Synaptics Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 9, 2023

There are 10 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Synaptics Incorporated First Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Munjal Shah.

Operator

Please go ahead.

Speaker 1

Thanks, Jada. Good afternoon, and thank you for joining us today on Snaptics' Q1 fiscal 2024 conference call. My name is Munjal Shah, and I'm Head of Investor Relations. With me on today's call are Michael Holston, our President and CEO and Dean Butler, our CFO. This call is being broadcast live over the web and can be accessed from the Investor Relations section of the company's website atsynaptics.com.

Speaker 1

In addition to a supplemental slide presentation, we have posted a copy of these prepared remarks on our Investor Relations website. In addition to the company's GAAP results, management will 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 market close today for detailed reconciliation of GAAP and non GAAP results, which can be accessed from the Investor Relations section of the company's website at synaptics.com. 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.

Speaker 1

Although Synaptics believes our estimates and assumptions to be reasonable, we 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 our most recent annual report on Form 10 ks and Quarterly Report on Form 10 Q 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 these forward looking information. I will now turn the call over to Michael.

Speaker 2

Thanks, Minjal. I'd like to welcome everyone to today's call. I'd like to start by thanking our team in Israel for their continued effort during this difficult period in their country. Our team continues to work tirelessly in the face of worry for their families and colleagues. In the last few years, we've been fortunate enough to establish a meaningful presence in Israel and our thoughts are with our team there.

Speaker 2

With that said, the main theme of today's discussion is that our business is lining up essentially as we've outlined over the past several months. In the quarter, we saw overall inventories come down in the channel as expected. Reductions are not uniform And we still have some work to do, particularly in Enterprise. Margins continue to be below our target model due to product mix, But a return to normal enterprise numbers should lead us back toward our long term target. In short, we continue to believe we are at We have now passed the bottom in our business and should start to climb out during calendar 2024 with both top line and mix improvements.

Speaker 2

While visibility to the slope of the recovery is uncertain, customers have started to place orders again, engagements are increasing And our pipeline is showing strength. Moving to the September quarter, revenue increased 5% compared to the 3 months prior and was slightly above the midpoint of our guidance range with our enterprise PC products performing better than expected. Our product mix imbalance resulted in a drag on gross margins putting us at the low end of the guide. We maintained our spending discipline and ultimately delivered non GAAP EPS above the midpoint of guidance. As discussed at our Investor Day in September, We are redefining our product breakouts as core IoT, enterprise and automotive and mobile.

Speaker 2

Beginning with our core IoT products, We continue to make progress with multiple design wins and new product introductions. In wireless, We introduced a new cost effective single stream device, this SYN-forty three thousand seven hundred and eleven. This product adds to our current high performance portfolio and is the 1st wireless device done from the ground up by the Synaptics team. I'm very proud to report that the device was a first pass success and was delivered on schedule. The other three devices we introduced this year the SYN-four thousand three hundred and seventy five 6E, a dual radio 2x2 Wi Fi 6E product The SYN-four thousand three hundred and eighty one, a 1 by 1 triple combo and the SYN-four thousand three hundred and eighty two, a 2 by 2 triple combo are all beginning to ramp at customers.

Speaker 2

In addition, the development of our first dedicated broad market chip is progressing as planned and we expect to tape out the device next year. In the quarter, we saw the first orders from a new module partner Marking our initial channel expansion with the goal of extending our reach into the broader customer base. Finally, we won multiple designs in the high performance IoT market, sports cameras, drones and sound bars, and we are engaged in new opportunities in trucking and logistics, TVs and industrial automation applications. All of these designs require the highest performance Wi Fi, flawless interoperability And unmatched Bluetooth coexistence. In our processor roadmap, we recently introduced a quad core Linux based Power efficient and cost optimized system on a chip, the DVF-one hundred and twenty.

Speaker 2

Like other SoCs in the processor portfolio, this device Can be used to execute a variety of artificial intelligence applications. DVF-one hundred and twenty can run machine learning models on chip, Utilizing our standard toolkit and framework for rapid development and deployment. Early traction includes intelligent video and adaptive noise cancellation for the unified communications and collaboration market. The device also operates From our unified software development kit that supports existing Synaptics SoCs demonstrating our extensible software platform. As with our wireless products, we had several wins in the quarter, some in our traditional operator customer base and others for more general purpose applications.

