Broadcom Inc. (SYNA) Earnings Call Transcript & Summary

Good day, and welcome to the Synaptics Webcast Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Jason Tsai. Please go ahead, sir.

Good morning, or good afternoon, and thank you for joining us today to discuss Synaptics' acquisition of wireless -- of Broadcom's wireless IoT connectivity business. My name is Jason Tsai. I'm the Head of Investor Relations. With me on today's call are Michael Hurlston, our President and CEO; and Dean Butler, our CFO. Following our prepared comments, we will open up the call to Q&A. This call is also being broadcast live over the web and can be accessed in the Investor Relations section of the company's website at synaptics.com. We'll be using a supplemental slide presentation during this call and we'll also post it on our Investor Relations website. This conference call, the associated press release and presentation made available today contain certain forward-looking statements within the meaning of applicable securities law. These forward-looking statements relate to our financial condition, results of operations, plans, objectives, future performance and business, including our expectations regarding the proposed transaction between Synaptics and Broadcom, the expected timetable for completing the transaction and the potential benefits of the transaction. Our estimates and assumptions are subject to a number of risks and uncertainties beyond our control and may prove to be inaccurate, including substantial risks and uncertainties arising from the transaction, the integration of the acquired business into Synaptics and forming customer retention, substantial competition in our wireless IoT productivity market, selling price trends and risks that our market and build opportunities may not develop as we currently expect. 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 periodic reports filed with the SEC including the Synaptics Form 10-K for the fiscal year ended June 29, 2019, for important risk factors that could cause actual results to differ materially from those contained in any forward-looking statements. Synaptics expressly disclaims any obligation to update this forward-looking information. The discussion in this conference call will be limited only to the proposed acquisition. In addition, management will also discuss financial metrics on a non-GAAP basis, which excludes share-based compensation, acquisition-related costs, certain noncash recurring or nonrecurring items. As we are in quiet period, we will not make any comments on the current ratings environment or on near-term outlook for our business. I will now turn the call over to Michael.

Thanks, Jason, and thanks, everyone, for joining us on the call today. I'm excited to talk to you and discuss how the acquisition of Broadcom's wireless IoT connectivity assets fits into our strategy to accelerate our growth and improve our profitability long term. This is a strategically compelling acquisition that increases our footprint in IoT and significantly expands our addressable market. This acquisition is extremely complementary to what we're doing today, adding best-in-class WiFi, Bluetooth and GPS to our portfolio and enabling us to deliver a more complete solution to our customers. This is a $250 million all-cash transaction that will be immediately accretive to cash flow as well as non-GAAP margins and earnings. In addition to the manufacturing rights we obtain for a wide set of products, we have access to 2 additional road map products without the additional OpEx spend. These 2 products are purpose-built for the IoT market and will feature the absolute latest in wireless connectivity technology. Dean will discuss the financial aspects of the acquisition later on the call. For most of our current IoT solutions, whether they are targeted OTT video streamers, smart home devices, fax and printers or even automobiles, the end products also need wireless connectivity. So adding this asset to our portfolio enables us to offer a more complete reference design to our customers. As you can see on this slide, we offer a majority of the technology required for many of these IoT devices. The SoC is the most critical component of dictating the capabilities and performance of the device. Connectivity is the next critical decision, and we believe by providing both components, we can enable our customers a faster time to market at lower costs with even better overall performance. With this acquisition, we're acquiring the rights to the absolute best-in-class connectivity solutions in the market, developed for the leading smartphone OEMs. These products feature the lowest power consumption and the highest level of integration in the market, all of which have been battle-tested by the world's most discriminating customers. These connectivity solutions include state-of-the-art WiFi 6, Bluetooth 5 and Bluetooth 5.2 LE and GPS L5. We will also be bringing over an outstanding team to continue to grow and support this business. Despite not being a focus for Broadcom, this business has traction in the IoT market today with meaningful revenue, a broad design win backlog of Tier 1 OEMs and significant upside. As you look at the IoT products in which Synaptics already has presence, you can see why adding this asset is critical. Every market we serve also needs wireless connectivity. So we now have the ability to offer more content to our customers and add touch points to our existing account base. In addition, the product line opens new applications such as industrial, surveillance cameras and home appliances where we don't have a presence today, allowing us to further expand our addressable market. As we talked about recently at our Investor Day, our SAM today is $5 billion, and the wireless IoT connectivity SAM today is estimated at $3 billion, growing at a 10% compound annual growth rate for the next 3 years. We estimate that this acquisition will increase our combined market opportunity to $8 billion, growing at a pro forma 9% compounded. This is a greenfield opportunity for us to significantly expand our footprint in what is already a large market today and accelerate our long-term growth. I'm excited to bring this asset to Synaptics. And as many of you know, I was involved in this business for nearly 16 years while at Broadcom and was the General Manager for nearly 10 of them. So I'm intimately familiar with this asset and its potential. We also have executives of Synaptics who've been involved in different aspects of this business, from operations, to design, to marketing, to sales. We have an immediate understanding of the technology and the customer base. The wireless connectivity products we're getting as part of this transaction have been battle-tested and validated by the most uncompromising OEMs when it comes to performance, and they're second to none. While there are several competitors in wireless connectivity and IoT today, all lack either technical -- leading technical performance, a Tier 1 SoC solution or a fundamental understanding of the customer base. Synaptics is the only one that combine all 3 elements, giving us true competitive advantage and our customers the best possible experience. One of the things that makes this transaction truly unique is the fact that Broadcom will develop 2 future products for us. This will allow us more runway to develop our in-house design capability and build upon IP that we'll be getting as part of this transaction. We will focus on customer capture in the near term while we're able to offload the design activity. We will be able to rely on the best wireless engineering team for new leading-edge products featuring the latest technologies such as WiFi 6E, ensuring that we continue the heritage of leadership connectivity for the next few years. This was a pitfall of another similar -- of other similar transactions and one we felt we solved in the most advantageous way. So in summary, the addition of wireless connectivity to our existing IoT assets will enable us to better serve our existing customers while opening an array of totally new markets and engagements. We are confident that this acquisition will deliver significant revenue growth for the company while helping improve gross margins and operating margins.

