慧榮科技 (SIMO) 2006 Q1 法說會逐字稿

Good day ladies and gentlemen. And welcome to the Silicon Motion Technology Corporation 2006 first quarter earnings conference call. My name is Laetitia and I will be your coordinator for today.

At this time all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. [OPERATOR INSTRUCTIONS]. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to today’s host, Richard Wei, Chief Financial Officer. Please proceed, sir.

Thank you. Good morning everyone. Thank you for joining us today. And we thank you for your continuing interest in Silicon Motion.

This is Richard Wei, the Chief Financial Officer. With me here today is Wallace Kou, the Company’s President and CEO. During today’s call we will discuss the following topics. We will start with a brief overview of the operating results for the first quarter. After that Wallace will provide you with an update of the business strategy and guidance for the upcoming quarter. And then we will leave time for Q&A.

Before we start the call I need to go over our standard safe harbor policy. 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 differ materially, including risks that may be beyond the Company’s control. For these risks, please refer to Silicon Motion’s filings with the securities authorities in the U.S.

Now, let’s review the financial results. The first quarter was definitely challenging for us, but our results largely fell inline with our revised guidance. Net sales in the first quarter total TWD166m, or $17.5m, an increase of 10% from the first quarter of ’05 and a decrease of 35% from the fourth quarter of ’05. Overall unit shipments increased 88% from the first quarter of ’05, but slipped 33% from the fourth quarter ’05. The blended average selling price was -- fell 41% from the first quarter of last year and 3% in the fourth quarter of last year.

By product, sales for Mobile Storage products accounted for 72% of total sales, which was down from 84% in the fourth quarter last year. Sales for Multimedia SoCs represented 27% of total sales, which was an increase from 16% in the first quarter last year. Sales from other products accounted for about 1%.

Net income totaled TWD137m, or about $4.2m, in Q1. That was an increase of 42% from TWD96m in Q1 of last year and a decrease of 44% from TWD246m in the fourth quarter.

As could be expected, the new reporting standards have required us to include options expenses in our P&L effectively lowered our results. Excluding these charges our non-GAAP net income for Q1 of this year was TWD155m, or about $4.8m.

Our net margin was 24.1%, which was up from 16 -- 18.6% in Q1 of ’05, but down slightly from 28.2% in fourth quarter. The non-GAAP net margin was 27.3%.

Diluted earnings per ADS were TWD4.38, or $0.14, which was up 20% from TWD3.64, or $0.12 in the first quarter of last year, and down 44% from $0.23 in the fourth quarter last year. Non GAAP diluted earnings per ADS were TWD4.9, or $0.15.

With that, let me turn the call over to our CEO, Mr. Wallace Kou. And we’ll give you a chance to ask your questions later. Wallace.

Thank you, Richard. Good morning.

Okay, I’ll start with some observation on the quarter. First, I’m sure most of you know by now the NAND flash memory product was weaker in [sales] across the board in the market. The resulting price instability, especially during the months of January and February, also had a major impact for ourselves, because most of our Mobile Storage customers stayed in the sideline without placing orders.

Although we are pleased to have met our revised revenue target in such a tough market climate, we are being challenged by those difficult market conditions, which have resulted in a limited visibility for some products. Some of the bottlenecks, however, were within our controls. The single biggest internal factor affecting our performance in the quarter was the delayed shipment of our new products, including our [Tumble] controller, SM [Future 2], [XP] Picture Controller SM290, new high-end USB Controller SM325, and the [endless pro adaptor] SM281, and new MP3 Controller SM350.

So, besides the challenges we were still able to maintain our gross margin at 53.2% and our net margin at 22.3%, which were still levels that we find quite satisfactory. In what was probably the big highlight of the quarter we matched the [inaudible] seasonality trend in our Multimedia SoC business and increased our sales by 12% in the first quarter, mainly as a result of a strong demand for Multimedia Display Processors.

Looking forward to the second quarter, we remain quite optimistic. Overall, we’re encouraged and confident in the Company’s ability to [more increase] the margin back to last year’s level and a positive base. So, we believe our sequential revenue growth of 14% to 26% next quarter. We continue to believe the revenue growth will be driven by a shift in sentiment in the NAND Flash space. As a result, we’ve had to reach a high revenue growth fairly substantially during the later part of the year.