Speaker 2

For example, our customer Swisscom launched their next generation streaming device TV Box 5 that is 35% more energy efficient and half the size of its predecessor, helping them achieve strict European ESG goals. Soon, we expect to announce our new family of general purpose SoCs targeting a wide variety of IoT applications That will enable Synaptics to expand our addressable market. Our enterprise and automotive products had 2 diametrically opposed stories during Quarter with our PC and automotive products performing better than expected, but continued softness in video interface and enterprise headsets. Our automotive products remained steady with new TDI based wins at Toyota, Tata Motors, Volkswagen and Mercedes. The move to larger screen size is accelerating, but the corresponding ASP Benefit is offset by continued competitive price pressure.

Speaker 2

Another favorable trend in automotive Is increased adoption of local dimming, which brings LCD screens, which have already have price and longevity advantages To the performance level of high end OLED giving us added confidence in our Smartbridge rollout. PC is a 2nd bright spot with solid sequential growth in fiscal Q1. Customer inventories appear to be back to normal levels And demand is improving. Our touchpad and fingerprint solutions continue to perform well with design wins across major OEMs and smaller customers. In addition, we are seeing solid traction in several focus areas within enterprise that we believe are long term growth drivers.

Speaker 2

Our human presence detection solution for laptops performed better than initially forecast as early attach rates were higher than projected. We had our 1st wireless headset launch with one of our leading customers, Logitech, introducing a product that utilizes our AI based voice processing for near field and far field noise suppression as well as premium hybrid ANC algorithms. Our low power enterprise class audio SoC enables up to 40 hours of battery life. However, the remainder of enterprise is weak as inventory levels Persist at relatively high levels. In addition, new product ramps are slower than normal with engineering cutbacks at our customers affecting the Timeline of initial introductions.

Speaker 2

In spite of this, customer interest, design wins and momentum remain strong for our products and it is only a matter of time before we see a return to normal run rate. In mobile, we believe the majority of Android handset makers are shifting more of their models to flexible OLED, which plays to our strength. Our Chinese customers are doing better against foreign competitors in the domestic market. Outside China, we continue to build momentum at Samsung Following the successful launch of the Z Flip 5 phone and we expect to follow on see follow on wins in the near future. To conclude, our business is stabilizing at current levels.

Speaker 2

We continue to expect a recovery starting in calendar 2024, So visibility to the strength and the slope of this recovery is still limited. We are confident enterprise inventories will return to normal levers over the next Few quarters improving our overall mix and margins. We are focused on executing our core IoT opportunities and are already seeing traction with our initiatives to expand our addressable market. Now let me turn the call over to Dean for a review of our Q1 financial results and second quarter

Speaker 3

outlook. Thanks, Michael, and good afternoon to everyone. Before I get started, I want to remind investors that we have reclassified our revenue into new categories, core IoT, enterprise and automotive and Mobile beginning this fiscal year. We believe this provides investors with better measurement of our focus areas And creates an easier and more direct comparison with similar peers. We have provided this reclassification on a historical basis and the supplemental slide presentation posted on our Investor Relations website.

Speaker 3

Now, let me dive into the review of our financial results for the recently completed quarter followed by our current outlook. Revenue for the September quarter was $237,700,000 which was above the midpoint of our prior guidance. Revenue from core IoT, enterprise and mobile were 16%, 65% 19%, respectively. While we did not guide to these categories during our August call, Q1 results were in line with our expectations of former IoT and former mobile products, while our former PC products outperformed our forecast during the quarter. Year over year consolidated September quarter revenue was down 47%, but more importantly grew sequentially by 5% as we moved off from what we believe to be the bottom of sales.

Speaker 3

On a consolidated basis, channel inventory depleted nicely in the quarter and our distributors point of sale indicated an increase relative to prior quarter. Core IoT revenue increased by 15% sequentially, but was down 66% year over year. This area has experienced the most channel inventory accumulation, which we believe is now near its bottom and should see its final depletion over the coming quarters. In Enterprise and Automotive, our September quarter revenue was up 9% sequentially, but down 47% year over year. Sequential growth was driven almost entirely by recovery in PC product shipments.

Speaker 3

We are optimistic that this may be a directional indicator of overall corporate IT spending as we look forward into calendar year 2024. Automotive product shipments slowed modestly during the quarter, but were largely in line with our expectations. We're continuing to work down inventory across the balance of the enterprise portfolio, which will likely take place over the next few quarters. Mobile product revenue was down 15% sequentially in the September quarter and down 10% year over year. We are seeing modest improvements in Android shipments and are gaining share with Samsung.

