Thank you for standing by. And welcome to the Synaptics, Inc. Fourth Quarter Fiscal Year 2022 Financial Results Call. [Operator Instructions] After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to Munjal Shah, Head of Investor Relations. Mr. Shah, please go ahead.

Thank you. Good afternoon and thank you for joining us today on Synaptics’ fourth 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 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. In addition to the Company’s GAAP results, management will also provide supplementary results on a non-GAAP basis, which excludes share-based compensation, acquisition related costs, and certain other non-cash or recurring or non-recurring items. Please refer to the press release issued after market close today for a detailed reconciliation of GAAP and non-GAAP results, which can be accessed from the investor relations section of the company’s website at synaptics.com. Additionally, we would like to remind you that during the course of this conference call, Synaptics will make forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of 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, and welcome, everyone, to today’s call. We had a strong finish to an outstanding year, one in which our IoT business grew 80% and increased from 46% to 63% of our product mix. As our diversification strategy continues to play out, we see opportunity ahead for our IoT business, particular in the four growth areas we discussed in last quarter’s call. June quarter revenue was slightly above the mid-point of our guidance range with strength across our IoT products offsetting some weakness in our mobile business. Our results showcase that our diverse portfolio is providing more resiliency in an uncertain demand environment. We maintained our profitability with non-GAAP gross margins generally consistent with the prior quarter’s record level. We also delivered record non-GAAP operating margin and our non-GAAP EPS was at the high end of our guidance range. It has been almost three years to the day since I joined Synaptics. In that time, our non-GAAP gross margins have improved from 39% to 61%, our non-GAAP operating margins from 5% to 39% and, perhaps most importantly, by shifting the company away from its high mobile concentration, we have reduced our end-market risk. In that three-year period, our IoT business has grown from $78 million in Q4 2019 to $332 million in Q4 2022, a 62% compound annual growth rate with most every line of business contributing. As a reminder, our IoT portfolio not only serves a variety of end-markets, but also a wide range of customers. Last quarter, we highlighted four specific growth drivers within our IoT portfolio. Together these businesses grew more than 90% this year, an amazing growth rate and best-in-class among semiconductor businesses. However, we are seeing moderation in some segments of these areas and will discuss the puts and takes. First, our automotive business…

Thanks Michael, and good afternoon to everyone. I’ll start with a review of our financial results for the recently completed fiscal year and recent quarter and then provide our current outlook. For the full-year fiscal 2022, net revenue of $1.74 billion was a new company record and up 30% compared to $1.34 billion in the prior year, largely due to an 80% year-over-year growth in our IoT products, partially offset by our Mobile products, which saw a 20% year-over-year decline. Gross margin for the company’s products continued to expand with a new record for fiscal 2022 GAAP gross margin of 54.2%, compared to 45.6% in the prior year. Our non-GAAP gross margin of 60% for the year was also a record and compares to 53.6% in the prior year as our mix shifted to IoT product applications and we delivered higher value products to customers. GAAP net income for the recently completed fiscal year was $257.5 million or $6.33 per diluted share, compared to the prior year of $79.6 million or $2.08 per diluted share, a year-over-year increase of 223%. Non-GAAP net income for the completed fiscal year was a record $551.2 million or $13.54 per diluted share, compared to prior year of $316.4 million or $8.26 per diluted share, delivering a 74% year-over-year improvement. Revenue for the recently completed June quarter was $476.4 million, slightly above the midpoint of our guidance. Revenue was up 1% sequentially with the company’s IoT product growth offsetting sequential declines in both Mobile and PC. Revenue from IoT, PC, and Mobile were 70%, 17% and 13%, respectively. Year-over-year, June quarter revenue was up 45%, as our IoT products continue to deliver significant growth. Our June quarter IoT product revenue grew 87% year-over-year and was up 10% sequentially reflecting strong customer demand during the quarter.…

Certainly. [Operator Instructions] Raji Gill with Needham. Your line is open. Gary Mobley with Wells Fargo Securities. Your line is open.

Hey, guys. Thanks for taking my question. As you know, I'm new to the call, so I apologize in advance if I violate any official or unofficial protocols here. But we appreciate the fact that the fiscal year is off to a -- bit of a soft start. It's a common theme throughout the earnings season. But how are you guys thinking about the balance of the year? What are you planning for? Do you have much visibility into the balance of the year? If you can just give us any color there would be much appreciated?

