Good day, and thank you for standing by. Welcome to the Synaptics Inc. Second Quarter Fiscal Year 2024 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. I would now like to hand the conference over to your speaker today, Munjal Shah, Vice President, Investor Relations.

Thank you, Josh. Good afternoon, and thank you for joining us today on Synaptics' second 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 non-cash or recurring or non-recurring items. Please refer to the press release issued after the market closed 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 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 everybody to today's call. Synaptics delivered earnings that were largely in line with expectations, a small achievement in a period marked by industry-wide uncertainty, reduced overall demand and an accumulation of inventory. We recognized these issues about a year ago and took actions to align ourselves to the market environment. While that resulted in significantly lower top line revenue, we intend to use the downturn to position ourselves for the future by investing in our Core IoT products. In fact, we can now see a path to sustained growth in Core IoT, particularly in wireless. We continue to believe we're at the bottom of our cycle and do not foresee further decreases from this point forward. However, the shape and timing of the recovery remains uncertain. Turning to the December quarter, revenue was slightly above the midpoint of our guidance range and flat compared to the prior three months. Our gross margins were at the midpoint of our guidance despite an unfavorable product mix, headlined by mobile performing better than initially forecast. Our spending was lower than we originally expected, resulting in non-GAAP EPS toward the high end of the guidance range. For the past few quarters, we've been consciously working down inventory throughout our supply chain. As a result, in our PC, wireless and mobile product areas, stocking levels are at or very near historic norms. On the other hand, we still have some work to do in enterprise, where inventories are moving slower than expected. We continue to attribute this to a slowdown in enterprise IT spending, which has impacted higher-margin areas of our business such as docking stations, enterprise telephony and high-end headsets. As we outlined last fall, we are focusing our investments in Core IoT, which contains our wireless and…

Thanks, Michael, and good afternoon to everyone. I will first review the financial results for our recently completed quarter and then provide our current quarter outlook. Revenue for the December quarter was $237 million, which was slightly above the midpoint of our prior guidance. Revenue from Core IoT, enterprise and automotive, and mobile were 16%, 58% and 26%, respectively. Year-over-year, consolidated December quarter revenue was down 33%, but more importantly, we continue to stabilize the business sequentially. On a consolidated basis, our distribution channel inventory continued to decline in the quarter, although some products continue to experience high stock and slower inventory turns, while other products are beginning to see new restocking orders. Core IoT revenue was roughly flat sequentially and down 46% year-over-year. Over the last three quarters, we have worked tirelessly to deplete excess inventories where possible and believe we are finally reaching the point where we can expect to return to growth in our third quarter fiscal 2024. In enterprise and automotive, December quarter revenue was down 12% sequentially and down 40% year-over-year. Here, many customers began their slowdown two to three quarters after we began experiencing declines in our Core IoT products, which leads us to believe that enterprise may require some additional patience. Mobile product revenue was up 42% sequentially in the December quarter and up 10% year-over-year. This marks one of the strongest mobile quarterly sequential increases since our fiscal 2022. We are experiencing strength across the Android ecosystem in China, as well as ramps from new flagship smartphones. At this point, it's unclear whether the strength is due to fundamentally strong end market demand or if it's merely channel restocking ahead of the Chinese New Year. We continue to expect our mobile sales to remain subject to normal seasonality patterns. During the quarter,…

Thank you. [Operator Instructions] Our first question comes from Quinn Bolton with Needham & Company. You may procees.

Hi, guys. Thanks for taking my question and thanks for all the detailed sort of segment by segment in terms of where you think you are in the inventory process. I guess, first question, trying to get a sense of, in a number of your product segments, you've said you think you have kind of reached normalized inventory levels, and you'll start to ship in line with consumption. I guess my question is, do you think you're currently shipping at end consumption? Or does that return to end consumption imply growth over the next some number of quarters as you come back to shipping in line with consumption? And I guess a sort of related question is, just as you look across all of your businesses, do you still think you're under-shipping consumption rates by, say, much as $100 million a quarter down here at the roughly $230 million, $235 million a quarter revenue level?

