Good day and thank you for standing by. Welcome to the Synaptics Incorporated Second Quarter Fiscal Year 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to Munjal Shah, Head of Investor Relations. Please, go ahead.

Thank you. Good afternoon and thank you for joining us today on Synaptics’ second quarter fiscal 2022 conference call. My name is Munjal Shah and I am the Head of Investor Relations. With me on today’s call are Michael Hurlston, our President and CEO, and Dean Butler, our Chief Financial Officer. 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 on 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 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. 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 operations, plans, objectives, future performance and business, including our expectations regarding the potential impacts on our business of the COVID-19 pandemic and the supply chain disruption and component shortages currently affecting the global semiconductor industry. 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 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, Munjal. I’d like to welcome everyone to today’s call. We finished calendar 2021 on a strong note and I am proud of what we were able to achieve. We capitalized on our market opportunities, while navigating supply and logistics challenges. We delivered double-digit revenue growth in 2021, while still managing to consistently improve gross margin. Revenue for the December quarter was at the mid-point of our updated guidance, with continuing strength in our IoT products. Our GAAP and non-GAAP gross margin was another record for the company. Higher revenue and gross margin in turn drove our quarterly non-GAAP operating margin and non-GAAP EPS to record levels as well. Our momentum remains strong and we’re seeing many growth drivers, particularly in IoT applications. Our design-win pipeline remains robust and we see continued opportunities to cross-sell our products, driving our dollars per platform higher. Our customers are introducing new digitally enhanced products that are smarter and more connected than ever. At this year’s CES show, several products such as IoT home hubs, smart cameras, wireless workplace configurations, smart doorbells and smart monitors were announced and feature our semiconductor solutions. In early December, we completed the acquisition of DSP Group and welcomed a talented group of unbelievably capable engineers. We expect the team to accelerate our product roadmaps in the areas of wireless, home security, and low power edge AI. The learning that DSP Group has had on voice enabled AI products will serve us well as we embark on tackling the even more promising long-term opportunity applying machine learning to simple computer vision applications. Our integration is on-track and we are already seeing the benefits of the two teams working together. Synaptics’ larger sales force and strong customer relationships are bringing DSP Group technology into new accounts that were not previously…

Thanks, Michael, and good afternoon to everyone. Before I begin, I’d like to remind everyone that our Q2 results and Q3 guidance include the impact of the DSP Group acquisition, which closed on December 2, 2021. Integration of this new team is well under way. We have successfully migrated all major DSP Group systems and processes to the Synaptics platform and our $30 million operating cost synergies are on track. Moving on to the fiscal second quarter results, revenue for the quarter was $421 million, at the midpoint of our updated guidance. Revenue was up 13% sequentially with strong demand for the company’s IoT products and was partly aided by the DSP Group acquisition which includes approximately one-month of contribution. Revenue from IoT, PC, and Mobile were 62%, 20% and 18%, respectively, in the December quarter. Year-over-year, the December quarter revenue was up 18%, driven by growth in our IoT revenue, where we are continuing to focus our efforts. Our IoT product revenue increased 60% compared with the year-ago quarter and up 27% sequentially. Our revenue momentum in this area continues to outpace almost all peers and is now at a milestone $1 billion annual run-rate. Our Mobile and PC revenue declined year-over-year due to timing of certain programs. PC product revenue was down 7% sequentially and down 10% year-over-year and was impacted by continuing supply-chain shortages for certain components at our customers. Our PC demand over the last six to nine months has been relatively flat as we continue to see a stable commercial market. Our Mobile product revenue declined 3% sequentially and declined 26% on a year-over-year comparison due to a product transition with a certain customer. During the quarter, we had two customers greater than 10% of revenue at 13% and 12%. For the December quarter, our…

Yes, thank you and congratulations on stellar results. Question on the IoT. The growth that you saw in the quarter 60% year-over-year and the growth that you're expecting in the March quarter up 100%. I'm wondering if you could maybe describe some of the subsegments of IoT which is driving the growth. For instance last quarter you mentioned virtual reality headsets adding to the IoT number you're talking about automotive growing kind of faster wireless connectivity. I'm just curious how you would kind of segment those particular areas within IoT and how we think about those segments not only in the March quarter but kind of progressing throughout fiscal year 2022?

