Synaptics Incorporated

us the puts and takes first our automotive business continues to grow and we are seeing some benefit as supply becomes more readily available we continue to win new tddi designs but are also experiencing strong ramps with our existing customers such as Ford and Toyota we see three trends driving growth in our automotive business one Shift to electric vehicles is accelerating, and with that, there is an increase in consumer expectation for a more digitized interior. Second, screen sizes are becoming larger. And third, a general move to TDI technology, which plays to our advantage as we have higher market share. Given the growth rate in this business, competition is beginning to increase. As such, we have products in design that move us to better cost positions and drive the feature set up. Next, our wireless connectivity business continues to show strength in both design wins and the product pipeline. Last month, our triple combo wireless device received the 2022 Best of Sensors Award for connectivity. The device offers Wi-Fi 6E, Bluetooth, and Thread ZigBee protocols on a single chip. Our Wi-Fi business continues to benefit from the transition from Wi-Fi 5 to Wi-Fi 6 and 6E, where we have considerable performance advantages, particularly in terms of power and rate versus range performance. Production of Wi-Fi 6 designs has started with several large OEMs, including Google. Another area of strength for our wireless products has been ULE technology. Product ramps are underway at numerous security companies, including ADT. While we continue to feel good about our long-term wireless prospects, we expect to see some near-term moderation in the consumer facing part of our business. Third, our virtual reality business has shown tremendous growth over the last calendar year. We are seeing significant opportunity ahead as Chinese customers begin their product launches. We remain the unquestioned leader in this market and have a roadmap that positions us well as screens go to faster refresh rates, higher pixel densities, and finer display types such as micro OLED. However, more than any of our IoT businesses, this is a new end market and growth is ultimately dependent upon the success of our OEM customers. Our largest customer is reporting a significant slowdown and we will be dependent on these new customer launches to really drive this business forward in the near term. Finally, our video interface business continues to see solid demand in its core docking station application as the attach rates to PCs is increasing. Our backlog remains high because of supply constraints. but we're starting to see some incremental improvement in our ability to service demand. For the most part, these devices are purchased by enterprise customers where demand is more resilient compared to consumer and markets. We're seeing good traction with our next generation products. For example, our dual chip solution was recently designed in by StarTech for their hybrid docking solutions combining our display port technology with our display link compression. In addition, we are enthusiastic about our unique wireless docking opportunity that we will believe will ultimately be additive to the overall TAM. Besides docking stations, our video interface products are getting traction in other applications, such as factory automation, smart monitors, VR headsets, and video conferencing. Finally, our spider chip for the protocol adapter and converter market is building market momentum with design wins and opportunities at leading OEM customers, including Lenovo, Belkin, Kingston, and Cable Matters. In our process technology business, we are winning new designs for audio processors, including our first in TWS, several gaming headsets, and video conferencing systems. One of our most exciting wins is with Google and their Pixel Buds Pro, enabling best-in-class active noise cancellation capabilities and extended battery life. We have also been successful in penetrating new markets for our video processors, most notably a video conferencing win at Cisco. Finally, our UCC products are having great success with Voice over IP customers, seeing volume increases, share gains, and content expansion with one of the world's leading UCC providers. In general, we are using our processor technology to pull through other products. We have certainly had great success cross-selling wireless, but have also had success in carrying other products, such as touch and video interface. Two last areas of note. Our cordless products have performed far better than we originally expected, and we are gaining market share. Finally, our single chip FlexSense, a device that combines four typically discrete sensors, is receiving positive initial customer response, and we are encouraged by our building customer pipeline. Let me move on to our PC product group. Market demand for PCs has softened further, and we anticipate a mid-teens market decline in calendar 2022. We expect to outperform the overall PC market given our strength in enterprise and higher-end SKUs where demand trends are better compared to consumer notebooks. Our new Vulkan ASIC with best-in-class security and premium user experience for larger size click pads is gaining market traction. HP's latest enterprise notebook products use this ASIC and we expect all other OEMs to adopt the device in their new models. In addition, we are starting to see touch pads become larger and designs moving from click pad solutions to haptic force pads. We expect to benefit from this industry transition as we have a strong market position and higher content, which we believe will result in 30 to 40% average selling price uplifts. Mobile is now only about 13% of the company's revenue. The headwinds we discussed in our last conference call have not abated, resulting in weaker than forecast performance in the business and further expected erosion next quarter. For the September quarter, we expect our mobile business to be down approximately 40% on a year-over-year basis. After thinking we were at the bottom, business has continued to deteriorate at our large North American handset customer, primarily driven by sell-through of their low-end model. However, we remain confident in our market position in the areas in which we focus. The pace of new handset model launches with our touch technology has remained consistent, highlighting our market strength. We see some positive signs in China as overall shipments have grown in the last two months, and the mix of flexible OLED handsets continues to increase. In addition, we are seeing modest incremental revenue from our high-end flexible OLED display driver as supply improves. However, we are experiencing increased competitive pressure and now expect limited participation in this market. To conclude, we had an exceptional fourth quarter and fiscal year with record financial performance. We introduced several new products, successfully integrated our acquisition, and grew organic and inorganic revenues. Our portfolio approach is presenting us with opportunities to cross-sell multiple products into customer platforms, an important growth factor for the company. While we are seeing some near-term market headwinds, primarily in mobile and PC, from weakening consumer confidence, we remain confident in our long-term potential, particularly in IoT. As a result, we see value in repurchasing our own shares. Dean will provide more details in his remarks. Let me now turn the call over to him to review our results and provide our outlook.