Yes. Quinn, good question, and I'll take a stab and let Michael to add on. I would say, in general, there's -- it's actually a mixed bag across the different product groups. Look, I think, overall, we're probably still under-shipping overall consumption. However, it differs across the different groups. For example, Core IoT really was plagued with a lot of inventory. We've been working that for three straight quarters. This is our fourth quarter now. Guiding into the March quarter up. It looks like we've depleted a large portion of that. There's still pockets within individual products even within Core IT. For example, in mobile and kind of PC-related customers, largely that inventory is resolved. Now we're just shipping back to end demand. As you know, PCs may be a little choppy, mobile seeing more recent strength, and then probably enterprise, which is the most unclear at this point, is there's certainly still inventory in channel. We're probably under-shipping. But I think the demand has sort of fundamentally shifted there, just given corporate IT spending is down, and it looks like -- at least in the near term, it's unlikely to come back up in any sort of rapid pace. I hope that helps, Quinn.

Yes, it does.

Go ahead, Quinn. I don't have a lot to add to what Dean said.

I was just, I guess, going to ask, it sounds like, especially on the enterprise side of things, that if demand has sort of softened with a slow corporate IT spending environment, that prior thoughts that you may be under-shipping demand by as much as $100 million. It sounds like we may need to temper that, just given the sort of weaker macro environment as we think about where the revenue run rate might normalize as you finally clear the inventory in enterprise. It sounds like that's probably the way we should be thinking about it.

Yes. I think that's -- generally, that's right, Quinn. Look, I think we're -- there's two factors in enterprise. One is that there is still inventory. I mean, we're still seeing inventory in pockets. And then two is, as we've kind of worked through the inventory, we realized that the demand is lower than perhaps we thought. So those two factors are kind of leading us to where we are. I still think that demand is going to return, and obviously, we're going to clear out these inventory levels. So I think the statement remains consistent, but it's tied to that increase in enterprise spending. And once that happens, I think we're back in business.

Got it. Understood. And then, you guys, I think in the script, said a couple of times, you think you've reached the bottom for revenue, which is great to hear. I understand that the pace of recovery is uncertain. But I think at least you've put the line in the sand that you don't think sales go down from here. So we've got the bottom in revs. But gross margin also looks like you may be bottoming your 52.5% in December, guided to 53% in the March quarter. Can we also sort of infer that you think you've probably hit the bottom in gross margins in this range of, call it, 52.5%, 53% that you saw December-March?

Yes, I think that's right, Quinn. Look, at 52.5% we ended December. We're guiding up into March. So we do think that, that even on the margin front hit its low point. It should work up from here. Again, as enterprise sort of recovers, it may take a little bit longer. But I think the worst is behind us on the margin front.

Excellent. Thank you guys.

Thank you. One moment for questions. Our next question comes from Christopher Rolland with Susquehanna. You may proceed.

Hi, guys. Thanks for the question. You had some nice commentary on wireless IoT. And so, I’d like kind of your thoughts more longer term here. Is this really -- this kind of snapback we’re seeing, is this kind of inventory-related? Or is there -- through your visibility on design wins or engagements, is this a bona fide bottom? And would you expect a strong, sustained rebound from here?

Yes, Chris, we think we bottomed and we think that we have a sustained rebound. So the snapback, I think, is almost entirely due to getting the inventory out. We're not all the way there. There are actually -- Dean said it in one of his comments. There's still even pockets in wireless, but I think we're largely through that. So the snapback that you characterized is largely a resumption of shipping to end demand. I think on top of that, as I said in my remarks, we are seeing a bunch of design wins. We've characterized at Analyst Day, the size of the funnel. The funnel is very, very strong here. And we've actually converted a bunch of design wins, one of which we alluded to in the prepared remarks around automotive. So we feel like there's going to be another layer here, right? We're building toward this $1 billion target in wireless. And I think that there's -- right now, it's almost entirely just return to normal demand. But I think we're going to start soon seeing a layering in of all the design activity that we've had for the last year to 18 months.

Thank you, Michieal. And then, mobile, obviously, a great quarter here. It looks like it takes maybe a small step-back next quarter. But longer term, are we getting something going here? Can you broaden it? Samsung, beyond the GS24, how are the other OEMs and engagements there? I think Novatek has been talking up this market a little bit. I don't know if you have a similar kind of thought for the rest of the year.

Yes. I would say, we -- not a lot of upside opportunity. We are -- one of the things, I think, that I alluded to is sort of areas outside mobile. We've done a good job, I think, capturing the high end of the market. We do see, Chris, some opportunity in mid-tier, and we're looking at that to see what we can do. And we think we can do that at appropriate margin levels. But I'd say, generally speaking, we don't see a heck of a lot of upside in mobile from where we are today.