Yes. Hi, Gary. No violation so far, so good fair question. We don't have a whole lot of visibility. I continue to worry, I think as does Dean about our mobile business, we've seen pretty significant declines over the last couple of quarters in that business primarily related to China. IoT business is generally held up well, but as we said in the prepared remarks, we're seeing some pockets of softness, some pockets of strength on balance it's holding up relatively well. So I think it's going to probably be another quarter before we really get to a point where we have visibility, I would say, and we just got to work through this period in the PC and mobile sectors where there is some uncertainty.

Okay. I don't think you filed your K yet, but if I go back to your most recent filing, I believe your purchase obligations were about $280 million, which I believe is an elevated level for you guys. And so my question is, did they tick up more as we concluded the fiscal year? Are they higher than you need them to be? Do you have more capacity in some areas than you need from your foundry partners? And is there any ability to negotiate the timing or quantity with your fab partners?

Yes, Gary, this is Dean. Just maybe -- just a quick one on some of the quantification. So you're right we haven’t filed the K yet that will come out in a couple of weeks consistent with, but we’re filing the annual. There hasn’t been any significant movements in purchase obligations, as you know -- we do have a few obligations with a subset of suppliers, but the vast majority don't have sort of a written liability on obligation. Michael, do you want to talk about capacity?

Yes, I mean, I would say two other things, Gary, right, on the purchase obligations. Obviously, on the back end of those we think we've got customer obligations that sort of tied to those. So we feel good about having a balance between our purchase obligations and where we've been able to pass that on to customers in terms of long-term agreements and things of that nature. We're definitely seeing easing in supply as we said in the prepared remarks. There are still pockets where we're chasing supply, our operations team is working overdrive on some of our nodes 55 nanometer being one where it's still really, really compressed. But in other areas, we're seeing some easing that's allowing us to meet demand where we can. So a little bit of a mixed bag there as well, Gary.

Right. Appreciate the color. Thanks, guys.

Absolutely.

Raji Gill with Needham. Your line is open.

Yes. Thank you for taking my questions. Just wanted to dig a little bit deeper into some of the comments you talked about with respect to changes in customer behavior. You mentioned some pockets of weakness obviously in mobile phones that's been well documented, that's now 10% of your business. But you talked about -- little bit about softness in some subset of wireless applications and virtual reality headsets. You mentioned overall these products are tied closer to the consumer, so if mobile is about 10% of the business, if you kind of put that to a side, what percentage of the revenue in total would you feel is types of the “consumer applications”?

Yes, Raji, I mean, it's actually tough to tell, because many of our IoT products as you might imagine are long tail in nature. It's a minority portion and each sort of technology area has a different mix of consumer versus enterprise sort of applications. So I don't have a specific sort of quantification. Like we said in prepared remarks, our observation has been as the products get closer to the consumer, it does seem like we're seeing more volatility from the customers. Two of those examples, first being VR, right, is sort of having a very consumer centric, customer base. Second is mobile phones, which you mentioned has been pretty well documented. And then within wireless applications, obviously, a subset and that is sort of long tailed applications.

Yes, Raji, let me give a little bit of sort of color on VR. I think we have one customer that's relatively well documented that's seen some softness in their sell through products in North America. The offsetting event for us is we've got a couple of ramps that we expect in the back half of the year that give us confidence that we can kind of hang on there even though that particular part of our business is obviously very consumer facing. In wireless, as Dean said, I think it's more of a mixed bag where we've got a range of end applications, some of which are industrial, some of which are enterprise, some of which are consumer and it's probably hard for us to sort of break that down into different numbers to give you a read.

Got it. So the gross margins are holding up nicely at around 61%, the IoT business is now 70% of revenue, it’s going to 74% of revenue. It's by far the highest gross margin segment of your company. So if there is a slowdown within IoT maybe on some of the consumer facing products. How are you kind of able to kind of maintain the gross margins? Or should we be expecting, kind, of some volatility or variability in those margins over time?

Yes, I mean, I think near-term it goes back to your first question at sort of the overall mix. And within IoT, we've got a reasonable part of the business that's enterprise or in some areas industrial and we expect the gross margins there to hold up. And is that part of our business becomes a larger part of the mix, you would expect some gross margin expansion. But in the consumer areas to your point, in that area of mix, we're seeing some price competition. We would expect some gross margin erosion potentially. So depending on how those two play out as parts of our mix, I think you get an answer right now that says on balance we see it holding up plus or minus through the balance of the fiscal year.

Yes, and I would just add one more item, Raj and we've talked about in the past on prior calls. We do have input prices that continue to change. Mix is certainly in our favor. IoT sort of continues to grow, that probably doesn't change, but that's a bit offset by changing input prices. We obviously forecast and guide one quarter at a time and we can continue to do extremely well in the gross margin department. And we would expect to continue to do that for the next quarter as you can see in September here.

