Ladies and gentlemen, thank you for standing by, and welcome to the Synaptics, Inc. Second Quarter Fiscal Year 2021 Financial Results Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Jason Tsai. Please go ahead, sir.

Thank you, and good afternoon, and thank you for joining us today on Synaptics' Second Quarter Fiscal 2021 Conference Call. My name is Jason Tsai and I'm the 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 a supplemental slide presentation, we have also posted a copy of these prepared remarks on our Investor Relations website. The supplementary slides have also been furnished as an exhibit to our current report Form 8-K filed with the SEC earlier today and add additional color on our financial results. 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 noncash or recurring or nonrecurring items. Please refer to the press release issued after the market close today for a detailed reconciliation of GAAP and non-GAAP results. Additionally, we'd like to remind you that during the course of this conference call, Synaptics will make forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business, including our expectations regarding the potential impacts on our business of the COVID-19 pandemic. 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, 2020, for important risk factors that could cause actual results to differ materially from those contained in any forward-looking statement. Synaptics expressly disclaims any obligation to update this forward-looking information. I will now turn the call over to Michael.

Thanks, Jason, and I'd like to welcome everybody to today's call. We had a strong finish to 2020 as we continue to make progress in terms of delivering sustainable growth, with better predictability and higher profitability. Our diversification strategy is paying dividends as IoT has become our largest business, resulting in the highest non-GAAP gross margin, net income and EPS in Synaptics' 35-year history. Both our IoT and PC businesses individually achieved record revenue in the quarter. As we turn our attention to aggressively driving growth, we will adhere to the principles that have guided us to this point: disciplined investments, tight spending control and a focus on differentiation. We are starting the year with a strong backlog of design wins across all our businesses that puts us in position to drive growth and further improve our profitability in 2021 and beyond. Now let me give you an update on our business. First, in IOT, now our largest business, we are seeing broad-based design wins across all segments. We now have a diverse customer base that spans consumer, enterprise, service provider, automotive and industrial end markets. We anticipate the overall market for IoT will continue to grow at a 10% to 15% CAGR for the next few years. Based upon the strength of our design pipeline and potential share gains, driven by a strong product road map, we believe we have the opportunity to grow at least in line, but most likely outpace the overall market. In wireless connectivity, we continue to enjoy solid design win momentum in home automation, smart displays, thermostats, smart watches, drones, home surveillance and streaming devices. We are on track to double the run rate of this business within the next 12 months and expect significant growth to continue in fiscal 2022 and beyond. Our…

Thanks, Michael, and good afternoon to everyone. First, I'll start off with a review of our financial results for our recently completed quarter, then provide our current outlook for our fiscal Q3. Revenue for the December quarter was $358 million, above the midpoint of our guidance. Revenue was up 9% sequentially, reflecting a stronger demand for our IoT and PC products, partially offset by a sequential decline in mobile. Year-over-year, December quarter revenue was down 8%, driven by a decline in mobile revenue as our prior fiscal year still included our now divested TDDI business. During the quarter, we had 2 customers above 10% of revenue at 18% and 13%. The December quarter marks a defining moment in the company's history, with IoT now squarely our largest business, accounting for 43% of revenue in the quarter, while PC accounted for 26%, and mobile accounted for 31%. As Michael highlighted, our corporate transformation is well underway, and we are focused on accelerating the growth of our IoT business. We expect our broad portfolio of products and customers in this business to deliver better predictability and consistent growth in the future. Our IoT business reported record revenue of $155 million this quarter and was up 36% sequentially and up 74% compared with the year ago quarter as new programs began to scale up across our entire IoT portfolio. This was also a record revenue quarter for our PC products, with revenue of $92 million, up 14% sequentially, and up 12% year-over-year as work-from-home demand continued to drive strong PC sales globally. Revenue from our mobile products was down 17% sequentially and down 49% year-over-year. The sequential decline in mobile was primarily driven due to the trade restrictions limiting potential sales to Huawei, and a decline in LCD display driver shipments to our…

[Operator Instructions]. Our first question comes from Kevin Cassidy with Rosenblatt.

Congratulations on the great results. And the new target model is very stunning. On the gross margin improvement that you saw quarter-over-quarter, you said it was related to product mix, but was there some improvement even, say, within the IoT market, IoT products?

Yes, Kevin, within - I mean, it actually was both mix - product mix within IoT and the other businesses. So we did have a gain within product mix. But also, as you know, for quite some time, we've been hard at work on operational improvements, and we've been able to benefit. Part of the improvements in the quarter were from our own operational improvements that we've made, and we expect that to continue going forward.

