sufficient to meet the reduced demand for our display driver products from high end smartphone OEMs. That being said, we view this as a temporary pause in our growth and are anticipating normal seasonal patterns to return in the second half of the calendar year. In the interim, we're responding with significant reductions in our operating expenditures that will not impact our long-term growth objectives. It's important to note that the primary issue in the March and June quarters does not reflect a share loss nor…

Thanks, Rick. Revenue for the March quarter was $402.5 million, approximately 11% below the mid-point of our guidance range. Roughly half of the shortfall is attributable to the supply chain issues affecting our display driver business as Rick mentioned earlier with the remainder reflecting the broader weakness at the high end of the smartphone market. Year-over-year, March quarter revenue declined 16%, and sequentially was down 14%. During the quarter, we had three customers above the 10% threshold. These three customers ranged from 14% to 27% of third quarter revenues. Revenue mix for Mobile and PC products was approximately 88% and 12%, respectively. Revenue from mobile products was down 15%, compared with the year ago quarter and down 13% sequentially. Revenue from PC products was down 20% year-over-year and down 23% sequentially. Non-GAAP gross margin of 39.2% was slightly above the mid-point of our guidance range and primarily reflects overall product mix, and further represents a year-over-year improvement of 130 basis points. Non-GAAP operating expenses came in better than expected at $103 million, down $3 million from the preceding quarter. The decline was driven primarily by continued prudent management of our operating expenses, despite a rise in legal expenses, as well as the continued appreciation of the yen versus the US dollar. GAAP operating expenses in the March quarter were $123.3 million, which includes share based compensation of $14.5 million, and acquisition related costs of $5.8 million, consisting of intangibles amortization and change and contingent consideration. Our non-GAAP tax rate was 17% in the March quarter, while our GAAP tax rate was 6.4%. Non-GAAP net income for the March quarter was $46 million, or $1.21 per diluted share, a 28% decline year-over-year, as compared with $63.5 million or $1.65 per diluted share in the third quarter of fiscal 2015. Turning to…

[Operator Instructions] We'll go first to Rob Stone with Cowen and Company. Please go ahead.

Hi, guys. I wanted to ask what are the indicators that give you confidence about the second half of the calendar year and when you talk about normal seasonable growth patterns, are you talking about relative to typical year-over-year growth for you or are we talking about sequential growth off of this very low base for the fourth quarter? And then I do have a follow up. Thanks.

Thanks, Rob. So I'll address it and then Wajid can add some additional color perhaps. When we talk about normal seasonable growth I would say, yes, more the historic pattern that Synaptics has. Now we're being very cautious, we don't want to guide the balance of our calendar year, there is a lot of turbulence that's going in the marketplace, but as you can tell from our press release and our subsequent remarks, we have had to pause a bit with one of our product lines and as you would expect with normal cycles and we get through the supply chain inventory issue that will kick back in as per normal. So we're not going to give precise numbers or anything like that for obvious reasons, but give you a little bit of color. That's where we see things going through the balance of the year.

Okay. My follow up is on the fingerprint design wins. I think you said 20 different design wins for new phones and you also mentioned some new customers. But is that 20 with new customers other than -- not counting wins with Samsung?

That's correct, Rob. We have a number of new design wins, multiple design-ins with phones. You could have multiple phones per customer, of course, but we're quite happy with the progress that we've made outside of our traditional fingerprint customers.

Thanks. I'll jump back in the queue.

Thank you. We'll go next to Kevin Cassidy with Stifel. Please go ahead.

Thanks for taking my question. On gross margins, I would think with this -- I would have thought with display driver business being down, the gross margins would move up. Can you just give us a little more of the dynamics of your various product exposures versus gross margin?

