慧榮科技 (SIMO) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the fourth quarter 2005 Silicon Motion Technology Corporation earnings conference call.

My name is Cindy, and I will be your coordinator for today.

[Operator Instructions]

I would now like to turn the presentation over to your host for today's call, Mr. Richard Wei, Chief Financial Officer.

Please proceed, sir.

Thank you.

Thank you joining our company's call today.

We released our results last night and I hope you all had a chance to read it.

You can find a copy of the earnings release on our website if you have not seen it yet.

Our website also contains a PowerPoint file that includes some of the material that we will be discussing today.

Let me just go through some of the [procedures] first.

This conference call is also being broadcast live over the internet.

A replay of the call will be available at our website, www.siliconmotion.com, under the Investor Relations tab.

A telephone replay will also be available from 12 PM on January 26th until 12 PM on February 2nd eastern time.

To access replay, please call 888-286-8010 or 617-801-6888, if you're calling from outside the US.

The access code will be 78419186.

Now let me also go through the Safe Harbor statement.

Certain statements made during the course of our discussion today may constitute forward-looking statements that are based on management's current expectations and beliefs, and are subject to a number of risks and uncertainties that could cause actual results to different materially, including risks that are - that may be beyond the company's control.

For these risks, please refer to the company's fillings with SEC.

Now I'm going to go over our Q4 results quickly, and then I will turn it over to Wallace Kou, our President and CEO, for his remarks on Q1 in 2006.

And then we'll wrap up with the Q and A session.

We had solid sales growth in the fourth quarter and we saw improved momentum in most of our key businesses.

Sales grew 14% year-over-year, and 17% sequentially to NT $872 million.

That was the equivalent to about $26.1 million US dollars.

Unit shipment of mobile storage products, which include controllers for flash memory cards as well as controllers for USB flash disk drives, grew 107% year-over-year, and 24% sequentially to 30 million units.

Unit shipments of multimedia SoCs products, which consist of MP3 controllers as well as graphics decipher features, grew 754% year-over-year and 132% sequentially to approximately 947,000 units.

We continue to maintain a balanced approach to revenue growth while sustaining our healthy margins.

Our gross margin increased from 52.2% in the third quarter to 53.9% in the fourth quarter.

Operating margin increased from 16.3% in the fourth quarter of '04 and 27.8% in the third quarter of '05 to 30.2% in the fourth quarter.

Net income increased 164% year-over-year and 15% sequentially to NT $248 million.

That's about 7.4 million US dollars.

Diluted earnings per ADS in the fourth quarter of '05 were $0.24 US, and that's compared to $0.11 in the fourth quarter of '04 and $0.21 in the third quarter of '05.

For the full year 2005, our sales totaled $2,686,000,000 New Taiwan dollars and that was approximate 83.6 million US.

And that was up 24% from 2004.

Gross margin for the full year was 50.0% up from 41.2% in 2004, and operating margins similarly extended from 17.5% in 2004 to 25.2% in 2005.

Net income was NT $676 million.

That was about 21 million in US, and that was up 152% from 2004.

And full year EPS for the ADS was $0.72.

Now I'll turn over to Wallace.

Thank you, Richard.

Good morning.

Let me start with Q4 [positive] supply situation, as there are near term challenges supply situation high density in NAND Flash memory, which is a key component for our customer.

In Q4 '05, our customer have made such a contract whereby with Samsung, [High Nicks] or [Renesis] they were able to secure in-door supply.

But however most of our tier two flash memory card and UD players have a difficult time to finding High density flash memory, especially in 4 gigabits mono die, or 8 gigabit two die package.

While supply situation improved in December, customers hesitate to place big orders due to unstable pricing from such manufacturers.

In the flash memory card markets, we also had excellent design wins in micro [ASD] cards, which are used in mobile phones.

Micro ASD card could be the major fast growing flash memory card in '06, we have enhanced our focus in this growing market and gained market share.

Now let's look at our product development.

In Q4 '05 we extend our [SM2XX] controller family by introducing [SM2's CD5, 2 CD6] products with high performance, high ESD potential with new channel interface.