And if I could just squeeze in one more question, I'll hop back in the queue. The internal inventory grew over 1005 year-over-year on an absolute dollar basis. So our revenue is growing, revenue grew maybe 45%, so inventory growth is doubled out of revenue growth. Just wondering how you're thinking about inventory? How you're thinking about the channel inventory, particularly in IoT and kind of currently where are your kind of lead times for those IoT products? Thanks so much.

Yes, it's a good question. That's not exactly a fair way to characterize on the gross inventory level given the revenue has been changing substantially. I would argue that a year ago we're probably significantly under inventoried and so we're just sort of catching up. What I would say is the inventory increase is largely coming out of two primary areas where the inventory turns, sort of, days of inventory has slowed around PC and mobile products. So what we would look to do is probably dial back some of our inventory position in those two areas and in areas that we continue to be strong, we would continue to look to carry decent inventory, specifically in some of our IoT products. On top of this, what we’ll also ends up clouding a little bit of pictures as lead times sort of come in and start to get compressed. The inventory and therefore backlog does move as lead times start to change and those have started to come in as supply has loosened a little bit in some of these areas.

Your next question comes from the line of Chris Rolland with Susquehanna. Your line is open.

Hey, guys. Thanks for the question. Some guys are coming out and they have decent September in terms of the guide, but then pretty big fall for December. And I think that's because perhaps their customers are building inventory into the September quarter. I guess do you have any visibility into that? And as we look past September, what are we kind of thinking trough or a -- sorry, not a trough, but a steady state mobile quarterly rate might be like when things get back to normal? And would you classify PC here as normal as well? Those two segments are in particular, what I'm trying to figure out from a steady state longer term perspective? Thanks.

Yes. Chris, again, fair questions and I think we're all trying to get to the bottom of where this is. I think in Chinese mobile handsets where the majority of our exposure is -- it’s still very hard for us to say. As I indicated in the prepared remarks we’re seeing some signs of life in that market where sell through is ticked up. We've seen sort of month-over-month increases. However, like you, I'm concerned about inventory levels and how long that's ultimately going to take to burn off such that we see an uptick there. We do have a slightly positive offsetting event and that is there are more handsets coming online. The mix is shifting more and more toward this flexible OLED display type, which as you know is one where we have strength. In the PC area, again, I think we've got -- it's hard for us to sort of understand where this thing bottoms out. As you do, we're hearing of inventory in the channel, I think our sort of positive offsetting event there is we're more commercially facing and we haven't necessarily seen the big puts and pulls that some of our competitors have that have a more consumer facing mix. So again very hard for us to sort of guide beyond the quarter we just gave. Some positive signs, some positive signs in terms of inventory bleed, but on balance, it's tough to call. I don't know, Dean, if you have any more than that.

Yes, that's right. I mean, I would just echo Michael’s comments and a lot of these customers I think are reacting from the macro. And I think until customers start to get comfortable on where the overall economy is headed, I think there's probably going to be a little bit of choppiness, kind of, across the board.

Thanks, guys. And then my next one is around OpEx, so it seemed like it was pretty good in the quarter better than we had expected. What does that portend for the rest of the year and investment here? And then perhaps related or unrelated, the Broadcom connectivity IP business that potentially I believe might be up for sale again in 2023? Are there any updates on your thinking there? And would you potentially be up purchaser of that or is this all internal OpEx and R&D development that you guys are focused on?

Yes, Chris, let me just first take the OpEx one, I'll let Michael comment around Broadcom WiFi. OpEx, we're actually still on track on OpEx nothing is sort really changed we continue to invest in the business. What you saw in the June quarter and I spoke to it a little bit in my prepared remarks is we had an unexpected FX benefit to OpEx in the quarter, excluding sort of what the FX impact is, we would have been pretty in line with what we had previously guided. So that was sort of an unexpected FX. Guiding into September, really what you see on the OpEx in that guide range is a resetting of the new fiscal year for the company and resetting of all the bonus plans and accruals sort of around that. So that you sort of typically see every year and we would continue to hire and sort of grow kind of per our plans, I would say on the OpEx side, probably nothing has really changed from the thesis. Michael, do you want to talk about WiFi?

Yes, Chris, I mean, here's the way that the contract reads, obviously at the end of the three year exclusion zone, they could resell the business again a third time if you will. It's hard for me at this point to understand what they would sell there -- at least as we understand it now, there are no people that are working on IoT class products at Broadcom, whereas when we got the business there were, there is no business that is attached to the IoT segment anymore. Whereas when we got the business there it was, so it's not to say they can't. There won't be a lot of the dynamics that, that we got when we ended up taking on this business, I don't know as a buyer what I would buy now in this particular circumstance seeing that there is no business and no people attached to it. It's not to say we might do something creative to keep somebody else out of it if it was indeed up for sale, but it's hard for me to understand what a buyer would be getting this time around.