Yes, thanks, Kevin. This is Wajid. I'll address that. So yes, you're absolutely right. With our display driver revenues coming down quarter-over-quarter, we would expect that gross margins would have some level of uptick. But as we mentioned in our prepared remarks, we are seeing some weakness in the high end of the smartphone market, and the high end of the smartphone market is one of the places where our margins are generally richer from a product mix standpoint. And it's because of that product mix that we're having -- we're seeing lower gross margins moving into the fourth quarter.

Okay. And maybe just traction you're getting in TDDI, is that cannibalizing your touch customers now or are they brand new customers?

Okay. And maybe just traction you're getting in TDDI, is that cannibalizing your touch customers now or are they brand-new customers?

Well, for the most part I would say Kevin it's brand-new customers. As Wajid just mentioned we tend to be geared more towards the higher end of the marketplace, and in fact, for example right now a number of specifically the Chinese design wins that we have, you go led technology and our TDDI devices tend for the most part to be shipping more in the midrange area. Where we have gotten our design wins. So from a LCD manufacturer's perspective, many new customers there. You heard me rattle off those names in the prepared remarks. Some of them we've serviced in the past but probably at least half of those were new names. In them we actually talk about the OEMs, they've certainly used our product in the past. But again, it would tend to have been more high-end where with our TDDI solutions it's more midrange. Some high end phones, as well.

Okay. Thank you.

Thank you. We'll go next to Osten Bernardez with Cross Research. Please go ahead.

Yes. Good afternoon. Thanks for taking my questions. I just had a couple questions with respect to the DDIC demand that you're seeing. How many customers would you say or any customers were part of that shortfall in demand in March? Could you discuss that at all?

Sure, Osten. As you can imagine we're always hesitant to get any specific customer news. There has been some press for multiple customers over the past week. I would say that the primary issue was with a limited number of customers, where the demand picture changed substantially towards the end of calendar Q1 and then into Q2. We'll say as indicated though, and again in the press over the last few weeks, overall in the high end of the smartphone market it's clearly not growing at this juncture and we're seeing the growth in the midrange of the market and even towards the low end. In some ways that hurts us as Wajid articulated. But in other ways we see our TDDI solution start to come out, it's actually providing a great deal of opportunity for us, as well. So we're happy, we're well positioned with TDDI and we've also been working on more value oriented fingerprint solutions, as well, and that's part of the 20 design wins that I mentioned during my prepared remarks, as well.

Got it. And then secondly when you are noting the challenges at the high end outside of the DDIC opportunity are you speaking specifically towards the touch opportunity? Are you seeing any impact on the fingerprint side or are you just speaking generally for the whole company in terms of high end pressure? Because you seem to distinguish between the DDIC challenge but also highlighting high end smartphone demand.

Great question, Osten. So our fingerprint business is very robust. We're not putting it in that category. That's why we've been fairly specific, it's DDIC, now in some cases we have what's called two chip DDIC which it uses a discreet DDIC chip and it uses our touch controller. And those tend to be in cell type of solutions which are part of the high-end marketplace. So there is major customer issue and then to a lesser degree what I just described.

Thank you.

Thank you. We'll go next to Rajvindra Gill with Needham & Company. Please go ahead.

Yes. Thanks for taking my question. I'm just trying to wrap my head around the miss because the miss is about $160 million for the June guide, which has been far worse than I think then a lot of other Apple suppliers, or at least some of the other Apple suppliers were able to offset it with growth in other areas. So just, I wanted to get a sense of how much of this is related to DDIC for June quarter? I know March you said was 50-50. If you could kind of quantify the June guide, because it implies a significant amount of units that were -- that must have had a correction.

Yes, Raj, I'll take that call and then Rick might want to follow up. So just a couple of things. First of all, we've seen a lot of weakness in our PC business, and we had talked about that the last time around. We were anticipating some weakness in the PC market. But I know you're asking about this fiscal year but year-over-year our PC market revenues have declined quite significantly. Simply because of what's going on in the market. Now, this -- these two quarters were more impacted by the mobile side of our business, and probably more than half of the $160 million that you're alluding to is related to our display driver product line. Significantly more than half is related to that. The remainder is the general weakness we're seeing in the high end smartphone market that Rick talked about in the last question. And as we mentioned our fingerprint business is still doing quite well. So you can kind of narrow it down to those three areas that I talked about earlier.