In MP3 full (inaudible) mode our SM2XX can achieve 40 megabytes per second in read, and 34 megabytes per second in write.

We set a new performance standard of our MMC Card.

These products are needed for high entity camera, as well as the camcorder, and can account for our quick link in consolidating our leading position in the fast growing markets.

In addition, we also start full production of SN222 [compact five controller], which we believe can bring significant revenue in '06 for us.

In addition, our MP3 product turned out to be a bright star for us, especially we saw the severe shortage for high density NAND Flash in Q4.

We then made a direction change in late Q3 last year to focus on card reader MP3 player; this type of devices though require building flash memory.

We continue to see new design wins from Card Reader MP3 Players.

Looking ahead for '06, we are expecting to see some upside potential to enhance our OEM markets, and the increasing supply of NAND flash is likely to be beneficial to us.

Therefore we're positioning ourselves to deliver wide ranging support and futures, especially focusing the new coming MLC flash memory from Samsung, Hynix/ST micro as well as AGNs on Renesas, which are also a type of MLC memory.

We plan to see continuing growing USB flash disk markets, and we will also enter a card reader controller market in the second half of the year.

In the next two quarters, we will ramping up production of [SNCC2], dual functional controller, [SN 281], [MS Pro do it to FP adapter, and SN2 lighting FP controller products].

While seeing the result of early prototype and their outstanding, this is consistent with the ration we set and presented last quarter.

For our identification strategy, high volume consumer product is looking well.

We are mainly anticipating in growth for the Card reader and MP3 Player market and we anticipate Q1 shipping volume will be higher than Q4 last year.

This year [mobile phone] will be the major driver for flash memory card. [Trying to sell the new] mobile phone will have remote fresh flash and memory card,.

We believe we are well positioned for the up coming year.

Now we welcome your questions.

Operator?

Thank you.

[Operator Instructions]

We will wait a moment for a list of questions to compile.

And gentlemen, your first question comes from the line of Quinn Bolton from Silicon Motions, please proceed.

Good evening guys, nice quarter and nice guidance for 2006.

Wanted to see if you could give us some more sort just your sense heading into the March quarter for the supply constraints, especially in the large density side, is that sort of partially behind the 19 to 23% decline in first quarter revenues or do you think that that kind of level is just more seasonal factors, and then I have got a couple of follow-on questions.

Q1 revenue decline primarily for seasonality, because we also have -- some customers has certain inventory in the channel, such as the high density flash memory also has unknown its moment, also we saw additional price dropping of [cables] so that's why we believe 20% revenue decline is a reasonable guidance in Q1.

Okay, so it looks like - - if prices are dropping looks like their supply situation has been mostly fixed at this point, but guys are holding off making purchases until they see a more stable price environment, is that an accurate characterization?

Yes.

That's right.

Okay.

Next you guys seem to be pretty well positioned if I recall with Hynix, Hynix seemed to have pretty good NAND numbers when they announced results a day or so ago.

Can you just kind of talk about the Hynix relationship and to the extent that they gain share in NAND flash, is that a -- how does that affect your business?

Well I think we do have very good [storage] with the Hynix, as well as [ASD micro].

I think they've both - the really major gains we are going to see as both Hynix/ASD micro are going to render MLC memory in March.

So, it's because the current yield is much better than anticipation, so we believe that's going to drive the global flash memory cost probably down to another 20%, we are going to balances it for our customers who are very close to Hynix.

I think the MLC initially promised support for the -- for large density, full sized flash memory card as well as the USB and MP3 product line.

Okay, and then just two more questions.

You talked about some gains in the SD card market, can you just sort of talked about are those we made more with the Taiwanese card manufacturers or are you actually gaining share at some of the larger branded OEMs ?

I believe in Q4 we probably shipped about 2.5 million controllers just for micro SD cards.

In Q4, because the technology in fabrication for micro SD wasn't mature.

So the supply for micro SD card is seeing severe shortage for mobile phone makers.

In Q1, I think just in Taiwan probably, there will be around six to seven manufacturers who are able to produce micro SD card.

In Korea, there is about an additional four more that are able to ramp up micro SD card.