Okay. Great. And the - everyone has talked about the problems in the supply chain. Can you narrow down where the problem is? Is it just getting wafer starts? Or is there even something in the packaging? Where in the supply chain and is there relief coming, I guess, is anyone expanding capacity?

Yes. Kevin, it's pretty broad-based. We're certainly - it starts with the wafer starts. And you're right, that's the linchpin, but it exists in packaging, it exists in tests. It's a pretty broad-based problem. And I think what you're seeing is a confluence of a number of different phenomenon. I think all the semiconductor companies are seeing pretty good demand. We are - seem to be - maybe seeing more demand than most, but we're really happy with the businesses that we're in. I don't know that the picture changes until one of the segments sort of hits a speed pocket, an air pocket, meaning the automotive sector, the PC sector, the mobile sector. Until something happens that's a significant air pocket, I think the supply chain tightness is going to continue to exist.

Okay. Yes. And if I was going to just ask one other. That's why I was next going to ask about the PC market. Some of the growth you're seeing there, clearly, the demand for the work from home and maybe converting to notebooks from desktop, but are you also getting higher dollar content in the new PCs?

Yes. We talked about that. I think that the new form factors that we're seeing are more complicated. You've got these larger touch pads, in some instances, that are driving dollar content up. I think Dean mentioned that fingerprint attach is going up. Maybe I said that the fingerprint attach is going up, which enhances dollar content. So it's - the long pole is certainly the volume, the number. But if you look one click below, we're actually increasing dollar content and the fingerprint attach is certainly helping us out.

Our next question comes from Raji Gill with Needham & Company.

Yes, I echo my congratulations as well. Great momentum in the business. Dean, on the long-term financial targets that you outlined, quite impressive. Wondering if you could give us a time frame and how do you define long term? And the shift to 57% gross margin, is this mainly driven by the mix of IoT? Are there other additional kind of operational improvements that you anticipate? And how do you intend to kind of sustain the IoT gross margins from, say, competition or from other factors?

Yes. Good question, Raji. So first on just time line to get there. I mean, generally, we view this as three years or beyond to get there. I think we are really putting out a model that we're striving to go chase down. And given the amount of mix change that we expect going forward out of IoT and the other 2 businesses, it actually will evolve over time. So sort of that's the rough time line. In order to sustain gross margins at this new target, 57% to 1, we're at 52% in the December quarter, which we just announced, up a little bit here, guiding into the March quarter. It actually is 3 factors, I would say. So one is mix, with IoT being greater than 50% of our revenue. Once we get there, that's a contributing factor. We've been successful in taking down the cost structures in our products, and we expect to continue down that path going forward. And then, finally, sort of the key to longer-term is to maintain the new product launches that are consistent with a higher gross margin profitability targets that we're laying out. And that really comes around the differentiation and high-end products that we aim to take to market.

And my follow-up question is kind of the long-term target of mobile kind of coming down to 25% of sales. So how do you - this is, I guess, a question for Michael. So how do you kind of want investors and kind of customers to view Synaptics on a long-term basis? Is there kind of one cohesive kind of strategy across the end markets that you want to kind of convey to the marketplace? Synaptics, historically, has been kind of a PC/mobile business. There clearly is a change going on into IoT and other areas. But is there kind of an overall kind of cohesive strategy that kind of links all three segments together?

Yes. I mean - so if you think about it, Raji, our touch and display products come from mobile today. And we think that we've certainly applied those successfully to automotive, which is in our IoT bucket. We think that we can apply them successfully to applications like PCs, so you have a clear crossover there. We think we can apply it to AR/VR glasses. There's a lot of emerging technology transitions in the display business with micro-LED, micro-OLED coming on, and those will feed into AR/VR glasses, they can feed into games. There's a lot of other sort of IoT-ish segments where we can apply technology that we, historically, applied to mobile. So we intend to leverage what we've done in mobile to different end markets. And I think that's why you see the mix change. Now that's not to say that we're going to ignore mobile phones. We still think there's some business for us in the mobile phone area, but we really do intend to apply that technology in a way that's going to be more consistent with a PC and IoT kind of centered company.

Our next question comes from Karl Ackerman with Cowen.

