Synaptics Incorporated (SYNA) Earnings Call Transcript

Good morning, everyone. Welcome to Day 3 of Citi Virtual Technology Conference. My name is Atif Malik. I cover U.S. Semiconductors and Equipment Stocks here at Citi. It's my pleasure to welcome Jason Tsai, Head of Investor Relations at Synaptics today. The format of our discussion is fireside chat, and I'll go with my questions first. And if you have any questions for Jason, please e-mail them to me. It's atif.malik@citi.com. Welcome, Jason.

Thanks for having me.

Jason...

Thanks for having me, Atif. I appreciate the opportunity. Just real quick before we get started, safe harbor statement. We'll be making some forward-looking statements here on the presentations today. So please refer to our filings with the U.S. SEC in order to get a full understanding of the risks and uncertainties with investing in our securities.

Great. Jason, before we dive into the Q&A, I think it will be beneficial for the investors if you can talk about the 2 most recent acquisitions, the IoT assets from Broadcom and DisplayLink. How these 2 acquisitions kind of fit into the overall strategy and synergies and all that.

Yes, it's a great question. We've been talking about those quite a bit lately. These are -- as we've talked about with our strategy and with our new management team, M&A is a critical part of our growth driver, growth vector longer term. And these 2 acquisitions, I think, were uniquely situated here for driving growth and opportunity within both of these acquisitions. If you take a look at the first one, the Broadcom acquisition, the Broadcom WiFi assets acquisition, this is something that's truly complementary to what we do in our IoT business today. We're quite strong in the Edge SoC business. These are the processors going into a number of smart devices today, including smart speakers, streaming devices, security cameras, et cetera. The vast majority of these devices, these solutions in the devices are being paired with connectivity already. So we see, obviously, a lot of synergies that we can derive from having those WiFi connectivity assets in-house. This is a margin-accretive -- gross-margin accretive and certainly operating-margin-accretive opportunity for us to bring that best-in-class, world-class bulletproof, WiFi, Bluetooth, GPS connectivity solution from Broadcom that historically has been developed for the mobile market and now we're bringing that to the IoT market. And I think that there's certainly a significant amount of pent-up demand for this best-in-class solution. We're spending a lot more time today talking to customers about the opportunity that presents itself for integration and bundling of our WiFi with our Edge SoC. And so you'll start seeing a lot more interesting applications and a lot more interesting integration going forward. On the DisplayLink side, this is another one of these tuck-in acquisitions, and this really consolidates our leadership on the docking station. Synaptics organically is already a leader in the enterprise and corporate space for laptop docking stations. And these are typically what we call one-to-one relationship. An HP-to-HP or Dell-to-Dell or Lenovo-to-Lenovo, these docking stations are typically tailor-made for specific laptop models. Whereas the DisplayLink solution is what's called the universal dock. And under the hood here, their secret sauce is really their software and video compression technology, where they've been able to take, in essence, a very fat data stream. The ability to push multiple 4K monitor displays and compress that data stream into a very small and very efficient data stream. And what that does is it enables them to transport that high bandwidth required data to drive these monitors over literally any connection. So the lowest common denominator today is USB Type-A. We all have them in our devices, whether it's going to be a Windows laptop, a Mac, MacBook Air or even Google Chrome and Linux, they are -- the only ones out there are really that have been able to develop a solution that is universally applicable. And so what we've seen, even before COVID was that enterprises were looking to enable their consumer, their employees to bring their own devices, to have more customization and what devices make the most sense for that user. And as a result, in order to sync up with the network in order to drive the multiple displays and work the keyboard and mouse, et cetera, the DisplayLink universal dock was really the only platform that would work. We're also seeing the bigger macro trend of office hoteling. Instead of being assigned a permanent seat in the office, you come and go, and each day that you show up, you get assigned a different seat. And so that's where a universal docking, again, is really the only solution that can meet those type of use cases. And so we're seeing good uptake from enterprises. We're seeing strong macro trends as both of these bigger -- longer-term trends help drive growth longer term. But more importantly, if you take a look at the gross margins here, this is 77% gross margins with operating profitability well north of our 20% operating margin target. And so we believe there's still additional synergies that we can capture over the next 12 months. And so we believe we can take this from a 25-plus percent operating margin today to north of 40% with those synergies in place. So we're pretty excited about how all this works together. And then certainly, longer term, with DisplayLink taking that world-class software and video compression, pairing that with our ASIC and hardware design capabilities, and then layering on top of that the Broadcom WiFi connectivity, I think we've got a real -- really the only place that has the platform and in-house capability to drive wireless docking, wireless casting. And so we see that as a meaningful future growth driver, and that's something that we're working hard on. So overall, I think there's a lot of synergies that will capture more short term. Certainly, a lot of the revenue synergies from the WiFi acquisition, but cost synergies on the DisplayLink will also be hugely accretive to the bottom line for us. And then longer term, those new opportunities will really start taking hold over the next couple of years.

