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Good day, everyone, and welcome to the Synaptics Fourth Quarter Fiscal Year 2019 Conference Call. I’ll remind you that today’s call is being recorded. And now, it’s my pleasure to turn the conference over to Jason Tsai. Jason?
Good afternoon, and thank you for joining us today on Synaptics’ fourth quarter fiscal 2019 conference call. My name is Jason Tsai, and I am the Head of Investor Relations of 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 & Investor Relations. This call is also being broadcast live over the web and can be accessed from the Investor Relations section of the 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 recurring or non-recurring items. Please refer to the press release issued after the 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 Synaptics will make 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 filed with the SEC, including the Synaptics Form 10-K for the fiscal year ended June 30, 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 will now turn the call over to Saleel Awsare. Saleel?
Thanks, Jason, and I’d like to welcome everyone to today’s call. I’m happy to be speaking to you today on behalf of the Board and our Executive Leadership Committee. As I’m sure you saw earlier this week, we announced the appointment of Michael Hurlston as our new President and CEO, and he is expected to start August 19. He will join the Synaptics Board on the date of his appointment. We are happy to welcome Michael as he brings with him a wealth of experience in semiconductors, especially in markets that we are focused on, and has a strong track record in delivering results. We believe that Michael will be a great cultural fit for the company and look forward to his leadership in driving the transformation and the next wave of growth for the company.
Now, I will first provide an update on our business and our corporate transformation, and then Kermit will discuss our financial results and outlook. Fiscal year 2019 was a challenging time for Synaptics due to increased macro and geopolitical uncertainty, as well as management transitions that drove short-term weakness in our business. Despite these challenges, we kicked off our new fiscal year in laser-focused on transforming into a stronger, more profitable company for the long-term.
We talked about on our last earnings call, the corporate transformation initiative we kicked off focuses on driving innovation, unlocking the untapped potential within our extensive product portfolio technologies and expertise, and aligning the business towards better profitability long-term.
We have identified the investment areas for higher profitability and growth. These include edge computing SoCs for consumer IoT in the smart home, fingerprint sensors and TDDI for automotive, OLED display and touch for mobile devices, audio SoCs for wired and true wireless headsets, and high speed wire connectivity for PCs, peripherals and VR. We are now executing on the transformation to deliver a stronger company with more diversified growth, higher margins and stronger profitability.
For these focus areas, we are developing differentiated solutions that encompass more software, more firmware and more intelligence. We are doing this is collaboration with our customers by aligning our roadmaps and continuing to be an essential partner for their long-term product development.
Based on these actions, we are beginning to deliver better margins highlighted by our second consecutive quarter with gross margin above 39%. In addition, we have a more diversified revenue mix with IoT now accounting for 30% of our revenue and mobile accounting for just 50% in Q1 fiscal 2020, down from over 60% for most of fiscal 2019.
Our people are the key to our company’s success and our ability to compete long-term. In this area, we restructured and reduced headcount, aligning our workforce to our strategic direction. Further, we’ve kicked off a retention program to retain key engineering and management personnel to ensure continuity through this transformation. These necessary and strategic actions are helping to establish a strong foundation for the future and our planned growth.
Now let me share with you some recent business highlights. Synaptics remains focused on innovating in the IoT business. We have a strong pipeline of wins and are confident it will grow double-digit in fiscal year 2020. Leading our innovation is the edge computing SoC portfolio that targets consumer IoT in the smart home. We are building a strong franchise around smart edge AI solutions that leverage our voice and video-centric software and firmware capabilities, enabling our customers to quickly integrate their IP and accelerate time to market.
Additional investments in this area will combine our latest CPU, NPU and GPU for enhanced computer vision capabilities, significantly expanding AI functionality at the edge. We are seeing tremendous interest from OEMs developing a new generation of media streamers and global service providers seeking to monetize on smart home products.