Thanks, Michael. And just a clarification from Dean. Dean, what do you think run rate for the -- in terms of OpEx for the remainder of the year would be for next year? Just trying to understand December through Jan, thanks.

Yes, I would just, you know, look at for the September guide and just sort of modestly sort of step up quarterly.

Thanks, guys.

Krish Sankar with Cowen. Your line is open.

Hey, guys. This is [Eddie] (ph) for Krish. I have a question on your Virtual Reality exposure. It seems you have a strong pipeline in that segment. So once those programs ramp, which I'm assuming should happen in back half of next year. How big can the Virtual Reality become as a percentage of IoT? Thank you.

Yes, Dean, maybe you can give two seconds on what we said when we first broke out the business and maybe I'll talk a little bit to the second half of the question, which is how big we see it. I mean, I think that this one as Munjal put in the prepared remarks is really dependent on how well that market does. We have a big position in the market, there's one sort of giant customer right now, but we're actually really optimistic that we're going to see two or three equally sized customers come online here relatively quickly. And depending on how sell-through goes, we think we're going to do really, really well in that market. But it's totally dependent on in this one in terms of how you call the TAM, how you call -- how well our end customers will end up selling these products. So we think we have a differentiated product line. It's one that we're focused on. We continue to develop products for. We're optimistic that we can continue to lead in the market, but the guesses to the size of the market ultimately really were dependent on market reports and guesses as much as probably you are. I don’t know, Dean, you want to add some color on the sizing where we initially broke it out?

Yes, yes, just to give a little bit of quantification, Eddie, since this public, we broke it out. A couple of quarters back, when we first started talking about VR, we had reported at that point in time it was about a $50 million a year run rate revenue business for us. It had sort of since grown, it had been growing quite rapidly for actually a couple of years. And so is obviously much larger now. Maybe it's really dependent on where does this market go. As Michael said, I think if the market reaches its potential that many people expect it really could be a pretty sizable business for us in the future.

Great. Thanks, guys.

Kevin Cassidy with Rosenblatt. Your line is open.

It's a great question, Kevin. I mean, I think the problem for us is there's a lot of tie between what we do in mobile and technology then we then redeploy to automotive or to VR. It is an overall accretive business for us. It's throwing off cash. It's obviously we've been really disappointed in how it's grown from a top line perspective certainly over the last couple of years. And so we continue to evaluate it quite honestly and look at what our options might be, but it's really that complication and in some respects it's a positive one where we get a lot of engineering leverage from mobile that we can redeploy into several other areas that are important to us and that complicates that discussion a bit more than might be apparent.

Yes, I would just add Kevin, one other thing is, since Michael and I joined, we obviously have taken sort of a different strategic lens to mobile, which is managed to where our value proposition is and that's what we've been focused on, a lot of the focus has been on IoT as you've seen over the last couple of years. And we sort of continue to manage that way. I think where we have differentiation and value to be had in mobile, we'll continue to prosecute that business. But it does have synergies that Michael talked about in some of our other areas that are strategically important.

Okay. Yes, I can see that how -- especially for automotive and maybe if you could talk about the barriers to competitive -- competitors that you have in the automotive market?

And the big one, Kevin, is this concept of TDDI. I mean, you really have to have state-of-the-art display drivers and state-of-the-art touch. We are seeing customers come in and what we're trying to do to differentiate is we're trying to local dimming, which has to do with the contrast ratio. You see, we're introducing products around that. As I said, we're introducing some lower cost products, we're introducing products that enable larger feature sets such as you can some of the -- some cars that without going into names put knobs on the screen itself and we can enable that. So we've been able to keep ahead of competition both from a cost standpoint and a feature standpoint. And then we think we have a long range advantage by bumping the contrast ratio, looking to deploy OLED and cars, there's a number of different things that we think that are happening is dynamics that will keep our performance edge there. So that's a great market for us, that just a very fact that you need both state-of-the-art touch and state-of-the-art display driver keeps competitors largely at bay.

I see. Great. Thank you.

Thanks, Kevin. Good speaking.

Vijay Rakesh with Mizuho. Your line is open.

Yes. Hi, Deane and Michael. Just a quick question on the IoT side, obviously, you have a pretty good mix there between automotive and some DSP group stuff and display link et cetera. But if -- how would you break that up if you were to look at IoT between the consumer exposure or industrial or enterprise and automotive, if you can -- is there a way to kind of ballpark what the mix would be between the different segments?

