Synaptics Inc

NASDAQ:SYNA

Earnings Call Transcript 2019-Q2

[Operator]

Good day and welcome to the Synaptics second quarter fiscal year 2019 conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Ms. Jennifer Jarman of The Blueshirt Group. Please go ahead

[Jennifer Jarman]

Thanks very much Stephanie. Good afternoon and thank you for joining us today on Synaptics' second quarter fiscal 2019 conference call. With me on today's call are Rick Bergman, President and CEO, Kermit Nolan, newly named Interim CFO and Wajid Ali, outgoing CFO, as announced in this afternoon's press release. This call is also being broadcast live over the web and can be accessed from the Investor Relations section of the company's website at synaptics.com.

A quick reminder that we have posted a supplemental slide presentation 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 exclude share-based compensations, 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 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.

And I will now turn the call over to Rick Bergman. Rick?

[Rick Bergman, President, Chief Executive Officer]

Thanks Jennifer and I would like to welcome everyone to today's call. Synaptics posted another strong quarter and a positive first half of our fiscal 2019. Revenue was right on the mark, within our guidance range and up 2% sequentially. I am very pleased to report that we handedly our projections for non-GAAP EPS positing year-over-year growth of 40%. This was driven by our sixth consecutive quarter of improvement in non-GAAP gross margins which were up 300 basis points over the year ago period as we continue to inch closer towards our medium-term target of 40%.

Our favorable operating performance provides further validation of the positive impact of the Synaptics 3.0 strategy on our company and our financial results. We have made disciplined smart decisions as we transition into a more diverse company with decreasing reliance on mobile and shifting greater focus to IoT. This has allowed us to steadily improve our margins and amplify our earnings power, boosting our profitability profile and business model.

As we enter the new calendar year, we believe the significance of this transition is even more evident in light of the current conditions affecting certain areas of our business. As wildly widely reported in mobile, a couple of leading OEMs have publicized significant softness in demand. Like others in the supply chain, Synaptics is not insulated from these trends. However, the value of our diverse customer base and strong position with several China OEMs that continue to post growth is helping to somewhat lessen the impact.

We remain a clear leader in the field as we continue to deliver innovation that our customers highly value across OLED DDIC, touch and TDDI. In IoT, we are excited to be sampling our next generation AudioSmart solution to key customers. This is the industry's first to 22 nanometer purpose-built solution for the voice market providing low-power, cost efficiency and the ability for higher-level integration. As previously noted, we are seeing near-term weakness in the broader consumer IoT market. However, the catalyst for growth remain very attractive and we continue to set ourselves up for strong leadership and success across the multiple opportunities we are addressing with a growing pipeline of design wins.

The PC market is a bright spot for Synaptics generating year-over-year growth and demonstrates the staying power of our investments and innovations even in mature market, where we have been operating for a long time. While we are not immune to component shortages across the industry, we are benefiting from increased content per PC through growing attach rates for our capacitive fingerprint solutions.

Lastly, we remain very well-positioned in automotive, where we remain on a trajectory to double our revenue by 2021. Armed with the ability to better navigate downward market cycles under Synaptics 3.0, we remain very excited about the main growth drivers of our business, including IoT, OLED and automotive, where we continue to invest to support our broad solutions platform and premium customer base. In addition, we are laser focused on strong execution as we deliver our next-generation of products which I will now discuss as we review recent progress across our four key markets.

Let's begin with our IoT division. Synaptics-powered devices continue to proliferate in areas from smart speakers to set-top boxes and sound bars to voice-enabled cards, accessories and high-fidelity digital headset and high-end smartphones. In fact, it's now common to have multiple products powered by Synaptics in your home, office and car.

Our new series of Smart Edge AudioSmart solutions leveraging 22 nanometers is now sampling at key customers and is expected to begin shipping in fiscal Q4. These include the world's first fully integrated SOCs comprising neural network acceleration, our proprietary wake word engine, our highly-advanced far-field voice processing. Targeting a broad variety of voice-enabled smart home devices including hubs, Wi-Fi repeaters, speakers and appliances, the AudioSmart AS3XX product family incorporates a new powerful machine learning engine.

Ensuring a high level device and system security is a fundamental differentiator of this new set of products. This ranges from a dedicated security processor to architecting every element of the SOC and system implementation. The AS371 solution with SyNAP on-device intelligence enhances consumer privacy by greatly reducing the need to continuously send personal data to the cloud.