As we highlighted last quarter, we started shipping Smart Edge AI AudioSmart SoCs and we are now expecting a major customer to begin selling their products in retail starting next quarter. We are also now engaging with other hardware makers and kicked off several new designs based on these SoCs to embed voice-capabilities into other consumer devices like sound bars and TVs, mesh and WiFi routers and media streamers. We expect to see these customer products at retail over the next few quarters.
Jumping to audio headset SoCs, we are building on our success with two of the world’s top three smartphone OEMs with a new design win for a highly anticipated flagship phone that is expected to ship in every box at retail starting this quarter. Additional investments in this area leverage our advanced software and firmware capabilities such as hybrid active noise cancellation, unique playback processing, and cutting-edge voice pick-up technology. These technology innovations enrich the audio experience, expecting to drive greater adoption of our solutions and continued strong growth for us in next generation wired and wireless headsets.
The mobile business, we are focusing on higher gross margin, premium segments of the market. We continue to win OLED touch and display designs across major smartphone OEMs due to our superior performance and features.
LCD-based smartphones will remain a vital part of the smartphone makers’ portfolios for the next few years. Through well-established OEMs and display manufacturer relationships, we see ongoing development for LCD-based handsets are encouraged by the opportunity to support their transition to OLED.
As the industry prepares for the transition to 5G, we are also partnering with display manufacturers and smartphone OEMs to deliver high-performance OLED and LCD screens that leverage the higher bandwidth networks with better displays and resolution to give consumers a meaningful improvement in performance with faster 5G networks.
Moving to our automotive business, we are energized about the long-term opportunity and we are investing in fingerprint sensors and TDDI solutions. With regard to fingerprint, we received approval for start of production from our lead OEM customer and expect to see our first automotive fingerprint solution in 2020 model year cars.
Our TDDI solutions have been well received by OEMs, Tier-1s and display manufacturers worldwide. We exited fiscal year 2019 with TDDI design wins at six major OEMs across Europe, North America, Japan and China. Many of these OEMs are planning to transition all of their future display systems to a full in-cell platform using TDDI. Additionally, we are in active discussions with several additional OEM/Tier-1s that is centered around migration to TDDI from conventional touch screens.
We expect to have another successful year of design wins with automotive TDDI products in fiscal 2020, and we are committed to this market long-term. This trend is expected to continue as TDDI offers significant cost and optical performance advantages to car manufacturers. As part of our efforts to enable this industry transition, Synaptics is expanding our product portfolio in fiscal 2020.
Within our PC business, Synaptics remains the major market share leader for both touchpads as well as secure fingerprint authentication. Growth in fingerprint for PC is highlighted with new designs at all the major PC makers, including HP, Dell and Lenovo. We are a trusted leader in secure biometrics and pleased to partner with these industry leaders.
As you can in these highlights, we are making progress in our transformation. We’ve identified the right investment areas and are executing to our strategy. Our margins are improving, our business and customers are becoming more diversified and we are well underway in our transformation journey to becoming a stronger, more profitable company.
With that, Kermit will now discuss our results and outlook.
Thanks, Saleel, and hello everyone. Synaptics’ revenue for fiscal 2019 of $1.47 billion was down 10% from last fiscal year. For our fourth quarter, revenue of $295 million, was down 12% sequentially and 24% year-over-year, slightly below our guidance range and reflects the impact of our customer, Huawei, being placed on the entity list and accounting for more than $20 million impact in the quarter. While we can ship our solutions to Huawei without limitation, their ability to produce phones for certain markets has been adversely impacted by the restrictions on access to certain U.S.-based technologies as well as their ability to source other components.
Revenue in the June quarter for mobile, IoT and PC products was approximately 54%, 26% and 20%, respectively. We had two customers above 10% of revenue, at 18% and 16%. For the June quarter, our GAAP gross margin was 30.6%, which includes $15.4 million of intangible assets amortization, $700,000 of share-based compensation costs, and the accrual of a $9 million charge for a loss on a supplier commitment agreement, which was an arrangement, intended to secure a minimum supply commitment from a vendor through the end of calendar 2020. As demand is no longer projected to achieve the minimum commitments required, we have accrued an estimated loss under the supply agreement.