Yes. Raji I think your question actually touched on the three that I would pick as being the big growth drivers. And that would be first the VR goggles. Obviously, we have a large customer in that space, that's doing really well. But I think we talked about in the prepared remarks is the fact that we're winning everywhere and now Chinese goggles are starting to come online and drive some pretty good volumes. So, we feel good there. Second one you touched on is automotive. And the issue there is we're going from a world of these discrete chips that touch and display drivers -- discrete touch and display drivers to TDDI. And while we participated in discrete touch and discrete display drivers, we had relatively low market share. As the market begins to tip toward TDDI, we have high market share there and as that becomes the preponderance of the units that ship, we expect we're really going to do well. And then the last one also you touched on which is the wireless products we're winning there. It's our WiFi-Bluetooth combos and then a mix of our standalone GPS products that are really driving the results. So, those are really the three areas. Of course our other businesses are doing pretty well too. In fact there's not a single area in the IoT portfolio that I could point to that was showing weakness.

And that's excellent to hear. And then on the supply situation, last time we spoke the supply situation remains tight. You are in the process of consolidating your foundry partners. You had mentioned in the past that you had as many as 10 foundry partners, but you're in the process of consolidating those to a few. So I wanted to get an update in terms of, how you're looking broadly at your supplier relationship. Are you getting – are you confident that you'll get the extra capacity as the year goes on? And are you going to be able to get capacity for some of the new products and the new areas that you're focusing, first, the WiFi protocol chips versus the more mobile-orientated chips?

Yeah. Again, excellent question Raji, I say the following. I mean, certainly we feel like we can get incremental supply that supports the guidance and keeps us optimistic about the future, that said, you're absolutely right. We touched on it in the prepared remarks. Our biggest challenges are all these new growth areas for us, because our demand is outstripping our ability to get incremental supply. So I think Dean talked about even some backlog accumulation in his remarks, and we see that in WiFi. We see that in the VR goggles. We see that in automotive. We see that in these protocol adapters. So in all of these areas, where we've got effectively new categories of products, we're having the most difficulty keeping up with supply. But we are able to get incremental supply here and there, and that gives us some confidence that, we're going to be able to continue on this growth vector that we've outlined.

Great. And just one more question, if I could squeeze in, and I'll step back in the queue. The gross margins 60% just phenomenal margin expansion in the last couple of few years. The 60% margin for March, could you talk about what's driving that both on a fundamental basis. Perhaps you can talk about the contribution that DSP is having. But even putting aside DSP, it does imply that the margins within the different segments IoT mobile PC have been improving. Obviously, the next question is how much of that is price increases? I know you talked about that you're passing the input cost in the form of price increases. So I would assume that would be neutral to the margins. But can you discuss how price is affecting your margins if at all? Thank you.

Yeah, Raji. So, on pricing, what I'd say that's largely margin neutral. I mean, where input pricing has gone up certainly, we've had the price pass it along to many of our end customers. But it should be thought of as margin-neutral. Really, the margin increase as we guide into the March quarter is all around mix. So one as our IoT portfolio continues to grow, those are a number of product areas that actually are margin accretive for us. But all areas of the portfolio have been improving their margins over time, as really our focus has been on selling the premium versions of products in all of the market areas. So the more premium devices in PC, we're going after premium things in mobile, and of course many of the premium areas in IoT. And so that's sort of been our fundamental shift really over the last couple of years, and that's what you're seeing here going into March.

Great. Thank you very much.

Thanks, Raji.

Thank you. Our next question comes from Christopher Rolland with Susquehanna. Your line is open.

Hi. This is actually Doug Son [Ph] on for Chris. And thank you for taking my question. So, I just want to follow up on the supply question earlier. You said your number one constraint is around the wafers. And we've actually seen some other companies either investing heavily into CapEx or just locking in wafers way in advance. So is this something that you're considering, and if you could just elaborate a bit more on your strategy here. Thank you.

Yeah. I think we obviously where we can we're looking at entering into these long-term agreements to try to lock up supply that's not consistent across the board. If we think it makes sense then we will enter into those agreements. I would say that that's not universal. I mean our tactic to the -- for the most part, has been to work with key partners and sort of increment out this wafer supply. We're of course a fabless semiconductor company so we are not subject to CapEx per se. We're strictly a consumer and it runs into the cost of goods line. So it's obviously a never-ending battle. We're doing what we can to increment our supply. And as I said in certain cases and you alluded to it where we see opportunity we will look at and entertain long-term agreements.

Great. And then as a follow-up you also talked about the Chinese handset market being weaker than expected. So how are you seeing this end market demand here into the back half of the fiscal year?