We think there were will be four key areas to us heading into the Q2. First, we think the Flash Memory pricing will start to be stabilized. Second, we believe we’ll see rampup on non-manufacture in MLC Flash Memory. Third, cycle [inaudible] have it for small contact and Flash Memory Card, such as microSD, miniSD, and MMC Mobile due to stronger demand on handset market. Lastly, we think the higher inventory level as some end-customers should start to become trimmed down as they prepare for what is felt to be a seasonally strong second half.

Going forward the major area where we are focusing our attention is backroom spending and meeting the need of volume customer. We will continue focusing on improving quality and customer satisfaction are integral to all of this.

Now concludes our prepared remarks. Now, I think we take any questions you may have.

[OPERATOR INSTRUCTIONS]. And your first question comes from the line of Quinn Bolton with Needham & Company. Please proceed.

Hello Wallace, hello Richard. How are you? I wanted to ask first, Wallace, you mentioned I think delays in some of the new product shipments. With NAND Flash pricing beginning to stabilize, do you think you can start to ramp up production of those new products?

And perhaps more importantly from an ASP perspective, as these new products come into the mix, what happens with the blended average selling prices?

I think that certain products, because we have a very unique innovation. So, the ASP may go even higher, probably to $1.50 to $2.00 range. So, with the new products moving to mass production that is going to help the average ASP.

And then I wanted to follow up a bit more on pricing. It looked like pricing, from the press release, I think was down to 70% quarter over quarter. That seems to be a very abrupt price decline in Q1. Do you think that was more a reflection of the fact that NAND Flash pricing was coming down so quickly? Was it a big shift to single channel controllers? Or was it a shift to, say, some of the smaller density micro cards for cell phones? Can you give -- could you just paint a little bit more color as to what’s going on with the pricing? And whether you think again the -- what would your outlook be for pricing heading into the second quarter?

Let me just clarify a little bit. The 70% actually was a combination of actual price declines. And then there is also a currency component in U.S. dollar terms. The ASP decline was about 14% for the Mobile Storage segment. And of that 14%, the USB decline was a lot more. The decline for the Flash Card Controller was somewhere in the 10% to 11% range.

Okay, and how about the outlook into the second quarter for blended ASPs?

I think the price decline, if you’re including the graphics part, that’s under Flash Controllers, I think the price decline should be much less, because the new products will offset some of the price declines in the older products.

Okay. And then just lastly, it looks like you had a big quarter in the display processors. And I know a lot of that goes through distribution. Any sense that either distributors and/or end-customers may have accumulated some inventory? Or do you think there are new products that were ramping that caused the surge in demand for the display process. That’s a very high ASP product. So, shipping a few more units has a good impact on the top line. What’s your outlook specifically for that product group going into the second quarter?

I think it’s not likely that customers will have a lot of inventories, because I think part of them are specifically designed into specific applications. And so, typically the distributors don’t order until their final customer has started to produce the final device.

Based on current orders for -- from the [inaudible] for those display processors, do you think that business is up sequentially?

I think the -- we’re pretty pleased with about the dark display processor product as from the Q4 to Q1, because some of the design -- it’s being designed -- being for almost two years or two and a half years. It’s a very, very long development cycle. I think after it’s into production it becomes very stable product.

So, most of the product are coming as a direct involve to supporting as part of the line such as on Sony. The third generation for locating free TV and the networking products on HD and NUC. So, there is a certain area. And we do see the product line continue to grow strongly in China region, in Europe as well as in Japan.

So, it sounds like it could be up quarter to quarter in [inaudible].

Currently I think the -- at least we see that demand is strong.

Okay, great. I’ll hand over to somebody else. Thanks guys.

Your next question comes from the line of Jennifer West with Merriman. Please proceed.

Hello, I just wanted to follow up on a couple of the previous questions. So, the delay in new products, the timing of that now, are they supposed to be introducing and start ramping up in the June quarter now?

Yes, I think some product line will enter immediately from April. But some will probably be in late May or June timeframe.

The reason for delay [apportioning] is of our internal development of softening Company software, supporting some new coming NAND Flash. A portion of reason also because end customer, because they planned production plant, I’ll have to add a certain feature. So, it’s all a combination reason between the customer side, our internal factor.

Okay. And you mentioned the MP3 product, is that the integrated MP3 chip?

