Good day and thank you for standing by. Welcome to the Synaptics Incorporated First Quarter 2024 Financial Results Conference Call. [Operator Instructions]. I would now like to hand the conference over to your first speaker today, Munjal Shah. Please go ahead.

Thanks, Jeda. Good afternoon and thank you for joining us today on Synaptics First Quarter Fiscal 2024 Conference Call. My name is Munjal Shah and I'm 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 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 posted a copy of these prepared remarks on our Investor Relations website. In addition to the company's GAAP results, management will 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 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. 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 and quarterly report on Form 10-Q for important risk factors that could cause actual results to differ materially from those contained in any forward-looking statements. 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. I'd like to start by thanking our team in Israel for their continued effort during this difficult period in their country. Our team continues to work tirelessly in the face of worry for their families and colleagues. In the last few years, we've been fortunate enough to establish a meaningful presence in Israel, and our thoughts are with our team there. With that said, the main theme of today's discussion is that our business is lining up essentially as we've outlined over the past several months. In the quarter, we saw overall inventories come down in the channel as expected. Reductions are not uniform and we still have some work to do, particularly in Enterprise. Margins continue to be below our target model due to product mix, but a return to normal Enterprise numbers should lead us back toward our long-term target. In short, we continue to believe we are at or have now passed the bottom in our business and should start a climb out during calendar 2024, with both top line and mix improvements. While visibility to the slope of the recovery is uncertain. Customers have started to place orders again, engagements are increasing, and our pipeline is showing strength. Moving to the September quarter, revenue increased 5% compared to the 3 months prior and was slightly above the midpoint of our guidance range with our Enterprise PC products performing better than expected. Our product mix imbalance resulted in a drag on gross margins putting us at the low end of the guide. We maintained our spending discipline and ultimately delivered non-GAAP EPS above the midpoint of guidance. As discussed at our Investor Day in September, we are redefining our product breakouts as Core IoT, Enterprise & Automotive…

Thanks, Michael, and good afternoon to everyone. Before I get started, I want to remind investors that we have reclassified our revenue into new categories, Core IoT, Enterprise & Automotive and Mobile beginning this fiscal year. We believe this provides investors with better measurement of our focus areas and creates an easier and more direct comparison with similar peers. We have provided this reclassification on a historical basis, in the supplemental slide presentation posted on our Investor Relations website. Now let me dive into the review of our financial results for the recently completed quarter, followed by our current outlook. Revenue for the September quarter was $237.7 million, which was above the midpoint of our prior guidance. Revenue from Core IoT, Enterprise and Mobile were 16%, 65% and 19%, respectively. While we did not guide to these categories during our August call, Q1 results were in line with our expectations of former IoT and former Mobile products, while our former PC products outperformed our forecast during the quarter. Year-over-year consolidated September quarter revenue was down 47%, but more importantly, grew sequentially by 5% as we moved off from what we believe to be the bottom of sales. On a consolidated basis, channel inventory depleted nicely in the quarter, and our distributors' point-of-sale indicated an increase relative to prior quarter. Core IoT revenue increased by 15% sequentially but was down 66% year-over-year. This area has experienced the most acute channel inventory accumulation which we believe is now near its bottom and should see its final depletion over the coming quarters. In Enterprise & Automotive, our September quarter revenue was up 9% sequentially, but down 47% year-over-year. Sequential growth was driven almost entirely by recovery in PC product shipments. We are optimistic that this may be a directional indicator of overall corporate…

[Operator Instructions]. Our first question comes from Christopher Rolland of Susquehanna.

Thanks for the question, guys. I guess Enterprise, we're waiting for this to come back. Where are the pockets where you see the most inventory? And are there any products or areas that are now kind of clear of that inventory overhang and orders are starting to come back reasonably well?

Yes, Chris, this is Michael. Thanks for the question. I'd say two pockets of concern. One is around our docking station business and that's obviously a great margin driver for us. We've seen some recovery in the display port side of the business. The DisplayLink, if you remember, that was one of our acquisitions, the one-to-many dock that one has had quite a bit of inventory, and we're still going through that. The other area is audio. We did really bang-up business. And again, it's a gross margin accretive product for us. And that one has been slow. We've started to see a little bit dribs and drabs of orders, but I still think there's quite a bit of inventory in the channel. What's doing well? Obviously, PC now we're classifying in this area, and we had a good quarter in PC. We do think that's a solid leading indicator for docking stations that, it's just a matter of time for inventory clears out. And frankly, it probably couples in these audio -- these wired audio headsets as well. So on balance, I'd say, relatively good news even in the Enterprise sector.