Great, Jason, for those comments. Before we talk about your major end markets: IoT, PC, mobile, one theme that's coming out of our conference over the last 2 days is the normalization it's taking from the COVID-19 disruption. We're still hearing about demand outstripping supply in certain areas like mobility, but would love to get your thoughts in terms of where Synaptics is with respect to achieving some degree of normalization from the disruption that we saw earlier this year.

We've been pretty fortunate. Our team has done an exceptional job in, first off, making sure everybody is safe, and we have all the tools we need in order to continue to be productive. Last quarter, we taped up 4 chips in this COVID environment, which I think is a very impressive task just given the challenges that presents itself. Our guys were even dropping off samples at the front doors of our customers' homes, just in order to kind of continue that design process while everybody is sheltering in place. As it affects our business, what we've seen is a few different impacts from COVID. On the PC side and PC-related businesses, like the docking, certainly, that's been much stronger than what average contribution would be as enterprises outfit more and more of their employees with laptops and portable mobility solutions. And so we've seen our PC business, which historically running at around $60 million to $70 million a quarter run rate, is now upwards of $85 million, $90 million a quarter. We've been seeing that elevated level now for the last couple of quarters, and we've guided to kind of similar level into the September quarter, and we've talked about certainly the strength continuing into the December quarter. Whether that ultimately means December is going to be flat or up or down sequentially, still remains to be seen. But still, we expect the PC business to be running much hotter than what our normal run rate would be. On the IoT side, though, there are some elements here that have been weaker. We do have some automotive business, as you know, because of the lot of automotive factories were shut down, a lot of these new designs and the ramps were pushed out. The first cars with our automotive TDDI will come to market towards the end of this year, so within the next few months' time. So as more and more models come out, we'll start seeing much more meaningful scale in the automotive TDDI business. On the Edge SoC side, historically, our strength has really been in the smart speakers, in particular, with Google. And one of the challenges that we faced here was that a big part of Google's sales strategy in their channel was the retail brick-and-mortar, where it was an impulse buy, as people were walking through the aisles of Best Buy, they pick one up. Unfortunately, retail brick-and-mortar experience even today is vastly different than what it was 6 months ago. So we have seen a bit of a headwind in terms of that business. But what we are optimistic about is that the pipeline that we have and certainly driven in part by those 4 new tape-outs that we did last quarter, but the pipeline we have has been stronger than ever. Our new generation or second-generation Edge AI SoC solution was launched at CES earlier this year. And with that, we're starting to expand meaningfully. And so if you take a look at the new design wins, we talked about a couple with U.S.-based service providers that will start -- that we won last quarter, but we'll start seeing new and innovative devices from them that's largely driven by COVID because they are trying to enable their consumers to consume richer content at home. They're trying to enable their consumers to be able to connect with friends and family more easily. So new devices coming out will be like soundbars with streaming capability built-in. We'll also be seeing new smart displays coming out that enable you to connect virtually with friends and family but in a much more seamless way. And so a lot of these new products are being driven by our Edge SoC product with our Edge AI capability. And so you'll start seeing a lot of these products ramp over the next 12 months. And we're very excited about the pipeline of designs that we have here that will start production.