Good afternoon, everyone. We're excited to have signed a definitive agreement to acquire rights to Broadcom's wireless IoT connectivity assets and the underlying intellectual property. Let me provide you the details related to the acquisition and outline the financial rationale. We will be acquiring this business for a total consideration of $250 million in an all-cash transaction that is expected to close in our Q1 of fiscal 2021, subject to customary closing conditions. As part of the transaction, we have agreed to a 3-year limited exclusivity which Broadcom will preclude themselves from relicensing the rights. In addition, Synaptics has agreed not to sell into certain markets reserved for Broadcom. We expect to fund this acquisition with the available cash on hand and will not require additional financing. We do not believe regulatory approval will be required and anticipate closing of this transaction to occur within Synaptics' current quarter Q1 of fiscal year 2021. This acquisition is a clear example of our long-term strategy taking shape as we redeploy our capital to accelerate growth and profitability. With the April 2020 divestiture of our low-end mobile LCD TDDI business, we are redeploying this capital to meaningfully move our portfolio upstream in the value chain. We are bringing in a business that significantly expands our long-term revenue growth potential as well as adding immediate accretion to our non-GAAP earnings and non-GAAP operating margins. As of Synaptics' Q3 fiscal 2020 quarter end and including the cash received from our recent divestiture, we have a cash balance exceeding $700 million available to us, including the $100 million drawn on our revolver. After accounting for this transaction, we will have more than $460 million of cash remaining on the balance sheet. We believe we'll be in a stronger financial position as the addition of connectivity will boost our profitability and cash flow, providing us with future capital to execute on our long-term strategy of diversifying our business with acquisitions that are additive to our overall portfolio. Today, this business is generating about $65 million in annual revenue. We believe we can quickly and significantly grow this revenue base and believe this business will be accretive to our non-GAAP gross margins and operating margins, with non-GAAP gross margins of 50% or better and operating margins well above 20%. This business will add approximately $15 million a year in operating expenses and will be immediately accretive to our non-GAAP EPS. We will be bringing over a team of approximately 60 people that will enable us to capitalize on the strong momentum of this business and help drive additional synergies within our existing IoT products. This asset will become part of our existing IoT business. And as we have highlighted in our recent Investor Day, we anticipate IoT will become the largest part of our portfolio longer term, and this acquisition will help us to accelerate our leadership in this market. The addition of wireless IoT connectivity will increase IoT to account for about 33% of our revenue on a pro forma basis, putting us well underway in growing IoT to be 40% or more of our business in the future. The addition of these new products and customers will further accelerate our customer and product mix diversification initiatives. As Michael pointed out, we believe the growth opportunity for -- here will be significant. Not only is this market for IoT connectivity growing rapidly, we believe there will be significant synergies that we can uniquely capture with the addition of this asset. Broadcom already has a well-established footprint with both Tier 1 OEMs as well as leading channel partners targeting a diverse set of end markets in consumer, commercial, industrial and automotive applications. There are significant cross-selling opportunities we see today in the IoT market, and our ability to bring more complete solutions to market will enable us to become a more meaningful semiconductor supplier to our customers. Beyond just revenue growth and synergies, this acquisition is accretive to our long-term financial targets that we have laid out in our Investor Day. We will be able to accelerate our ability to achieve those targets through this acquisition. In summary, this acquisition fits very well into our long-term strategy. It accelerates our ability to diversify our business and drive IoT to become a more meaningful share of our business going forward. This will also bring significant SAM expansion for Synaptics and equip us with best-in-class connectivity solutions to serve this market. The addition of this best-in-class product set, in addition to our existing portfolio, will bolster our technology leadership. Longer term, leveraging Broadcom's engineering co-development of the additional road map products without the need for any significant operating expense spend will ensure that we can maintain this leadership for several years to come. Lastly, it is immediately accretive to our non-GAAP margins and earnings, and we believe it will accelerate our ability to reach the financial targets that we have laid out. With that, I'll now turn the call over to the operator for Q&A. Operator?

