Okay. Good afternoon, and welcome to the first day of J.P. Morgan's 51st annual Technology, Media, and Communications Conference. My name is Harlan Sur, semiconductor capital equipment analyst for the firm. I have my colleague here, Peter Peng, who helps me cover the semiconductor space. Very pleased to have Michael Hurlston, President and Chief Executive Officer, and Munjal Shah, Head of Investor Relations at Synaptics here with us today. I've asked Mike to start us off with an overview of Synaptics, summary of the March quarter, June quarter outlook, and then we can go ahead and kick off the Q&A. Gentlemen, thank you for joining us this afternoon.
Let me turn it over to you.
Harlan, thank you. 51 years, that's a pretty long time. Not too bad.
51 years, yeah.
Not too bad. Okay. Just a quick recap of the Synaptics story. We're obviously a fabless semiconductor provider . We've got three businesses that we talk about. One is mobile, and that's primarily touch controllers that go into handsets. We talk about a PC business, and our PC business is largely characterized by the touchpad and fingerprint sensors that go into client devices. The third business and the largest portion of our business and one that's getting the most attention is what we categorize largely as IoT. That's made up of a collection of smaller businesses. We've got an automotive-facing business. We've got a collection of assets that are wireless in nature, Wi-Fi, Bluetooth, Thread. We've got some assets that we sell into docking stations and audio.
There's a broad collection of products that sell into what we largely call the IoT market space. That's been our fastest-growing business over the last couple of years. We've certainly hit an air pocket here in the last couple of quarters, and our guide is reflective of that. Munjal, do you wanna give some color on the numbers?
If you, if you look at it from our guidance, what we've seen is we've articulated our guide to be sequentially down on a revenue basis. It's primarily driven by inventories that we are seeing in the channel and at our customers. The approach that we've taken to that is try to bring those downs to a normal level. As a result, you're seeing a little bit of a sequential decline in our top line.
Perfect. Well, I appreciate that. Maybe that's a good place to start off with is first few questions on sort of the near to midterm, and we certainly wanna delve into the mid to longer term profile of the company. If we look at consensus estimates, you know, the Street is forecasting June quarter, this quarter, to be the bottom and sequential improvements as we move through the second half of the year and into next year. You guys have already noted that, you know, you're under shipping end demand by $75 million-$125 million.
It does set the stage for a potential inflection at some point, right? Even in a slower macroeconomic environment, you're working down customer excess inventories. At some point, you should be starting to move back up towards more normalized consumption levels.
Given your visibility, orders, new product ramps, how are you thinking, Mike, about the recovery profile of the business over the next few quarters?
I think you got it right, Harlan. I think it's gonna take a couple of quarters to work through the inventory. Right now we're under shipping demand, as Harlan said, somewhere between $75 million and $125 million. We expect that to normalize in early calendar 2024. We expect to start a climb out in early 2024. By the end of our fiscal year, which is the June of 2020 quarter, we'd expect to be relatively close to that 225 plus, let's say, 100 at the midpoint, 325, 330 type of run rate. You know, the inventory that's built up in the channel is appreciable. We were first hit by an accumulation in kind of consumer-facing businesses.
The second shoe that dropped in our last quarter guidance, as you know, was to do with enterprise. We'd also had an accumulation there. Somewhere lumped in with all of that good news is a decline in overall demand, somewhere in the neighborhood of 10%-15% in sort of overall demand. Our number, this kinda $325 at the midpoint, our natural run rate does account for the decline in demand. We'd expect as demand normalizes that that number too would grow.
You know, during these periods in these type of weak environments, and, you know, we've been through, you've been through many down cycles, there's a period of extreme volatility, customers wanting to push out, customers wanting to reschedule, customers canceling orders. Then you go into a period of sort of stabilization for a few quarters. Then, you know, as demand comes back, as you work down excess inventories, the shipment profile begins to improve, right? Is the team at that point in time where, I'm not asking you to quantify absolute dollar value of backlog or orders, Is the activity level of push outs and cancellations, has that activity sort of become more muted, or is it still pretty volatile? Are you still seeing a lot of customer push outs, rescheduling and so on?