Based on that, and the ASPs, it implies there was between 40 million to 50 million units that were in excess, which seems so significant relative to I guess what others are saying. Is it how you're selling into the LCM market that's creating some of this volatility and just, Rick, on the September and December to get -- I just don't want -- want to have a better understanding of what the actual normal seasonality is because I haven't seen normal seasonality in this business for some time given you've acquired two companies in the past.

Yes. And I mean some of the frustration I'm hearing from you really has to do with the deepness of the supply chain that we've got as it relates to our display driver business. And so the demand signals that we are getting is from our LCMs. And those demand signals are not only determined right from the end customer but there is layers in between that they are then getting demand signals from us, as well. From those other partners, as well. So it's those -- it's that deepness of the supply chain that's causing the demand signal to change over time. And that's where you're kind of getting that 40 million to 50 million units, is because of the change in the demand signal over a lengthier supply chain.

Okay. Thank you.

Thank you. We'll go next to Vijay Rakesh with Mizuho. Please go ahead.

Yes, sorry about that. Just, when I look at your June quarter guide just to go back on the previous question, the 100 million, 120 million miss on the top line, if I look at this going back from December that's almost a 35% decline in revenues, and I was wondering if you could reconcile that? I know you took a step towards that but it's almost like the Intel Apple, maybe your personal business went away. I was wondering if there is -- based this on advancing the channel or variation into this guide or this is just] it's about the same and this is just reflective of end demand.

Yes, so I think it's all three things. So as Rick mentioned in his prepared remarks, we haven't had any market share losses that we can kind of point to for our display driver products. Now, the change in the guide you're absolutely right, it has to do with the product that's in the supply chain. And as the end customer demand has changed between the last time we provided guidance to now, that change in end customer demand along with corrections that are happening in the supply chain as a whole that's what's caused the variation in the amount of product that we're going to be shipping in during this period of time.

And when you -- go ahead.

Little more color as well, so in some ways, even if you go back to the fall time frame, there was certain expectations that parts of the market would grow year-over-year. Now we're here in the spring, actually the exact opposite happened and there has been significant decline. But once you buffer up growth and then you see decline you can imagine if you're way deep in the supply chain which does make us somewhat unique, that ripple through effect kind of hurts us the most as we get snapped at the very end. And so viewing all that and going through the analysis that we've done over the past few weeks as we said in the press release, we really felt it was the appropriate cautious approach to assume that the product that now is embedded in the supply chain is sufficient to cover the demand in this fiscal quarter.

And when you look at the 20 design wins that you talked about, are those all designs ins only and -- obviously you cannot speak to the volumes because we don't know how big those would be but are those more for kind of all ramping in the second half?

So let me speak to that a bit. We're a little more cautious now as even last quarter we had a government kind of step in and slow down some of our design inactivity, if you can understand my hint. Which was a little bit frustrating for us. But it's over a number of different customers over a number of different phones. And they are design ins, and the ramp is beginning. Won't have a major impact in this current fiscal quarter, just the nature of ramps that occur. But still we'll have some revenue from those design ins, and then through the course of certainly in Q3 and then into calendar Q4, definitely material to our fingerprints in our Company.

And one last question. One structural change in the industry as we look on is obviously you talked about some of the big market for all of next year and probably huge chunk the year after. You obviously dominate the LC type of display with touch. Can you give us some talks on how you see the -- how you're positioning for OLED that on the driver of the [indiscernible]. Thanks.