Excellent. Maybe one for Dean too. It sounds like mix is the big problem with gross margin here, but are there any other issues to consider, anything like pricing, et cetera? And then, maybe you could give us a timeline on when we might be able to return to 57% gross margin? Or your target gross margin, again. It seems like it might be pushed out a bit.

Yes. Largely, this is mix driven, Chris. As we talked about at Investor Day and even on prior earnings calls, the Enterprise business being a little softer is actually is going to prevent us from having margins move immediately. I mean there's some mild pricing pressure, but it's not materially factoring into our guide. Any pricing pressure really is about maybe new products that might ramp in a year or 2 from now. So that's not as much of a sort of near-term concern. It's really all around mix. And how do we get back to our target mix and our target margin model? Really what we need is for all of the areas to kind of move back into its normal mix. We think that, that Core IoT business has hit bottom and that's starting to move up. Enterprise probably is just a little bit behind that, while at the same time, actually, Mobile is actually starting to move faster and actually looks like it's up in December quarter. So that's a headwind for us.

Your next question comes from Kevin Cassidy of Rosenblatt Securities.

Congratulations on the great quarter in this atmosphere. Interesting new wireless connectivity products you're introducing, can you give us an idea of what the ASP lift will be for those products versus the past generation?

Yes, good question. And thank you for the nice words. It does feel like, to your point, we're now really coming off the bottom. I'd say we sort of called the bottom relatively early in the cycle and now it feels like we're certainly moving off of it. Our wireless products, everything that we're doing right now is in the high-performance areas. We outlined in the Investor Day, these three categories for us, the high performance, the Broad market and then the Bluetooth opportunity. And so this one is in the Broad -- sorry, in the high-performance area. It's a 1x1 product. Typically, a 2x2 product, to give you an idea, is in the sort of to $3.5 to $5 range, a 1x1 product is in the sort of $2 to $3 range. What we get and benefit here, and I think you and I had talked about this before, is the idea of a lower die size. So our Core IoT business is sort of from a gross margin perspective is sort of at the corporate model or maybe slightly below as we outlined at Investor Day, this gives us an opportunity to improve and continue to see a build on gross margins by taking some of the cost out of this 1x1 device.

Great. And I imagine with the smaller die and higher performance, you're moving away from any competition -- head-to-head competition? What's the competitive landscape like?

Yes, that's right. I mean in high performance, particularly for the IoT market, we really have -- I don't want to say the run of the market, but we're obviously on these security cameras, video streamers, drones, things that are moving video across the wireless link. We have an incredible competitive advantage just because of the quality of the signal that we're able to generate. We really like where we are from a competitive standpoint, and there's not many folks out there, Kevin, that can do this, really can deliver that consistency of wireless performance over that long video -- long range. So we think we're really, really well competitively positioned and this 1x1 just helps us on the cost front.

Your next question comes from Krish Sankar of TD Cowen.

Congrats on the good results and the guidance too in this environment. The first question, I was wondering, either for Michael or Dean, based on the bookings you're seeing so far in the quarter, can you give any color into March? Do you think it could be flattish? Or do you think there could be some seasonality impact on it? And then I had a follow-up.

Yes. Let me take that one, Krish. Based on what we see on bookings, we actually think we've hit bottom. In fact, if anything, it looks like things are looking more positive as we look forward. We're not guiding specifically into March or anything beyond the December quarter at this point, but it does look like based on bookings and what we can see into channel dynamics, et cetera, looks like bottom is actually behind us and likely moves up. I mean the open question is trajectory, right? We have less visibility on exactly what does that slope look like, but it seems to be positive rather than negative.

Got it. Got it. That's very helpful. And then I had a follow-up question on inventory. Is there a way to quantify how much excess inventory is there at your customers? Either in terms of days or what it is today relative to maybe 3 months ago or beginning of the year? And along the same path, Dean, you've done a great job reducing inventory days. What is the target? Do you want to go back to like 70 days, which it was historically? Or do you have an updated target for your own inventory days?

Yes. It's kind of an interesting question, Krish. As we start to see the bookings, we're a little wary, what does positive momentum look like from here, and how far down should we drive inventory. Typically, we would want to hold something like 75 days, in that range. But I think that contemplates, hey, like a very consistent, you can predict the mix super well kind of business. So I think it probably -- days continues to float down a little bit, but we're going to be cautious on not trying to outsmart ourselves and cut inventory and get the mix wrong and then not be able to respond to any upsides or any sort of new bookings to start flowing in. As far as sort of channel shifting, I mean basically what we've been trying to do, Krish, without like targeting a specific days or inventory level, we're trying to ship in less than shipping out, and for the first time last quarter in September, we saw ship out actually from the distributors start to move up relative to the June quarter. One data point is not quite a trend, so we're going to keep an eye on that. So I think what you'll probably see from us over the next kind of couple of quarters, they just continue to sort of be cautious on what we're shipping in the channel. Until we have really a nice trend behind us that we can kind of get back to normal as far as channel operations. So I hope that helps Krish.

