All right. Hello, everybody. Good afternoon. Thanks for joining us. I know it's late in the day, late in the conference, so appreciate everybody's attendance here today. My name is Gary Mobley. I'm with Wells Fargo Securities. One of the companies I cover as a semiconductor analyst is Synaptics, and up on stage with us today, we have Dean Butler to my immediate left, who is the CFO, and we have Munjal Shah on my far left, who heads up investor relations. To level set things and provide a context for our deeper discussion, I was hoping you can give us an overview on the Synaptics business, and then we can dig deeper from there.
Yeah. Yeah. So first, thanks for having us, Gary, and it's a good conference. We've had a great set of meetings so far. So by the way, you know, congratulations to you, Wells team. To give sort of some context on Synaptics and what we do in our marketplace, the company largely focuses on sort of the fairly fast-growing segment of semiconductors in the world of IoT. So our focus is largely in, you know, building wireless and processor capabilities for that, which is a fairly recent investment over the last three or four years, where the company's been heading that direction. Before that, and we still have a big portfolio that services enterprise.
We do, you know, commercial laptops, a lot of enterprise, you know, semiconductors, and then if you run the clock even more, a smaller segment that was, you know, focused on, you know, smartphones. About 10%-15% of our revenue is, is sort of smartphone-based. I think a lot of investors sort of know the company from that legacy smartphone era, and what I would just say is, you know, that being 10% or 15% is sort of the, the legacy part of the company, and going forward, really, it's, it's the processor, you know, connectivity around, around IoT. That's really our focus, and we think actually is a, it's huge opportunity for the company ahead.
Okay. I attended your Analyst Day, which was recent in New York, so appreciate the, you know, all the updates there. So I was hoping that you can walk us through some of the key messages, maybe from a financial targets perspective, and I know you realigned some of your reporting segments. Maybe you can just give us an overview of what you were trying to communicate there at the Analyst Day.
Yeah, well, first, maybe just starting on realigning some of the reporting units. We did that largely because the company had gone through such a shift over the years that I think we really needed to redefine sort of where, where the investment's going, where the, you know, growth opportunity is for the company. And what we realigned to was actually, you know, three new buckets. One was we shifted what was previously defined as, as IoT, which was 70% of, of the company's revenue. Last fiscal year was 70% IoT. And we, we honestly got a lot of questions from investors: How does that break down? What's within the 70%? It got to be sort of too big of a bucket, and, you know, there was sort of this natural tendency to try to dig and parse it out even more.
So I think what we wanted to do is give people clarity on, hey, what part of IoT is most interesting? What part of IoT are we focused on? And the best way for us to do that is give a clear definition, and that definition more from sort of this broad IoT, sort of everything, into two very distinct technologies that we see as, as sort of IoT, which is, wireless and processors. And I think many investors, you know, think about that as, you know, kind of squarely, hey, IoT applications for technology. So that, that was sort of the main reason why we wanted to break it back down. And then second, you then thought, okay, well, sort of what's left of the remainder of historical IoT definition?
We wanted to clarify for a lot of people, you know, many of those applications end up selling into Enterprise-focused customers, so people that are sort of corporate IT is sort of largely the end buyer. And that, you know, set of business areas, we thought was more indicative of a slower growth rate than kind of a faster-growing, sort of traditional IoT. So we wanted to put bounds around, hey, what that Enterprise is for the company, what that definition is, and then the corresponding, hey, growth rate. I mean, an Enterprise growth rate is kind of mid-single digits. So we said, "Hey, that's kind of a 4-6 growth rate, you know, kind of business," where our Core IoT, our new IoT definition, Wi-Fi processor, hey, that's a 20%+ grower.
I mean, that's, that's a very fast-growing element of, of the market, and therefore, we think our, our sales, you know, growth rate is gonna be sort of 20%+ . And then we made no change to actually our historical Mobile definition. That didn't change. It's, it's still only sort of 10% of, of the company's revenue, and I think most people understand that to be sort of single-digit grower anyhow. So we wanted to make sure that people understood, hey, each of the three areas have different, you know, growth rate potentials, what that definition was, who the ultimate end consumer of them were.
I thought that was, you know, most people found it, you know, very helpful actually, to sort of redefine that and understand what the growth potential, you know, market sizing, and then ultimately, how does that translate into the company's sort of future growth?
Got it. Mixing all that together, 10%-15% long-term growth?