Voice is rapidly becoming the preferred interface for interacting with devices. Recently at CES, two of our product partners launched the first car accessories with Google Assistant and our far-field voice solution, the JBL LINK Drive and the Anker Roav Bolt. Another success in the IoT space includes a selection of our VideoSmart and AudioSmart technologies by SK Broadband in Korea for its upcoming B TV consumer devices to be launched in 2019. This partnership is expected to power next-generation services to four million subscribers. Synaptics' VideoSmart technologies have a leading market position in the fastest growing segment in the IPTV OTT industry where service providers have adopted Android as a software platform.

Industry analysts report that over 70% of TV operators worldwide are considering Android and that there will be over 100 million devices shipped by calendar year 2022 with Android TV. In addition to the latest 4K HDR video and security technologies, our VideoSmart family has added AI to its differentiating feature set. Our AudioSmart far-field voice DSP technologies are also being adopted by TV providers for enabling consumers to use their voice to control their TV and home automation services.

Now let's turn to our mobile division. Our strategic investment and timing of product rollouts in smartphone displays are really paying off as the TDDI market continues to grow rapidly and as broader OLED capacity begins to materialize. Our Clearview OLED display driver leveraging flexible chip-on-film packaging or COF has been widely adopted by several major smartphone OEMs. As we move into the next generation of solutions, we believe that we are now sampling the industry's lowest power OLED DDIC, which consumes 40% less power than the prior version. Synaptics continues to lead the evolution towards bezel-free and brilliantly immersive infinity displays for both OLED and LCD smartphones with our innovative COF designs, highlighted by over 20 projects already in mass production including the world's largest OEMs.

Our close partnership with key display manufacturers in China, Japan and Korea are arming global smartphone OEMs with state-of-the-art touch and display technology across all resolutions, whether OLED or LCD panels. We have built a mature COF supply chain to address the rapid trend toward bezel-free phones and our early innovations in TouchView TDDI and discrete DDICs are enabling the market to flourish with vivid smartphone displays showcasing our feature-rich technology.

Some of the latest adopters of Synaptics TDDI include Huawei, who selected our TouchView technology for multiple models, including the P20, the Honor 8 and 10 Lite as well as five other models. In addition, OPPO chose our TDDI for its new F5 and Vivo for its new V9 models. Synaptics' leadership in OLED has also led to several discrete touch wins including two new models from OPPO and three new Vivo phones.

Our VR portfolio is also gaining traction with our R63455 DDIC being selected for the latest QUALCOMM reference headset design. The 2K resolution of our solution helps eliminate the screen door effect and enables higher resolution content to be sent over existing data protocols like USB Type-C.

Now let's move to another key growth area, automotive, where the connected car is driving market trends towards more and larger displays. In the prior quarter, we talked about several display manufacturers building full in-cell automotive panels using Synaptics TDDI solution. I am pleased to say that we are now seeing those efforts transform into design wins across Japan, Europe, China and the U.S. demonstrating wide adoption of the technology, industry recognition of Synaptics' strength in display and touch integration.

We had several automotive TDDI display panels at CES this year, which were well received by OEMs and Tier 1s and likewise Synaptics' solutions were also displayed by multiple OEMs in their booths. In addition, we lit up the first OEM production panel using Synaptics TDDI this month. We expect cars with Synaptics TDDI technology to rollout of assembly lines towards the end of calendar year 2020.

Now let's turn to our PC division, where our strong touchpad business continues to command market share leadership and our PC fingerprint business is strong and growing. In fact, our newest Match-in-Sensor fingerprint solution will be shipping in leading PC OEMs products starting this quarter. Our footprint in PC also includes Skype certified audio codecs and display interface technologies. Our leadership in these areas along with key partnerships with leaders such as Microsoft, AMD, Intel and standards such as FIDO continue to define the roadmaps of PC OEMs globally.

In the quarter, we announced that Clevo, a leading OEM/ODM notebook manufacturer for a variety of global consumer brands, is featuring Synaptics' state-of-the-art SecurePad Gamma technology for several of its new high-performance notebook series. An industry first, the Clevo SecurePad Gamma integration merges Synaptics' newest glass-based touchpad technology with our new cutting-edge OXi-based Clear ID optical fingerprint sensor into a single module for notebook PCs. We are glad to be able to demo one of these models at CES.