Yeah. I mean, obviously, mobile is now a smaller part of our portfolio. We certainly believe in our roadmap. We're winning the majority of our touch sockets. We feel good about our position both in Korea and in China, as I think we've talked to in previous calls. It's then what's the sell-through. And that's obviously harder for us to determine. There seems like there's some softness. But for us it's a smaller part of the portfolio now. I think Dean talked about it being sub-20% of the overall mix. I'd say on the upside, we've got this new launch of our OLED display driver. Dean talked about it a minute ago in his comment. In general and mobile we're trying to go after the very highest end of the market. And this is a good example of it. It's a very high-end OLED display driver. And so, now, in each handset we have an opportunity and particularly at the high end to sell more content per phone.

Thank you.

Thank you. Our next question comes from Derek Soderberg with Colliers Securities. Your line is open.

Hi guys. Thanks for taking my questions. Actually I want to start with ULE. You have some nice large service provider wins in the U.S. and Europe. Just curious how that ecosystem build-out is progressing. And wondering, what's the best path to build out that ecosystem? Is it to sort of integrate ULE into other chipsets or simply cross-selling? What's sort of the best path for driving growth in ULE?

Good question. I think that there -- it depends on where it goes in the ecosystem. So we're just at the beginning of our ramp with one specific North American customer. And the opportunity is to go into these end points window sensors, door sensors that likely will be ULE-only as the technology itself is really conducive to longer range lower bandwidth types of things. So I think the sensor will ultimately be ULE-only. Where you get into an opportunity to combine technologies is in the hub, the thing that's controlling all the endpoints. And you certainly get into opportunities in things like surveillance cameras. So we are looking at certainly in the first phase cross-selling, cross-selling our Wi-Fi Bluetooth combos into those sockets. And then as that market progresses we'll evaluate should we bring ULE into some sort of super combo chip to really create a defensible socket. As I say I don't know that the highest volume piece of it will ever go to a combo type of solution because you have single function out at these window break sensors and door open close sensors.

Got it, got it. As my follow-up there's been some data out there that a good portion of growth has been from inventory build. Obviously for you guys in the March quarter, it looks like it's going to shape up nicely. But beyond that, do you have any visibility into sell-through for IoT and PC? I think you mentioned some softness in mobile. Any visibility into channel inventories of some of your larger customers? And how are you factoring any of that into internal expectations for the year? Anything on that would be great.

Yeah, Derek I would say, we have probably limited visibility into individual end customers' inventory positions. But what I can say is within our channel partners, the inventory remains very low. We don't really see inventory buildup in any specific area. I think the one exception is in mobile that you touched on. That actually has recently weakened for us. Outside of that, we don't see anything specific in IoT. PC continues to have occasional match set issues. I think you've heard from others around that. But that doesn't look like inventory to us. It just is an up and down on how they pull that inventory through to their factories.

Got it. Thanks guys.

Yeah.

Thank you. Our next question comes from Anthony Stoss with Craig-Hallum. Your line is open.

Hi guys. My congrats, especially on the gross margin improving from 40% to 60% roughly in two years pretty remarkable. Michael, on the IoT side just phenomenal growth. How much of that is from content expansion or taking share? Also what do you -- or where do you see content can go for you guys with more products heading into that market? And then for Dean, I'd love to hear your thoughts with supply constraints. Any view on the June quarter that you think it's going to be seasonal above or below or in line? Thanks.

Yeah. Tony, I mean just to talk about the IoT business, we've talked about the growth vectors being the wireless, the VR and automotive. I would say the long pull in our growth is actually new categories where we've actually gotten into new businesses for us. Those are really new businesses for us particularly if you consider automotive, the shift from discretes where we have been playing for a while b,ut really ramping the TDI solution. So in terms of the revenue line I'd say, that's the long pull. In other areas in our -- kind of our core run rate businesses we do feel like we've been taking historic share. Our video interface business, continues to run really strongly and we feel like that's a franchise business. But I'd really say, the long pull, in terms of growth are these new categories that are coming into play and creating new veins of revenue that we can go and mine.

And Tony on your second question, which was around supply constraints maybe beyond the March quarter, we're sort of not taking questions beyond March at this point. But what I would say, sort of looking out our supply constraints are you certainly a concern for us. We would certainly take more, if we could get it from our suppliers. But the backlog is extremely strong. In fact, backlog as we sit here today, is actually higher than what it was a quarter ago. So you can sort of read that as sort of net new orders coming in are outstripping shipments going out. And then despite having a great December quarter and despite now with this guidance in the March quarter, that continues to be strong. So we're sort of sitting here and not concerned as we look out beyond March.