GAAP operating expenses in the June quarter were $123.7 million, which includes share-based compensation of $9.6 million, acquisition related costs of $3.2 million, consisting of intangibles amortization and transitory post-acquisition compensation program costs, restructuring expenses of $7.3 million, and retention program costs of $2.5 million.
As part of our corporate transformation, we initiated a restructuring in June, which we anticipate will result in annualized operating expense savings exiting fiscal 2020 of approximately $40 million from reduced headcount, outside support and project costs. Also, as part of our overall plan and to ensure operational continuity and support as we transition the company through senior level management and product focus changes, we entered into retention arrangements with certain key engineering and management employees. The cost of the retention arrangement is expected to be approximately $23 million and will be accrued over the 18-month period ending November 2020.
Our GAAP tax rate was negative 1% for fiscal 2019. In the June quarter, we had a GAAP net loss of $46.2 million, or a loss of $1.35 per diluted share, and for fiscal 2019, GAAP net loss was $22.9 million, or a loss of $0.66 per diluted share.
On a non-GAAP basis, our June quarter non-GAAP gross margin of 39.1% was above the high end of our guidance range and primarily reflects a better product mix. June quarter non-GAAP operating expenses were below the low end of our guidance range at $101.1 million and up $1.9 million from the preceding quarter. For fiscal 2019, our non-GAAP tax rate was 12%.
Non-GAAP net income for the June quarter was $13.2 million, or $0.38 per diluted share, a 63% decline year-over-year compared with $35.7 million, or $1 per diluted share in the fourth quarter of fiscal 2018. Non-GAAP net income for fiscal 2019 was $141.2 million, or $4 per diluted share, essentially flat compared to $141.4 million last fiscal year.
Turning to our balance sheet, we ended the quarter with approximately $328 million of cash, an increase of $4 million from last quarter. The increase in cash for the quarter was primarily driven by cash flow from operations of $43 million, which was partially offset by $41 million of cash used in our share repurchase program for the purchase of 1.44 million shares.
Year-over-year, cash increased by $27 million, which was primarily driven by cash flow from operations of $154 million, partially offset by $119 million used in our share repurchase program for the purchase of 3.29 million shares or over 9% of our beginning shares outstanding, reflecting our ongoing commitment to generating shareholder value. As mentioned in the earnings release, we repurchased an additional 556,000 shares in July, increased the repurchase authorization by $100 million and extended the expiration date to July 2021.
Receivables at the end of June were $230 million and DSOs were 70 days reflecting a back-end loaded quarter. Inventories were $159 million and inventory turns were 5. Capital expenditures for the year were $24 million and depreciation was $36 million.
Now I will make a few comments regarding our quarterly outlook. Based on our backlog of approximately $277 million entering the September quarter, subsequent bookings, customer forecasts, product sell-in and sell-through timing patterns, as well as expected product mix, we anticipate revenue for the September quarter to be in the range of $300 million to $330 million. We expect the revenue mix from mobile, IoT, and PC products to be 50%, 30% and 20%, respectively. This guidance reflects a double-digit sequential increase in our IoT business, a small sequential increase in our PC business, and our mobile business remaining flat due to ongoing uncertainty with Huawei. Excluding this effect, our mobile business would be showing strong sequential growth.
I will now provide GAAP outlook data for our September quarter, and will follow with non-GAAP outlook data. We anticipate the stock-based compensation charge in the first quarter to be in the range of $15 million to $16 million. In addition, September 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. We also expect to accrue restructuring costs of $6 million to $7 million, and retention costs of $4 million in the first quarter. Finally, we expect our GAAP tax rate for fiscal 2020 to be in the range of 10% to 15% for the fiscal year.
I will now provide non-GAAP outlook data for our September quarter. Taking into account our overall revenue mix, we expect non-GAAP gross margin in the September quarter to be between 39% and 41%, anticipated to be our third consecutive quarter with gross margin above 39%.