We are well-positioned from those manufacturers who will produce micro SD cards for all the major players in the market, such as Nokia, Motorola, LG, Samsung Mobile and DoCoMo.

So you said you shipped 2.5 million micro SD cards-- or controllers-- in the fourth quarter?

We shipped about 2.5 million controllers, which is [inaudible - heavy accent] for micro SD cards in Q4.

Okay.

And then lastly, as the NAND densities move up, can you talk about any opportunities you see in the lower density side, maybe as the [NROM] Flash might come in and fill a void left by the higher capacities on the NAND side?

You mean the NROM?

NROM maybe replaces some portions of the NAND Flash memory?

Yes just -- to accept that there are lower -- if there are applications for lower -- an application that might not need two gigabytes or four gigabytes of NAND flash.

Is there an opportunity for you to kind of explore--?

In '06, probably there will be content pre-load type of memory card, which may not need multi-programming right.

So that could be an opportunity for a low density NROM Flash or even [E Square] to come to the market with the SD phone factor or MLC phone factor.

This is the opportunity for us to try to develop a diversified product line to support this kind of market.

And that would require effectively sort of an SD like or MLC like controller from Silicon Motion?

Ten host the different type storage device.

Okay.

Okay.

Great thanks.

Good quarter, guys.

And your next question comes from the line of [Pranilla Alia] of Deutsche Bank please proceed

Hi this is [Pranilla Halia from Merrill Lynch] How are you, Richard and Wallace?

Hi.

How are you?

Good, thanks.

Richard, maybe a question for you first.

Can you explain how you get to flat operating margins in 1Q with revenues down 21%?

If I'm doing the maths right, you are going to need higher growth margins or much reduced OpEx.

I think our gross margin is probably going to be flattish in Q1.

We don't really have a lot of fixed assets because we are a founded company, and so it's not that difficult to get flat gross margin.

On the operating side, we do have to reign in some of the expenses a bit to actually reduce the [op expense] in dollar terms to get to the flat up in [margin guidance] and I think it's doable.

Okay.

And then in your revenue guidance for 1Q, can you talk about how much unit -- what unit in ASD [inaudible] you're building in?

I think we are probably looking for somewhere around 5% to 10% ASP decline, and you can figure out the units from that.

Okay.

Richard, again, another one for you.

You've given sort of calendar '06, 95 EPS guidance mid point.

Surely, there's some revenue and operating margin assumptions related to that.

Are you able to give us a feel for what they are?

Yes.

I think basically our target is we want to achieve upward margin of about 30%, preferably higher, but 30% will be the win that we are looking for.

And looking at our numbers in Q4, by our upping margin moderates 30.2 I believe, and with the right amount of expense control I think we could maintain that type of upping margin in '06.

I think the first quarter because you are going to have the decline in revenue, so it's harder to reduce the other expenses as a percent of revenue beyond what's already in the fourth quarter '05.

And so when you start reading the stock option expense, your real GAAP operating margin will be steady below 30.

But I think you can make up for that in later quarters, as you scale your top line, your expenses will not rise at the same rate.

So full year our internal goal is to achieve 30%, and that's if you get that I think getting the EPS number that we guided should not be difficult.

Okay.

Fine question for you Wallace.

Can you talk about what fraction of your flash card controllers today going into cell phone parts?

You mentioned 2.5 million for SD micro, but there are other standards out there, if you add them all up are you able to say what fraction go into say cell phone cards?

Well, I think in Q4 we probably shipped more than 50% of the flash memory card controller into mobile phone.

That's including Mini SD as well as MMC micro and the Micro SD.

Now we really tried to focus on Micro SD because Micro SD has really become the fast growing sole factor for the mobile phone.

And we see probably in late Q2 to early Q1, in early Q3 the number probably can to reach 6 to 7 million units a month.

So that is the larger visibility for us, opportunity.

The key is micro SD cards, they require really deeper touching technology compared with mini SD and full size SD cards.

So, not every single one can jump into the market.

So I think we prepare for this type of card growing for almost six months in the past, so that's why from all the of six major manufacturers in Taiwan, and four in Korea, and one in US are currently design win with our controller today.