Yeah, that, that's right. Yeah, 10%-15%, sort of on a consolidated basis, largely being driven, you know, through Core IoT. So Core IoT, you know, 20%-30%, it's actually, it should be a pretty fast grower. And then mixing Enterprise, Mobile, it's sort of single digit. That's how you get to this sort of 10%-15%, you know, range number.
Okay. You've been fairly straightforward in communicating your view on gross margin, even before the Analyst Day, and it was consistent at around the 57% level, which at the time, you know, I think a lot of people thought, you know, it was too low. Maybe if you can give us a better appreciation of, you know, why 57 is the right target in the context of when perhaps you were overearning in the low 60%, mid 60% range, and versus where you're guiding to in the fourth quarter, you know, more in the low-to-mid 50% range.
Yeah, it's a good question 'cause we did receive a fair amount of feedback on, "Hey, when can the company get back to 60% or higher gross margin? You know, what would it take to get back there?" And I think some people sort of missed the point that when we set 57%, actually this was in 2020, I believe we set 57%. So, you know, rewind back to the beginning of COVID, at that point in time, we were way south of 57%. We were sort of kind of 50%. And that is how we've consistently seen the business throughout the ups and then now downs, even though we were sort of booming, and at one point, to your point, we printed, I think 62%, was sort of our high watermark on gross margin.
We continued to reiterate, hey, we think that the right target for this company, its set of markets, its set of technologies, is sort of a high 50 mark. And so we sort of resisted the urge to kind of tease people along, that it could go, you know, significantly north of 60, even though we were sort of already there at the point in time. So we started off with, I think, the right target, 57, in early 2020. We executed that and went beyond, probably overearning, sort of at the height of the COVID boom. And we actually really evaluated internally on, hey, what is, like, the sustainable sort of long-term trajectory of what the business is likely to be?
We came back to the point that actually 57 is probably the right target for the business, and that's a number of factors. One, if you benchmark, you know, Wi-Fi, processor-type businesses, we do have to, you know, consider, hey, we're blending in, you know, a mobile business, we're blending in a PC business, which are generally below that. You sort of get this sort of natural asymptoting around high 50s. Now, today, a lot of our business reaches into, you know, kind of big customers or early opportunities. Perhaps down the road, if it's tens of thousands, hundreds of thousands, super broad, super distribution-centric, maybe we have a different pricing power mechanism in play at that point in time.
But when we set out, excuse me, our earnings day in, in September, sorry, our Analyst Day in September, that's probably not in the cards over the next four or five years to sort of surpass it in any meaningful way.
Okay. You're, you're guiding essentially to low 50% gross margin, you know, for the first half of fiscal year 2024. Maybe if you can help us get an appreciation of when you get back to that target 57% gross margin, and, and what the driver of that, of that uptick is.
Yeah, I mean, there's... It's really mix driven, just so everybody is sort of aware, and I think we talked about a little bit on earnings call, is today, the things that are going better in the world are actually the product mix that's probably pulling us down. You know, Mobile things are doing better, PC things are doing better. Core IoT, you know, actually bottoming and moving, but what's not necessarily doing better is Enterprise, and that we sort of require the mix of our portfolio to be back to normal before we're at 57%, and a piece of that actually is Enterprise. So our Enterprise business, you know, does carry generally higher gross margin.
I think we talked about that in the Analyst Day in September, and we would expect that our mix needs to get back to normal before you would see that. So I think to me, it's just a timing question on how product mix evolves back to sort of normal state rather than any particular catalyst.
Okay. At the Analyst Day, you also talked about opportunities to increase ASPs or bill of material, probably is a better way to say it. But conversely, you know, given the market dynamics, there's, you know, there's obvious areas of pricing pressure. Maybe you can just speak about some of the divergent trends that you're seeing in the marketplace in the near term and as well as the long-term opportunity.
Yeah. I think there's considerable amount of opportunity, really, to do a lot of cross-selling with the portfolio. The portfolio itself actually lends itself to you know, cross-selling in IoT customers and enterprise customers, that I think will lead to ultimately sort of some accelerated, you know, growth. And the things that I think we have a good handle on are areas where we already have some level of, you know, high penetration in with customer bases. We have really good penetration in, say, automotive customers, really good penetration in enterprise customers. Those sort of things, I think, can lead to sort of higher ASPs in that realm.
