Good day, and welcome to the Synaptics second quarter fiscal 2020 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jason Tsai. Please go ahead, sir.
Thank you, and good afternoon, and thank you for joining us today on Synaptics' second quarter fiscal 2020 conference call. My name is Jason Tsai, and I'm the 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 also being broadcast live over the web and can be accessed from the investor relations section of our company's website at synaptics.com. In addition to a supplemental slide presentation, we have also posted a copy of these prepared remarks on our investor relations website. The supplementary slides have also been furnished as an exhibit to our current report on Form 8-K filed with the SEC earlier today and add additional color on our financial results.
In addition to the company's GAAP results, management will also provide supplementary results on a non-GAAP basis, which excludes share-based compensation, acquisition-related costs, and certain other non-cash or non-recurring items. Please refer to the press release issued after market close today for a detailed reconciliation of GAAP and non-GAAP results. Additionally, we would like to remind you that during the course of this conference call, we will be making 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 with the SEC, including the Synaptics Form 10-K for the fiscal year ended June 29, 2019, for important risk factors that could cause actual results to differ materially from those contained in any forward-looking statements. Synaptics expressly disclaims any obligation to update this forward-looking information. Now, before we get started, I'd like to announce that we are planning on hosting our Analyst Day in June in New York, and we look forward to discussing more details about our long-term strategy and targets with you at that time. I'll be sending out more details shortly. I will now turn the call over to Michael.
Thanks, Jason. I'd like to welcome everyone to today's call. I'm pleased to be speaking with all of you again today and report an outstanding quarter and finish to calendar 2019. In the December quarter, we saw unusually strong demand from our largest mobile customer, as well as in our PC business, leading to results that were better than we forecasted three months ago. We continue to be disciplined with our spending, resulting in OpEx that was lower than expected. All of this led to our first quarter of 20% non-GAAP operating margin in more than five years and a record quarter for non-GAAP net income and EPS. Dean will go into more details on our financial performance later in the call. I'm really pleased by our team's execution and the operational control and efficiencies that we've put in place and are beginning to impact our bottom line.
Now let me update you on the progress we're making in transforming Synaptics and reshaping our business to deliver sustainable, high-margin, long-term growth. Toward the end of last year, we started the process of our strategic review internally to assess our opportunities and risks. While we're still early in the process, I'm really encouraged by the highly differentiated capabilities in products like our OLED touch and our low-power, high-performance edge computing SoCs. These SoCs feature embedded neural networks and AI capabilities for smart audio and video devices and can span a variety of end markets. While we're excited about the opportunities in these product areas and will continue to invest here, we will also certainly de-emphasize other parts of the portfolio in order to continue to keep spending in a reasonable envelope.
As part of our portfolio optimization, we announced in December the divestiture of our mobile LCD TDDI product line for $120 million. We expect that this transaction will close in the June quarter. This is the right move for Synaptics, as our mobile LCD TDDI was already very margin dilutive, and with ongoing ASP pressure, it would have continued to be a drag on gross margins had we not made the move to divest this product line. We do retain our ability to develop and sell discrete display and touch solutions, TDDI for OLED displays, and TDDI for automotive. One of the ways we would look to use the cash from the sale is to look at inorganic opportunities to add more differentiated, high-margin, accretive assets to our portfolio.
Dean will provide more details later as to the financial impact on our P&L that this transaction is expected to have. Now let me update you on our businesses. In mobile, as I mentioned earlier, we saw unusual strength and demand from our largest mobile customer in the December quarter, and that strength continues into this quarter. Demand for the handsets that our display drivers are powering continues to exceed expectations in the short-term, and we continue to benefit as this current product cycle plays out. We're also seeing strong demand and design momentum with our OLED touch sensor.
As you may remember, our first win was with the Huawei Mate 30 Pro last year, and we're making very good progress with our customers in delivering a differentiated touch solution with premium features that include active pen support, face detection, and support for high report rates of 90 Hz and 120 Hz on the latest generation of on-cell flexible OLED displays. I'm very excited by our pipeline here, and I'm confident that our industry-leading OLED touch controllers will be a meaningful growth driver for Synaptics long-term, driven by the ramp of flexible OLED panel production. Moving to IoT, this business performed as expected in the quarter, and as new product launches with multiple customers delivered solid results.