Two questions, if I may. Dean, first for you. I appreciate your commentary on bookings and know your seasonality is typically down in March. But could you speak to your order visibility over the next few quarters? And I guess, given the additional supply chain pressures, how are these dynamics driving your discussions on both pricing and volume commitments to your customers?

Yes. So the order visibility on the backlog is probably a little bit better than it had been historically, given there is a consistent supply crunch, not only from us, but from other semiconductor vendors. And so we are deeply engaging with our customers to understand their demand to make sure that we're booking our supply chain to an equivalent level to support them. So we do see that we have probably a little bit better visibility than we normally would. Unfortunately, the supply chain right now is just extremely tight and is really limited to the upside even with this added visibility. As you know, the supply chain in semiconductors is relatively long. It's a pretty long lead time from order to production and then finished goods out the other side on the manufacturing flow. So it does take a while for the manufacturing supply chain to respond. And I think that's probably going to continue for a little bit of time. There was another element, I think, that you touched on around - I'll just summarize it as pricing and sort of what's happening there. A number of our suppliers are investing new capital expenditures, as we understand it, to try to support this upside in demand that they see broadly. I think there is some price raising happening on our suppliers and we sort of responsibly look to pass those along to some of our customers to the extent we can.

Understood. Appreciate that. Maybe for a follow-up to Raji's last question. Your gross margins continue to impress, despite the fact that, hey, mix is probably a little bit a decent factor here with mobile shrinking, both in terms of the March quarter and your longer-term outlook. But as you begin to secure these new programs for OLED touch controllers, are those accretive to your overall model? I guess what I'm really getting at is you beat expectations despite mobile being down nearly 30% year-over-year on an organic basis. So if mobile does come back, is that somewhat of a headwind from a - either a gross and/or operating margin standpoint?

Yes. I mean, I wouldn't call it a headwind. I mean, from where we are today, it's certainly not a headwind. I mean if you look further out to the long-term goal at 57%, it's certainly below that level. That level is IoT, and that's significantly growing for us. We see IoT sort of growing in this 15% range, which really garners the better gross margins for us. And that's where you're going to see the significant tailwind of gross margin longer term. And to the extent mobile has compression from there, it's really in line with our corporate averages. We think the mobile business is fairly consistent from here, and it's certainly not growing at that 15% CAGR that the IoT market is. So just as a percentage revenue mix, it's probably lower as you go out into the future on our long-term model.

Our next question comes from Christopher Rolland with Susquehanna.

Congrats on the results and nice to see this more aspirational long-term model. I guess my first question is around some of the M&A you've done recently. Perhaps you can talk about the pipeline that you guys have for connectivity and also DisplayLink? And then double-clicking or on the DisplayLink side, you've given us a 2019 number. I was wondering now that 2020 is closed, if you got - you guys could update us and just give us a broad idea of what kind of growth we could see from DisplayLink as well?

Yes. Chris, let me take the first part of it and have Dean talk about the DisplayLink numbers. I mean on the Wi-Fi asset, in the comments, we said that we see that revenue doubling from where we initially set the benchmark in the next 12 months. And we're really pleased with the pipeline that we're seeing there. As Dean has said, our biggest limiter, I think, in the Wi-Fi business is supply. We could do really, really well on that business if we had the supply. That's probably where our biggest challenges are, quite frankly, in the business on the supply chain side is in Wi-Fi. So we're modeling based on what we think we can get out of the supply chain, that doubling number. On the DisplayLink side, again, it surprised us. I think we've done really, really well with that business. Obviously, work from home and the shift to notebooks is leading to a higher rate of adoption of docking stations. Within that, the universal dock that DisplayLink drives has done particularly well. But then, as we mentioned, there's been a set of other design wins where we've been able to apply that technology, some of the in-room conferencing systems and some industrial applications. Again, that's kind of surprised us. They've been pleasant surprises. So both acquisitions have been better than we expected. And it could be quite a bit better-than-expected modulus than some of the supply challenges.

Yes. And Chris, maybe I'll just give you the quantification of where DisplayLink is today. When we got that business, calendar 2019 was somewhere in the $95 million a year revenue range. Where it is today? It's probably up 20% from there, it's sort of in the $120 million range. And going forward, we think that's probably not going to sustain 20%, but it's probably more like 10%, 15% going forward.

Fantastic. My second question, in your prepared remarks, you talked about a lead customer that you guys had. And the fact that you're powering perhaps 2 of 4 SKUs there. I guess, first of all, maybe talk about the propensity to go 4 for 4 here, how you feel about your chances of expanding that opportunity. And then secondly, your ability to service that customer if they did decide to go 4 of 4?