Understood. Thank you, guys.

Thank you. One moment for question. Our next question comes from Peter Peng with JPMorgan. You may proceed.

Hi, guys. Thanks for taking my question. Just on the enterprise and automotive, so just based on the mix guidance, it's kind of implying a low-single digit Q-on-Q decline. So if we kind of factor in the PC seasonality, your traditional enterprise, that seems like it's kind of bottoming or declining at a slower pace. So do you think that we're kind of at the bottom for the March quarter, and so it's more stability going forward? Or how should we think about the puts and takes in that?

Yes. I think you actually got it right. We're forecasting the PC market to be down sort of high-single digits. So that's the biggest contributor. The other areas are coming back a bit. I mean, I think you've got it right, that's a couple of percent. So I think we're at the bottom. I think we're still trying to figure out when we see increases in that business. And I think it is tied, as Dean said, to the enterprise IT spending. But we feel pretty good, I think, for the second quarter in a row about declaring absolute bottom, and numbers are starting to reflect that.

And then, for -- just kind of on Chris' comment on the snapback and the Core IoT [indiscernible] wireless portion, that was a $200 million revenue run rate kind of business. Do you think that you can kind of get back to those levels some time in this calendar year? Or is this more of a first half 2025 calendar year kind of trajectory?

Yes. Look, we feel very good about it. I think that the line of sight to getting back to par here is much closer. I don't think we have necessarily perfect visibility on the timing, but we feel very good that that's closer in than some of these other things in terms of the inventory levels. And then again, we are expecting to layer design wins on top of that. So our wireless business feels very good. Our confidence is generally very high.

Thank you, guys.

Thank you. One moment for questions. Our next question comes from Krish Sankar with TD Cowan. You may proceed.

Hi. Thanks for taking my question. I have two of them. Michael, just on the last question and your answer, it looks like you're guiding the wireless Core IoT growing 20% sequentially. And I'm not looking for guidance, but is it fair to assume that kind of a growth rate is sustainable through the remaining quarters this year?

Again, we feel pretty good about the business. And I would say, certainly, we're going to see double digits sequentially from here quarter-over-quarter. So I think we feel really, really good about where that business is. We're really just trying to get it back, as I think the previous questioner asked, to the $200 million level, and we think that that's relatively close in, and then growth from there. So I think it's fair for us to say that this level or somewhere in the kind of the double digits sequentially is very, very possible over the next few quarters.

Got it. And then, a follow-up for Dean. When I look at your March quarter guidance, you guys kind of gave the product mix. And it looks like 3/4 of your products are more -- should be in the high 50% gross margin range, if you're guiding more to like 52% to 54%. So I'm kind of curious. I understand enterprise and auto has still inventory. But what are like the one or two biggest overhang on the gross margin side now? Is it volume? Is it foundry pricing? Any color on that would be helpful.

Yes. There's obviously many variables in that, Krish. There's absorption at current revenue levels. There's always some prices improving on the supply side. There's some actually going the opposite way. But more than any of that actually happens to be the product mix. Generally, our enterprise bucket tends to have a higher gross margin mix of its own products, even sort of within products. And I think Michael sort of touched on it a little bit in his prepared remarks. Some of our sort of best gross margin applications that go into like docking stations or high-end audio headsets are seeing some of the most sort of hesitation from corporate IT buying. And so, that sort of contributed on to where we are on the margin mix. However, we're starting to see upside into IoT. And as Core IoT grows, that is actually also helpful [indiscernible] everything else moving around.

Got it. Thanks a lot Dean.

Yes. No problem, Krish.

Thank you. One moment for questions. Our next question come from Gary Mobley with Wells Fargo. You may proceed.

Hi, guys. Thanks for taking my question. If I'm hearing you guys correctly, it sounds like perhaps structurally, the market size or revenue potential in enterprise might be a little bit smaller than what you were thinking at your Analyst Day. At least the minimum pushed out further to the right. And therefore, the question is, is that causing you to sort of reevaluate the long-term gross margin target of 57%, which I believe is highly contingent on that very healthy margin mix from enterprise?