Speaker 3

While recovery in mobile is encouraging As more customers adopt higher end flexible OLED displays, we continue to believe the mobile end market will ultimately remain volatile. During the quarter, we had 2 customers greater than 10% of revenue at approximately 18% and 11% respectively. For the September quarter, our GAAP gross margin was 45.1%, which includes $17,800,000 of intangible asset amortization and $1,100,000 of share based compensation costs. September non GAAP gross margin of 53% was below our midpoint, but within our guidance range as product mix skewed us a bit lower. GAAP operating expenses in the September quarter were $142,300,000 which includes share based compensation costs of $32,100,000 and intangible asset amortization of $5,500,000 September quarter Non GAAP operating expenses of $96,700,000 was down from the preceding quarter and below our guidance range as we continue to maintain visual expense control.

Speaker 3

The GAAP tax rate was negative resulting in a tax expense of $15,000,000 for the quarter and the non GAAP tax rate was 17%. September quarter GAAP net loss was $55,600,000 or a GAAP net loss of $1.43 per share. Non GAAP net income in the September quarter was $20,300,000 an increase of 4% from the prior quarter and an 85% decrease from the same quarter 1 year ago. Non GAAP earnings per diluted share of $0.52 was near the high end of our guidance range. Now turning to the balance sheet.

Speaker 3

We ended the quarter with $824,000,000 of cash, Cash equivalents and short term investments on hand, down from the preceding quarter as we completed the wireless Licensing transaction early fiscal Q1. Cash flow from operations was $45,000,000 Capital expenditures were $6,700,000 and depreciation for the quarter was $7,200,000 Receivables at the end of September were $111,000,000 and days of sales outstanding were 42 days, a decrease of 23 days from last quarter. This decline is primarily due to collection from short payment term customers and some front end loaded linearity of our sales during the quarter. Our ending inventory balance was 132,000,000 down $5,000,000 as we cautiously reduce our inventory purchases. Our calculated Days of inventory on our balance sheet also declined at 105 compared to 122 at the end of prior quarter.

Speaker 3

Now let me turn to our December quarter outlook. September saw good progress in reducing our inventory among our distributors with inventories depleting in line with our expectations. Point of sale at our distributors continue to hold up and in fact increased versus the June quarter. As we look ahead, we continue to focus on reducing customer and distributor inventories further until full equilibrium is met. Demand shows signs of continued stabilization at the current levels With almost all our products shipping below historical 2019 levels, we expect to recover from these levels in 2024, but the timing and shape of recovery is still uncertain.

Speaker 3

We see improving strength in PC and mobile end markets, which creates a gross margin headwind from a product mix perspective. Given these end market dynamics and expected channel inventory burn in the December quarter, We anticipate revenue to be in the range of $220,000,000 to $250,000,000 roughly flat with the prior quarter. Core IoT is expected to be up slightly for the December quarter, enterprise to be down on ongoing inventory correction and mobile to be up as certain models are expected to ramp. We expect our revenue mix from core IoT, Enterprise and Automotive and Mobile Products in the December quarter to be approximately 17%, 59% 24%, respectively. We expect GAAP gross margin for the December quarter to be in the range of 42% to 45%.

Speaker 3

We expect non GAAP gross margin in the range of 51% to 54%, roughly similar to the prior quarter as mix remains unfavorable with mobile ramps occurring faster than inventory depletion in the other areas. We expect GAAP operating expenses in the December quarter to be in the range of $135,000,000 to $140,000,000 which includes intangible amortization and share based compensation. We expect non GAAP operating expenses in the December quarter to be in the range of $95,000,000 to $99,000,000 GAAP net loss per basic share for our December quarter is expected to be in the range of $1.40 to 1 $0.80 and non GAAP net income Per diluted share is anticipated to be in the range of $0.25 to $0.65 per share on an estimated 39,500,000 fully diluted shares. We expect non GAAP net interest expense to be approximately 6,000,000 December quarter with the corresponding GAAP net interest expense of approximately $7,000,000 This wraps up our prepared remarks. I'd like to now turn the call over to the operator to start the Q and A session.

Speaker 3

Operator?

Operator

Thank you. At this time, we will conduct a question and answer session. Please standby while we compile the Q and A roster. Our first question comes from Christopher Rolland of Susquehanna. Please go ahead.

