Third quarter fiscal 2019 conference call. My name is Jason Tsai, I'm the Head of Investor Relations at Synaptics. With me on today's call are Kermit Nolan, our Interim CFO and Chief Accounting Officer, and Saleel Awsare, Senior Vice President and General Manager of our IoT division, corporate marketing, and investor relations. This call is also being broadcast live over the web and can be accessed from the investor relations section of the company's website at synaptics.com. In addition to a supplemental slide presentation, we have 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 to 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 or recurring items. Please refer to the press release issued after the market closed today for a detailed reconciliation of GAAP to non-GAAP results. Additionally, we would like to remind you that during the course of this conference call, Synaptics will make forward-looking statements. Forward-looking statements will give our current expectations and projections relating to our financial conditions, 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 this company's current and periodic reports filed with the SEC, including the Synaptics Form 10-K for the fiscal year ended June 30th, 2018, for important risk factors that could cause actual results to differ materially from those contained in any forward-looking statement. Synaptics expressly disclaims any obligation to update this forward-looking information. I'll now turn the call over to Saleel Awsare. Saleel?
Thanks, Jason. I'd like to welcome everyone today to the call. I'm happy to be speaking to you today on behalf of the board and our executive leadership committee. I will first discuss the opportunities that lie ahead for Synaptics and update you on our business, then I will turn the call over to Kermit to discuss our financial results and outlook. Synaptics is undergoing a corporate transformation focused on driving innovation, unlocking the untapped potential within our extensive portfolio of technologies and expertise, and aligning the business towards better profitability long-term. Our board and the executive leadership committee is committed to improving shareholder returns by carefully evaluating the opportunities ahead in the markets we serve and making the right investment choices to further improve our gross margin.
We are thoroughly reviewing our product portfolio to better leverage our best-in-class solutions with an eye towards positioning the company for higher gross margins and profitability longer-term. We are moving quickly to strengthen our performance and address the challenges we face. With that said, let me now share a few product and customer highlights. For our IoT division, Synaptics is laser focused on innovating at the smart edge, and we are very pleased to share that our new AS300 family of SoCs announced at CES earlier this year, has already begun shipping millions of units to a major customer, a full quarter ahead of schedule. The AS300 family is at the heart of our smart edge AI audio smart solution. The world's first commercially available, fully integrated SoC that incorporates machine learning, neural network acceleration, a proprietary wake word engine, and highly advanced far-field voice processing.
This is also our first shipping design in 22 nanometer, enabling a broad variety of voice-enabled smart home devices, including hubs, Wi-Fi repeaters, speakers, and appliances. We are the leading solution provider for intelligence at the edge, and we expect to capitalize and extend this lead. Smart edge requires innovative technologies and integrated platforms that support the full range of consumer needs. Synaptics is building on its legacy as a leader in human interface technology to deliver a broad range of differentiated, integrated solutions that encapsulate voice and audio, video and display, AI, as well as security and consumer privacy. The market and adoption of these solutions are still in the infancy, and our differentiated portfolio will deliver best-in-class capabilities to the entire ecosystem and drive meaningful growth for our business over the next several years.
We will continue to leverage our industry-leading technology and will launch some very exciting new products later this year that will further drive integration of our human interface portfolio. In the mobile space, we continue to win major OEM smartphone designs for both LCD and OLED displays. In LCD, we are enabling more infinity displays with our full HD TDDI COP solutions, including two new design wins from Huawei and additional wins with other large OEMs. Our low power full HD TDDI solution also has flagship design wins at Oppo and Vivo.
In OLED, we continue to win share in the high-end segment of the market and expect to see upcoming flagship devices from leading handset OEMs continue to be supported by our best-in-class OLED display TDDI SoCs and touch sensors. While OLED solutions will continue to be a strong growth driver for our mobile business, we anticipate that LCD-based smartphones will remain a vital part of our customers' portfolio for the next few years. We are seeing ongoing development with our largest customers for LCD-based handsets for the next generation flagship and mainstream smartphone. We are excited by the progress we are making and are dedicated to supporting all of our large handset OEM customers as they ready their next generation devices that will launch later this year, whether it be LCD or OLED.