So we anticipate the micro SD card could be a dominant phone factor in the second half of this year, like [CE] the mini SD card.

Okay.

Hi.

Are you able to also give a split on what was the split between mini SD, micro SD and MMCmicro in your 4Q.

Is it about even?

We were not able to tell the detail.

But I think the-- that means the mini SD is still the highest and then -- well the micro SD that will be MMCmicro.

Okay, great.

And one last question, can you give some more color on how soon your new products are expected to ramp, and what impact they'll have on your ASDs and gross margins?

Well, I think MMC in -- in MP3 product line in Q4, we are almost shipping two times higher than Q3, MP3 player controller.

In Q1 we anticipate, I think, the volume were moving higher than Q4 last year.

We believe in Q2, we will probably be shipping more than 2 to 2.5 million in that quarter.

In the new product lines, SM222 CF controllers were also ramping very quickly.

We believe we'll probably reach [400k] per month in Q2 time frame.

For the new product line, which is now in production, probably ramping in next two quarters such as 332 and 281 and 290.

And these all have a very good potential.

We do secure several major customers in line right now.

Now we just have to find two manufacturing processors and make sure it can go out smoothly in the next two quarters.

Now do you expect these to slow the ASD decline and significantly raise your growth margins?

Actually, all these new products I said in Q3, all have a pretty high-- very-- those are our current growth margin performance.

Yes I think this should help the gross margin side.

Okay, great, thanks a lot.

And your next question comes from the line of [Meynor Rarith] from Merrimen.

Please proceed with your question.

Thank you and good evening, guys.

Do you have a target on your MP3 products, how big it's going to be in 2006 or exiting 2006?

We have internal targets, but we definitely want to be a recognized player in this market.

Okay.

And is it going to be-- I guess when you exit 2006, can this business be over 10% of your overall revenue potential?

Absolutely.

Okay.

Absolutely.

And does that require you to kind of get into the hard drive base MP3 market as well, or is it just basically with the current product road map that you have?

Well we do have a hard drive base MP3 controller but we don't anticipate hard drive base controller can grow very fast.

So we believe probably more than 90% of our shipments will be based on the NAND Flash, or card reader MP3 player.

And when you get to compare your products versus your competitors in the MP3 market, how do you compare or how do you win the business I guess how you - - against some of the established competitors in this MP3 market?

We are a first generation MP3 product line, but we do not have a complete integration especially AD to a DC to DC converter, as well as audio codec.

That's why we have -- we changed the focus to card reader type of MP3 player, because that business will not be impacted by the shortage for NAND Flash.

So we start to see strong demand growing in that segment.

Our second generation product will have all integrated and mixed signal solutions.

And we become VDIM 10 support.

With our knowledge in the NAND Flash support, I think we are uniquely positioned to support our customers use [inaudible - heavy accent] MLC.

Such outcomings are high in Samsungs and Renesas.

We probably are the only one can support, diversify a different kind of NAND Flash.

So that's our unique [weapon] compared with the competitors in this market.

Got it.

And when-- can you remind us when the second generation product is going to ramp again?

Probably in Q2 and in part ramping in Q3.

Okay.

Also on the-- I guess we are hearing, obviously, some unstable pricing on the NAND Flash side.

Have you seen any impact on pricing on your products at this point in time?

Because of what--

Customer always doubt and he wants you to lower the price.

But I think in-- today's position we probably represent the largest player in some merchant groups.

So the pricing in this year, the decline was probably much slower than last year.

We see several even players just going to walk away from this market, because the price is not picking up.

I think our strategy is very simple.

We alter very, very [few] product line, and so we can offer total package for the customer, which horizontally extends for the [pocket].

That's why we can protect our pricing very well.

Great.

Thank you.

[Operator Instructions]

And your next question omes from the line of Daniel Amir of WR Hambrecht.

Please proceed with your question.

Hi, happy Chinese New Year.

Actually this is Alena.

I am calling-- dialing in for Daniel Amir.

Hi Alena.

My first question is, do you see market share gains in just the controller front in the last quarter?

Yes.

Naturally, we believe our probably last year average of our market share around 23% for USB, 2.0 [five disc] controller.