But on the flip side, actually, I don't think a lot of suppliers are, you know, have a lot of appetite for lowering the cost of goods sold. So, you know, while you maybe extract a little bit better ASP, you sort of have this cost of goods sold that's, you know, not really moving on you, which there are other cases where actually prices are coming down. There's a lot more pricing pressure and a little bit more of the, you know, pure consumer kind of IoT things, or in a few places in automotive, we do have a little bit of pricing pressure as well. And so that sort of counterbalances all of this equation. And I think on balance, we see it as fairly a neutral environment.
I would expect next year you're probably not gonna see any supplier cost down on the cost of goods sold, but I do think it won't stay that way forever. I think at some point, you know, these fab suppliers, et cetera, will actually get back to some amount of normalcy in semiconductor, you know, pricing, but that's sort of yet to be seen, you know.
I guess TSMC is probably the most stubborn from a pricing perspective. I don't expect you to comment on that, but maybe you can just give us a sense of how diverse your supply chain is.
Yeah, we have a reasonably diverse supply chain. It, it's all sort of the sort of tier one main foundries that you would know and main assembly houses that you would know. That being said, we, we use different foundries for different things. Like our processors tend to utilize, a, some of the newer process nodes, and so there, there we go to places where, hey, we highly value technology. We have some other things that are sort of on very lagging, you know, analog-type nodes, and, hey, we don't need to go chase a bunch of process technology. We value stability, and so we'll look for, hey, stability, and, hey, where can we get sort of, you know, decent, you know, fab pricing? So we do sort of have a, a mix.
I think we have, you know, gosh, nine or so, you know, fab partners, which for a company our size is probably, yeah, too much. We'd like to sort of consolidate that down quite a bit, and we have made a move to try to consolidate that, but some of our sort of legacy devices still utilize some of the older fabs.
Okay. Let's shift gears to some more near-term dynamics. You hosted your earnings call not too long ago, I think just a few weeks ago. Maybe you can give us a sense of where we're at as you see it in the semiconductor cycle. I think you mentioned specifically a bottom, a bottoming, which I think was a quarter ago. And give us a sense of the shape of the bounce off the bottom, the slope, so to speak.
Yeah. Look, I think we sort of took down a lot of our revenue expectations about three quarters back. You know, give or take, one of probably the earlier, you know, folks to sort of take down revenue expectations. And it's run pretty stable from a revenue standpoint since our May earnings call. We sort of got it down, and it's been pretty stable sort of for the last three quarters now, including our December guide at the midpoint. I would sort of characterize it, where are we? We're sort of at or near bottom, and most customers and end markets that we participate in are seeing sort of stabilization. So there's a few areas that actually have started to turn back up, like, you know, mobile phones actually have started to turn back up. That's like 10% of our revenue.
But interestingly enough, if you go back in time, they actually were the first one to actually start declining, so they're actually the first one to start coming out of the hole. PC has stabilized and looks like that thing's bottomed, and that's starting to move back up. In our Core IoT business, hey, it looks like we're bottom, you know, here, and we're gonna start to move back up going forward. Probably the one that I would say we haven't quite bottomed out on is in the Enterprise. That one looks like, you know, hey, haven't quite reached the bottom, there's still some more to go before it sort of turns around. So that sort of gives me, what, that three out of four that, you know, have bottomed and are now looking more positive.
I'm optimistic that, hey, we're bottomed and we're sort of moving forward. Now, the big question I don't have a precise answer for you, Gary, is what does the shape of the recovery look like? And that even for us is not quite clear. I mean, if you asked me a couple quarters back, I would've thought, hey, inventory depletion, and you'd sort of move back up pretty quickly. Now, there's certainly some hesitation from customer forecasts, although people are optimistic that it's not gonna be a fast move up. It's sort of more of a sort of a gradual, sort of step-by-step move back up. So how that velocity changes through 2024 is sort of yet to be seen.
You know, there's, you know, positive indicators we get, like our distribution channel, which services a lot of logistics for various customers that sell out. So the selling into their end customers actually, you know, increased last quarter. So like, hey, that's a good indicator. One data point isn't a trend, but, hey, that's an indication that things are sort of moving in the positive direction. Inventories come down, that's a good indication that, you know, orders should start flowing back. You know, requests for cancellations, requests for reschedules has really slowed. We've seen pretty minimal sort of amount of cancellation and reschedule, so positive indicator. And then, you know, bookings are positive. They're, like, moving in the right direction, but they're still not enough that we'd say, "Hey, this is like a bounce back." Right? It's probably more gradual.