We expect non-GAAP operating expenses in the September quarter to be in the range of $96 million to $99 million. We anticipate our non-GAAP long-term tax rate for fiscal 2020 to be in the range of 11% to 13%. Non-GAAP net income per diluted share for the September quarter is anticipated to be in the range of $0.60 to $0.90 per share.
Now, I’d like to discuss our outlook for fiscal 2020. As a result of our shifting of investments driven by our new strategic direction and business model, we anticipate non-GAAP gross margins to improve to 39% to 41% for fiscal 2020, with the midpoint representing a key short-term milestone in our corporate transformation. We anticipate that revenue from IoT will increase by a low-teens percentage, PC will be essentially flat and mobile will be down significantly due to increasing macroeconomic uncertainties related to the current U.S./China trade tension, and our high-end LCD mobile customer’s long-term product shift to OLED.
For fiscal 2020, revenue will decline approximately 10% to 20% year-over-year. We look forward to updating you as the year progresses.
With that, I will now turn the call over to Saleel to wrap up our prepared remarks. Saleel?
Thanks, Kermit. In summary, we are excited by the opportunities that lie ahead for us as we start our new fiscal year. Our investments in differentiated, higher margin products have already begun to pay dividends and we expect that our focus on priorities and investments aligned to our corporate strategy will further improve our performance longer-term.
With that, I’ll now turn the call over to the operator to start the Q&A session.
Thank you. [Operator Instructions] And we will go first to Rajvi Gill at Needham.
Yes. Thanks for taking my questions. A question on the fiscal year 2020 outlook, you had mentioned that mobile is going to be down significantly due to China issues and then a shift of top customer from LCD to OLED. Why don’t you give us a sense in terms of if you could elaborate further on the macro China front? How are you being affected by that? I mean, are you seeing just overall lower Chinese handset units? And if we take – if we separate Huawei, what about the other kind of the overall handset market in China? And I guess, the shift to OLED at your top customer, what is your position in OLED competitively going forward?
Good question. As for Huawei, we obviously do anticipate that will be down, and with respect to our other China customers, depending on the products, we also anticipate that would be down somewhat too. So overall, we are anticipating that our TDDI and DDIC products will be down. Obviously, the DDIC tied more to that one particular key customer. In terms of OLED...
Yeah. Hey, Rajvi, this is Saleel. How are you? Let me answer your OLED question at are just generically. So the non-Korean OLED market this year is about 60 million to 80 million units, doubling from last year, and the industry analysts are expecting non-Korean OLED to increase even faster next year. And as I’ve said in the past, as we’ve said in the past, we are well positioned to grow as the Chinese vendors like BOE and Tianma come online and we are working very closely with them as we go forward. And we continue to lead the market for high-end OLED display drivers and we don’t expect that to change. And as far our biggest customer we usually, do not comment on that.
Okay. I understand. Because if I just do the math on the overall revenue outlook, down 10% to 20%, it’s going to imply that the mobile business is going to be down well over 30%. So can you give us a sense of what percent of sales is Huawei?
It’s probably about 10%.
And it’s good to see that the margins are kind of stabilizing and kind of recovering. Can you talk a little bit about, [well, it’s really] [ph] shift to the OpEx? So I think you mentioned that exiting fiscal year 2020 that there will be a reduction of $40 million. Can you elaborate on that? What was kind of the $40 million of fiscal year 2019 and what will be the overall OpEx profile, on a go forward basis exiting fiscal year 2020?
Sure. Sure. The forecast, obviously, we had a focused effort to reduce costs largely driven by corporate transformation initiatives. So those costs were primarily headcount costs, outside support and project costs. And a lot of this is transitioning throughout for the fiscal year, but by the end of the fiscal year, we anticipate that the annualized savings would be approximately $40 million. And at the same time, we also saw some of those benefits in our Q4, but they are little.
Thank you.
And we will go next to Christopher Rolland at Susquehanna.