Very helpful, Jason. Just specific to the lead times, you have a gambit of products. Can you just talk about how long your lead times are currently versus normal lead times and have they stretched and/or there are areas where the lead times have started to contract?

No. I think the lead times have been fairly consistent. I mean, certainly, early on with COVID and the Wuhan area being shut down, there were some impact to the supply chain as people couldn't -- trucks couldn't move parts from one area, one city to another. But a lot of those -- vast majority of all those issues have been resolved and lead times are back to normal times. So depending on the product anywhere from 4, 8, 12 weeks, it is back to normal. We haven't seen any continuing disruption of that supply chain.

Great. Let's start with the IoT business. I cover some other IoT names like Silicon Labs. And IoT is a very kind of broad category and sometimes it's a bit confusing to investors what is considered IoT. Can you just talk about the solutions that you're providing in this space?

Yes. So IoT, we've got a number of products in here. And you're right, it is a catchall phrase, right? So the primary products we have is really the Edge SoC solution, our video interface and docking solution and then our automotive. Those are the 3 critical areas for us in IoT. And then obviously, now with the WiFi, that's also part of our IoT product. So those are the main categories within our IoT products. The Edge SoC, again, primarily, historically going into those smart speakers but now expanding meaningfully. This new generation solution when we took -- the first generation, which was audio AI and then added video and vision AI. And so audio AI was kind of the latest generation Google smart speakers where it processes a lot of the voice data, pretty much all the voice data on the Edge. And what that does is, for the consumer, offers a lot more privacy. Your voice data isn't going back to the cloud and being stored there anymore. It's all being processed at the Edge. So that creates not just better privacy but also a much richer user experience, much faster response times. But in addition to that audio AI, we've -- with this new generation product, we've added video and vision. And with the video AI, what we've been able to do is a couple of different interesting things. We've been able to take fairly standard video content, 720 or 1080p and using our AI capabilities upscale that to a 4K or even 8K resolution. And oftentimes, the software AI-based upscaling is better than the hardware upscaling. And so what we've seen with our service provider customers is that this has been -- this has enabled them to provide a richer experience for their customers without having to build out massive infrastructure to push out a much fatter data pipe. And so they've been seeing -- we're certainly starting to pick up these solutions as a way to offer richer content, richer solutions. Another applications for the video AI is in security cameras for night vision. So taking an image of video stream that is taken in very low light and using AI to improve the quality of that picture so it looks like it's virtually daytime. And so we're starting to see a lot more traction here. The vision is -- we're also working with service providers as well. And in this case, there's a camera cashier set-top box. And it sees, when it sees that, last time you sat in front of the couch, you were halfway through whatever episode on Netflix, it queues that up for you automatically without you having to do anything. So I think what the service providers are recognizing now that their business model needs to change, right? Historically, you pay them for content. But nowadays with cord-cutting and with all sorts of other services available, they need to offer a richer, more immersive, more customizable, more personal experience for their consumer in order to justify that value-add that they're providing. And so we're seeing a lot of traction here with service providers for these next-generation boxes that have a lot more of these capabilities. On the vision side, it's also applicable to things like security cameras as well, right? So when you show up at your front door, your cameras don't have to alert your family, but when the UPS guy shows up or when a stranger shows up, that's when the alerts show up. And so those -- having the ability to do those AI calculations and AI capabilities at the Edge, really, drives a much richer user experience for the consumer and certainly saves quite a bit of network processing, cloud processing, data center, CapEx for the service provider longer term. So we've seen a lot of traction there. On the video interface side, within the IoT business, this is, again, the docking business, the one-to-one docking as well as the universal docking, we certainly have seen strength with this business through COVID and the work-from-home. But, I think, we do see some longer-term growth drivers that we had highlighted with the acquisitions that could -- that should drive really good business dynamics and fundamentals longer-term for the video interface business. And then lastly, on the auto side, as more and more automakers switch from using discrete display drivers and discrete touch sensors for their infotainment system into an integrated TDDI solution, we've been winning the lion's share of these projects. So over the last 2 or 3 years, our team has secured something like more than 70% of all the RFPs out there for these automotive TDDIs. And so the benefit of using an integrated solution instead of 2 discrete is that it also saves a meaningful amount of cost per display. And so as cars get more and more displays, saving $20, $30 per display becomes real money for these automakers. And so we're starting to see more and more of these cars starting to roll out. As I said, starting the first car rolling out late this calendar year and then certainly more and more over the subsequent years.