Okay, thanks.

And also, how about what momentum are you seeing in the USB flash front with the major PC market right now?

The competition is a lot.

But I think we in-- from March we are going to alter 0.16 micron technology.

We've integrated thorough research in then we shall go to that later.

And all the new products we alter are going to support all types of NAND Flash, which is also special for ISTP technology.

That will enable customers can do different types of applications, such as security encryption, finger print, as well as networking, power meters such as announced by [Excel] Media.

So this will help us reposition strongly.

Not only will we continue gaining market share for retail channel, but also we start to gain more market share from major OEMs such as comp PC makers.

I think that maybe in Q2 we are going to -- if the customer allows, they can announce with their names, probably from top street PC makers.

Great.

Thank you.

And my last question is, when can we expect your image sensor products to hit the market?

We are just sampling the PC camera controller, we believe-- because the design cycle is around our four to six months.

So we believe we are going to see that happening in Q3 in this year.

Okay.

Great, thanks.

[Operator Instructions]

And you do have a follow up question coming from the line of Quinn Bolton of Silicon Motion, please proceed.

Great, thanks.

Just wanted, Richard, to ask-- given the lunar New Year holiday, does that help reduce the R&D and SG&A here in the first quarter and help you keep that operating margin flat.

Is that part what happens quarter to quarter?

No.

You cannot reduce their salary just because they are on holiday.

That's not the reason.

Okay.

And then what were tape out costs?

I know you introduced a lot of products in late fourth quarter.

Yes, right.

A lot of the tape outs were done in Q4, right?

So Q1 tape outs probably would be a little bit less.

And also bonuses, you wouldn't have to accrue as much and there are some-- a portion of your expenses are discretionary.

So we can bring that in and that should help you achieve reductions about somewhere around 20%, and that would be where you need to be because your revenues have come down by about 20%.

Okay, great.

Thanks.

And you have a follow up question coming from the line of [Pranilla Alia] of Deutsche Bank.

Please proceed with your question, Mr. Alia.

Hi.

Just a quick follow-up.

Looks like your multimedia storage segment was relatively flat year-on-year in 4Q.

Are you able to talk to whether it's reasonable to expect the segment to return to solid growth in calendar '06?

And if yes, by how much and what part of that will come from unit versus [inaudible - heavy accent] ASDs?

I think your -- your number's probably grown.

We had decent growth in the multimedia segment in Q4.

Unit-wise definitely revenues roughly flat year-on-year, slightly more than flat.

Maybe my numbers are wrong but - -

There is an -- the NTT segment actually growing very nicely for us now.

The --

I was talking of the multimedia storage, so I thought [inaudible - multiple speakers] Flash drives.

Storage?

Yes, storage.

The storage device, yes because our Q4 the ASP declined alone.

I'm sorry, are you referring to mobile storage or multimedia SoCs?

Mobile storage, sorry.

Okay.

Mobile storage.

Yes, the growth in mobile storage was slower in Q4 versus Q4 of 2004, that's correct.

And primarily because the ASP, DOD or ASP decline which is closer to 50%.

And so we had strong unit growth year-over-year, but because of ASD decline revenue has been kind of - - has not grown as much.

Should we expect a similar trend in calendar '06?

Aggressive unit growth but sort of eroded by ASD decline?

Well, the ASD decline, one major factor really was the phone package change going from package chip to bare dyes, right, and that transition it was about 80% in Q3 and 86% or 87% in Q4, so that's mostly worked its way through, and so I don't see think our ASP decline in '06 will be at the same rate as it was in '05.

Okay.

Thanks a lot.

[Operator Instructions]

And gentlemen, there are no other questions waiting in the queue, so I will turn it back to you for any closing remarks.

Okay.

Well, thank you very much for your interest in the conference call and the company.

We hope to see you again in the near future.

Just in case you are interested in the replay, the telephone replay number again will be 888-286-8010 or 617-801-6888, and access code is 7841-9186.

You can also listen to the replay on our website.

And again, thank you for your interest and we look forward to talking to you again next quarter.

Thank you for your participation in today's conference.

This concludes the presentation and you may now disconnect your lines.

Please have a good day.