At CES last month, we announced and demoed several new IoT products, including our VS600 family of edge computing software-enriched SoCs that combine CPU, GPU, and NPU with over six teraops of performance to power audio, video, computer vision, and deep learning, AI capabilities, combining intelligence and personalization to provide an enhanced experience for consumers. We're seeing strong interest from retail device makers and TV service providers, and this new family of SoCs will power a new generation of smart displays, smart cameras, soundbars, set-top boxes, voice-enabled devices, and other emerging connected products. Our design pipeline continues to grow across all of our IoT segments, and we are confident that the business will continue to be a strong growth driver for Synaptics. In PC, we saw unusual strength this quarter, driven by a couple of different dynamics.
As we talked about last quarter, we saw what we believe to be accelerated orders ahead of the anticipated tariffs that were supposed to be enacted in December. We also saw strength in the enterprise market as companies continue to upgrade to Windows 10 ahead of Windows 7 support that ended in January. While we do not expect the strength in the PC market to be sustainable, we continue to enjoy high market share in our fingerprint and touchpad product lines. Overall, I'm really excited by the momentum we're seeing in our business. We have a strong pipeline of wins with all our major customers. Our strategy to focus on more differentiated solutions that have higher margins is beginning to pay off, and our operational discipline is adding leverage to our model.
We still have a lot of work ahead of us in this transformation, but I'm very encouraged by the early progress we're making and our incredible team that is executing toward a stronger, more profitable future for Synaptics. Let me turn the call over to Dean to review our second quarter financials and provide our outlook.
Thanks, Michael. Good afternoon to everyone. I'll start with a review of our financial results for our recently completed quarter and then provide our current outlook for fiscal Q3. Revenue for the second quarter of fiscal 2020 of $388 million was approximately 6% above the high end of our previous guidance range, up 14% from the preceding quarter and down 9% from the same quarter last year. Our revenue strength from the quarter primarily reflects better than expected demand from our largest LCD display customer and from our PC customers. During the quarter, we had two customers above 10% of revenue at 21% and 13%. For the December quarter, our GAAP gross margin was 41%, which includes $8.2 million of intangible asset amortization, $600,000 of share-based compensation costs, $200,000 of retention program costs, and $1.8 million partial reversal of a previously accrued loss on a supplier commitment agreement.
GAAP operating expenses for the December quarter were $124.8 million, which includes share-based compensation of $14.5 million, intangible amortization of $3 million, restructuring expenses of $13.3 million, and retention program costs of $3.4 million. We accrued a GAAP tax expense in the quarter of $12 million, bringing the year-to-date GAAP tax rate to 22.3%. GAAP net income for the quarter was $19.8 million, or a net income of $0.58 per diluted share. On a non-GAAP basis, our December quarter non-GAAP gross margin of 42.9% was 40 basis points above the high end of our guidance range and primarily reflects ongoing cost-saving initiatives and an overall better product mix.
The December quarter non-GAAP operating expenses were below the low end of our guidance range at $89.2 million and down $6.3 million from the preceding quarter, primarily reflecting the benefit of restructuring activities that have resulted in the achievement of the previously announced $40 million annualized OpEx savings six months ahead of schedule. To reiterate Michael's comments from earlier, I'm pleased to point out that our 20% non-GAAP operating margin for this quarter was the first in more than five years for Synaptics. Our non-GAAP tax rate for the quarter and year-to-date period was 12%. Non-GAAP net income for the December quarter was $70.1 million, or $2.04 per diluted share. A 29% increase year-over-year compared with $54.4 million or $1.55 per diluted share in the second fiscal quarter of 2019. Both of these were a record high for the company. Turning to our balance sheet.
We ended the quarter with approximately $425 million of cash on hand, an increase of $74 million from the prior quarter, primarily driven by cash flow from operations. Receivables at the end of December were $246 million, and DSOs dropped to 57 days. Inventory were $103 million, and inventory days were 42, down from 63 in the prior quarter, reflecting stronger product demand throughout the quarter. Capital expenditures for the quarter were $3.2 million, and depreciation was $8.1 million. Before I turn to our guidance, please let me discuss the expected impact of our mobile LCD TDDI divestiture. We expect this transaction to close in our fourth fiscal quarter, and when it does, we'll receive $120 million for this product line, plus an additional cash payment for on-hand inventory at that time.
From a P&L perspective, let me give you a sense and scale and scope of this mobile LCD TDDI product line. For the last fiscal year, 2019, revenue was more than $300 million, and gross margins were in the mid-20s%. Mobile LCD TDDI is a profitable product line for Synaptics, and while most of the associated OpEx will move off of our P&L, we will retain some of the OpEx in the form of trap costs that will take us several quarters to unwind. Revenue from this product line is expected to decline in fiscal 2020 as compared to fiscal 2019, as we've been more selective in the mobile LCD TDDI revenue opportunities which we've pursued, so that gross margins this year will be higher than fiscal 2019, but will still be meaningful dilutive to the corporate average. We will provide additional color after the transaction closes.