Yeah. I think it's become more muted. I would say that's partly to do with the fact that we ripped the Band-Aid off.
Mm-hmm.
We've been characterizing in some of our discussions during the day, you know, we have, as I think many of our competitors do, these long-term agreements, and we've got a significant amount of backlog that we could be shipping.
Yes.
We've sort of proactively made a decision.
Mm-hmm.
to reduce inventories to normalized levels, as Munjal said, and use some of that Push out and cancellation type of activity that you just characterized to win future designs. We've kind of taken some short-term pain in order to improve our long-term outlook. You know, that obviously has resulted in a substantial decrease in the top line, sort of peak to trough. I think we're in much worse shape than a lot of people, but we think that that will result in a better long-term outlook.
Perfect.
Given the weak industry environment, I think industry capacity is loosened, and we're starting to hear of a potential weakness in pricing. What are your pricing expectations for, you know, second half of the year and are you concerned about pricing pressure?
Yeah, Peter, we are. You know, it's certainly increased. I mean, there's portions of our business as you guys know, that where we have pricing power and we're in a fairly good situation relative to market share and our ability to control the market. There are other areas of our portfolio that are more subject to pricing pressure. You know, Our enterprise business is very strong, and there, I think we have more pricing power. Our automotive, our Wi-Fi business and our mobile business to a certain extent, is subject to more transactional type of behavior and more pricing pressure as a result. Those are the three businesses where we see the pricing pressure.
As we think about our gross margin, as you both know, and you've spent a lot of time talking to us, we've run our gross margin from the high 30s to 60%, and Munjal has signaled, I think, through all of that we expect to operate the business at 57% gross margin, and that takedown from 60% to 57% accounted for an element of pricing pressure and then, you know, continued input pricing increases, which we're still seeing from some of our suppliers.
Okay. Beyond some of the near term industry headwinds, you know, the IoT segment is one of the fastest subsectors in semiconductor industry, and your IoT portfolio is expected to grow double digits. You know, Synaptics has a broad and diversified customer base in IoT that targets applications across consumer, enterprise, automotive, and wireless connectivity. I think the team highlighted that you have a $4.3 billion IoT opportunity. Kinda help us rank order some of the big growth drivers for the team over the next three to five years.
Yeah. Again, appreciate the question, Peter. I think, you know, you look at our big 3 growth drivers, number 1 is wireless. We have a pretty strong short-range wireless portfolio. We've got Bluetooth assets, as I said, we've got Zigbee and Wi-Fi. We tend to lead with Wi-Fi. That's the strongest part of our short-range wireless portfolio. We tend to be on the high-performance end of the spectrum. What we think we have in front of us and an opportunity to further capitalize on that, we're still a relatively small player. When you think about of the Broadcoms, the Qualcomm, they have a very high market share. We still are very modest, and we think we've got a significant runway in front of us on high-performance Wi-Fi.
The other thing that we're trying to do is move our cost basis down a little bit, simplify our solution, and get into the industrial, the medical, the home automation segments.
Mm-hmm.
We have a big initiative underway to open that TAM up as well. Wireless kinda has those two fronts and really is a big growth driver for us. Second area is automotive. As you both know, we're in the early innings of a shift from discrete touch in these panels in cars and discrete display drivers that actually light up the panels to an integrated solution that combines both touch and display. Today we're the leading provider of TDDI circuits, as we call them, in cars. As these large displays become greater and greater, there's more and more of them with the advanced infotainment systems that are coming online, our opportunity grows.
It grows by virtue of the screen size is getting bigger, and it grows by virtue of the shift from discrete to an integrated TDDI solution. On top of that, some months back, we announced the second component that we can sell into the car, a SmartBridge component that sits between this touch and display circuit and the applications processor that drives the infotainment unit. That's a pretty significant piece of content that we can ship into the cars as we look forward. The final growth driver for us is this idea of wireless workspaces. We talked about our franchise enterprise businesses. One of the big franchises is in docking stations. Oddly enough, we have a very strong position in that market.