You may recall, in 2016, we announced an exclusive partnership with OXi Technology, a Shanghai-based developer of unique and patented optical fingerprint technology. The collaboration includes combining technology from each company in the development of new proprietary optical sensing solutions and we are pleased to see the starting to accumulate in innovative new user interfaces.

Before we move to a discussion of the financials, I would like to address the CFO transition announced today as Wajid has decided to pursue an executive level opportunity at another publicly held company. On behalf of the Board, I would like to thank him for his numerous contributions to Synaptics over the last several years and we wish him well with his next venture.

We are pleased to announce that our long time VP of Finance and Corporate Controller, Kermit Nolan, who has been with the company for nearly 15 years, has been promoted to Corporate VP, Chief Accounting Officer and Interim CFO. We have also begun a search for a new CFO.

With that, I would like to give Wajid an opportunity to say a few words.

[Wajid Ali, Senior Vice President, Chief Financial Officer]

Thanks Rick. This is a very bittersweet transition as I made a personal decision to pursue an opportunity that makes a lot of sense for me from a professional development standpoint. It's been quite a privilege to work with Synaptics these past four years, along with such a talented executive team. And I am truly thankful to play the role in the company's transformation and expanded growth and profit potential.

Having worked very closely with Kermit during my tenure here, I have the utmost faith in his abilities as Interim CFO. And it's my pleasure to now introduce him to walk you through the Q2 financial results and outlook.

[Kermit Nolan, Interim Chief Financial Officer]

Thank you Wajid for your support and confidence and hello everyone. Synaptics posted solid second quarter results with revenues of $425.5 million at the midpoint of our guidance range and up 2% sequentially. As reflected in the presentation materials that we released in advance of this call, revenue from mobile, IoT and PC products was approximately 65%, 20% and 15%, respectively.

Revenue from mobile products was up 5% compared with the year ago quarter and up 4% sequentially. Revenue from IoT products was down 18% year-over-year and up 1% sequentially. As we discussed last quarter, we have shifted a large portion of our investment dollars from in-display fingerprint to IoT to enable stronger growth of IoT over the mid-term, which we believe will become more evident towards the end of the fiscal year. Revenue from PC products was up 4% year-over-year and down 7% sequentially.

During the quarter, we had two customers above 10% of revenue at 14% and 20%. For the December quarter, our GAAP gross margin was 35.2%, which includes $15.1 million of intangible asset amortization and $800,000 of share-based compensation costs. GAAP operating expenses in the December quarter were $124.8 million which includes share-based compensation of $15.4 million, acquisition related costs of $3.3 million consisting primarily of intangibles amortization and some transitory compensation program costs and restructuring expenses of $2.1 million.

Our GAAP tax rate for the second quarter was 36.2%. In the December quarter, we had GAAP net income of $12.8 million or $0.36 per diluted share. On a non-GAAP basis, our December quarter non-GAAP gross margin of 38.9% was near the high end of our guidance range and primarily reflects overall product mix. December quarter non-GAAP operating expenses were $104 million which was below the low end of our guidance range.

For the second quarter, our non-GAAP tax rate was 12%. Non-GAAP net income for the December quarter was $54.4 million or $1.55 per diluted share, increase of 42% year-over-year compared with $38.2 million of $1.11 per diluted share in the December quarter of last fiscal year.

Turning to our balance sheet. We ended the quarter with $283 million of cash, an increase of $20 million from the preceding quarter, which reflects approximately $59 million of cash flow from operations, net of $38 million used to repurchase approximately 988,000 shares during the quarter. We expect to continue to be active on an opportunistic basis with regard to our stock repurchase program.

Receivables at the end of December were $326 million and DSOs were 69 days, reflecting a backend loaded quarter. Inventories were $146 million and inventory turns were 7.1. Capital expenditures for the quarter were $4.4 million and depreciation was $9.2 million.

Now I will make a few comments regarding our quarterly outlook which reflects the broader market factors that Rick mentioned earlier. Based on our backlog of approximately $255 million entering the March quarter, subsequent bookings, customer forecasts, product sell-in and sell-through timing patterns as well as expected product mix, we anticipate revenue for the March quarter to be in the range of $340 million to $380 million. We expect the revenue mix from mobile, IoT and PC products to be approximately 62%, 20% and 18% respectively.

I will now provide GAAP outlook data for our March quarter and will follow with non-GAAP outlook data. We anticipate the stock-based compensation charge in the third quarter to be in the range of $16.5 million to $17.5 million. In addition, March 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. Finally, we expect our GAAP tax rate for fiscal 2019 to be in the range of 25% to 30% for the fiscal year.