Now let me discuss our outlook for the third quarter. Based on our backlog entering the March quarter of approximately $284 million, subsequent bookings, customer forecasts, product sell-in and sell-through timing patterns, as well as expected product mix, we anticipate our total revenue for the March quarter, which includes mobile TDDI, to be in the range of $330 million-$350 million. We expect the revenue mix from our mobile, IoT, and PC products to be 52%, 24%, and 24% respectively. I will now provide GAAP outlook for our March quarter and follow with non-GAAP outlook. We expect our GAAP gross margins to be in the range of 39.5%-41.5%. We expect our GAAP operating expenses to be in the range of $115 million-$120 million, which includes charges for intangible amortization, stock-based compensation, and we also expect to accrue restructuring and retention related costs.
Finally, we expect our GAAP tax rate for fiscal 2020 to be in the range of 20% to 25% for the fiscal year. I will now provide non-GAAP outlook for our March quarter. We expect our non-GAAP gross margin for the March quarter to be between 42% and 44%, and anticipate this to be our third consecutive quarter with non-GAAP gross margins above 40%. We expect non-GAAP operating expenses in the March quarter to be in the range of $88 million-$91 million. We anticipate our non-GAAP tax rate for fiscal 2020 to continue to be in the range of 11% - 13%. Our non-GAAP net income per diluted share for the March quarter is anticipated to be in the range of $1.30-$1.60 per share. This wraps up our prepared remarks.
Now I'd like to turn the call over to the operator to start the Q&A session. Operator?
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll take our first question from Charlie Anderson of Dougherty & Company.
Yeah, thanks for taking my questions, and congrats on the strong results. I wanted to start with gross margins. You guys have made a lot of progress there so far. I wonder if maybe you guys could summarize what's been done so far in terms of cost-saving initiatives that help gross margin sort of beyond mix, and potentially what's left to do. Just sort of taking aside the LCD TDDI transaction, what are some of the other levers that are available to you to enhance gross margin? I've got a follow-up.
Hi, Charlie. This is Michael. Thanks for the nice words. I think that the first benefit obviously is on mix, Dean alluded to in his remarks.
We've walked back from some of the TDDI business that in the past I think we would've taken, and I think we've talked about that on the last couple of calls, so that's certainly been a benefit. We definitely have a lot more operational focus, and we've started really looking at our costs, and that means our variable costs, whether it's from suppliers, in all parts of the supply chain. I think we're in the very early innings there, but we've started to find opportunities where we can take some cost out of the business. We're going to continue to do that. I think that's going to be a multi-quarter project. We're trying, I think you and I talked about, to rationalize our supply chain. Right now our supply chain is very wide.
I think that by making some moves to consolidate the supply chain, we should get some more leverage and hopefully get some better costs out of the system. I think we're still in the early innings there, so there's still some room we think we have on the gross margin line.
Great. Thanks so much for the color. For my follow-up, a question on IoT, kind of a two-parter here. Looks like you'll be up sequentially in March. I think the typical seasonal pattern is that you've been down historically in March in IoT, maybe just wondering what's different this year. I think heading into the year, the thought was that that business for the full-year could grow in the low teens, and I think you'll need maybe $100 million quarter or so in June for that to happen. Maybe just update us on your view on IoT for the full-year. Thanks so much.
I'll let Michael handle the visibility on IoT from a project perspective, but just to give you a little bit of color. IoT as a business sequentially Q3 midpoint versus Q2 actual is slightly down as where we think for the March quarter. It is up year-over-year, in the seasonal pattern, this is actually seasonally down in our fiscal Q3. Just to give you a little color, it's seasonally down. We're up double digits year-over-year from where we were last year, really positive on kind of where this thing's kind of been growing. Michael, if you want to make a
Yeah, Charlie, I think we continue to see nice areas of strength across the portfolio. We talked about edge SoCs. I think that we have a nice design pipeline there and continue to be optimistic about the growth. The wired audio business, we've talked about some wins there with some inbox headsets, and I think we've clicked off another couple. We continue to be pretty excited about that business. Then of course, the video interface business continues to click along. It's a lower portion or smaller portion of our overall portfolio, but is accretive on the margin line, and we continue to grow that business as well. I think we continue to be optimistic. As Dean said, this next coming quarter is down, but I think that's in line with what we normally see in terms of seasonal patterns.