That’s correct.

Okay. And can you give us an update on the hard drive base product and its planned roll out?

You mean MP3 product line?

Correct.

Yes, I think we’ll start to render a small volume from May and moving forward we do have very unique -- I think the Q1, because the low-end product line MP3 really impact a lot. But I think in Q2 we do have a very unique successful business model, especially in Korea region it was very successful MP3 product line.

Okay. And then can you update us on your transition to 0.16?

Our USB product line starts on April. We all transition to 0.16 micron for both low-end and high-end products.

Flash Memory Card, it depend on the segment. We will cautiously migrate from 0.18 to 0.16, because certainly we need to handle it’s a dual voltage card for the mobile handset makers. So, we will be selected to choose the product line moving to 0.16 micron from Q3 to Q4 range.

Okay. And do you expect that to -- how does that translate to your gross margin outlook? Do you expect to maintain these levels throughout the year?

We think gross margin are going to be flat for the rest of the year. That’s our -- we’re trying to maintain it at that level.

Okay. And then can you give us an update -- I think the last quarter you gave us an APS guidance range of $0.90 to $1. Do you think that’s still achievable?

At this point I would say yes.

Right. Thank you.

The next question comes from the line of Daniel Amir with WR Hambrecht. Please proceed.

Thanks a lot. I have a few questions here. First of all, can you comment a bit on the mobile cards for handsets? This seems to be a market that you’re really getting in more aggressively this quarter. You’re going to start shipping into that market. Can you comment on -- how -- try to quantify how significant it is for your business? And going forward into the second half of the year what type of position can you have in the space?

For small [phone manufacture] of Flash Memory Card for mobile handset, primarily I think the Q1 [inaudible] Q4. I think Q1 micro ASP is the strongest, although its volume is lower than Q4. But I think now in to the new mobile phone -- new model introduction looking for probably around 14 new different model in Q2, it’s going to try a majority for microSD, and second miniSD as well as MMC mobile.

We do have very, very successful penetration for Samsung Mobile, LG Mobile and [inaudible], Vodafone is one with the roll out. Also, we very, very close, if our customer announce into the largest player too. So, I think the mobile phone handset was [more by] Flash Memory Card Controller will be a main growth actually in the Q2 and into the second half of the year.

How much -- as you look at your total SD shipments, how -- is this going to be the majority of your SD units in the second half of the year?

We believe probably it will be at least about 50 to 60%.

Okay. The second question is can you give us an idea what type of unit shipments we saw for the USB Flash during Q1 and the mobile segments as well, just quantify like you usually break it down?

USB of the 20m that were shipped in Mobile Storage, USB was slightly of 4m and the rest were the Flash Card Controllers.

Okay, and MP3?

I prefer not to get into that. It’s down from Q4.

Okay. Do you expect -- if -- do you expect any increase in all these segments in the second quarter?

Yes.

Okay. The -- now related to the R&D expenses and how we model off expenses going forward, how should we look at the R&D line here? Should we see it at the same level? Is it increasingly slightly here Q over Q? What is the guidance here on the R&D and OpEX?

I think dollar wise this should be going up, percentage wise that should be down a bit.

This is for R&D?

For OpEX.

So, dollars of R&D increasing?

Yes.

Okay, and OpEX as a percentage decreasing?

That’s correct.

Okay. Now, could you comment a bit on the competitive landscape a bit in the Controller market right now and USB and in Cards, what you’re seeing? You commented that the USB ASPs have been declining much more rapidly. Is this because of more competition? Is this due to more -- the supply chain of the USB market right now, and on the Cards market as well?

I think that we did not see really any new competition. Naturally the players for USB Controller are shrinking. So -- because really you hand me the certain scale, the [inaudible] market.

In Q2 we are transitioning to 0.16 micron in -- with integrated power reset and will do that later. So, our cost will be more competitive. Our performance will set a new milestone. We also put all new generation MLC from high mix SD micro as well as Samsung. So, I think we’re well positioned to move forward to provide the [inaudible] solution for the customer. We start to see a high growth in Q2 timetable.

Do most of your competition don’t have controllers working with MLC?