Yes. So Vijay, we don't break out into these, sort of, sub areas. I mean, I think what we try to do last call, I think in this call is talk about sort of the four major growth areas within IoT. And that actually makes up the good majority of actually that revenue base that we give everybody enough color on sort of what are the technologies, you know, driving that change. And just to reiterate from Michael's prepared remarks that subset of the, sort of, four growth drivers. You account for 90% year-on-year growth, so those businesses are doing tremendously well and they account for the majority of IoT.

Got it. And then I saw IoT is now getting almost 74, 75% of our earnings, which is your target. And you have a pretty good portfolio. But if you are looking -- are you -- would you still look for M&A or and what would be the where do you see opportunities to broaden out or improve that IoT platform?

Yes, Vijay. We definitely, I mean, I think that inorganic growth is a pretty big plank of the platform that Dean and I are putting forth. And I think that we've done relatively well with the acquisitions that we've taken in. We've maximized synergies and actually over delivered in almost every case in terms of what we put forth is our operating plan. What I'd say right now and Dean alluded to it when he started talking about the share buyback, I think it's a difficult environment right now for M&A. Our valuation is obviously we think is incredibly low. That's why for the first time Mr. Butler is signaling some appetite to do a share buyback. We think that if we had to put stock in a deal, it's incredibly cheap right now. Meanwhile, we've had a pretty big correction in our stock price. Some of our competitors all had corrections probably not as much as ours. So the M&A environment right now just from a financial perspective is difficult. We continue to look to add breadth in the IoT area Vijay, I think there are pieces like power and other things that you could see that if we brought in and we're able to cross sell, it might make sense, but we have nothing really identified primarily, because of this problem in valuation for the most part.

Got it. Great. Thank you.

Ambrish Srivastava with BMO. Your line is open.

Hi, thank you. I had a question on distribution and visibility into that channel, Mike and Dean. First, what is the percent of sales given that distrivution the top two customers also distribution? And then, so just please remind us what's distribution sales? And then can you just help us understand your visibility into that channel and some sense of what channel inventory is? Thank you.

Yes. First on distribution sizing, sort of, traditional distribution is relatively small. Many of our customers are sort of OEM customers. So distributors, if you think about it in sort traditional sense are probably in the 30% range. There are some distributors that we use that are sort of logistics providers between sort of us and the OEM that aren't really doing sort of demand creation. So that's sort of another component. The distribution inventory position is probably up a little bit, I think we've seen customers wanting to carry a little more inventory and some of them actually do that through their distribution partners. That is probably an area that customers utilize when the macro starts to change. They either sort of push to the distributors or pull out of distributors depending on sort of their viewpoint of what's happening in the macro?

Ambrish maybe add a little bit more color on top of Dean. I mean, unfortunately it's kind of like our business as a whole, I'd say it's a bit of a mixed bag. In some areas, the disti inventory as Dean said is probably higher than normal and distis are definitely trying to cut back on how much inventory they have. They don't want to have as much carrying cost at the moment. So they're obviously trying to de risk a little bit. So even against normalized levels, there is some pressure to cut that. But then in other parts of the business, as we've been saying, it's actually very light and we're basically almost on a JIT type of shipment basis in areas like automotive, docking station, parts of our wireless business, we're shipping and there's very little, it's almost passed through from the distributors. So it's a bit of a mixed add, I wish we could give you a little bit more clarity, but it really does depend for us kind of segment by segment.

No, I think this is helpful. Thank you, guys.

Martin Yang with Oppenheimer. Your line is open.

Hi, Michael and Dean. Thanks for taking my question. The question is a follow-up on the IoT segment you highlighted four key growth drivers. Are those four areas also representative of the top four revenue in dollar contribution. If not, can you maybe rank some of the highest contributors by product segment to the IoT?

Yes, they certainly are the top four within IoT. I mean, the only exception I would say is sort of processors as a sort of a general bucket is probably bigger than VR. That would be the only swap I would say, Martin.

Got it. So you are referring to the media SoC part?

Yes, there's a -- I mean, there's a bunch of things that if you -- on the prepared remarks, Martin, that are in there. We have audio process, we do have the edge, the video processors are in there. We have our UCC processors that are voice over IP. Those are kind of collectively, as Dean said, if you sum up those three product areas that collection is probably larger than VR today.

Got it. Thank you.

Thanks, Martin. Good question.

This concludes the time allotted for Q&A. I will now turn the call over to Synaptics Management for final remarks.

I would 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 a lot.

This concludes the Synaptics, Inc. fourth quarter fiscal year 2022 financial results call. We thank you for your participation. You may now disconnect.