Your next question comes from Quinn Bolton of Needham.

This is Nick Doyle on for Quinn. Congrats again also for the performance in what we're seeing is a weak IoT environment. Can you talk a little bit more about why you think the rising PC demand is a solid indicator of the Enterprise recovery? I'm just -- is demand coming from the same Enterprise customers that typically buy your docking stations and audio products? I guess I'm just trying to make sure it's not more of a consumer-driven recovery.

Yes. I mean, you've got the right general direction for the answer. We're definitely biased toward corporate spending and corporate buying. So in areas that our Enterprise products ship into the audio headsets, the docking stations, they will typically follow and be relatively well correlated to PC because our PC is really Enterprise focused. We have some mix of consumer in there. And I agree with your thesis. We're a little bit less certain about that particular segment of the market. But because we're so heavily indexed to corporate, our PC business has done pretty well over the last couple of quarters, certainly coming off bottom. And we had expected to start pulling through docking station and headsets. And we -- I think if you remember for those folks that followed us on previous earnings calls, the docking station and headset businesses fell later than PC. So we saw a roll off later. We would expect that now to recover a little bit later as well. So it's not totally inconsistent with prior remarks on the downside. On the upside, we expect to see the same thing. And certainly, Enterprise doesn't move quite as fast as the consumer markets.

And then yes, we're talking a lot about inventory and gross margins on the call already, but I guess I'll ask it a little bit of a different way. Is there a way to get back to 56%, 58% without the Enterprise recovery -- yes.

Yes. I mean, maybe I'll take that and have Dean add some color. I think that is a challenge. I mean, we're -- our Enterprise business is obviously our best gross margin business. I think if it doesn't recover, it will be a bit more of a struggle and not that we can't get there. I mean we're making a lot of improvements, as we just outlined a second ago in the Core IoT area to help on the margin line with cost reductions and things like that. But I do think that we are -- the gross margin improvement back to 57% and what have you is very dependent on the Enterprise business.

Yes. Nick, I would just reiterate what Michael said. It does depend on Enterprise getting all the way back to normal. If Enterprise were not, you'd probably fall just a little bit shy of that target, but you would need Enterprise to recover from this inventory and get back to its normal level to get up to target or any chances of moving back beyond that, like you said.

Your next question comes from Gary Mobley of Wells Fargo.

I hope your employees in Israel are safe and stay safe. Knowing that you have such a large employee base, I think, primarily from the DSP Group acquisition. I wanted to ask about how many have been called to military duty? And given those circumstances, how you're managing those day-to-day operations and as well road maps that come out of that region?

Yes, Gary, thanks for the question. And obviously, I appreciate the sentiment. We've had slightly less than 10% of our employees called into service. Some of those that have been called actually are able to multitask a bit. They're doing backline jobs, meaning intelligence and some other sort of back-of-the-front-lines type of activity. So they're able to perform as mostly as usual. That being said, obviously, there's really some important projects that are going through our Israel team, and we're trying to backfill those with engineers across the globe. And I think right now, as it stands, we have a good plan for that, and we can keep most of our key projects very much on schedule.

Appreciate that, Michael. As my follow-up, I wanted to ask about some of the inflationary pressures or lack of in your supply chain. I appreciate the fact that mix is presenting a gross margin headwind, but presumably as well, some higher cost inventory flowing through the P&L statement. But as you think about the pricing terms that you're getting from current design wins as they're happening today. How does that match up with the trends and foundry quotes that you're seeing from your foundry partners as well. Is that does that fit into your goal at 57% gross margin?

Yes, Gary. I mean, we're, if, our cost, I'd say, on balance, are going down modestly. So in general, we're seeing relatively good cooperation from our foundry partners, not significantly, but modestly, we're seeing decreases. And we're certainly working as well with our OSAT suppliers, our operations team is figuring out different strategies in the back end on packaging and test to take cost out of the business. And they've actually done a pretty remarkable job. I mean, there's no secret that foundry prices have been tough to move, and our biggest cost is wafers, but we have seen, I'd say, modest decreases in the supply chain. The question that keeps coming up over and over again on the pricing pressure, I mean, it's there. It's there to a certain extent, but that's why we've kind of come off the 60%, 61% gross margin and move that target down to 57%. I think that contemplates a modest level of pricing pressure that Dean talked about and also what we're seeing in the supply chain, which, again, is some help, but I wouldn't call it. We're not doing jumping jacks yet.

Your next question comes from Ambrish Srivastava of BMO.