I think we do see there could be some also new controller vendor support MLC. But, as you know, those are high mix and SD micro just ramping the MLC, so you need a very, very intense [by] support to closely work with the Flash Memory supplier to assure customer can move to a mass production. And we also expect Samsung will launch the 53 nanometer process with 8 gigabit normal MLC. So, we are well positioned to support that new memory.

Okay. And the last question is one of your biggest customers is basically currently in a merger agreement. How do you think that’s going to -- assuming the merger closes, how do you think that is going to impact your business considering a bit the weakness that they have, of course, in Q1 and Q2 going forward?

I think the [Lassar] was our biggest customer in the past. But I think Q1 the revenue significantly decreased. But we expect they will continue. We’re -- probably we’re going to normal strength in Q2 timetable. We have no comment regarding [Lassar], the -- their internal issue.

However, we do see strong growth from other customer side, like our business with Sony, with Samsung, with SG Micro and they all continue to grow strongly.

Okay. Thanks a lot.

Your next question comes from the line of Rob Adams with Montgomery. Please proceed.

Thanks gentlemen, good evening, just a quick clarification to start. Looking at your USB Controller product line, should we assume that a 100% of your units ships going forward are going to be at 0.16 microns?

For certain customer, because if they [staying] the [20 watt] A micron. So, it probably take a -- but that probably one to two quarter to finish the old product line, because that probably will be -- start from maybe 40 -- 30% in Q2 down to maybe less than 50% in Q3 timeframe.

Okay. Okay, thanks. Moving to the handset space, can you give us an idea as to the number of customers you have using your controllers for micro form factor or handset targeted cards, and how that trended quarter over quarter?

We know direct customer, but we have no idea for indirect customer, because there are -- probably more than 20% new mobile handset with a removable storage card. So, there are many, many growing demand also from China, as well as a new OEM mobile handset maker from Taiwan. So, it’s a -- the demand and -- for the Micro SD sound factor, Mini SD, and MMC mobile is incredible.

There is a new trend called [Tumble] Socket which promote by MMCA. There’s a lot of mobile handset use those microwave SD or MMCmicro. It could be also a very interesting trend by doing also help our business, because we are the largest supplier for MMCmicro Card Controller.

Yes, just even -- so, and looking at the handsets you’re completely standards agnostic right? You don’t care whether it’s going to be SD Micro or MMC Micro?

Yes.

You’ve got the part. Okay.

[Yes.]

Great thanks. And then to the extent that you have a swag at this, can you give me an idea looking at handset cards what do you think the average density per handset targeted card is right now?

For miniSD I think it’s higher than micro SD due to the manufacture technology barrier. For micro SD today generally it’s only stacked for two [die]. So, for micro SD the majority for our customer shipment is 256 megabyte 1 ton a megabyte, very few shipping with the 5 [tel] megabyte.

For miniSD I think the main density will be 5 tel megabyte as well as 1 gigabyte density, some customer even shipping with a 2 gigabyte [one factor].

Okay, excellent. Gentlemen thanks very much.

Okay.

Your next question comes from the line of Andrew Root with OTA Asset Management. Please proceed.

Hello and thanks for taking my question. I’m just curious on your ASP result in the first quarter and guidance. Your ASPs are down 41% obviously year on year. The first quarter was only down 3%, even though NAND Flash pricing was down a lot more. Is there any linkage between the ASPs of your products and the market, because on a year over year basis it seemed to wash out. But you had a lot less price pressure in the first quarter. If you could just help us understand why that is and why you won’t experience any price pressure on a lag in the next couple of quarters?

Yes, hello Andrew. I think the more relevant process is probably the 10 to 11% basis point in our Flash Card Controller. The 3% is on a standard basis.

Right.

With graphics and graphics ASP is a lot higher.

Right.

It’s in the $16 or $17 range. And so, that -- that’s not related to Flash at all.

Okay. So, it’s possible as the other Flash Controllers become a larger part of the mix next quarter that your ASP is likely to be down mid to high single digit?

On a blended basis?

Yes.

Or is this with a --

No, blended.

On a blended basis it’s -- yes, it’s possible the ASP probably will go up to a mid single decline in Q2. It depends on the mix. And -- but if you just focus on the portion that’s really the Flash I think our ASP is going to be slower, because of the products actually coming on line in Q2.

Okay, that makes sense. And then the -- why -- you didn’t have full year guidance in your release, why is that?