Speaker 4

Thanks for the question guys. I guess, Enterprise, we're waiting for this to come back. Where are the pockets where you see the most inventory? And are there any products or areas that Are now kind of clear of that inventory overhang and orders are starting to come back reasonably well.

Speaker 2

Yes, Chris, this is Michael. Thanks for the question. I'd say 2 pockets Of concern, one is around our docking station business and that's obviously a great margin driver for us. We've seen some recovery in the DisplayPort side of the business. The DisplayLink, if you remember that was one of our acquisitions, the one to many dock.

Speaker 2

That one has had quite a bit of inventory and we're still working through that. The other area is audio. We did really bang up business and again it's a gross margin accretive product for us And that one has been slow. We've started to see a little bit dribs and drabs of orders, but I still think there's quite a bit of inventory in the channel. What's doing well?

Speaker 2

Obviously, PC now we're classifying in this area and we had a good quarter in PC. We do think that's a solid leading indicator for docking stations that it's just a matter of time before that inventory clears out. And Frankly, it probably couples in these audio, these wired audio headsets as well. So, on balance, I'd say Relatively good news even in the enterprise sector.

Speaker 4

Excellent. Maybe one for Dean too. It sounds like mix is The big problem with gross margin here, but are there any other issues to consider anything like pricing, Etcetera. And then maybe you could give us a timeline on when we might be able to return 57% gross margin or your target gross margin again, it seems like it might be pushed out of it.

Speaker 3

Yes. Largely this is mix driven, Chris. As we talked about in Investor Day and even on prior earnings calls, The enterprise business being a little softer is actually is going to prevent us from having margins move immediately. I mean there's some mild pricing pressure, but it's not materially factoring into our guide. Any pricing pressure really is about maybe new products that might ramp in a year or 2 from now.

Speaker 3

So that's Not as much of a sort of near term concern. It's really all around mix. And how do we get back to our target Mix and our target margin model, really what we need is for all of the areas to Kind of move back into its normal mix. We think that that core IoT business has hit bottom and that's starting to move up. Enterprise probably is just a little bit behind that, while at the same time actually mobile is actually starting to move faster and actually it looks like it's You're up in December quarter, so that's a headwind for us.

Speaker 4

Great. Thanks guys and nice to hear the bottom IPN. Yes. Thanks Chris.

Operator

Thank you. One moment for our next question. Your next question comes from Kevin Cassidy of Rosenblatt Securities, please go ahead.

Speaker 4

Yes. Thanks for taking my question and congratulations on the great quarter in this atmosphere. Interesting new wireless connectivity products you're introducing. Can you give us an idea of what the ASP lift Will be for those products versus the past generation?

Speaker 2

Yes, good question. And thank you For the nice words. It does feel like to your point, we're now really coming off the bottom. I'd say we sort of called the bottom Relatively early in the cycle and now it feels like we're certainly moving off of it. Our wireless products, Everything that we're doing right now is in the high performance areas.

Speaker 2

We outlined in the Investor Day These three categories for us, the high performance, the broad market and then the Bluetooth opportunity. And so this one Is in the broad mark sorry, in the high performance area. It's a 1 by 1 product. Typically, A 2 by 2 product to give you an idea is in sort of 3 point $5 range, a 1 by 1 product is in sort of $2 to $3 range. What we get in benefit here and I think you and I had talked about this before is The idea of a lower die size.

Speaker 2

So our core IoT business is sort of From a gross margin perspective, it's sort of at the corporate model or maybe slightly below as we outlined in Investor Day. This gives us an opportunity to Improve and continue to see a build on gross margins by taking some of the cost out of this 1 by 1 device.

Speaker 4

Great. And I imagine with these smaller die and higher performance, you're moving away from any competition, head to head competition. How does the competitive landscape play?

Speaker 2

Yes, that's right. I mean, high performance, particularly for the IoT market, We really have, I don't want to say the run of the market, but we're obviously on these Security cameras, video streamers, drones, things that are moving video across the wireless link, we have an incredible Competitive advantage is because of the quality of the signal that we're able to generate. We really like where we are from a competitive standpoint and there's not many folks out there, Kevin, that can do this. It really can deliver that consistency of wireless performance over that wireless performance over that long video long range. So We think we're really, really well competitively positioned and this 1 by 1 just helps us on the cost front.