I will now provide non-GAAP outlook data for our March quarter. Taking into account our overall revenue mix, we expect non-GAAP gross margin in the March quarter to be between 38% and 39%. We expect non-GAAP operating expenses in the March quarter to be in the range of $102 million to $106 million. We anticipate our non-GAAP long-term tax rate for fiscal 2019 to be in the range of 11% to 13%. Non-GAAP net income per diluted share for the March quarter is anticipated to be in the range of $0.70 to $1 per share.

In closing my comments, I would like to point out that we continue to diversify our product mix with greater focus on maximizing profitability and we are operating within our short-term model for gross margins and operating profit as we look at the fiscal year. As you know, historically the March quarter is our seasonally lowest period with the back half of the calendar year generally being much stronger. While quarterly patterns maybe more volatile due to global economic factors, we continue to focus on our short-term model with an eye towards the mid-term.

And with that, I will hand the call back to Rick.

[Rick Bergman, President, Chief Executive Officer]

Thanks Kermit. While we can't control the broader market conditions, we continue to march forward with our disciplined strategy and targeted investments under Synaptics 3.0 which has better equipped us to weather gyrations in our markets by expanding our product portfolio and diversifying our customer base while pressing ahead in voice and other growth areas of the business. Ultimately, we are investing to win.

As shown at CES, Synaptics is number one in numerous key areas across our technology portfolio and we intend to expand our share. We are well-positioned for leadership in IoT with solutions based on vertically integrated software, firmware and hardware and as a strategic supplier to key market leaders. We continue to innovate and lead in the mobile market with strong growth opportunities across LCD, TDDI and OLED display and touch. We are forging a strong growth path in automotive where we are leading the transition to TDDI and expect the benefit as the connected car drives a revolution in the need for displays.

Lastly, we continue to innovate in the PC market where we remain the leader in touch and are capitalizing on additional growth opportunities through fingerprint as well as voice and audio solutions. Our investments are focused on driving technology and product leadership in high-growth markets as well as rapidly increasing our dollar content per box. By carefully developing our product roadmap, we are successfully executing to our financial targets with expanding margins and profitability.

With that, we will now turn the call over to the operator to start the Q&A session. Operator?

[Operator]

[Operator Instructions]. And we will take our first question from Kevin Cassidy from Stifel. Please go ahead.

[Kevin Cassidy, Stifel]

Thanks for taking my questions and congratulations on the good results and good luck, Wajid. Maybe you had mentioned it slightly, I don't know what kind of a snapback we would see in the coming quarters. Can you give us an idea what are channel inventories like? And maybe even the situation on TDDI wafers?

[Rick Bergman, President, Chief Executive Officer]

Sure Kevin. So I think as you discussed in the past, for the majority of our business, the idea of a channel isn't a huge concept. We certainly, for our new IoT business is where the smaller companies start to play a bigger and bigger role for us. But for our mobile customers, we kind of manage it. We indirectly have some of that effect with the display manufacturers. But for the most part, we are comfortable and we have accounted for any of that certainly in the guidance that we have. And as we march forward, certainly there's additional opportunity.

And that kind of leads us into your second question, which is TDDI. There, any inventory is very, very lean. So we have now, at this point, I can say, supply is meeting demand. We believe we have adequate support from several of our sources to meet the demand out there. And it's somewhat unfortunate though, because we had to pass on a few opportunities last fall that we would otherwise be rolling with if we had the wafer supply. But at this juncture, we are ready to continue forward and grow that business.

[Kevin Cassidy, Stifel]

Okay. Great. And maybe just gross margin seems to be holding up very well even with weakness. Is it IoT driving that? And is there a room for gross margin expansion still?

[Rick Bergman, President, Chief Executive Officer]

Yes. Kevin, if I put out there, the goal for the company is to get to 40% and we are going to have to work at it. And we have six in a row and we are not committing that we will continue to we hit that going up every quarter, because ultimately, we are focused on increasing earnings per share. As you can tell just from the percentages, IoT isn't the number one reason anymore that our gross margin is going up. I would say, it's two things. Our product mix has been somewhat favorable across all three businesses. And then the second factor is just the incredible focus that we have internally on that and recognizing the need that we want to continue to have gross margins go up across the company.