What we think we can do is capitalize on that and make it wireless to increase our ASP per unit, also to attach wireless to monitors into in-room video conferencing systems that you see in the workplace and really make anything that has video, videos like Zoom conferencing and things like that. We're having to transport that video over a wireless link. We think we can do that uniquely well and open up a third area of growth for the company.
You talked about the wireless portfolio. It's probably one of the fastest product categories under the Synaptics umbrella. You've got a, you know, you've got a great design win pipeline on Wi-Fi 6, Wi-Fi 6E. Help us sort of level set the stage for the next generation, which is Wi-Fi 7. We hear maybe gateways, access points end of this year, beginning of next year. Mobile and IoT, maybe 2025. Obviously, the team obviously should be positioning itself for Wi-Fi 7. Help us understand. Give us an update on the Wi-Fi 7 development efforts and as it relates to your target markets, when should you intercept the market with your Wi-Fi 7 chipset solution?
Yeah, thanks, Harlan. Again, a good question. I think you characterized it correctly. Wi-Fi 7 to me for IoT is a 2025, 2026 type of intersection point. However, segments of our market, this high performance video transfer segment may need Wi-Fi 7 sooner. We are trying to get on an accelerated timeline relative to our Wi-Fi 7 roadmap while continuing to prosecute this opportunity to go a little bit down market and service these industrial, medical, and home automation types of applications. We've have a bit of a bifurcation on our roadmap. I think it's really important for us to maintain relevancy in the short range wireless space. We plan on introducing Wi-Fi 7 as early as 2024 to try to get a little bit ahead of.
Mm-hmm
... of the phenomenon you just characterized. Frankly for us, for video transfer, I think it will be somewhat important for us to be, to be ahead of the general IoT market landscape.
Within the automotive markets, you touched on it a bit. You know, you guys are benefiting from the long-term trend of increasing infotainment content, the digitalization of the cockpit. You're attacking the auto markets in several areas, connectivity, discrete touch, integrated display and touch. Help us understand the design win pipeline, the forward revenue pipeline, and how should we think about it on a normalized basis, right? If auto production is flattish, given your pipeline, given content growth of your products, how should we think about the auto business growth profile over the next, call it three to five years?
Again, appreciate the question. I think that, you know, we have it, you know, as you know, I come from a short-range wireless background. Through a lot of the semiconductor downturns, we just drove right through it because the market itself was just growing faster than any headwind was coming from the macro. I think that's gonna be very similar to what we see in auto. Right now, the, you know, I, I don't even know about flattish. You know, I continue to worry that there's gonna be a bit of a downdraft in the automotive space, but I think our design win pipeline and what we have going on relative to this conversion of discrete to an integrated solution and then larger and larger panels, which leads to more TDDIs per car. Today-
Right
M aybe we're at one and a half TDDIs per car. I think that number bumps up to two and a half here with larger and larger screens. We have that content tailwind, plus we have this addition of a SmartBridge. That certainly won't be a 2024 type of thing, just given automotive design cycles, but I think you start to see that tip in 2025. Those two things together, I think, offset any sort of headwind that we'd see from the unit decline. I'd expect unit flatness to potentially even a decline into 2024.
Okay.
You've built a strong portfolio of products and funnel around the consumer automotive enterprise IoT markets. The other big market segments that requires strong connectivity, edge processing, video processing is the industrial markets. You know, like factory automation, building automation, for example. You know, your Katana platform is a good example of, utilizing edge AI solutions, which is optimized for ultra-low power use cases in edge device like office buildings, retail factories, warehouse. I guess, how is the team thinking about leveraging more of the technology like your connectivity portfolio into more stable infrastructure-focused end markets like industrial?
A good question, Peter. I think, look, for industrial today, we're a nothing player. I think that Katana is our first foray into those markets, and what that does for us is bring in two elements that I think are gonna be important going forward. It's got a neural network, so there's an element of AI in that device. It's a very unique device in that you can actually compile a machine learning model and wholly run it at the edge of the network. People talk about edge AI. This is AI on a chip, right? You really have the entire system running on this particular edge device and the semiconductor itself. We take a machine learning model, we train it, we then compile it into the device itself and run it there.