Okay, great. Thanks so much.
Thank you. We'll take our next question from Christopher Rolland with Susquehanna.
Hey, guys. Thanks for the question and very nice quarter. Display manufacturing is pretty heavy in the Wuhan region. I know that two of the leading Chinese OLED display manufacturers are there. I think Tianma is there. There wasn't a lot of commentary about how this might affect your business. Just wondered how you're looking at it and what sort of adjustments we should have in our heads at least as we move through the quarter?
Yeah. Chris, this is Dean. Let me just give you a little bit of sense just how we thought about our guide for the quarter. It's a fluid situation, I think, as everybody kind of points out, and there's not a whole lot of clarity, given that there's kind of the extended Lunar New Year right now for a lot of the factories in Greater China. What I will say is our direct supply chain doesn't run through the Wuhan region. Largely, our direct supply chain resides outside of Greater China for a large extent. As you correctly point out, many of our customers' supply chains do run inside of Greater China.
We've chosen to be just a little bit conservative on how we've guided this quarter, but we feel that we've kind of incorporated what we know as of today into our guide.
Great. Thank you. Dean, while I have you, about the TDDI business. You said that revenue was $300, but it sounded like it was declining. I'm wondering, when this does eventually come out in June, how much less than the $75 million a quarter run rate should we be using? Also on the gross margin side here, I'm getting maybe a 450 basis point benefit for company gross margins when you take this out. Like you said, you've already walked away from some of the lower-end stuff. Would something like 300 basis points be more like it? Thanks.
Chris, I'm not sure about your math because I think internally we don't quite get to the number that you're kind of estimating. To give you a sense on what this business size is, like I said, last fiscal year was a little bit north of $300 million. We've selectively walked away from a little bit business there. It's not vastly different. I would say it's kind of low double digit percentage that we've probably walked from on how to sort of think about it. Remember, the other thing that you might want to think about incorporating, this TDDI business is the normal kind of mobile seasonality cycle that you would see. I hope that helps.
Great. Thanks so much.
Thank you. As a reminder, to ask a question, please press star one. We'll take our next question from Ari Shusterman of Needham & Company.
Hi, this is Ari taking the question for Rajvindra Gill. First off, wanted to say good job on the great quarter. My first question would be regarding the use of cash for further M&A. Are there certain areas, sectors you want to particularly focus on, or what can we expect in the future?
Yeah, I don't know, Ari, that we have specific areas of focus. What I will say thematically is that I think in the past, the company has looked for bigger TAM acquisitions. There was Marvell and Conexant that were both in pursuit of large TAMs. I think that Dean and I are more on the page of trying to do what I'd call tuck-ins that are going to be margin and operating income accretive. We're looking for perhaps smaller things that are going to be much more in line with our current business, adjacent to our current businesses, and will add on both the gross margin line and on the op margin line. At least directionally, that's where we're going.
As I said at the outset, I don't know that we have anything specifically identified that meets that, but we certainly think that there are some things out there that can fall into that zone.
Okay, thank you. My follow-up would be about the set-top box market opportunity. Previously, you mentioned that this would be a big area of focus for you guys. Can you perhaps talk about your positioning there? When should we expect a potential ramp in that area? Thank you.
Yeah, I think we feel good about the opportunity on our edge SoCs generally, and I think that there's the edge SoC, we've built a platform that can go into consumer applications. You've seen design wins from Salil and his team on Google. We've talked about that in the past. We think that we have an interesting platform, for example, for video surveillance. Of course, there's set-top box. On set-top box, we today have very minimal market share. We've got some customers in Korea. We've got Swisscom. Generally speaking, our presence there is fairly small. We think that as a North American supplier, we have opportunity to grow the footprint, potentially in North America, potentially in Europe, but I think those ramps will take some time.
The customer base is obviously one that first we need to get qualified in their products, and then they need to ramp. It's not a quick ramping segment, and I don't expect, even in this calendar year, to see much in terms of materiality in that space.
Thank you.
Thank you. We'll take our next question from Brett Simpson of Arete Research.
Yeah, thanks very much. I have a question on the OLED touch opportunity that you see in front of you. You mentioned in your prepared remarks that you have Huawei as your sort of first customer here. Can you maybe just talk more generally about how you see OLED touch? I mean, we hear a lot about Y-OCTA as a big opportunity here. What gives you the confidence that we're going to see sustainable differentiation for you guys in OLED touch? That's really the first question. Thanks.