Yes. I mean, of course, the current situation is exactly like you described it, Chris, where we have 2 of 4. One of those 2 SKUs has not sold as well as I think anybody projected. And overall, although this design win has a lot of fanfare, because of the ASPs and other things, it's certainly not a material piece of business for us. I think it's kind of a less than 5% type of number. So it gets a lot of attention and things like that. But at the end of the day, it's been a nice thing for us to kind of create some buzz around the company, but maybe not a lot more than that. As we go forward, we are concerned. We think that there is some churn in the market that our competitors developed a custom solution for that customer. We're still very much engaged with them on touch products at the moment. But I think that it's a lot less clear than it has been how that's going to shake out for the next model year given that custom solution.

Our next question comes from Harrison Barrett with Arete Research.

First, I'd like to ask about the industrial IoT opportunity. How are you approaching sales into this market? And could this be an area where you look to make an acquisition to add to the customer base? And then just when can we see this - when can we expect industrial to be a significant part of the IoT mix?

Yes. Yes, I would say two things. So first of all, we are lucky enough to have one product, and that's the Wi-Fi product, where we typically modularize that product and sell-through our module partners into the industrial segment. So we don't have to develop the broad-based supply chain and broad-based sales force that you think that you'd need. We're able to sell into a module partner, we're now expanding the number of module partners that we work with and then that module partner fans out from there. So we are really able to get leverage on the Wi-Fi business. We have other businesses that we're getting into now in industrial. We talked a little bit about some of these handheld SKUs that we're able to leverage our DisplayLink products into, and again, those have done very, very well. So we're finding ways to apply technology that we have to that industrial segment, doing so in a way that doesn't drive up our sales spend and doesn't make us go particularly wide. We've got a new product, too, that we're applying to the industrial segment. And it's new. It's an emerging segment. I talked about it in my remarks, and that's this low power AI solution. That low power AI solution, we're actually really, really excited about. We think that we can leverage some development that we did in the audio area, attach our wireless to it, again, create a modular solution and sell it into industrial applications, people counting types of applications and really open up a whole new frontier for us in industrial segment.

Great. That's very helpful. And appreciate the other touch commentary you gave just now, but could we get an update on OLED TDDI? Have you had any more engagements with customers? And is there any update on where - when we might see a first product in the market for that?

Yes, good question. We, obviously, continue to develop there. I think what's been a change for us is, given the supply crunch, we've seen an opening, an opportunity for us for OLED DDICs. There's been a lot - even today, there were probably 3 or 4 comments talking about how the current supply base in OLED DDICs has been compressed. We have always had technology that is conducive to the OLED display market and display driver, and we kind of see a near-term opportunity to apply that technology at ASPs that are sort of consistent with our corporate gross margin, which is a change. That hasn't been true in the past, and presents a near-term tactical opportunity. So while still focused on OLED TDDI, and we think that's an opportunity for us further out, we've actually kind of shifted a bit into OLED DDICs that, we think, represent a better opportunity for us near term.

Our next question comes from Derek Soderberg with Colliers Securities.

I also want to touch on mobile. So you have touch chips and display chips. Now that you're sort of gaining traction in touch, I was wondering if you could speak to the mix between the two, where that mix is trending as we look into calendar '21. And then I'm wondering if you can give us an indication of when you think that LCD display chips business will base out?

Yes. Maybe the last question first. I mean, I think that certainly, over the next couple of years, I think the LCD display driver has sort of phased out, right? I think we've talked about that in previous calls where we've essentially got 1 customer on LCD DDIC. The handsets that goes into the LCD-based handsets have done relatively well. So we've enjoyed that business. We think that there's going to be refreshes down the road. And we think we're the incumbent, we think we're going to continue to enjoy that business on a go-forward basis, certainly, over the next handful of years. Your second question is good. Certainly, near term, we've seen a tip toward touch in the sort of the none - in the large handset customer segment. We've had some great momentum, I talked about in my remarks in Korea. It's the first time we've ever had design wins, certainly, in the last 5 years, I think people have told me in Korea, with a large Korean handset OEM. And then we've just done really, really well in OVX. We - our touch controller has just done phenomenally well. So certainly, in the near term, we believe that, that's going to be - we're going to mix our business toward touch controllers. In, call it, the second half of the year, as I mentioned, we do see a frontier opening up on OLED DDICs. Today, we have no revenue there. We don't think that - in a backward look, we thought the margins were going to be challenged there, but the dynamics have changed very significantly in that market, and we think that there's going to be a tactical opportunity. So depending on how that plays out, we could see a remixing toward DDIC in the second half of the year. But right now, it's been a great touch story, mixing toward a bunch of new customers. And depending on how you view Huawei right now, we don't have Huawei baked into our numbers at all. But we had historically done very, very well there. And depending on whether they come back online, there is upside to our numbers.