It can't do gene sequencing or anything complicated like that, Face ID, anything complicated, but it can do inventory tracking, meter reading, even some of this predictive maintenance that we talk about that's so important in industrial, Industry 4.0 or whatever the nomenclature is. That's element number one. Element number two, as you said, is the connectivity. I think if you look at our connectivity today, it's not super well suited to industrial. It's high performance, and high performance in this particular vein means probably too high a cost. What we have over the course of the next year is we talk about introducing Wi-Fi 7.
Another vector is really taking the cost of our solution down, simplifying the solution, making it easier for customers that don't have a lot of wireless experience to adopt it. We think we can execute. We've already introduced a chip, we are set to introduce it this summer, that takes the cost basis down very significantly from our traditional Wi-Fi, which is based on a Broadcom design base . We expect a second chip to come online in early 2024 that takes the cost down another significant step. That's gonna be an important piece as we think about this industrial market.
Having an MCU, a little processor, that can do some edge AI and has a neural network, and then have a more cost-effective wireless connectivity solution, be it Bluetooth, Wi-Fi, Zigbee, we're doing all three together, is going to be the second element. We think we now have a much better portfolio to take into industrial, into medical, into home automation, things that tend to be stickier-
Yeah.
that we think stabilize the business a little bit better and don't subject us to this, these fairly significant swings that you guys know about.
Touching briefly on your maybe switching gears for a second. Y our more mature PC and mobile segments, they're slower growing businesses, but, you know, it's a good source of cash flow generation with which to fund your faster growing I-IoT businesses. How should we think about the long-term growth outlook and the strategy for the team in PC and mobile?
I think you got it right, Harlan. 2 things I would say. One, you're right that the unit growth is flat to even declining, I think, in both PC and mobile. Our goal is to operationalize those businesses and make them high operating margin contributors to the company. We've done that. I think in PC, when I took over the company 4 years ago, we had, you know, 5 or 6 sites working on our PC products and a tremendous amount of OpEx. We've loaded that up almost entirely into Taiwan.
Yeah.
which is a lower cost geography, and we've really consolidated our engineering efforts. That being said, we're still gaining some share and around the edges, plus or minus. We think that those are going to be modestly growing businesses. Our touch business, as you know, has benefited from the move in mobile. Our touch business has benefited from the move to flexible OLED screens, and those flexible OLED screens played to our advantage because there's a lot of noise, and we have to have pretty high precision analog to digital circuits that take that noise out of the system. We've have very high market share, as you know, in Chinese handsets. We think we have an opportunity in Korea to pick up some market share. We'll see how that plays out. You know, both businesses, I think, will grow modestly.
You know, not significantly over the near-term horizon, but we were operating in a way that, as you correctly said, they fuel our IoT business.
Perfect.
Okay. Just kind of tying a lot really. You know, your IoT business has a strong double-digit long-term growth file. Your PC and mobile have slower growth business, but still profitable. Prior to the weak demand environment, you were driving a, you know, 70% revenue mix for your IoT focus end markets. Obviously, IoT is now in the mid-fifties of your revenue mix. What do you think is the more normalized mix for your business over the next several years, given a faster growth profile for your IoT business?
Yeah. I mean, obviously, step one is to get the IoT mix back to 70% or so, we think it actually becomes even more pronounced. I mean, if we operate the business correctly and things go as we plan, I think it's not that we. Harlan's previous question is right. We don't intend to shrink either PC or mobile. We think that grows, IoT significantly outgrows both. Sort of in the end state, you know, we'd expect IoT to get to, you know, 85%, 90% in a perfect world of our overall mix and have a de minimis PC and mobile business. Again, not that those are declining, it's just that the IoT business is outgrowing those. IoT is, as you both know, has a much better margin profile for us.