Smartphone headsets are transitioning from analog to digital, and we continue to leverage our best-in-class digital audio SoCs for this rapidly emerging USB Type-C headset market. With that, we are very pleased to announce a new USB Type-C headset design win with an additional top three smartphone OEM for the upcoming flagship smartphone that will be included in every box worldwide. We will ship a few million units in the current quarter for this new design win, and it is expected to go throughout the rest of the year. This follows our previously announced digital audio headset and dongle solution shipping in the box with Google Pixel 3 and with multiple Huawei phone. The market for digital audio is growing very quickly, and our technology leadership in this space has enabled us to capture meaningful wins at the world's largest OEMs.
We are very pleased with our progress and expect to see the wearable segment grow strongly for us as digital audio and active noise cancellation adoption for smartphones continues to expand. On the topic of wearables, at the recent HP Reinvent World Partner Forum, HP unveiled its current edge virtual reality headsets featuring Synaptics ultra-high-resolution VR display technology. Our industry first breakthrough display technology supporting higher resolution per eye has enabled OEMs to design a new generation of VR headsets with meaningfully better visual capabilities, bringing users a more immersive and better experience than before. Other VR headset makers that have recently announced products using our display technology include PICO's G2 4K headset and Acer with its ConceptD Ojo. Worth noting is that Synaptics is the only company delivering an end-to-end GPU to display pixel solution by leveraging our VR Bridge. Just a quick note on our automotive business.
We are pleased to have secured many design wins with our TDDI and fingerprint-based solutions, both of which position us well as cars begin to roll off the assembly lines over the coming years. We continue to execute on our long history of delivering best-in-class human interface innovation to the world's leading technology companies. We are very excited by our strong pipeline of new products and design wins that will ramp later this year and across all of our different products. Lastly, I want to provide an update on our search for a new executive leadership at Synaptics. The board has engaged an executive search firm, and interviews for the CEO position are already underway. The priority is to fill this role before resuming the search for our next CFO.
Given Synaptics' proven track record of technology innovation and market leadership, we expect to attract world-class talent. We will update you as quickly as possible on our progress. With that, Kermit will now discuss our results and outlook.
Thank you, Saleel, and hello, everyone. Synaptics posted third quarter results with revenue of $334 million, down 22% sequentially and slightly below our guidance range. Weakness in the quarter was primarily attributed to softness in the smartphone market, particularly in China, as well as the temporary impact of product transitions within our IoT business, partially offset by continued stability in our PC products. As reflected in the presentation materials released in advance of this call, revenue from mobile, IoT, and PC products was approximately 61%, 19%, and 20% respectively. During the quarter, we had three customers above 10% of revenue at 17%, 16%, and 10%. For the March quarter, our GAAP gross margin was 34.7%, which includes $15.2 million of intangible asset amortization and $700,000 of share-based compensation costs.
GAAP operating expenses in the March quarter were $119.8 million, which includes share-based compensation of $15.1 million, acquisition-related costs of $3.3 million consisting primarily of intangibles amortization, and some transitory compensation program costs. Our year-to-date GAAP tax rate was a negative 49%. In the March quarter, we had GAAP net income of $6.7 million, or $0.19 per diluted share. On a non-GAAP basis, our March quarter non-GAAP gross margin of 39.5% was above our guidance range and primarily reflects an overall positive product mix. This was our seventh consecutive quarter of non-GAAP gross margin improvement. March quarter non-GAAP operating expenses were $99.2 million, which was lower than expected, primarily reflecting a reversal of variable compensation accruals from the first half of fiscal 2019. Our year-to-date non-GAAP tax rate was 12%.
Non-GAAP net income for the March quarter was $29 million, or $0.83 per diluted share, a 10% decline year-over-year compared with $32.4 million, or $0.92 per diluted share in the March quarter of last year. Turning to our balance sheet. We ended the quarter with $324 million of cash, an increase of $41 million from the preceding quarter, which reflects approximately $47 million of cash flow from operations, net of $7 million used for capital expenditures during the quarter. Depreciation for the quarter was $8 million. Receivables at the end of March were $267 million, and DSOs were 72 days, reflecting a back-end loaded quarter. Inventories were $153 million, and inventory turns were 5.3. Further, while we did not repurchase shares in the third quarter, we do have $148 million remaining in our share repurchase authorization and intend to opportunistically repurchase shares.