[Kevin Cassidy, Stifel]

Okay. Great. Congratulations again. Thanks.

[Rick Bergman, President, Chief Executive Officer]

Thank you.

[Operator]

[Operator Instructions]. We will move on to Vijay Rakesh from Mizuho. Please go ahead.

[Vijay Rakesh, Mizuho]

Yes. I guess, a good quarter and guide here and best of luck, Wajid. Just on the inventory side, I was wondering if you could give us a little more color on how inventory is looking [indiscernible].

[Rick Bergman, President, Chief Executive Officer]

Vijay, thanks for the question, but we kind of heard the first part. And you said inventory and the line broke up quite a bit. Could you repeat it please?

[Vijay Rakesh, Mizuho]

Just inventories in the channel at the distributors?

[Kermit Nolan, Interim Chief Financial Officer]

Inventory in the channel at distributors.

[Rick Bergman, President, Chief Executive Officer]

If you are asking about do we have inventory in the channel or at distributors. Someone answer that question for Kevin. We aren't like a lot of our semiconductor peers that have the large international distributors. We run pretty lean with the exception of our IoT business which for a portion of that business with the smaller customers, we do stock inventory. Now we do have somewhat of a channel through the display manufacturers. But as an example, with TDDI right now is very lean because of our ability to meet the market demand through the winter. So overall, the general channel or inventory that we have already sold, so to speak, is fairly lean for Synaptics.

[Vijay Rakesh, Mizuho]

Got it. And just on the gross margin side, obviously it appears to be you guys are executing well. As you look at 2019, how do you see the gross margin plays out through the rest of the year?

[Rick Bergman, President, Chief Executive Officer]

Sure. I will start and then if Kermit wants to add some comments as well. A lot of it still, as I said, comes down to mix. And so as we kind of look out through the calendar year, you start to see seasonality. And we have big hopes for our IoT business and that tends to be a second half of the calendar year business. So we will continue to work the gross margins. You saw our guidance for this quarter. And as I mentioned on Kevin's question, from a focus perspective, the company will do our best to continue to inch it up as we move forward.

[Vijay Rakesh, Mizuho]

Got it. Thanks.

[Operator]

[Operator Instructions]. And it looks like we have a question from Kevin Cassidy from Stifel. Please go ahead.

[Kevin Cassidy, Stifel]

Hi. Yes. Thanks for taking my follow-up. Just on the OpEx, it looks like it was very good control. Can we expect that going forward? Or are there some one-time changes there?

[Kermit Nolan, Interim Chief Financial Officer]

Well, I think, again, we have taken actions over the last two-and-a-half years to bring our OpEx in line with our revenues. We are definitely anticipating this quarter to be in that range of $102 million to $106 million. I would like to think that we will maintain that. Obviously there's also investment into IoT. But my expectation is we will keep the OpEx down in the $102 million to $106 million range, hopefully this quarter and next quarter for sure.

[Kevin Cassidy, Stifel]

Okay. Great. And maybe as a follow-up, Rick, you mentioned the 22 nanometer devices. Does that give you a cost advantage also? Or maybe Moore's law now work out as well as for just driving cost, but maybe more for performance?

[Rick Bergman, President, Chief Executive Officer]

Yes. Kevin, we recognize we are in consumer devices which there's always cost pressure on those type of devices. So when we made that selection, we really felt 22 nanometer was a sweet spot, especially the global foundries process which is an SOI type of process which gives better performance power than some of the other CMOS technologies out there. But also because it's not quite in the 12 or 14 nanometer node where you talk some pretty darn expensive wafers and mass costs and so forth. We really felt it gave us a notch up from what was 28 nanometer, the right cost point and then the right power performance ratio as well as the ability to continue to integrate.

[Kevin Cassidy, Stifel]

Okay. Great. Thank you.

[Operator]

Up next is Ari Shusterman from Needham and Company. Please go ahead.

[Ari Shusterman, Needham and Company]

Hello. This is Ari. I am taking this question for Rajvi Gill, Needham and Company. So within consumer IoT for auto, who are your key partners right now and what new partners are you trying to attract to your platform? And same goes for consumer IoT for smart home.

[Rick Bergman, President, Chief Executive Officer]

So our key partner is in, let me start with automotive. As you can imagine, it's bit of a combination. We really have to meet with three different entities. One is the classic-branded OEMs. And until some of these products are announced, I can't really go into who they are. But they want to understand and it's so important to them, now with the connected car about where display technology is at. We meet with them.