The enterprise IoT business, as we've discussed, is a stickier business where we have what we feel are really strong franchise businesses, and we have a certain amount of pricing power there. In Wi-Fi, we think we can continue to differentiate. In automotive, we think we can continue to differentiate, even though those are more competitive businesses. you know, we really like what we're doing in IoT, and we intend to kind of add to that portfolio, you could say at the expense of PC and mobile.
Do we have any questions from the audience? Feel free to raise your hand and we'll get a mic over to you. I've got a question on leveraging the portfolio. When I think about, when I think about IoT, I think connectivity, compute, and sensors or, you know, human machine interface, right? You guys have the entire portfolio. Feels like you have a pretty significant cross-selling opportunity in front of you. You've mentioned before, right, that of your top 10 customers, half are buying, you know, three or more products from the Synaptics team. What's the strategy to drive higher percentage of customer wallet share per opportunity, right, to continue to drive towards your revenue targets?
Yeah. I think that there's two dimensions. We certainly wanna continue to cross-sell.
Mm-hmm.
And we've built up a fairly wide portfolio. I mean, that what makes us maybe more difficult to understand, is the breadth of the portfolio that we have. We would like to cross-sell it. Good examples are in enterprise telephony, where we have a super strong business. We've been able to bring in video elements, we've been able to bring in Wi-Fi elements and really strengthen the platform as we go out to our tier one customers. In automotive, you know, there's opportunities now to sell GPS, to sell Wi-Fi, in addition to our TDDI circuits. We're really trying to do that.
I think the new thinking in the company has been around, let's go expand the real estate in areas where we do indeed have strong market positions, and that means in docking and enterprise telephony and headsets, how can we capture more of the BOM? There is opportunity to do that. I think we've been focused on expanding market segments that we can go into and not thinking as much about BOM and real estate that we can capture. The thinking internally has changed a bit and said, "Look like now, in some of these businesses that are not gonna have double-digit types of growth, how do we expand the content?
How do we sell more to the customers we have and into the platforms we already have? I think over the next couple of years you'll see a pretty pronounced shift to that kind of thinking.
Switching to, you know, touching on the financials. I think on the capital return, you know, the board has approved additional $500 million for share repurchases, and then, you know, you have available authorization of nearly $1 billion. Right now you have about $900 million of cash on the balance sheet. Given that the team's free cash flow generation has slowed due to a weaker demand environment, what's the team's thought process on deploying share buyback? Secondly, given that share is also trading at attractive valuation, how's the team thinking about share repurchase versus M&A?
Yeah, I mean, maybe take it and have Munjal add some color. You know, first off, I think that We've been dipping our toe in on share buyback over the past few quarters. I think we're gonna get more aggressive. That doesn't mean aggressive. That means more aggressive than we have been, which has been very modestly aggressive on share buybacks. I think you'll see a little bit more than you have from us in the past in that regard. We agree. The stock is at a very, very low valuation for us, and we think it's very attractive for us to buy back shares. Having said that, why aren't we gonna get aggressive on share buyback? It is because M&A continues to be our top priority.
I think that as we look at the landscape right now, there's some very attractive assets that are coming on. People are trying to in this set of market conditions, everyone's trying to figure out what's important to them and businesses are for sale that are meaningful for us. We wanna continue to look at tuck-in acquisitions. Perhaps in the past, we've been looking to expand breadth. I think now you'll see us look to do accretive deals. We like those, and I think we The three big ones that we've executed during my four years with the company have been viewed very, very positively and have been accretive, but have perhaps added breadth to the portfolio. Now we're looking for depth. How do we add in automotive? How do we add in wireless?
How do we add in some of the areas where we have a strong footprint? How can we add some complementary things, as Harlan was asking, cross-selling? How can we put together some better assets? We're trying to be a little bit more deliberate about the M&A strategy, but that continues to be our sort of number one priority. I mean, Munjal, any...