I will make a few comments regarding our quarterly outlook. Based on our backlog of approximately $210 million entering the June quarter, subsequent bookings, customer forecasts, product sell-in and sell-through timing patterns, as well as expected product mix, we anticipate revenue for the June quarter to be in the range of $300 million-$320 million. For the June quarter, by product, we expect our IoT revenue to grow sequentially. We expect our mobile revenue will decline sequentially as the customer works through inventory in their supply chain, and our PC revenue is expected to be stable. Revenue mix in the June quarter for mobile, IoT, and PC products is expected to be approximately 55%, 25%, and 20%, respectively. During the second half of the calendar year, we expect growth in IoT and mobile revenue, while PC revenue is expected to remain stable.
We have taken a cautious approach to our guidance considering the impact of existing supply chain inventory levels. We anticipate that the level of product currently in the supply chain will be sufficient to meet the reduced demand for certain of our high-end display driver products from a leading smartphone OEM, which we believe will clear in the first quarter of fiscal 2020. I will now provide GAAP outlook data for the June quarter and will follow with non-GAAP outlook data. We anticipate stock-based compensation charge in the fourth quarter will be in the range of $16 million-$17 million. In addition, June quarter GAAP expenses will include non-cash charges of approximately $18 million related to intangibles amortization, of which approximately $15 million will be reflected in cost of sales. I will now provide non-GAAP outlook data for the June quarter.
Based on our overall revenue mix, we expect non-GAAP gross margin in the June quarter to be between 37.5% and 38.5%. Gross margin is expected to decrease slightly sequentially due to product mix within mobile. We expect non-GAAP operating expenses in the June quarter to be in the range of $102 million-$106 million. Our OpEx is expected to be stable sequentially if you exclude the one-time reversal of compensation accruals in the March quarter. We anticipate our non-GAAP long-term tax rate for fiscal 2019 be in the range of 11%-13%. Non-GAAP net income per diluted share for the June quarter is anticipated to be in the range of $0.20-$0.45 per share. Let me finish with some commentary around what Saleel addressed.
As we look to transform the company, we are reviewing options to drive profitability, align costs, and increase cash flow as we manage through short-term challenges. We will evaluate each of our product offerings carefully and look at opportunities with a much greater focus on profitability to drive investment choices. As we complete the process, our goal is to emerge with a business that will drive our overall corporate gross margins into the 40s% range while aligning spending to improve operating margins and drive our business towards greater long-term profitability. With that, I will hand the call back over to Saleel.
Thanks, Kermit. While we continue to work through some residual supply chain issues that are impacting our short-term financial results, we remain keenly focused on executing on our strengths and delivering on the untapped potential of our product platforms. This will entail an even more pronounced effort to reshape our portfolio towards higher margin products with the goal of achieving meaningful better gross margins longer term. We already have the building blocks and customer wins in place to execute across our IoT platform, where we expect to return to growth and to drive even greater momentum across the portfolio. We will couple this with smart targeted investments in key product and market opportunities, as well as a focus on spending alignment to conform with the product areas that we choose to focus on over time. We are intent on delivering consistent improved profitability for Synaptics over the long term.
We are in the initial phases of this process to directionally improve our long-term profitability and plan to keep you updated on our progress regularly. I'm confident that we are making the necessary changes and focused on the right priorities to accelerate Synaptics into a stronger future. Finally, we are participating in a few key trade events this month, where we will demonstrate our latest innovation. This includes Display Week, which is next week in San José, and Computex in Taipei at the end of the month. If you're attending, we will welcome you to stop by for a demo. With that, I will now turn the call over to the operators to start the Q&A session. Operator?
Thank you very much. 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 will pause for just a moment to allow everyone the opportunity to signal. I see we have our first question from Kevin Cassidy with Stifel. Please go ahead.
Thank you for taking my question. The gross margin decline due to revenue mix within smartphones, can you say, are there certain products that are getting more challenged on gross margin, or is it simply because of the inventory that you had discussed?
Yes, Kevin. I will take that one. In terms of the mix and the impact on mix in the fourth quarter in mobile, it's really our integrated type products that are going to impact the margin or push the margin down relative to our discrete products, which, of course, the volume of the discrete products will be down in the fourth quarter.
Okay. Maybe as you're thinking of the transformation of the company, is it possible to stay in the handset business and generate over 40% gross margins? Maybe if you could talk a little bit about your thoughts around that. It seems like it's a trade-off of large markets versus gross margin.
What we find is our products, I guess you could say in the general market, things tend to get commoditized. Being a leader in technology, we see a path to continue down this in the mobile market for what we think is a fairly extended period of time. Of course, working with certain key customers. We do believe that there's a path to improving those margins. Again, the overall mix of gross margin is going to be pushed into the 40s. Again, IoT will help support that focus.