Great. And then just a quick question on set-top boxes. Wondering if you can give us an indication on the size of those opportunities? Any dual sourcing, ASPs and sort of when you expect those opportunities to ramp?

Yes. I mean, we're ramping - obviously, we've been engaged in the set-top box area for a while. So we've got - we've got production revenue coming from that business today. All the sockets are single sourced. It's very difficult just given the software complexity to dual source in a set-top box. A customer may dual source or run two suppliers, one on one model of the set-top box, another on another model. But the way we think of second sourcing is truly interchangeable across models and that doesn't necessarily exist here. The new hands - the new set-top boxes that - lead times on these are relatively long. You typically have a year from a design win to actual ramp. So the 2 new design wins that we talked about in the remarks are probably a year away from ramping. Each of our set-top box customers, I mean, think about it as on first order kind of between $5 million and $10 million. It's not huge numbers, but it's a business that we try to aggregate and leverage across software and hardware such that we can accumulate a set of these $5 million, $10 million wins and build a decent-sized business. But each individual win is somewhere on that order.

[Operator Instructions]. Our next question comes from Martin Yang with Oppenheimer.

My first question is about Katana. Can you talk about some of the early customer feedbacks you've heard and maybe go into more details on the target applications for the new IoT?

Yes, Martin, so let me ask the second question first, answer the second question first. What a lot of people have done in this low power AI is focused on visual wake words. And what we think we're going to do in a very different fashion is - sorry, verbal wake words, audio wake words. What we think we're going to do differently is going to actually have a product that based on visual wake words. It will trigger on motion, it will trigger on seeing people, it will trigger on identifying an object. So it's a very different approach. It's a unique product, one that has a lot of demand now because people are very interested in counting people in buildings. But as a previous caller asked about, in the industrial setting, you're trying to detect whether people are in a room, and then turning the air conditioning on or off, right? Turning - we have TV screens in a lot of our offices, turning the TV screens on or off depending on whether people are there. So our primary focus and our differentiator is around the visual concept and really applying a camera-based solution. So we really like that. And of course, if we've got a neural network in there, we have artificial intelligence, we can train it. We can do object detection based on training algorithms and inference. We really like this. We think it's a truly differentiated product. So we have, in early engagements, in some of the segments that we talked about. But again, I think we're probably a year or more, frankly, away from real meaningful revenue here. It's early, both in the market and, frankly, in our product development cycle, but we - based on our early engagements with customers, we think this could be a biggie for us, Martin.

I have another question on your long-term IoT growth. When you look at different target markets you are addressing, do you internally prioritize growth to conform to that long-term target? Or do you more prioritize margin expansions or you're pretty neutral with the two different goals?

Yes. I mean we obviously are trying to stay disciplined, as I said in my opening remarks, toward the gross margin and spending. And we think that where we have our investments, and you touched on one, this Katana IC. We think that we can grow, and we're going to grow consistent with gross margin and consistent in the spending envelope that we've outlined. So we think there's - we, obviously, think there's growth. The growth is going to be coming largely from our IoT business. And in some sense, as a previous caller had asked about that, we're going to take and apply technology that we have today that we've applied to mobile toward IoT businesses. And we think that those are faster growers, better gross margin, and we can hit the long-term targets that Dean outlined by containing in to - not just chase revenue for revenue's sake, which I think is the gist of your question. We think there's enough piles of revenue out there that we can maintain our gross margin numbers on and still hit the 8% to 10% growth that Dean outlined.

Yes, Martin, maybe I'll just add that if you look at our IoT portfolios, they're generally fairly high-end products that have nice differentiation in the marketplace. So really, when we're thinking about our product road map, that's how we think about it as growing a differentiated portfolio and executing growth where we can, but staying disciplined within the margin confines that we outlined.

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Michael Hurlston for any further remarks.

I'd like to thank all of you for joining us today. We look forward to speaking to you at our upcoming virtual investor conference during the quarter. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.