Yeah, Brett, fair question. I think that we definitely feel very good about our technology in the flexible OLED segment. Y-OCTA is a specific Samsung brand. It's a thinner display, as you know. The ability to pull out signal from a very noisy environment when your touch circuit is right up against the OLED, the pixels that are driving the display, is really a challenge. We feel like we've been able to resolve that with high precision analog front ends, and we're able to really pull signal out, a capacitive signal that represents your finger, out of a very noisy backdrop that comes from the LCDs or the pixels that are right next to the embedded touch circuit.
We have proof points today, as you called out, and we stated in the remarks on Huawei. We think that we've got a good design pipeline there and as a result of our differentiated technology. We think that this is going to be a growing segment for us in the coming quarters. We feel good about maintaining that. We've got a roadmap now that is very focused on OLED touch, and we think that we can maintain a lead there for a foreseeable set of design cycles.
Maybe just a quick follow-up on mobile in general. If we look beyond fiscal 2020, obviously, there's a lot of moving parts here. You have the closing of the deal for mobile TDDI, and we know TDDI generally is in a declining state. Then you also have your largest customer where LCD is not going to be around forever. I'm just looking at the mobile business that you see in front of you beyond fiscal 2020. How do you think about growth or how do you think about managing the balance between some of those declining product cycles and areas like OLED touch? Do you think fiscal 2021 or over the sort of medium term that mobile returns to you and your growth for Synaptics? Thanks.
Yeah. I think it's hard to forecast. There are a lot of moving pieces, but I think that pundits had sort of written us off because they'd seen this decline in the LCD display driver, and there's no doubt that has been a declining segment for us. I think that what's not been appreciated is our differentiation on OLED touch, and we think that certainly that's going to be a growing segment for us. How the two pieces move together, I don't know that we have a good read on. It depends on how launches go next year and the mix looks between LCD and OLED. We feel pretty good about the business right now, and certainly from a gross margin perspective, we see opportunities there depending on how the mix goes to continue to enhance gross margin and operating margin in our mobile segment.
Great. Thanks very much.
Thank you. We'll take our next question from Paul Chung of JP Morgan.
Hey, guys. Thanks for taking my question. First up, on your leverage levels which are pretty excellent, will be even better after the sale of the TDDI business. What kind of longer-term leverage levels are you comfortable with? Can you also remind us if you have any hedges in place to kind of offset some of the dilutive impact of your convertible and how we should think about dilution there? I have a follow-up.
Yeah. Hey, Paul. This is Dean. One, just on leverage ratio, in June when we have our Analyst Day, which Jason kind of alluded to at the beginning of the call, we'll be talking a little bit more about cap structure there, sort of stay tuned. I would say where we are from a debt capacity level, we have clear capacity available to us. Right now, we have no intention of going to tap more debt on the balance sheet. One, let me just say that. The other question that you had around do we have hedges on our convert and how to think about dilution. No, our convert does not have any hedges directly attached to it. It does have a potential dilution factor, but the company does reserve a call provision that's actually embedded inside of our instrument.
Okay, thanks. Then, just on PC demand, it looks like you expect another solid quarter in Q3. Do you think you can quantify the pull-in demand you think kind of drove Q2 strength and maybe Q3 guide as well? Then as we kind of move out 6-12 months from now, do you think we kind of revert back to that mid-$60 million quarterly run rate or maybe possibly lower if the pull-in kind of effects linger a bit? Thank you.
I think that it is unusual. I would say generally, we'll probably see a revert to our normal quarterly run rate. Our normal quarterly run rate is a bit higher than $60 million, but generally speaking, we should, to your point, revert back to that. It's been a really pleasant surprise. I think that we talked about it in the prepared remarks. We thought last quarter was going to sort of be the end of it given what we thought were pull-ins ahead of the tariff, but we have a very nice quarter in front of us. I think that what we're seeing is on a mix basis, a higher percentage of commercial laptops coming out, and those commercial laptops we have better exposure to than consumer. Demand seems to be sort of up a little bit.
I think the PC segment is growing 4%-5%. The commercial segment, and certainly the customers we are largely exposed to in the commercial segment, which are the big three, they seem to maybe be doing better than average. On balance, our business is growing higher than the run rate of the PC market. Again, I think that that is probably not sustainable. We do have very high market share in that segment, but for us to be growing meaningfully above the average growth rate of the PC market, given our high exposure, is probably not something that we should expect.
Great. Thank you.
As a reminder, to ask a question, please press star one. At this time, we have no questions in queue.
Okay. With that, I'd really like to thank all of you for joining us today. We look forward to seeing you at upcoming investor conferences and certainly at our upcoming Analyst Day. Thank you very much.
Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.