Okay, great. Okay, I'll get back in the queue.
Thank you very much. I'll remind our audience once again, if you would like to ask a question, please signal by pressing star one on your telephone keypad. Just ensure that your mute function is turned off to allow your signal to reach our equipment. Just press star one to ask a question. We'll take our next question from Rajvindra Gill with Needham & Company. Please go ahead.
Yes, thanks for taking my questions. A follow-up on the strategic investment. You'd mentioned evaluating different options so you could get to the target of 40%. If you look at the different products within mobile, OLED, discrete, TDDI, and then, to a lesser extent, fingerprints, and then you look at PC and IoT, how do we think about that conceptually in terms of the mix of those businesses and the goal to get to 40%? Should we expect to see more OLED revenue within mobile and more discrete and less integrated? How do we think about that in terms of the longer-term direction of 40%?
Good question, Rajiv. We would say, the way we look at it, we do believe OLED has a path to higher overall gross margins, and the discrete products we believe will maintain some good gross margins. Obviously, the integrated products do drag down the gross margins somewhat, but it doesn't necessarily make them a bad investment, especially if we can be on the leading edge in terms of delivering products. Of course, within the mix, we intend to grow IoT. Saleel, if you wanted to add.
Hey, Rajiv, this is Saleel. As you know, IoT, as I've said earlier in my prepared remarks, will start growing in the second half of the calendar year in double digits. The gross margins in IoT continue to be very healthy, and we see that moving forward. Just to add to what the PC area is, where we maintain our margins, and we feel good about that as we move forward. Just adding to what Kermit said, we are directionally working towards this and move our gross margins into the 40s range.
Thanks for that. For my follow-up, in the mobile business, you had mentioned a customer working through to clear inventory. You're helping to clear it in fiscal Q1. I was wondering if you could provide some color with respect to that. Was it share loss? Was it just a drop in demand in China? Was it a transition? I'm just trying to get a sense of the big mobile drop-offs quarter-over-quarter in September. Thank you.
Okay. We believe that There's a lot of background noise. Anyway, we believe that we're maintaining market share in the mobile space. We've secured meaningful, new design wins in OLED and LCD, with numerous top handset OEMs. We believe both the flagship as well as mainstream phones will help us maintain our share, increase share.
You expect that inventory to be cleared by September?
Yeah. No, that inventory in the supply chain should be cleared in the September quarter. Yes.
Thank you.
I see we have our next question come from Anthony Stoss with Craig-Hallum. Please go ahead, sir.
Hi, guys. A couple questions. Saleel, I'm curious for you guys to suggest that your PC business is likely going to be flat into September. Given normal seasonality would call for that to probably be up, I'm curious what you're seeing there. Secondly, maybe you can comment related to the mobile market on the pricing environment, if it's more aggressive than what you've been expecting or have seen in the past. I had a follow-up after that.
Yeah. Tony, on the PC business, let me just understand your question. You're asking why we expect it to be flat in the September quarter, just to be clear?
Yes.
There are a couple of reasons. We feel good about where we are at with the business. We have been gaining share in some segments that we've talked about in the past, specifically in some of the commercial PCs that we are well-engaged with. We feel really good. It's a mature market, so we don't expect big, if any, gyrations in this, and we are very well-positioned, and we are the leader in the space. We understand the market well, and we feel good about it for the September quarter. Your second half of the question was on mobile pricing, is that correct?
That's correct.
Kermit, mobile pricing, are you expecting more challenges?
At this stage, I think it's fairly stable.
Yeah.
I wouldn't expect there to be significant challenges.
Yeah.
Again, our goal is to continue to come out with leading-edge products for our mobile customers.
As a follow-up, guys, and maybe not to put you on the spot, without a CEO or CFO, do you expect your fiscal year 2020 revs, do you have a shot at that growing year-over-year? Also to put you on the spot without a CEO or CFO, what can you do to cut costs? Are you hamstrung before you bring in a CEO to see what he wants to do?
Yeah. We are not commenting on our fiscal 2020 revenue specifically. To your second half of the question, we have an executive leadership committee that has been put in place. We have an executive chairman. I don't believe we are hamstrung. We are evaluating all of our businesses closely and making sure that we are spending and investing wisely. We are investing in higher-margin products that's going to drive better profitability longer term. We will have a better sense as to these actions and we will need to take. We'll continue to work through our internal evaluations, but I'll let you know we're doing that with urgency. Stay tuned, I will give you a lot more clarity at next quarter's call.