Hey, guys. It’s David Abraham behalf of Chris Rolland. Thanks for taking my question. I guess, to start out – I guess, congratulations on your guidance next quarter at 40% midpoint for gross margins. It’s really come a long way over the past couple of years. As we think about next year on your guide of kind of 39% to 41% for the year and given the transformation of businesses ongoing and going under right now, it seems a bit like a growth throughout the year. Do you think that’s a conservative target? Or it is just the revenue being down hurting gross margins?
Yeah. So it really probably is the revenue being down that is going to affect gross margin, combined with the product mix within each of the product lines. That’s my view anyway of why the margins would be in that 39% to 41% range.
Got it. And then housekeeping on the gross margins as well. The impact from the loss on supply commitments, can you share any detail as to what product that was related to? And then do you expect this to continue going forward? Or was this an accrual for the total loss that was all taken in the June quarter?
This was an accrual for the total loss all taken in the June quarter. It had to do with mobile products.
Got it. And then for my final one, as I look at your backlog in the September guidance, it was a pretty high percentage, higher than normal of your total revenue that you’re guiding to. Is there anything unusual you’re seeing in order patterns or customer behavior that is leading to kind of a cautious approach there?
It’s really – there’s a lot of uncertainty as it relates to Huawei from our perspective, especially given the impact we saw last quarter in Q4. You could argue that it is conservative, but I think it is also reasonable in light of the current macroeconomic conditions, China/U.S. trade war, in fact that Huawei seems to be effectively a bargaining chip within that trade war.
Great. Thank you.
[Operator Instructions] And we will move next to Charlie Anderson at Dougherty & Company.
Yeah. Thanks for taking my questions. Good afternoon. There were a fair amount of comments on the script about automotive. I think, you guys mention both TDDI and fingerprint sensors. I wonder in some of the design wins that you are getting if you could speak to how much dollar content per car that could be, if any thoughts on the adoption of fingerprint sensors over time within automotive? I imagined it is pretty much nil today and then I’ve got a follow-up. Thanks.
Hey, Charlie, Saleel here. How are you? So on the automotive side, specifically, Charlie, depending on the number of screens, the dollar content is double-digit dollars. So it’s quite substantial. We have said earlier that the first cars with fingerprint 2020 – will be in the market 2020. So we’re seeing that and we’re seeing tremendous amount of interest and really adoption of this going on. So we feel really good about it. So being in production is going to be wonderful and then we are the ones that are the go to company to make that happen. And the TDDI, as I told you, is getting more and more designed in and more and more cars are multiple screens and we are working very closely with most of the automotive guys to enable their solutions.
Great. Thank you for that, Saleel. And then there was also – you guys went through the investment areas and I think one that was sort of new to me was the high speed wired connectivity for PCs, peripherals and VR. So I wonder if you could expand on that at all. Thanks.
So Charlie, that’s a part of our IoT portfolio. And as I said at the last call, Synaptics has had tremendous technologies in-house, right. And this is one of the nuggets that as a part of my last few months of looking at the IoT portfolio this – we’ve had this business. Every dock that you buy right now needs a high speed connectivity device and we’ve had this interface technology in-house. And what’s happening in future is most of these PCs, laptops, even the tables, only have the USB connector left. So you have to buy one of these solutions either as a dongle or integrated in a dock. So we are extremely well positioned.
And the reason this is a very exciting space is because it’s got lots of analog content like high speed SerDes involved and therefore, it is hard for people to jump in. So that’s where we are at today. Where we are taking it into the future, VR requires high speed wired connectivity, and we already spoke, I think in the last call, but I’m seeing tremendous traction with our DDIC plus our high speed wired connectivity. And I’m telling you, we’re getting double-digit dollars as a [bump] [ph] with like three and four chips designed into some of these VR headsets. It’s early days in the VR market, but as we position ourselves for longer term growth, this is the kind of space we want to be in.
Perfect. Okay. Thanks so much.
Yeah.
And we have no additional questions at this time. So that will conclude today’s conference. Once again, I would like to thank everyone joining us. You may now disconnect. Please have a good evening.