Okay. Then if I could have a quick follow-up with Michael. Shifting gears a little bit into the auto side. You guys have recently entered on the connectivity side. I'm curious, if you can share any details on the traction you're seeing or really anything in auto?

Yes, Tony, I mean I think that's not quite right. We're obviously, looking at connectivity for auto but we haven't entered there. Our focus has been on a lot more of these video transfer types of products, wearable products, consumer gadgets of different varieties. Automotive remains something we feel like we could go into if we want to, but at this point we're more in kind of a look through the window type of mode.

Got it. Great. And thank you.

Thanks, Tony

Thanks, Tony.

Thank you. Our next question comes from Karl Ackerman with Cowen. Your line is open.

Yes. Good afternoon. Two questions for me please. One for Michael, and one for Dean. Michael, you spoke about now shipping OLED display drivers, which complements your OLED touch controller offering. I'm curious how you think about integrating both of those components that may allow you to broaden your mobile offering to new and past significant customers?

Yes, Karl. I mean we've talked about that. I think when I first got here, we talked about a mobile TDDI product for high-end OLED phones. As we got into it and we talked about in previous calls I think we saw this real opportunity in OLED discrete -- OLED display drivers not doing a TDDI solution. Right now, I would say, most of our bandwidth is occupied on a family of discrete display drivers. We continue to investigate TDDI. The opportunity for us in the engineering priority allocation has been on discretes simply because we see a quicker path to entry there, a better process match in terms of the touch circuit and the display driver. And there's all kinds of new products that are opening up the folds, the flips, the things like that where it requires a little bit of nuance on the display drivers. So I'd say that's where we're spending our time. Although to your point, I think, you ultimately will end up combining the two technologies.

Understood. Thank you. Dean, this is the first time you gave the number of car models you're designed into, if I'm correct. Are all these models ramping today, or is there a way to think about the step function of how they will ramp over this year and next? Thanks.

Yes, Karl, I mean, let me just explain the numbers that we gave. I think, we said we're designed into 50-plus models at 20 different in discrete manufacturers, six of those are ramping now, so there's a lot that's future. Their design-ins, design wins, they're not production. And we really tried to characterize this market as really being in the early innings of a shift to TDDI. Most of the units that go out today are still discrete display driver, discrete touch, but we're starting to see that tipping point. And certainly, as I said in the prepared remarks, most if not all new designs or TDDI-based rather than discrete-based.

And just one quick data point for you Karl. We have previously talked about sort of 40-plus models. And sort of the update here is now it's 50. So it's incrementally adding our model count that we have previously.

Helpful. Thank you.

Thank you. Our next question comes from Kevin Garrigan with Rosenblatt Securities. Your line is open.

Hi, guys. This is Kevin Garrigan on for Kevin Cassidy. Thanks for taking my questions and let me echo my congrats. My first one there's an expected inflection point coming in the second half of calendar 2022 for new Android smartphone launches. Can you give us an idea of what the adoption rate of flexible OLED is for these new smartphones? And has the competitive landscape changed in the flexible OLED touch market lately?

Yes. I think our sense is that the number of flexible OLED displays are increasing, and increasing I'd say not dramatically, but something short of that. So the mix is definitely going to a flexible OLED, we continue to have strength and advantage in flexible OLED touch controllers. So as the market tips that way we feel pretty good. And then as we've characterized the second driver in our mobile business is the shift from Korean displays to Chinese displays. And there in the Chinese displays, we think we have the opportunity to sell in that display driver, again, it's the kind of the highest end of the SKU stack.

Got it. That's helpful. And just as a follow-up, you guys announced the wireless docking station reference design. Can you give us a sense of what the dollar content increase is for you in a wireless stocking station versus wired and should we kind of view this product as cannibalistic to your current product line, or is it kind of more market expansion?

Yes. I mean, I'd say, it's a little bit of both. I definitely think there's going to be some cannibalization, but we also think it's got features to open up a whole new market set. So I think it's a bit of both. And then I think on the second one, we're looking at tens of dollars on the content side that steps up from a traditional wire dock to go to one of these wireless docks. So I don't know the exact numbers, but it's something north of 10.