Speaker 4

Okay, great. Thank you.

Operator

Thank you. One moment for our next question. Your next question comes from Krish Sankar of TD Cowen. Please go ahead.

Speaker 5

Yes. Hi. Thanks for taking the question and congrats on the good results and the guidance too in this environment. The first question I was wondering either for Michael or Dean. Based on the bookings you're seeing so far in the quarter, can you give any color into March?

Speaker 5

Do you think it could be flattish? Or do you think there could be some seasonality impact on it? And then I had a follow-up.

Speaker 3

Yes. Let me take that one, Krish. Based on what we see on bookings, we actually think we've hit bottom. In fact, If anything, it looks like things are looking more positive as we look forward. We're not guiding Specifically into March or anything beyond the December quarter at this point, but it does look like based on bookings and Yes.

Speaker 3

What we can see into channel dynamics, etcetera, looks like bottom is actually behind us and likely moves up. I mean the open question is trajectory, right? We have less visibility on exactly what does that slope look like, but it seems to be positive rather than negative.

Speaker 5

Got it. Got it. That's very helpful. And then a follow-up question on inventory. Is there a way to quantify how much Excess inventories there at your customers, either in terms of days or what it is today relative to maybe 3 months ago or beginning of the year.

Speaker 5

And along the same path, Dean, you've done a great job reducing inventory days. What is the target? Do you want to go back to Like 70 days, which it was historically or do you have an updated target for your own inventory days? Thank you.

Speaker 3

Yes. It's kind of an interesting question, Krish. As we start to see the bookings, we're a little weary What does positive momentum look like from here and how far down should we drive inventory? Typically, we would want to hold something like 75 days in that range. But I think that contemplates, hey, like a very consistent, You can predict the mix super well kind of business.

Speaker 3

So I think it probably days continues It slowed down a little bit, but we're going to be cautious on not trying to outsmart ourselves and cut inventory and get the mix wrong and then not be able Respond to any upsides or any sort of new bookings that start flowing in. As far as sort of channel shipping, Basically what we've been trying to do, Krish, without like targeting a specific days or inventory level, we're trying to ship In less than shipping out. And for the first time last quarter in September, we saw Ship out actually from the distributors start to move up relative to June quarter. One data point is not quite a trend, so we're going to keep an eye on that. So I think what you'll probably see from us Over the next kind of couple of quarters, we just continue to sort of be cautious on what we're shipping in the channel until we have Really a nice trend behind us that we can kind of get back to normal as far as the channel operations.

Speaker 3

So hope that helps, Chris.

Speaker 5

Yes, thanks a lot, Dean. Thanks, Michael. Thank you.

Operator

Thank you. One moment for our next question. Your next question comes from Quinn Bolton of Needham. Please go ahead.

Speaker 6

Hey guys, this is Nick Doyle on for Quinn. Congrats again also for the performance in what we're seeing is a weak IoT environment. Can you talk a little bit more about why you think the rising PC demand is a solid indicator of the enterprise recovery? I'm just is demand coming from the same enterprise customers that typically buy your docking stations and audio products? I guess I'm just trying to make sure it's not more of a consumer driven recovery.

Speaker 6

Thanks.

Speaker 2

Yes. I mean, You got the right general direction for the answer. We are definitely biased toward corporate spending and corporate buying. So in areas that our enterprise products ship into The audio headsets, the docking stations, they will typically follow and be relatively well correlated to PC Because our PC is really enterprise focused. We have some mix of consumer in there.

Speaker 2

And I agree with your thesis. We're a little bit less certain about that particular segment of the market. But because we're so heavily indexed to corporate, Our PC business has done pretty well over the last couple of quarters, certainly coming off bottom, and we'd expect it to start pulling through docking station and head And we I think if you remember for those folks that followed us on previous earnings calls, The docking station and headset businesses fell later than PC, so we saw a roll off later. We would expect that now to recover a little bit later as well. So it's not totally inconsistent with Prior remarks on the downside, on the upside, we'd expect to see the same thing and certainly enterprise doesn't move quite as fast as the consumer markets.

Speaker 6

Thanks. And then, yes, we're talking a lot about inventory and gross margins on the call already, but I guess I'll ask A little bit of a different way. Is there a way to get back to 56%, 58% without the enterprise recovery?

Speaker 7

Yes.