[Operator Instructions] We'll now take our first question from Christopher Rolland at Susquehanna.

So we used to follow Cypress, and of course, they bought what I thought was this portfolio back in the day. So I guess my first question is, how are they selling this asset again, I guess? And then secondly, I think you talked about an exclusivity of 3 years. Are you worried that Broadcom will sell the asset once again?

Chris, let me take both parts. I think, first, relative to Cypress, what happened was in that agreement, there was sort of a gray area of market carve-outs where Broadcom could operate in certain areas and Cypress was able to operate in others, but there was sort of a middle ground. And in that middle ground, since I was operating the business at the time, we were able to grow this rather substantial piece of business. And there was a support team that is coming over as part of the transaction that was really intimately involved in that, winning the designs and carrying that business forward. So it's that business that ended up coming over to us that was kind of created in this gray area, if you will. Now what we have is, I would say, substantively similar to Cypress in that we have these manufacturing rights and things of that nature. The big difference is we get these road map products. And I think where we -- where Cypress struggled is the ability to sort of prosecute business at the same time as designing new products. And at least for probably the first 5 or 6 years, we're going to have the ability to sort of grow a design team organically, but have all of Broadcom kind of take on the responsibility for designing our future products. And these will be purpose-built sort of co-designed, co-specified products tailored for the IoT market. So that really is a big, big difference and differentiator in terms of the deals. Yes, in some respects, they've largely resold the asset. I don't think they could do that again because the support team that was left behind is coming over to us. So they really don't have the assets and the ability to recreate a business for a third time, if you will. That capability has been almost entirely hollowed out as a result of this transaction.

And then I guess a follow-up there is, are you immune from -- do you have immunity for any recourse from Infineon around this contract? And then more separately, the 2 road map products that you talked about, I think one of them might have been WiFi 6E, and I was unsure on the other one as well, but any other details there would be great.

Yes. Let me take the second part of it first. We talked about WiFi 6E being central to the future products. And you can imagine that both things -- both products will likely feature that technology. I don't want to go into more details on that, Chris, because these are obviously future products, and we don't want to tip off our competition any more than we have to. With respect to your first question, I mean, obviously, we've read and discussed all the contracts with Broadcom. We feel this is totally within Broadcom's bounds to sell and totally within our bounds to acquire. So I don't think that there's any -- should be any legal problems with Infineon at all.

Great. And congrats on the deal.

Thanks, Chris. Good questions.

We'll now take our next question from Charlie Anderson at Colliers Securities.

Congrats on the deal. I wanted to start sort of picking up on sort of the last points. So we saw what Cypress did with it. They were able to grow it very nicely in the first few years. We've seen Silicon Labs buy similar assets, NXP. So there's been sort of this established playbook in the industry of buying a connectivity asset and marrying it to a microcontroller company. I wonder if you could kind of compare and contrast some of those approaches and playbook to what you may do with this asset in terms of where you see some of the synergies and approach.