Sure. Absolutely. And actually as I was reading my remarks earlier I realized, hey, we didn't touch on OLED this time. Part of it is because nothing has really changed from that last conference call. We talked about how we were working on a multiple OLED device driver solutions and we continue to work on them, and we're marching away working with our customer base and developing world class technology just like we have for LCD displays as well. In terms of touch, we're one of the largest players already. There is one major supplier of OLED technology out there. And as I mentioned, for other reasons in the high-end smartphone market that you see at least from the Chinese and other OEMs, for the most part it's Synaptics touch controllers. So we understand what it takes to make a competitive touch controller on OLED and we'll continue to work with that major supplier as well as the other manufacturers that come online. And again, from an industry perspective we believe the majority of that capacity will come online more in calendar 2018.

Thanks.

Thank you. [Operator Instructions] We'll go next to Ambrish Srivastava with BMO. Please go ahead. Ambrish, your line is open.

Hi. Can you hear me? Sorry about that.

We can hear you, Ambrish.

Okay. Thanks. Sorry about that. I just wanted to get back to the guidance for the June quarter. And really trying to understand the weakness outside of policy [ph] we all know about. Samsung at least for now has indicated that they are so fine. So where is the weakness coming from? And I apologize if you addressed it, I'm juggling between calls. Where is the high-end weakness coming from? And then my follow-up is you know, Rick, inherently is in the supply chain, he was just answering the question on the complexity. Then how can investors have confidence on the back half? Because you just told us how complex it is and that's been the case, but you used to give us full-year guidance. So those were my two questions. Thank you.

Okay. I'll take the latter half of the question, and Wajid will discuss the first question. So in terms of the supply chain, unfortunately we don't have great visibility through the whole thing. Typically we ship into the LCD manufacturers that then may ship to an ODM that then -- will then put it on some type of transport, whether it's across the ocean on a ship or on a plane that then ends up possibly to a distributor that then moves it to a retailer and then eventually an end-user goes into that store and purchases it. And so we started to work much more closely with the LCD manufacturers at this juncture to get a real feel for what's going on. And we don't have a perfect answer going forward. Now, that being said, that's part of the reason why we're maintaining this very healthy cautious position on in terms of what we're doing in fiscal Q4, and we'll continue to be very cautious going forward. And we do believe they are called one-time events this time that made a particularly difficult for us giving the – how quickly things seem to change in the timing of our prior quarter and then the impact of this quarter. So all I can say is that as a team, we're going to continue to be even more diligent. Our business is becoming much more distributed as we move into TDDI, as well, and there is even more LCMs and so on, and our base will get more diversified going forward. And then Wajid, he was asking for clarity on Q4.

Oh, okay. So Ambrish, we had just mentioned a couple questions ago. So yes, more than half of the mess in Q4 is coming from our display driver business, with a smaller amount coming from our high-end smartphone business, primarily as it relates to touch. But really the vast majority of the shortfall is coming from our display driver products.

And this is for the June quarter, I'm assuming, this is not a guide, right?

Yes.

Okay. And is fingerprint going to grow outside of Samsung?

What was your question, Ambrish?

The fingerprint business, is it going to grow outside of Samsung. So in China do you have that translating into it?

Yes, Ambrish, I think as I mentioned a little bit earlier we mentioned 20 design-ins that's from a variety of different customers in Korea -- excuse me in Japan, Taiwan and primarily China. And certainly you're going to hear about those coming forward and it will have material impact on our fingerprint and company business in the second half of the year in a pretty substantive way.

Okay. Thank you. I apologize for making you repeat the answers. Thanks.

No problem.

That's fine. Thanks, Ambrish.

Thank you. We'll go next to Charlie Anderson with Dougherty & Company. Please go ahead.

Yes. Thanks for taking my questions. I wondered if you could talk about whether fingerprint or biometric is up or down March to June quarter.

Sure. So we had a very robust March quarter with fingerprints, and part of that was tied to customer ramp. And we're very happy that particular customer is doing quite well with their product. Now, that being said, typically this year or prior years, there is a bit of a drop off from that big ramp. And so we'll see a little bit pull back on the fingerprint business, but overall we're quite happy with that particular business, and where we're going and what it will mean for the balance of the calendar year.