Yes, Gary, I think you got one phrase of the question right in that, we see it as a push-out, nothing more. So I think that we feel good about the market sizes for our enterprise business. I think that we certainly realize that behind some of the inventory, there is a current depressed demand environment due to the enterprise IT spending. But we actually don't substantively believe that the demand profile in those long term has changed, right? We've actually gone out in a huge way to the enterprise customers to sort of assess and feel out, hey, what is the long-term demand in these businesses? And that has not changed. So everybody is still bullish about docking station consumption, enterprise telephony. In fact, we've got a bunch of new refreshes coming on both of those areas, both in dock and enterprise telephony, that will be kicking in, in the second half of this year, and enterprise headsets. So all three of those segments, which are definitely pronounced down due to the enterprise IT spending, big drivers of our margin line. I don't think that there's any change. Dean, you can correct me if I'm wrong, in sort of our view of the overall markets.

No. Yes, I don't think there's a market destruction, if that's what you're sort of going for, Gary. The second part of your question was dependence on that enterprise mix to drive 57%, which is the long-term target for the company on gross margin. We are dependent on enterprise actually performing well and coming back to a more normal level. I think what you will see is we're going to continue to be dependent on it. And that means the timing to achieve 57% is probably a little bit longer and really is predicated on the enterprise spending sort of coming back.

Got it. Thank you guys for that. Dean, you underspent on the OpEx side in the December quarter by roughly 6%. Sounded like that was more variable versus structural in terms of OpEx reduction. Correct me if I'm wrong there, but I'm most curious about how we should model and think about the OpEx when revenue normalizes, when you actually start to ship in aggregate to end demand, let's call it, $300 million per quarter plus in revenue.

Yes. So first On the December quarter, you picked up exactly right, Gary. It was under our guidance and actually under the prior quarter, really from a one-time on variable expense. We're guiding into the March quarter that that doesn't reoccur, it sort of goes back to where sort of run rate spend level is. As you know, our committed level on operating expenses has been $100 million a quarter or below and we've done a pretty good job to sort of keep it maintained inside that range. Now if you start to think about, hey, what does the company look like at a higher revenue base? We do anticipate that we would likely need to spend a bit more than that from here, But I wouldn't say that it's monumentally more. The way I think about it, Gary, it's probably something like a 5% adder on operating expense, kind of this mid, maybe high single digits that we would likely go up as revenue comes in. I mean, you will see in the beginning of our fiscal year, every year, there's sort of a little bit of resets on variable comp, the merit cycles, et cetera. Just a reminder, we're a junior end, so that's kind of starts to hit in the September quarter for us. So, I hope that helps, Gary.

It does. Thank you.

Thank you. One moment for questions. Our next question comes from Vijay Rakesh with Mizuho. You may proceed.

Yes. Hi, Michael and Dean. Good to hear businesses bottom. So I'm just wondering, just looking at the rest of 2024, just wondering how the seasonality plays out for you through 2024. Do you expect to get back to kind of that $300 million level exiting the year or something?

Yes, Vijay, good question. The one thing I would say is, kind of calendar 2024, it's really tough for us to tell like what is going to happen from here. Look we're sort of bottom, we're coming up, Core IoT is growing nicely. However PC and mobile type applications are very seasonal. I think actually industry-wide people are trying to get a handle on, hey, how did the sequential sort of move from here? I think the most comfort I have is, we're likely to move higher. We're almost unlikely to go lower. So it's higher and I think you'd see more sequential growth sort of continually led by core IoT. Enterprise is less clear for us. It's just tough for us to confirm, Vijay, on exactly seasonality and what that pattern will look like. Core IoT right now is what we probably have the most confidence behind.

Got it. And then on the AI PC side, any thought on how many PCs you expect with -- I know you had a pretty good demo at the HCS, but with the Astra and that family of products into the AI PCs. How many PCs do you think we see in 2024 with Synaptics on it?