Okay. Perfect. That’s very helpful. Thanks guys and congrats.

Thank you.

Thanks, Kevin.

Thanks, Kevin.

Thank you. Our next question comes from Martin Yang with Oppenheimer. Your line is open.

Hi, good afternoon. Thanks for taking the question. I have one question for Dean. Can you maybe talk about the GAAP gross margin trend in the past quarter and also being in the guidance. It feels like it's a tad lighter than your previous guidance for the December quarter and March is another slight step down. How much should we read into this – and what are the reasons behind that GAAP margin trend?

Yes, good question, Martin. So the first thing to know is notable that the GAAP gross margin for the December quarter is actually a record as well for Synaptics. So it's trading sort of in line record on the non-GAAP and GAAP side at the same time. The December and even more so into the March guide for the GAAP gross margin is going to be highly influenced by the DSPG acquisition. So there are a number of inclusions on GAAP-related step up in inventory value intangible amortizations that will run through the GAAP-only side. So you're going to see that effect for a couple of quarters until you get through sort of that initial amortization schedule.

Got it. That’s perfect. Okay. Thank you.

Yes. Thanks, Martin.

Thank you. And our next question comes from Brett Simpson with Arete Research. Your line is open.

Yes. Thanks very much. I wanted to ask about the non-GAAP gross margins. You mentioned this has like been a – one of the bigger jumps in the history of the semis industry and in terms of the performance gains. And it's been a fantastic improvement over the last few years. When I look at the portfolio you offer, there's still a lot of – are you playing in a lot of consumer areas where generally the returns are structurally lower than we would normally see. And certainly a lot of your peers would have lower gross margins. And so my question is the performance of the business has been fantastic. And – but really how sustainable are the gross margin returns across the business particularly some of the new categories that you highlight start to mature? Thanks.

Yes. I mean maybe I'll take the first comment and then turn it over to Dean. Obviously, we feel good about the sustainability of the gross margin line. I think mostly because while you're right the end markets in which we play are consumer auto where there's quite a bit of competition, we feel like we've got a level of differentiation, a level of integration and a level of performance enhancement that gives us the ability to sell at higher ASPs than our competitors. We really do feel like the gross margin is something we worked on. We worked on structurally since Dean and I got here and we've obviously, improved in almost every quarter we've been together. It's going to level off at some point. I mean there's no question. It's not going to improve at the rates we've seen. But I do think that it's something that's sustainable.

Yes. Brett, I think that's the important point to take across is that largely our products are aimed at premium portions of our end markets sort of just broadly characterizing as consumer and low margin is not necessarily a true fact. In fact, we talked about – and for instance our areas of processors right? We're going after things that are doing AI at the edge, video transport, decode-encode audio with high-end features, wireless connectivity, Wi-Fi 6 and 6E that's the cutting-edge Wi-Fi standard today with lower power than any of the competitor solutions on the marketplace, unique capabilities to transport video in a wired form factor. Even in PC and mobile, we go after high-end commercial laptops. We're now integrating haptics type designs into some of our PC products. On the mobile side again it's aimed at flagship high-end flexible OLED type mobile devices where in fact the engineering is valued and the things that Synaptics can bring is valued by the customer base and therefore we can extract a reasonable gross margin. So I think that's the way to think about it Brett. It's not necessarily sort of overly generalizing but you think about it as the premium areas.

Okay. Thanks for that. And maybe just a follow-up on pricing. I guess, we've seen big foundries. TSMC is one of your big foundries. They've been raising prices quite meaningfully going into 2022. And we're seeing a lot of chipmakers are passing that on as they should if they can. Can you maybe talk about or give your perspective on how you're dealing with those cost increases. And when you look at that March quarter guide, how much of that sales increase is generally a pricing increase? Thanks.

Yeah. So we're no different from many of our peers. And I think we've been pretty straightforward that we have seen input prices change in the past quarter, quarters before that. And we've incorporated any known pricing changes for our March quarter guide. We do pass along these price increases largely to our end customers. And so as input prices change largely that ASP changes in conjunction. And it is actually an economics 101, right, when demand outstrip supply you actually will see this phenomenon. So, yeah, we have been successful in passing that along and we continue to do so if input prices were to continue to change. But it's fully incorporated into our March guide.

Got it. Thanks very much.

Yeah. No problem, Brett.

Thank you. And at this time I'm currently showing no further questions. I'd like to hand the conference back over to Mr. Michael Hurlston for closing comments.

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

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.