Speaker 2

Yes. I mean, maybe I'll take that and have Dean add some color. I think that is a challenge. Jermaine, we're our enterprise business is obviously our best gross margin business. I think if it doesn't recover, it will be a bit more of a struggle and not that we can't get there.

Speaker 2

I mean we're making A lot of improvements as we just outlined a second ago in the core IoT area to help on the margin line with cost reductions and things like that. But I do think that we are the gross margin improvement back to 57% and what have you is very dependent on the enterprise business.

Speaker 3

Yes. Nick, I would just reiterate what Michael said. It does depend on enterprise getting all the way back to normal. If Enterprise were not, you'd probably fall just a little bit shy of that target, but you would need Enterprise To recover from this inventory and get back to its normal level to get up to target or any chances of moving back beyond that like you said.

Speaker 7

Thanks.

Operator

Thank you. One moment for our next question. Your next question comes from Gary Mobley of Wells Fargo. Please go ahead.

Speaker 8

Hey guys, thanks for taking my question. I hope your employees in Israel are safe and stay safe. Knowing that you have Such a large employee base, I think primarily from the DSP Group acquisition. I wanted to ask about how many have been called To military duty and given those circumstances, how you're managing those day to day operations and as well, growth maps That come out of that region.

Speaker 2

Yes, Gary, thanks for the question and obviously appreciate the sentiments. We've had slightly less than 10% of our employees called into service. Some of those that have been called Actually are able to multitask a bit. They're doing back line jobs, meaning intelligence and some other sort of Back of the front lines type of activities, so they're able to perform as mostly as usual. That being said, obviously, there's really some important projects that are going through our Israel team and we're trying to backfill those with Engineers across the globe and I think right now as it stands, we have a good plan for that and we can keep most of our key projects Very much on schedule.

Speaker 8

Appreciate that, Michael. As my follow-up, I wanted to ask about Some of the inflationary pressures or lack of in your supply chain. I appreciate the fact that mix is Presenting gross margin headwind, but presumably as well, some higher cost inventory flowing through the P and L statement. But as you think about The pricing terms that you're getting from current design wins are as they're happening today, how does that match up with the Trends in foundry quotes that you're seeing from your foundry partners as well, does that fit into your goal, the 57% gross margin?

Speaker 2

Yes, Gary. I mean, we're if you our costs, I'd say, on balance are going down modestly. So in general, we're seeing relatively good cooperation from our foundry partners, Not significantly, but modestly we're seeing decreases and more certainly Working as well with our OSAT suppliers, our operations team is figuring out different strategies in the back end on packaging and test To take cost out of the business and they've actually done a pretty remarkable job. I mean, there's no secret that Foundry prices have been tough to move and our biggest cost is wafers. But we have seen, I'd say modest decreases in the supply chain.

Speaker 2

The question that keeps coming up over and over again on the pricing Pressure. I mean, it's there to a certain extent, but that's why we've kind of come off the 60%, 61% gross margin and move that target down to 57%. I think that contemplates a modest level Pricing pressure that Dean talked about and also what we're seeing in the supply chain, which again is some help, but I wouldn't call it We're not doing jumping jacks yet.

Speaker 8

Got it. Thank you, guys.

Operator

Thank you. One moment for our next question. Your next question comes from Ambrish Srivastava of BMO. Please go ahead.

Speaker 7

Hi, thank you. Thank you for taking my questions. Dean and Mike, I just wanted to I'm trying to map The new segments with what you had before. And really just trying to understand how much of the enterprise business or What's the mix of the enterprise business that still is in that sort of challenged inventory not bottomed out yet? I'm assuming the part of the consumer PCs, where is that now?

Speaker 7

Is that part of core IoT or where did that go?

Speaker 3

Yes, Ambrish, let me just first make a statement. We're not intending to sort of slice and dice our new buckets and quantify every piece. That being said, our former PC bucket that we had historically reported is 100% In the enterprise and automotive bucket today, our historical PC business that we formally called out, It was largely focused on enterprise laptops. I mean, we certainly had consumer exposure in there as well, but the majority of that more Significantly more than 50% is enterprise focused. So for simplicity, that's fully captured in our enterprise buckets.

Speaker 3

And just sort of give you like a first order PC, you can take the historical PC number and just sort of compare it to our new enterprise and automotive bucket. So that PC makes up kind of do a first order 1 third of the bucket and 2 thirds being the balance of the enterprise related devices and or the automotive related devices. So if that helps you map a little bit, Ambrish?