We did in the previous conference call. And that was $0.90 to $1 in EPS. We have not changed that.

Okay. And then which quarter, seeing as this quarter was below expectations, which quarter, or quarters, do you think will be much better than expected from your initial year plan? Where do you get that back?

Well, I think compared to the initial framework the Q1 number was $0.04 or $0.05 short of the original target for Q1.

Yes.

And we’ll probably make it up in Q3 and Q4.

Okay. So, is Q2 in line or ahead of the prior plan?

Q2 -- our internal target is higher.

Okay. Okay, that makes sense. And then if you just remind me what your long term gross margin model is. It’s 50 -- if we model ’07, should we think 53% or is it moderate a little bit?

In ’07?

Yes, well, I just like -- when you’re pricing the new products for the market, what’s your target model?

When we price new products we actually aim for higher than that.

Okay.

But you have to offset all the products sample, the -- having a gross margin over time.

Great. But I mean corporate wide you’re long term target model gross margin is what?

When we -- whenever we launch a new product we can charge premium, especially if it’s a leading on the line. So, that’s why if we talk a higher margin ASP.

No, I understand that. But you are obviously managing to some blended gross margin over time. Is 53% the right number for the long term or?

Yes, the Company has the right number.

Okay, great. Thank you.

Your next question comes from the line of Pranay Laharia with Deutsche Bank. Please proceed.

Hello guys, thank you very much. Wallace, I know you tried to address this earlier, but I was hoping you could just reiterate your view on NAND pricing environment right now. And when you and your customers expect supply demand balance to be restored and prices to stabilize?

I think that start from early Q1. And I think we start to see the NAND Flash -- the price decline become more moderate. I think it look like everybody suffer in Q1. If you talk with Samsung, Hinix or major and their prime manufacturers they’re also [unprepared] to see such a sharp and big decline in Q1. So, I think if you calculate the cost structure probably most manufacture almost hit their bottom cost structure.

So, we don’t expect to see any sharp and big price decline in Q2, even to the second half year. But, however, the improvement will be the new MLC delivery. If Hinix and SG Micro the 4 gigabyte can move in smoothly, ramping up very quickly and as well as I think Samsung new ML seeing second generation, we see the [nanometer] can [ramp] it up in the second half of this year. Micron probably Q4, has also been helped the total because the price for density.

So, the -- we see the fixed price. So far looking in Q2 should be pretty -- a slight decline. Q3 and Q4 based on because the demand is stronger, so very unlikely to see the sharp decline like Q1 in this year.

Okay, very good thank you. Richard, who are your top five customers and was any customer more than 10% in the quarter?

Yes, I think there was one customer over 10%. That was ATT. The rest were all the [Oriental] type one.

Okay. A question for you Richard again, despite the revenue shortfall in the quarter and delayed shipments of new products your inventories didn’t really grow in the quarter. In fact, they were down Q on Q. Now, can you talk about how you were able to manage that? Did you slow down your orders early in the quarter? Is it -- is there any chance that foundries are holding their [reserve] for you? They are not showing up in the inventory?

I think we spoke on the ordering in the December/January timeframe, because it was going to be a seasonally slower quarter and didn’t want to have a repeat of Q1 ’05.

Okay. Could you give the relative ASPs today in your Mobile Storage segment between USB Flash Drive Controller and Flash Card Controller?

Can you repeat that?

Yes, could you give the relative ASPs today between the USB Flash Drive Controller and Flash Card Controller, the relative ASPs, which ones more than the other?

Well, the average -- you mean -- so, if you’re looking for the low end --

[Say] for on a blended basis.

[Inaudible] I have low end and high end. So, the price [phasing] price are very similar.

Okay, very good. And then maybe it’s too early to say, but are you willing to give revenue growth guidance for second half this year?

Well, I think we are sticking with just the EPS guidance. That’s probably easier. The revenue guidance for the rest of the year, we’ll take it one quarter at a time.

Okay, fair enough. Thank you very much.

[OPERATOR INSTRUCTIONS]. There are no more questions at this time. I will turn it over to management for closing remarks.

Well, thank you for your interest in Silicon Motion and if you have more questions do call us afterwards, otherwise we look forward to talking to you next time.

Thank you very much and good day.

Thank you for your participation in today’s conference. This concludes the presentation. You may all disconnect and have a good day.