Look, I mean, on our PC line, Vijay, we're forecasting very, very modest growth in the number of units. We certainly hear all this stuff about AI PCs, our customers keep talking about AI PCs, and our customers are also talking about a pretty pronounced refresh in the back half of the year given everybody bought new PCs four years ago with COVID -- the onset of COVID. Our numbers are much more muted. We certainly don't -- we're not baking any of that in, any of that enthusiasm. If it hits, look, it'll be very helpful, because I think what we've done and what we're focusing on over the next couple of quarters is share. Where we are continuing to be excited, you touched on it, it's a slightly different area, is the whole user presence detection that we have with one of the PC customers that's very AI-centric and we intend to take that product and make it more of a general purpose product that will enable us in the Astra area to have a general purpose MCU with AI capability. So our customer is pretty excited. I mean they've seen the sample we talked about in the prepared remarks, they've seen the sample of this AI MCU. They like it and they think it's incredible in terms of the level of performance and differentiation it brings. It'll start shipping at the end of the calendar year and into next year. And if things go well for us we expect to see a pretty big bounce on that product that adds to what we're currently selling into the PC platform.

Got it. And one last question if we can sneak it in. On the handset side, you had a pretty good pick up last quarter, obviously, a big win with this 2024 as well. I missed one of your comments, but were you thinking that handset business mostly flat through the year or how are you looking at that trending? Thanks.

Yes, I mean, I think it's seasonal. I mean, there's going to be some seasonality. Dean talked to that in one of the questions. I'd say for where we are, there's limited upside. I don't think there's a lot of downside where we are from a share, just given the performance of the IC and things of that nature. But our attach rate is very high in China and at Samsung at this point. We said we think we can get some more handsets in the mid-tier at Samsung. That's definitely possible given the work that the team has done. But on balance, on balance, I think we're going to kind of track Android handset shipments at this point, and significant, significant share gains will be more difficult.

Got it. Thank you.

Thank you. One moment for questions. Our next question comes from Kevin Cassidy with Rosenblatt Securities. You may proceed.

Yes, thanks for taking my question and congratulations on the results. Just -- there's been a lot of weakness in IoT and you're calling the bottom and seeing it coming back. Can you talk about the design activity? Maybe try to relate it to the past cycle. Is this activity up tremendously? And then also, what are your MCUs and Wi-Fi getting combined in these designs? Or are you getting some leverage on your Wi-Fi parts? Thanks.

Yeah, Kevin, I mean -- so first, thanks for the nice words. On Core IoT, yes, we are excited. I mean, I think that we've talked to a lot of you about design traction, and now it's starting to hit. Again, very early innings, right? We're still not happy with the overall revenue numbers because, as previous questioner pointed out, we're still well below the $200 million mark. But we think we get there just based on what we had before and then these design wins start to layer in. And we're doing well across the ecosystem with our wireless products. We highlighted a new area for us, which is automotive. As we think about the processors, those ones are kind of a longer road. So they are, yes, they are pulling through our wireless. In every instance, we're trying to package up our wireless and our processors. And Astra, which we had kind of a very, very soft launch before the end of the calendar year, we've definitely lumped in our wireless drivers in that software offering so it pulls through. What we have seen is slower than expected customer ramps. All of these new wins we have are taking more time than before, largely because our customers have kind of cut their engineering budgets, and so the ramp up time has been slower than we've historically seen. We're baking in now in our thinking and our numbers, generally slower ramp times, Kevin, than we saw before -- than we've historically been used to. But we don't think that any of these are losses at this point in time. We just think it's ramping a little bit slower than we'd initially forecast.

I see. Great. Okay. Thank you.

Thank you. One moment for questions. Our next question comes from Martin Yang with Oppenheimer. You may proceed.

Hi. Thank you for taking my question. I have one question on enterprise and automotive. Have you started speaking with our customers regarding this year's annual budget cycle for enterprise spending? Do you get a feel that adjusting for inventory differences, 20 -- calendar 2024 will be flat, down, slightly up on a yearly basis?

Yes, Martin. I mean, I think 2024 is generally better than 2023. So it's still an issue. We're obviously, early in the year we're staying close to the customers and their customers are giving forecasts. So we're one step removed from both, let's say, Dell and HP. Everybody's hopeful for the second half. I mean, I think there's a lot of optimism built into the second half. We see that. I think as we said in the prepared remarks, I think we're working through the inventory situation. Although it's still there in pockets, as Dean said, generally now it's going to be what's the demand? What's the demand in enterprise? Definitely optimism in the second half. We think that the signals we're getting, but we're one step removed, as I said, so it's still -- the picture is still a bit cloudy.

Got it. Thank you. That's it for me.

Thanks, Martin.

Thank you. I would now like to turn the call back over to Michael Hurlston for any 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 and again next quarter. Thanks a lot.

Thank you for your participation. You may now disconnect.