Speaker 7

Yes, that does. Okay, got it. Got it. So then the and just back to the comments on stabilization from the peak to trough, if this is indeed the trough, seems like it is. Thank you.

Speaker 7

You saw it earlier than everybody else. I think you're off by 50%. Just trying to understand what other Metrics that you look at and we've all been through so many cycles. They're never the same and yet there are a few metrics that are the same. So in terms of rate of cancellations, bookings, what can you provide To kind

Speaker 3

of support that view that we indeed are at the bottom here. Yes. Let me just outline some of the things that we look at from a quantitative standpoint, certainly there's a lot of qualitative customer conversations, design activity expected to go into ramp, etcetera. But from a quantitative standpoint, generally we are looking at things like Booking rates, hey, booking rates accelerated, slowed, you will look at book to bill sort of ratios. What we noticed is that actually bottomed a few quarters back.

Speaker 3

We look at cancellation rates and push out requests On already booked backlog, what we've noticed over the last actually several quarters that has significantly slowed. In fact, It's very little now. It's actually almost back to sort of a normal rate. There's always some amount of noise in the system on People rescheduling their backlog, etcetera, normal course of business. But what we've seen over probably The last 2 to 3 quarters is like the peak volume from these second quarter metrics Started to slow down in their magnitude.

Speaker 3

We saw peak order as people try to cancel and reschedule. And as you know, when we talked about it back in our May call, we started allowing people actually to reschedule on what it is that they needed We do. We also work with channel partners to do the same. So on balance each quarter we've seen that amplitude go way, way down and To the point where it's getting close to being sort of normal course of business. We Do you see this level as certainly sustainable.

Speaker 3

In fact, if anything, we're probably biased up to bias Down as we look into 2024. And I think, hey, credit to the business teams and sales teams here at Synaptics on trying to make a call early on where the direction of inventory and forecasts are going and I think the internal team did a pretty good job.

Speaker 7

Got it. No, this is very helpful. Thank you. Appreciate it.

Operator

Thank you. One moment for our next question. Next question comes from Martin Yan of Co, please go ahead.

Speaker 9

Hi, thank you for taking my question. The question on the module partners You developed. Can you maybe talk about does that partner help you to address any new segments, geography or customer base? And do you see more of those new partnership developing in the medium term?

Speaker 2

Yes, Martin, thanks for the question. The module partners are important for us because As we try to move into this broad market strategy that we outlined in the Investor Day, This is a really good first step. The customers that they can serve are not customers that we would be able to enable. So our business, like many of the semiconductor businesses, is built around big customers, Customers that we all know and understand the nameplates of, but there's a huge market out there that are these smaller customers that We simply can't service with our application engineers. So this particular module partner is Really going after a bunch of customers that we couldn't service.

Speaker 2

There are applications in there like Tags and inventory trackers and things like that, that these guys are getting into that are Not things that we would normally do, but I think the more important issue is the customers that they serve versus customers we would serve. And so We would expect this particular module guy like our first module partner to become a very, very meaningful component of our wireless business Simply because they can serve a very, very broad array of customers that we wouldn't otherwise touch.

Speaker 9

Thank you, Michael. So is it right to assume the impact on your business once the market recovers in earnest And this new module partner maybe serve or impact your business similar to getting to a new distributor?

Speaker 2

It's almost like that Martin. Yes, it's pretty significant. I mean the customer touch and We obviously are monitoring who they're talking to and they report that out. I mean the number of customers they're talking to Are in the 100 and we would talk to 10. So it's a really multiplicative effect.

Speaker 2

And yes, ultimately we would expect to see business on the level of a distributor because they act like that. They're obviously very technical. They have a tremendous amount Software support that goes with it. It's very focused on wireless modules, in our case, a combo module. But they're really, really specialists in taking the product, doing the work on it to modularize it and then reselling it.

Speaker 2

But on a magnitude basis, yes, it's like a distributor.

Speaker 9

Got it. Thank you very much.

Operator

This concludes the question and answer session. I would now like to turn it back to Michael Perlstein for closing remarks.

Speaker 2

I'd like to thank all of you for joining us today. We certainly look forward to speaking to you at our upcoming investor conferences during the quarter. Thanks and have a good day.

Operator

This now concludes the conference. You may now disconnect.

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Earnings Conference Call
Synaptics Q1 2024
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