Yeah, no, Michael, you covered it really well. Peter, if you think about our cash, we have three primary uses for it, right? One is inorganic growth, the other is share buyback, and then debt management, right? That's how we look at it. When we look at cash use, the idea is to see what generates the best return for the company on a longer term basis. That's how we look at our cash. Absent anything over the next 2 years, the idea is not to continue to build cash on the balance sheet. If there is, if we don't come across a good tuck-in opportunity, then we can use it more towards buybacks. If there's an opportunity, then we definitely wanna position the company for long-term growth.
On the M&A strategy, you talked about going a little bit deeper into the portfolio, into the technology. We did have a discussion, and Mike, you did mention it as well, is that there are opportunities to leverage the portfolio to move into maybe a little bit more stable, less cyclical end markets like industrial, infrastructure related markets. As we mentioned before, I mean, you certainly have the portfolio, you've got the audio, you've got the video processing, you got the low power edge, you have digital signal processing, which is extremely important in some of these industrial type applications. What about expanding the breadth of the end markets as a organic or inorganic, sort of strategy?
I totally agree. I mean, I think we're lucky enough recently to get a guy from Infineon that's been involved in exactly what you said, which is sense, process, connect. I mean, that's how we think about our company. We haven't put all those elements together. To really sense, process, and connect, a great end market for us is industrial. It's medical, it's home automation, these stickier longer cycle businesses or longer cycle end markets that you characterize. We have a very distinct initiative now, organic initiative underway to try to figure out how we can build products that are better suited to those verticals.
It's gonna involve, you know, as I said, retooling our wireless a little bit. It involves sort of making a standalone MCU that is better suited to hosting a wireless processor, and doing some of the compute that you need for industrial. You're right, we have all the elements. We gotta spend the next year or so putting all that together.
Does it require a very different, like, go-to-market strategy? Do you have to have a different channel strategy to go after some of these markets?
Yes. I mean, I think that we've depended a lot to go broad. As an if you understand our IoT business, our IoT business is actually relatively targeted. We still have not a true broad market channel business, but we have relied to create a bit of a channel. In wireless, in particular, we've relied on module partners that sort of act as value-added resellers. They bundle together a lot of the RF components, not just the short-range wireless chip, but power amplifiers, switches, and the other things, and then do some of the software and customer support. We would expect to build a similar type of ecosystem around our initiative to get into industrial. Absolutely, you're right. It's not something that we can directly serve today.
We expect to build a channel for that, but we would depend a lot more on partnerships, I think, to attack that, certainly in the near term.
On the financial execution, particularly the gross margins, you guys have done a tremendous job expanding gross margins, right? When you joined the company back in 2019, Mike, you know, the company was driving high 30% gross margins. You drove it into the low 60% not that long ago. Yes, I mean, we're going through a little bit of a cyclical perturbation here, but you're still driving very strong 57% gross margins, partially because of the lower IoT product mix. As we move forward in time here, kind of near the midterm, what is the team seeing in terms of gross margin over the next several quarters? Does the team see gross margins moving back into that sort of 60% range once you normalize the product mix?
I mean, I think, again, your question sort of points to the answer, which is near term, it's mix driven. We've seen a takedown from 60 to 57. I think in talking to Peter in the past, we thought that was gonna be a little more of a glide path than actually transpired. The reason for the shift has been largely mix. I think in the near term, I would expect some additional headwinds 'cause we're not gonna get all the way through this mix issue, as we said, for 2 quarters. I think that there's some pricing pressure that us and other folks are seeing. Still there's some input pricing that has not yet played all the way out.
I think in the near term, those are going to hurt us over the next couple of quarters. That, as our mix restabilizes, those two things are still persistent, the pricing pressure and the input costs. As we enter calendar 2024, I would expect to get back to 57%. We think 57% is sort of our floor, and there is upside from there as we work the mix, but I don't think it gets all the way, Harlan, back to 60%. I think we've kinda been consistent in saying, "Look, we see the business as a 50% gross margin, and although I think there's a bit of upside, I don't think it gets us all the way back to the 60s.
Well, we are just about out of time. Mike Munjal, thank you very much for joining us today. Appreciate your participation.
Thanks for bringing the good weather. Appreciate it.
Thank you.
Thanks, Harlan.
Thank you.