In some cases, they will use a Tier 1 or in other cases, they will go directly to a display manufacturer and the display manufacturers are starting to look more and more like Tier 1s. We have to work with those Tier 1s or display manufacturers to get our product designed in. And you can imagine who the display manufacturers are in the world out there. It's all the names you know, whether it's Samsung, LGD, BOE, AUO, et cetera that participate in the automobile market.

As we shift to IoT, it's a much more fragmented ecosystem and we work with all of the key ecosystem players. Of course, Google is a big customer and we have been a strong support of their initiatives around Android and what they have done just globally, whether it's smartphones or anything. We also of course work with Amazon as one of their certified partners on voice. And many of the Amazon third-party solutions are based on our technology that you see available out there.

When you move into China, Baidu, Tencent, Alibaba, who we also work with, work for similar reasons. If with IoT, then you shift into, there's also the server provider market. So you are asking kind of a broad question, I guess, in some ways we did a presentation at CES and we list many of those partners and customers in that presentation, if you go out to our Investor Relations website. But the server provider platforms are all the providers out there worldwide. So it's a quite worldwide audience, Bouygues Telecom. We mentioned SK Broadband on this particular call. So that's a smattering of the partners that we work with in those two spaces.

[Ari Shusterman, Needham and Company]

Okay. Thank you for your answer. And then just one quick follow-up. When it comes to OLED, can you give a bit more color and some updates on the road map?

[Rick Bergman, President, Chief Executive Officer]

As much as that's publicly available. So today we have a QHD solution for OLED as well as a Full HD. And those can be used either with flexible or rigid OLED panels. We painted very strongly in the script that we have done a lower power version of those devices which has now begun sampling in the marketplace. And then beyond that, you can expect us to continue to innovate around display quality, power and higher levels of integration.

[Operator]

And next we have Charlie Anderson from Dougherty & Company.

[Charlie Anderson, Dougherty & Company]

Yes. Thanks for taking my questions. I am hopping between calls here. So sorry if some of this has been asked. Just on the IoT, it looks like where you are guiding to in the March quarter will be down maybe 19% or so after down 18% or so in December, if my math is right. So I guess I am just curious what you see as potentially turning that around? I know you have bunch of new products, specifically within IoT. And then as it turns around, I am kind of curious how the margin profile changes? I know the Marvell business you bought and the Conexant business you bought had very different gross margins. So in terms of when you do see that growing as a margin, is that helpful on the gross margin? And then I have got a follow-up.

[Rick Bergman, President, Chief Executive Officer]

Okay. Thanks Charlie. So in some ways, I think we should examine as to why is our Q3 guidance down year-over-year. Two kind of reasons there and it's persisted from what we said about Q2, so kind of no news there. it's just a lot of our business was in the smart speaker business and it just had a fantastic year kind of as it came out of the shoot there and so that weakness is persisting into Q3. That's kind of one factor.

And then the other factor is just more broadly the whole IoT market is slower, as you have heard I am sure the last few weeks. Those two factors kind of hit the lower year-over-year growth. We kind of expected to kind of grow from here. As I mentioned in my prepared remarks, we will be in mass production with our 22 nanometer products in our fiscal Q4 and that certainly gives us a nice boost. They tend to be a littler higher ASP products.

And then as we swing into more seasonality in the back half of the year, I think the year-on-year compares will be much more favorable. And so we certainly expect that business to grow going forward.

In terms of gross margin, Charlie, you are right. Conexant gross margins were a bit higher. The Marvell margins were a bit lower than 50%. We kind of balanced out a bit above 50% gross margin. That's where we expect our IoT business to continue to operate going forward.

[Charlie Anderson, Dougherty & Company]

Okay. Great. And then, Rick, just sort of a big picture question. You have exposure on the LCD side and then also exposure on the OLED side. I am curious just as sort of the consumer taste shifts and sort of what you are seeing real-time in terms of what people are after? Has anything changed in your view of what you need to invest in from a LCD versus OLED perspective internally? Thanks.

[Rick Bergman, President, Chief Executive Officer]

Sure. So again as I mentioned to a previous caller, we actually have our best look at the trends between the two in terms of percent of the marketplace in the Investor Relations site with the presentation we did at CES where we showed OLED, non-Korean suppliers being a little less than 100 million displays this year. So nothing to change out over the past month. So we are really excited about the OLED ramp and we think it will continue to be a higher and higher percentage of the smartphone marketplace.