So, sorry, I couldn't give you more detail than that, but this is sort of, we sort of are using the indicators on where we think things are headed.
Yeah, I appreciate that, visibility isn't great, and, given that order lead times are back to normal, customers are probably not very much inclined to give you much visibility beyond, you know, 13 weeks or so.
Yeah, I think in some customers sort of expect they can see inventory and channel. They can see inventory at semiconductor suppliers and expect, oh, my lead times might be sort of less than normal. Like, you know, so we do occasionally get customers that want sort of fast turns orders because-
Yeah
They understand, hey, there's inventory at various places that they can get it, so why put their liability on the line with the purchase order? So you get some weird behavior.
Yeah, and so sure, all that's being exacerbated by the end of the year, the end of the calendar year, the high interest rate environment, where cash is king, and nobody wants to hold inventory exiting the year.
That's right. That's right.
Okay. And so, I think what's on most investors' mind is what, you know, what does Synaptics look like on the other side of this inventory depletion process? Arguably, you were overearning, you know, back in calendar year 2022. But what do you think is a normal quarterly revenue run rate where you're actually shipping to end demand?
Yeah, but we, we sort of see, you know, a quarterly, you know, low $300s, let's call it, sort of end demand, but our expectation is to drive $400s. Look, what, what we outlined in our September investor day was, hey, our look forward over what, what we think probably the next five years is going. And that we think actually comes with, you know, considerable growth. We talked about it earlier, 10%-15%, you know, compounding growth rate. And really, it comes out of the Core IoT side of the business. We think that the business, if you fast forward in time, you get in a more normal environment, you know, we continue to execute, that that becomes, you know, roughly 45% of the portfolios, these Core IoT sort of fast-growing Wi-Fi processor assets.
About another 45% is kind of this Enterprise Automotive business, and the remaining 10% is kind of this, you know, mobile business that's sort of steady eddy. So what we, what we look for is, hey, there's gonna be some quarters where we're gonna have to go through some pain as the world, you know, deals with 2024 and, and how interest rates and the macro affect things. But we're actually looking out beyond that. We're trying to invest in this Core IoT, I think, which drives the company, you know, out beyond 2024.
Okay. So we've seen a recovery in the PC market or some normalization in the PC market. I would presume that's consumer, that's enterprise PCs. So on the enterprise side, if we're starting to see a recovery in PCs, when might we see that pull some sort of recovery on the docking station side, or as you refer to it, you know, one of the more profitable subsegments of the enterprise side of the market?
Yeah, it's a good question. I mean, we sort of see PC moving up as a positive indication that, hey, the rest of corporate IT buying sort of may follow. What we did see is enterprise sort of held in a lot longer than some of the consumer applications before it started to roll over with the inventory and some of the macro effects. We think that's probably the same on the upside. So as these things are starting to improve in some of the other areas, we think there's a time delay on what enterprise ends up happening. More than 50% of our PC offering actually is enterprise linked. So most of our laptops that we service, those models tend to be enterprise sort of focused models.
So we do have sort of a good glean into, hey, how are these, you know, laptop models selling and, you know, what's happening in the enterprise? It hasn't yet linked back to the docking station also returning, but we think that it's just sort of time delay. At the end of the day, these will be a somewhat linked, you know, set of businesses, which is why, hey, we actually wanted to categorize them together as an enterprise-linked sort of buying cycle. What's interesting is corporate IT spending is all done by you know, budget setting, right? And a lot of people reset their budgets at the beginning of the year.
If you look into 2024, look, everybody reads the same Wall Street Journal, and, you know, there's, you know, consumers are certainly still buying, but, you know, confidence from, you know, corporate America is not super high. So I wouldn't expect to see, like, a big uptick in corporate America's, you know, IT spending budgets. I think some of the laptop rebound is probably more of a function of, hey, people have been starved, you know, through, you know, the last couple of years, and that refreshes are starting to happen. I don't think that the docking refreshing, you know, just sort of hasn't happened, you know, yet, but we, you know, could be an indication to come.
Throughout this patch of softness, you've done a really good job at tamping down operating expenses and keeping them low at a steady state. I would imagine a lot of that has to do with bonus accruals and things like that. So maybe if you can just talk about what's fungible in that OpEx management. And the point of the question is, you know, what does the quarterly OpEx look like when it's paired with normalized or recovered revenue?