Great. The 2 comments on what you said about IoT, the first, you mentioned being in Google Assistant and Google speakers. How much success have you had in other peripherals interfaces, like Alexa? And then how meaningful a business could the auto display market be for you guys?

So our primary customer has been on the Google side. But I would say, especially with the WiFi assets that we acquired, they have been -- the Broadcom WiFi IoT assets, they have a much -- they also have a very broad range of end customers and applications. So part of the synergies that we've talked about is really bring one with the other. So I think we do have -- we do see real opportunity with all these platforms. I can't talk about any specific engagements that we're working on. But I think certainly, if you take a look at where Broadcom is today with their IoT WiFi connectivity, there's very little overlap between what they do versus our Edge SoC product, in terms of which end products that we're both in. And so I think as we work with all of these customers and talk about the next generation solution, we're very optimistic that the synergies that we're going to have here and the ability to pull both of these products together and put them in with the next-generation products at all of our customers, we're highly optimistic that that's going to be a meaningful growth driver.

Got it. And then the auto, how big this opportunity could be?

Yes. On the auto side, it's still too -- I mean, we haven't quantified it, but certainly, as you know, auto business -- to get the automotive design wins, it typically does take a few years. But once you're in, and once the cars start going to production, these are products that typically stay in the lineup for several years. And so for us, this is a snowball effect. This is a tip of the iceberg. As the first car rolls out, you'll have 3 more models rolling out, 3 additional carmakers rolling out, et cetera. So I think as the majority of the industry transitions away from discrete and moves more towards the integrated TDDI solution, which we expect to be the case, we're going to have the lion's share of that. We haven't broken out in terms of what that contribution would look like, but we're highly optimistic that this is going to be a very meaningful portion of our business longer term.

Okay. And on the set-top business, can you just talk just about the traction the team is seeing from the Marvell multimedia acquisition last year?

Yes. So the Marvell acquisition was actually several years ago. I think it was back in 2017, I want to say. So a lot of these early generation set-top boxes, last generation set-top boxes that we won, in that we also had a number of wins with these new Edge SoCs going into them for just the first generation, the audio AI, whether it's in Korea with SK Broadband, in Switzerland with Swisscom. In Asia and Europe, a lot of their set-top boxes are typically the smaller, they look like a smart speaker, they respond to your voice. You go, "Hey, Swisscom, change my channels, raise the volume, et cetera," they'll respond to voice. And so we've seen a lot of success here. And then we're building upon that for those -- that new generation of set-top boxes that we talked about that will add video and vision. So you'll start seeing a much broader range. One of the advantages that we have is that we're really only 1 of 2 U.S.-based makers for the set-top box SoCs. As certainly trade tensions around the world continue to escalate, service providers are much more reticent today to integrate to utilize a form made -- a Chinese-made SoC into their set-top boxes, and so we're seeing a lot of demand. Our competitor here in the U.S. will be Broadcom and certainly Broadcom has faced their share challenges with Europe and other parts of the world in terms of how they traditionally approach sales. And so we're seeing a big interest from service providers in Europe and around the world to look at other solutions. And we're really one of the only capabilities out there that kind of checks both boxes. And so we've been -- while the overall set-top box market, obviously, is not a growth market, our share today is very small. So while the overall market isn't growing, and in fact, it's probably in slight decline, coming from a very small base, it is a growth opportunity for us.