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, 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 gap gross margin of 54.2% compared to 45.6% in the prior year. Our non-gap 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 the 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 continued 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. Excluding the DSP group acquisition, our organic IoT sales were up approximately 65% year over year. As Michael mentioned, these results showcase the success we have achieved in our strategy to pivot Synaptics to a more diversified company focused on IoT applications. IoT is now 70% of our revenue and has grown at 50% compounding annual growth rate over the last three years to end the fiscal year at $1.1 billion in revenue, a significant achievement by almost any measure. In PC, our June quarter revenue was down 10% sequentially and down 3% year over year. Our historically high mix in commercial notebooks gives us confidence in our ability to continue to lead in PC through both up and down markets. As we look ahead, we expect modest downward market pressure in PCs as our customers adjust to a more cautious end buyer. But we would expect our commercially weighted business to outperform the overall PC market. Our June quarter mobile product revenue was down 20% sequentially and declined 4% year over year, lower than our prior expectations. Smartphone sell-through continues to be weak. We believe there's been a buildup of inventory across the smartphone channel, particularly in Chinese and Korean OEMs, that will likely take some time to burn through. As such, we expect demand for our mobile products to remain soft into the September quarter with limited visibility on when this trend might reverse. During the quarter, We had two customers greater than 10% of revenue at approximately 15% and 10%, both being distributors servicing multiple OEMs. A wide variety of our products shipped through these distributors and, as such, don't represent any specific one OEM or end market. For the June quarter, our GAAP gross margin was a new company record at 55.9%. which includes 22.8 million of intangible asset amortization, 900,000 of inventory fair value adjustment, and 1 million of share-based compensation costs. June quarter non-GAAP gross margin of 61% was at the midpoint of our guidance range, which maintains our momentum with a strong product mix. GAAP operating expenses in the June quarter were 142 million. which includes share-based compensation of $25.7 million, acquisition-related costs of $9.1 million consisting of intangibles amortization and amortization of prepaid development costs of $2.5 million and restructuring-related costs of $500,000. June quarter non-GAAP operating expenses of $104.2 million were down slightly from the preceding quarter and below our guidance primarily due to an unexpected foreign exchange benefit during the quarter. Our GAAP tax expense was $32.3 million for the quarter and non-GAAP tax expense was $21.4 million. In the June quarter, we had GAAP net income of $82.9 million or GAAP net income of $2.04 per share. Our record non-GAAP net income in the June quarter of $157 million was an increase of 3% from the prior quarter and an 81% increase from the same quarter a year ago. This significant increase in profit has rewarded our shareholders with a record-setting non-GAAP EPS per diluted share of $3.87, above the high end of our guidance range. Now turning to the balance sheet. We ended the quarter with $876 million of cash, cash equivalents, and short-term investments on hand, an increase of $121 million from the preceding quarter due to strong cash flow from operations of $128 million. Receivables at the end of June were $322 million, and days of sales outstanding were 61 days. up from 57 days last quarter. Days of inventory were 82 above 71 days last quarter and ending inventory balance was $170 million as inventory turns have slowed primarily in our mobile and PC areas. Capital expenditures for the quarter were $4.2 million and depreciation was $6.1 million. As Michael mentioned, we expect to return capital shareholders through our previously announced stock buyback program, which at the end of the June quarter has an available authorization of $577 million. We continue to pursue accretive inorganic opportunities. However, given the M&A landscape has become more challenged and we now have a comfortable cash balance, to shareholders via share repurchases and to begin paying down outstanding debt. While some of our market areas are experiencing moderate softness, we believe share repurchase is a good use of our cash and a positive return potential. Now, let me turn to our September quarter outlook. We anticipate revenue for the September quarter to be in the range of $440 million to $470 We expect our revenue mix from IoT, PC, and mobile products in the September quarter to be approximately 74%, 16%, and 10% respectively. At the midpoint, we expect our IoT products to continue to grow approximately 60% year over year and up modestly on a sequential basis. partially offsetting anticipated further declines in mobile and PC. Our backlog position remains strong and continues to be above the high end of our revenue guidance. However, we are seeing a change in some customer behavior, including some recent requests for push outs and cancellations. To add additional color, we are seeing this change in products tied closest to consumer applications, specifically mobile phones, virtual reality, and a subset of wireless applications. We expect to maintain our strength in gross margins, with GAAP gross margin for the September quarter expected to be in the range of 55% to 56%. We expect non-GAAP gross margin in the range of 60.5% to 61.5%, which at the midpoint of 61%, would be approximately 300 basis points higher than the same quarter one year ago. We expect gap operating expenses in the September quarter to be in the range of $152 million to $159 million, which includes intangibles amortization, prepaid development cost amortization, and share-based compensation. We expect non-gap operating expenses in the September quarter to be slightly below our June results and be a range of $102 million to $105 million. At this point, we have not changed our investment plans and continue to hire and add to our engineering and go-to-market capabilities to drive long-term product roadmaps. This sequential decline in operating expenses reflects a resetting of the company's annual bonus program as we begin our new fiscal year. Gap net income per share for our September quarter is expected to be in the range of $1.35 to $1.65 and non-gap net income per diluted share is anticipated to be in the range of $3.20 to $3.50 per share on an estimated 41 million fully diluted shares. we expect non-GAAP net interest expense to be approximately $8.5 million in the September quarter. Finally, beginning with fiscal Q1, we expect our fiscal 2023 long-term non-GAAP tax rate to be in the range of 16% to 18%, reflecting the tax law changes we discussed last quarter. This wraps up our prepared remarks. I'd like to now turn the call over to the operator to begin the Q&A session. Operator?

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