Kind of balancing that though, of course, I think consumers are speaking in terms of price points that they want for their phones. And LCD continues to have a substantial cost advantage versus OLED displays, at least for the next couple of years. So we are kind of sticking with that mix going forward. As you can imagine, we are shifting more of our investment dollars to OLED, because there's higher growth rates there while we also want to maintain our share and position in the LCD market.

[Charlie Anderson, Dougherty & Company]

Okay. Great. Thanks so much.

[Rick Bergman, President, Chief Executive Officer]

And, I guess, I should add there Charlie as well, that's independent of automotive where we certainly are picking up our investment in automotive will be vast majority of that will be LCD for the next decade.

[Operator]

[Operator Instructions]. We will move on to Brett Simpson from Arete Research. Please go ahead.

[Brett Simpson, Arete Research]

Yes. Thanks very much. Rick, I just had a follow-up on the mobile business. I don't know if could give us a sense for how you see TDDI as a market opportunity this year? Do you think in calendar 2019, TDDI will grow just bearing in mind there is a transition to OLED underway? And then just on the OLED side, can you give us a sense for what proportion of your mobile business is OLED today or help us sort of size this and how you think the ramp will play out? It's helpful knowing that you are seeing non-Korean OLED at like 100 million units this year. But any market share projections or anything you can help us just to sort figure out where you are positioned and how you think it plays out over the course of calendar 2019, that would be very helpful.

[Rick Bergman, President, Chief Executive Officer]

Sure. Let me see if I can address each of those questions. On the TDDI side, clearly the market will be bigger in 2019 than 2018. Now one of the challenges, of course, we have is, we had a pretty good share in 2018. And so our goal is to maintain that share as best we can. And it won't be a huge growth driver for us, but we still see the opportunity in the calendar 2019 to grow that business year-over-year.

Today, most of the TDDI market is in the Full HD segment. The HD segment, for example, is still a mix of a discrete type of solutions. But that's going to change very quickly as everybody is getting the benefits of TDDI finally. So a pretty rapid shift. That's in the presentation that I mentioned as well, our view on what percent of the market or what opportunity we have in TDDI.

On OLED, I have to remind myself, there is a couple of pieces to OLED. One is the display drivers which I tend to talk most about. And the business as part of the company is, sorry I am doing some quick math here, it's still relatively small, think in the five percentage area of our quarterly results. Maybe even a little bit lower than that.

As we move forward, of course we expect that to be higher. The 5% with the display driver comment. Of course, we sell touch controllers and there we participate much more broadly in the OLED markets. And I mentioned three design wins that we had with OPPO and Vivo. And those are all with Samsung display, as an example. That business is even bigger than the kind of the 5% category that I talked about. So we are a fairly reasonable sized participant in the OLED market today.

[Brett Simpson, Arete Research]

Great. And Rick, just to follow-up on that. As you look at the sort of the year playing out for OLED in calendar 2019, how do you see that non-Korean display, that OLED opportunity, the 100 million unit market that you described? How do you think your market share plays out? And can you give us a sense as to how that business evolves as we go through the year?

[Rick Bergman, President, Chief Executive Officer]

Well, it will ramp through the year, of course, as these various suppliers are bringing on capacity. So I don't know if I can give you a Q1 is this and Q4 is that type of number. I will say it is a bit less than 100 million units as best as we can tell. And our market share, again it's really hard for me to peg down on particular product line, especially when we are in the early stages. But this kind of historically in the small display market, we have been in the 30-ish percent market share.

[Brett Simpson, Arete Research]

Right. Thanks very much. That's helpful. Cheers.

[Operator]

It looks that there are no further -- sorry, it looks that there no further questions. [Operator Instructions]. And I apologize. Would you mind clarifying that last answer? I apologize, I interrupted.

[Rick Bergman, President, Chief Executive Officer]

Sorry Emily. I just wanted to make it clear. It is part of our SAM or the non-Korean OLED display manufacturers.

[Operator]

Okay. Perfect. Thank you. [Operator Instructions]. And there are no further questions. I would like to turn it back over to management for closing remarks.

[Rick Bergman, President, Chief Executive Officer]

Okay. Thank you everyone for joining us on the call today. We look forward to seeing some of you again soon at Mobile World Congress in the latter part of the month. Goodbye.

[Operator]

And this concludes today's call. Thank you for your participation. You may now disconnect.