Dean and Mike, I just wanted -- I'm trying to map the new segments with what you had before. And really just trying to understand how much of the Enterprise business or what's the mix of the Enterprise business that still is in that sort of challenged inventory, not bottomed out yet? I'm assuming the part of the consumer PCs, where is that now? Is that part of Core IoT? Or where did that go?

Yes, Ambrish, let me just first make a statement we're not intending to sort of slice and dice our new buckets and quantify every piece. That being said, our former PC bucket that we had historically reported is 100% in the Enterprise & Automotive bucket today. Our historical PC business that we formally -- was called out, it was largely focused on Enterprise laptops. I mean we certainly had consumer exposure in there as well, but the majority of that, significantly more than 50% is Enterprise focused. So for simplicity, that's fully captured in our Enterprise buckets. And just sort of give you like a first order, PC -- you can take the historical PC number and just sort of compare it to our new Enterprise & Automotive bucket. So that PC makes up, kind of do a first order 1/3 of the bucket and 2/3 being the balance of Enterprise-related devices and/or the Automotive-related devices. So if that helps you map a little bit, Ambrish.

Yes, that does, that does. Okay, got it. Got it. So then the -- and just back to the comments on stabilization from the peak to trough, if this is indeed the trough, seems like it is. I think our, you saw it earlier than everybody else. I think you're off by 50%. And I'm just trying to understand what other metrics that you look at, and we've all been through so many cycles. They are never the same, and yet there are few metrics that are the same. So in terms of the rate of cancellations, bookings, what can you provide to kind of support that view that we indeed are at the bottom here?

Yes. Let me just outline some of the things that we look at from a quantitative standpoint. Certainly, there's a lot of qualitative customer conversations, design activity expected to go into ramp, et cetera. But from a quantitative standpoint, generally, we are looking at things like booking rates, hey, if booking rates accelerated, slowed, you will look at book-to-bill sort of ratios. What we noticed is that actually bottomed few quarters back. We look at cancellation rates and push-out requests on already booked backlog. What we've noticed over the last actually several quarters, that has significantly slowed. In fact, it's very little now. It's actually almost back to sort of a normal rate. There's always some amount of noise in the system on people rescheduling their backlog, et cetera, it's a normal course of business. But what we've seen over probably the last 2 to 3 quarters is like the peak volume from these second-order metrics started to slow down in their magnitude. We saw a peak order as people try to cancel and reschedule and as you know, when we talked about it back in our May call, we started allowing people actually to reschedule on what it is that they needed to do. We also work with channel partners to do the same. So on balance, each quarter, we've seen that amplitude go way, way down and to the point where it's getting close to being sort of normal course of business. We do see this level as certainly sustainable. In fact, if anything, we're probably biased up to biased down as we look into '24. And I think, hey, credit to the business teams and sales teams here at Synaptics on trying to make a call early on where the direction of inventory and forecasts are going. And I think the internal team did a pretty good job.

Next question comes from of Martin Yang from Opp Co.

The question on the module partners you developed. Can you maybe talk about -- that partner help you to address any new segment's geography or customer base? And do you see more of those new partnership developing in the medium term?

Yes, Martin, thanks for the question. The module partners are important for us because as we try to move into this broad market strategy that we outlined in the Investor Day, this is a really good first step. The customers that they can serve are not customers that we would be able to enable. So our business, like many of the semiconductor business is built around big customers, customers that we all know and understand the nameplates of, but there's a huge market there that are these smaller customers that we simply can't service with our application engineers. So this particular module partner is really going after a bunch of customers that we couldn't service. There are applications in there like tags and inventory trackers and things like that, that these guys are getting into that are not things that we would normally do. But I think the more important issue is the customers that they serve versus customers we would serve. And so we would expect this particular module guy, like our first module partner to become a very, very meaningful component of our wireless business simply because they can serve a very, very broad array of customers that we wouldn't otherwise touch.

So is it right to assume the impact on your business once the market recoveries in earnest, and this new module partner maybe serve or impact our business similar to getting to a new distributor?

It's almost like that, Martin. Yes. It's pretty significant. I mean the customer touch, and we've we obviously are monitoring who they're talking to, and they report that out. I mean the number of customers they're talking to are in the hundreds and we would talk to 10. So it's a really multiplicative effect. And yes, ultimately, we would expect to see business on the level of a distributor because they act like that. They're obviously very technical. They have a tremendous amount of software support that goes with it. It's very focused on wireless modules, in our case, a combo module, but they're really, really specialists in taking the product, doing the work on it to modularize it and then reselling it. But on a magnitude basis, yes, it's like a distributor.

This concludes the question-and-answer session. I would now like to turn it back to Michael Hurlston for closing remarks.

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, and have a good day.

This now concludes the conference. You may now disconnect.