Okay. Thank you.
Okay.
We have our next question from Christopher Rolland with Susquehanna Financial Group. Please go ahead, sir.
Hey, guys. It's David Haberly on behalf of Chris Rolland. Thanks for taking our question. I guess to start out on the IoT win, or the USB-C win, rather, maybe you could talk about how this ramps throughout the year and how material this will be on an annual basis. Secondly there, is this a different win, or a different OEM than wins you've had for USB-C designs in the past?
Let me start with the second half of the questions. It's definitely a different win. A new top three smartphone OEM is going to put our solution in box, shipped with every phone that's coming out. It's a flagship phone, by the way, so stay tuned when you see it. Is it materially going to be meaningful? I don't want to get into the ASPs or any of that, but we did say that we are shipping millions of units this quarter. We'll grow throughout the year, and the gross margins are higher than our corporate gross margins.
Got it. Thanks for the color there. Then on the OLED side, how is capacity coming along at the Chinese OEMs there? Like your OLED, you have a couple wins again this quarter. It seems like you're progressing nicely. Is there anything holding you back from a capacity standpoint at this point?
I think when we were talking before, last quarter on capacity limitations, we were really referring to our TDDI products, I think, and the COF products. If your question is on OLED, no, I don't believe there's anything that's holding us back. I think there's a lot of opportunity in OLED, and in particular, certainly the second half of this calendar year.
Let me add a little bit more color, please, Kermit.
Yeah.
The non-Korean OLED market is going to be around 60-80 million units this year, doubling from last year. The industry analysts are expecting non-Korean OLED market to increase even faster next year, and we are extremely well-positioned with our solutions with the non-Korean OLED
Yeah
panel makers. We feel good about it as we go forward.
Great. Thank you.
I'll remind our audience one more time, if you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please ensure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We will take our next question from Charlie Anderson with Dougherty & Company. Please go ahead.
Yeah, thanks for taking my questions. First question, Saleel, on the AS300 family. It sounds like you have your first win there that's shipping now. Under kind of same question as the USB-C question before, is that an existing customer or new customer? I'd be kind of curious how you feel like that ramp is going to go in the back half. How much is that a contributor with that product to some of the growth and what types of end uses are customers utilizing that product for? I've got a follow-up.
Yeah. Let's take the AS300 product family. As we said in the prepared remarks, we shipped a few million units early, earlier than we had planned, because our lead customer wanted to ramp, and we see a ramp throughout the whole year. Charlie, the thing that really excites me about this is it's not one form factor. It's going into multiple different form factors. I see utilization in more than just one kind of product. I feel good about it as we go throughout the year.
Okay, great. Second question on OpEx, I know you kind of talked about it a little bit, I know Synaptics has sort of worked within an envelope of kind of a range in the 20s, let's call it, of OpEx as a percent of revenue over the past several years. If you talk about 40s being optimal at some point for gross margin, can you speak to what's an optimal level as OpEx as a percent of revenue? Maybe R&D as a percent of revenue as a starting point. Thanks.
Yeah, that's a good question. At this stage, of course, we're just evaluating all the businesses very closely within Synaptics and making sure that we're spending and investing wisely. We haven't made any final decisions about what those spends should look like in terms of the R&D and the SG&A dollars slash OpEx dollars. Certainly, we'll have a little more color that we could share with you on next quarter's call.
Okay, fair enough. Thanks so much.
Okay.
I'll remind our audience one last time, if you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. Ensure your mute function is turned off so that the signal gets to our equipment. We will take our next question from Kevin Cassidy with Stifel. Please go ahead.
Hey. Yes, thanks for taking my follow-up. Just again, going back to the goal of going over 40% gross margin. Would some of that strategy include maybe selling or discontinuing some of the low-end products?
Go back to evaluating the 40%. Kevin, thanks for the question. This is Saleel again. As you know, our gross margin has improved already seven quarters in a row, right? We have been focused on that here. We are continuing to evaluate all the businesses with a focus towards really investing in products that generate high margins for the company and driving growth from these products. Currently, I don't want to get into details because, as I said, we are working with urgency in the organization. We'll be able to give you more color the next time we all get on a call together, but you just have to stay tuned for it with us.
Okay. Thank you.
There are no questions in the queue at this time. I'll remind our audience