Great. And then I wonder if you guys have any sense of sort of true demand in your business, sort of some inventory repositioning here it seems like in the supply chain. So as we move beyond June you guys have talked in the past about what the market looks like in terms of growth, what will be sort of an updated view and where true demand is for all your end-markets?

Sure. And I'm not sure if you're referring to any particular customers there or not, but we closely follow the analysts’ reports and do our best jobs on tracking various customers and how they're doing. But as we've all seen over the last six months there has been very wide variance over projections as well as projected versus actuals. So I'm not sure anybody had a good enough crystal ball to call this particular spring situation that occurred. But more broadly, which I think you're hinting at is, what do we believe about the core markets. On the smartphone side, I would say, we're planning for 6%, 7% overall growth rate year-over-year -- calendar year-over-year and that's what we're building into our financial plans, and that seems to be consistent with I think most market analysts, if not slightly on the conservative side. On the PC side, specifically the notebook side, as Wajid alluded to, I think we all had hoped that as we got to some good year-to-year compares that the PC and notebook market would come around, but again as we saw, it looks like there was a negative 11% decline year-over-year in calendar Q1. So again, we're going to be cautious and plan on negative growth calendar ‘16 over ’15 at this juncture. Again, it will probably be negative 6%, 7% range. We're certainly hopeful as we move into Q2 and Q4 that we don't quite see that double-digit decline that we saw in Q1. Does that cover the question, Charlie?

Yes, absolutely. Thanks so much.

Thank you. Our last question comes from Tom Sepenzis with Northland. Please go ahead.

Hi, thanks for squeezing me in. I'm just curious if you could talk a little bit or give us a little more color on the capacity issues you're seeing on the TDDI side and when you think those might be alleviated?

Sure. So we have seen a really steep ramp in one of our TDDI products. And so that's the encouraging part, because as we mentioned, these are geared towards the high volume mid-range solutions. And as part of that it's just constraining us a bit in this quarter, and we'll have news how we're going to alleviate those concerns over the next couple months. But it's just a temporary thing that's having some minimal impact on our current ramp or quarter, but we're working through that like we normally do, work with the supplier to increase our way for allocation. This tends to be the tight time of the year with the semiconductor fabs, as everybody gears up for the consumer and holiday cycles that come up in the second half of the year. So, it's not unusual for us. We fight through it pretty much every year. This particular time it was just because we were ramping this new through product in a new process technology, the steepness of the ramp caught us a bit off guard.

Great thank you. And then in terms of just how the second half of the year develops, I mean, do you expect a pretty big snap back or is fiscal ‘17 likely to be down year-over-year for a second year in a row?

So Tom, we obviously knew this is where -- the analysts will certain want to understand where we are in fiscal ‘17, but to a certain degree, we've been taught a bit of a tough lesson in terms of what -- how far out we should project and so on. So we're trying to give you the best color we can that we believe we're seeing for the most part a one-time event here. And as we move into fiscal ‘17, we hope some of the customers that we deal with are going to snap back and the industry will snap back to use your terms, and we aren't losing share. We think we got great products. We've got some new growth coming in with TDDI and fingerprint that we'll be definitely stronger than a year ago in terms of revenue and so on. So we're certainly -- I am certainly optimistic that Synaptics will come back as we've done many times over a 30-year history. But in terms of saying X% or this many dollars, we're not going to go there at this time, and we'll talk to you again in July when we have that visibility on fiscal ‘17.

Thank you. I appreciate it.

Thank you. It appears we have no further questions at this time. I'll turn it back to management for any additional or final remarks.

Okay. Well thank you again everybody for joining us. We had a lot of news again this quarter. I certainly look forward to updating everybody over the course of the next few months or again at the next call in July. Thank you very much.

This does conclude today's conference. We appreciate your participation. You may disconnect at any time and have a great day.