Mm-hmm. Yeah. So today, our sort of stated OpEx is to stay below, like, $100 million a quarter. I think last quarter was something like $97 million, and that's kind of our stated goal, you know, during this point in time. Like, until revenue recovers, that's our plan. We're gonna sort of keep it at or under this $100 million a quarter bogey. At a normal environment, I think you would see OpEx move up, but, I mean, call it maybe it's up 5%-10%. It's sort of not- we're not, you know, artificially keeping it, you know, substantially low. I mean, I think you may see 5% or 10%, but that's about it. And the reality is, what have we been doing over the last, actually several years, is reallocating the priority inside the company.
So moving priority from mobile phones into IoT, priority from PC into IoT. What we tend to do internally is try to, you know, rationally allocate where the resources should be going, sort of project by project and sort of engineering function, to, to make sure that we're not out of balance. What ends up happening is, if you don't keep an eye on these reallocations, hey, one side sort of, you know, stays high, and then you keep adding on the other, and you sum it up, and you sort of gotten your place in, into a place where you don't want to be. We tend to focus internally on how to reallocate.
Normal environment, you know, we're probably holding back a little bit on some of the investments that, you know, we would probably put back into play, but that top line has to probably recover first.
Okay. Shifting gears to capital management, it's probably important to touch on the topic because you're flush with cash, I believe $124 million in cash, as of the most recent quarter. How do you rank order your priorities in capital allocation?
Yeah. So we've been pretty clear about our priorities on what we do around, you know, capital allocation. You know, first priority is always investing back in ourselves. Even at kind of this lower sales level than, you know, where we'd expect to be, cash generation for the company and positive cash flow is actually, you know, never in question. I mean, we're always cash flow positive. We can always, you know, afford to reinvest back into the business, so that one's sort of taken care of. But M&A actually ranks pretty high on our list. The company's done really well historically on, hey, adding assets that actually help accelerate growth or enter into new markets. We tend to look for things that are technology fits or customer base fits that we know well.
You know, likely things that we would focus on are sort of things that might help our, our Core IoT business, which is our primary function. Following M&A, if there's sort of, you know, nothing sort of interesting at play or that we, you know, might wanna keep on the lookout for, we, we actually strive to do some debt management. That actually is our, our next priority, is really what we wanna have is a pretty clean balance sheet, so that, hey, if, if an M&A target that's of the right strategic ilk comes up, that we have a balance sheet that we can actually activate, right? And if you're loaded up with a bunch of debt, then it really limits your, your flexibility. So absent M&A, we'd actually look to keep our debt level sort of in check.
And then on the share repurchases, we're actually pretty opportunistic. So, you know, we'll reach into the market and do share repurchases on disconnects, or sweep some of the excess cash flow into share repurchase programs. If you look over the last 12 months, what have we done? We did kinda $200 million in share repurchases. We did $150 million in sort of M&A-type activity. So those have been sort of what we have been doing. We haven't touched sort of the debt management, which is probably something that we would look at, since we haven't revisited that in a little while.
Okay. I hope you would agree with this, and I think you would, but you're probably a little over-indexed on the consumer side and maybe a little under-indexed on the automotive and industrial side. So my question related to that is that an example of a good fit from an M&A perspective, getting a complementary fit on those two particular end markets?
Yeah, I mean, it's a great example. I mean, we really do strive to expand our automotive capabilities, and a lot of our technology fits from Core IoT actually are pretty applicable into the industrial segment. But we historically don't have a great reach and channel into industrial-type accounts. Those would certainly be two areas high on the radar that would fill some of our strategic gaps and things that... Look, maybe we could get there, you know, on our own over time, but, you know, ways to accelerate activation in the industrial and ways to expand within our automotive footprint.
Yeah.
So those would be, you know, great opportunities. But, you know, we weigh those things as we move forward and, you know, there's technology fits, there's market fits, and, you know, what we don't want to do is probably create a portfolio that, you know, gets too wide, and there's not enough commonality that we can activate our resource allocation. So we want things that we know, technology we know, customers we know, that we can help, you know, extract value when we do M&A activity.
Okay. Well, we're pretty close to our time limit, so that's probably a good stopping point. Dean, Munjal, I really appreciate you joining us here at the conference. I appreciate all the people in the room. I appreciate all the people online who joined us as well. So again, thank you, guys.
Yeah, super. Thank you, Gary.