慧榮科技 (SIMO) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Second Quarter 2006 Silicon Motion Technology Corporation Earnings Conference call.

[OPERATOR INSTRUCTIONS]

At this time, I'll turn the call over to your host, Mr. Richard Wei, Chief Financial Officer.

Sir, please proceed.

Thank you.

Hi.

Good morning.

This is Richard Wei.

I'm the CFO of Silicon Motion.

Welcome to our second quarter earnings conference call.

Hopefully, you've had a chance to look over the earnings announcement that went out, last night.

And today, we'll follow our usual format.

I'll present the final details of the second quarter, then I'll go over -- then I'll have Wallace Kou, CFO, provide an overview of the second quarter and our outlook for the third quarter.

The level of detail will be comparable to previous calls.

Following our brief overview, we'll open the call to questions.

Before we conduct 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 SEC.

Now, the financial results.

Net income totaled NT$187 million, or US$5.8 million, in the second quarter, an increased 61% from NT$161 million in the second quarter of last year, an increase of 37% from Q1.

Non-GAAP net income was NT$206 million, or US$6.4 million.

The net margin was 27.2%, up from 21.0% in the second quarter of last year and up from 24.1% in the first quarter of this year.

Non-GAAP net margin was 30%, diluted earnings per ADS were NT$5.96, or US$0.19, which was up 38% from US$0.14 in the second quarter, last year, and up 36% from $0.14 in the first quarter of this year.

Non-GAAP diluted earnings per ADS were NT $6.50, or US$0.20.

Our current expectation for the third quarter is for the top line to grow by about 19% to 29%, which translates into about US$25.5 million to US$27.5 million, whereas looking for our gross margin to be about flat compared to Q2, and we're looking for our operating margin to be up from Q2, as well.

With that, I'll turn over to our CEO, Mr. Wallace Kou.

Thank you, Richard, and welcome, everybody.

I apologize for the delay.

Richard and I get a free [practice] due to operator mistake.

I'm going to start with second -- the highlight of the second quarter.

As you will recall, in our last conference call, we stated that we saw the silent recovery at the end of first quarter and beginning of second quarter.

Now, we are happy to report that the same quarter turned out as expected.

Increasing [inaudible] of our mobile storage product was the key driver for the growth.

Unique shipment of the mobile storage product grew by 105%, year-over-year, and [inaudible] percent, sequentially, to 29 million units.

In the second quarter, we made additional penetration in small form factor flash memory cards that are used in mobile phones.

We are very pleased with our progress with major OEMs.

Our new indirect customer in this space include, Nokia and LG Mobile.

With that addition of these two indirect customer, we are successfully penetrating into almost all of the top tier in mobile phone manufacturers.

The only one which we do not have exposure to is Sony Ericsson, since we do not have license agreement to develop any [inaudible] controller.

Overall, we continue to gain market share in a highly competitive USB franchise market with top tier customer such as small module, Dell, and LG.

We're also pleased with our achievements in managing high-performance products for PC camera, such as SM370 imaging processors.

We are [encouraged] [inaudible] recovery in the [NIM] flash memory market in the second quarter.

However, NIM flash memory prices have softened slightly in July.

Despite this, we believe that it's realistic to build our momentum from the second quarter, and continue to grow the business in the seasonally strong second half.

The flash memory card [bundle] to mobile phone are not expected to be impacted at all, from a soft-end pricing market.

Looking forward to the third quarter of '06, we are optimistic that we will have one more major customer that will start to ship microSD card to Nokia in the late Q3.

We also believe that it will be possible to grow MP3 controller business in the third quarter, as some of our design wins moving to well in production.

This is conclude our prepared remarks.

We welcome your question.

[OPERATOR INSTRUCTIONS]

We have a question from Jennifer West of Merriman.

Good evening, and congratulations on the quarter and the nice guidance.

I was wondering if you could expand on these flash pricing softness that you're seeing in July, and kind of if you see that stabilizing out at some point?

And how you think the pricing, overall, will trend throughout the third quarter?

Yes, I think softening [in] July, we see some high-density flash memory [inaudible] decline.

I think as much as about 20% to 23%.

But to the end of July, we start to see it stabilize.

We believe, now, we start to see the strong booking of our customer.

We believe August or July -- September, to be a back to the normal [half] season as before.

Okay.

And then, I don't know how much visibility you have, but can you talk to Q4 at all?

Typically, you see pretty strong revenue growth in the December quarter, as well, because of seasonal factors, correct?

I think we typically see a fairly strong Q4, but we are not ready to give guidance on Q4 at the moment.

Okay.

And then, can you talk to what you think these small form factor shipments could be, maybe as a percentage of total SD shipments by the end of the third quarter or second half of '06?

It could be from one-third to almost 45% of a total SD controller shipment.

Okay.

I'll let somebody else ask.

Thank you.

I'll take our next question from Daniel Amir of WR Hambrecht.

Thanks a lot and congratulations, Wallace, on this [very] good quarter.

A couple questions, here.

First of all, can you talk about the competitive landscape, right now?

How well you're differentiating from your competitors here, both in the USB side and the flash memory card?

Okay, in the flash memory card controller, there's two categories of competitors.

One is from the tablets.

Our controller, since we [now] see -- our business growth, is based on yearly growth.

So, we start to focus on mobile phone bundle business.

It's [inaudible], I believe, their really interest is not in this sector.

They probably focus more in the density growth, because of flash memory [is] shipping as a whole system.

In the controller side, we only see some Taiwan makers, such as [inaudible] or [Sky Media] has some small volume shipment, probably around 1 million to 100k of [inaudible] range.

So, we did not see really any major [stress] on the landscape in the flash memory card controller area.

In the USB flash side, I think we start to see some low-cost maker on China, such as [Chipang].

Also in Taiwan, such as [L Co Micro].

But, currently, we believe we focus on the major OEM, and we also strongly only hold our margin in the ASP, where we believe we're going to also continue growth in China market in the Q3.

Now, we did not see any major competitors going to take over our socket, but there'll be potentials, sure, for the ASP impact for the USB franchise business.

Okay.

Second question is related to the guidance.

Are you still speaking for your $0.90 to $1 EPS guidance for the year?

I think stronger track of our guidance for $0.90 to $1 for the whole year.

Okay.

And then, can you break down the USB units, flash card units -- display control units here in the second quarter, like you usually do?

Yes.

USB was approximately 5 million and the rest were flash card controllers.

So, 24 million was flash cards?

Yes.

And out of that, what percentage was basically microSD?

From 24 million, microSD about 10 to 11 million units.

Okay.

And what portion of that is going into the mobile market?

All microSD goes into mobile [world].

All of it?

Okay.

Now, the final question I have, today -- on the OpEx, can you comment just on how we should model the OpEx, going forward here for Q3 and Q4?

I think as a percent of revenue, I expect that should be down a bit.

But I think in absolute dollar terms, it'll likely push up.

And that's both for Q3 and for Q4?

Yes, but I don't want to provide guidance for Q4 right now.

I think it's safer to do just one quarter at a time.

Okay.

Thanks a lot.

We'll take our next question from Quinn Bolton of Needham & Co.

Evening, guys.

Congratulations on the good results and strong guidance.

I was wondering if you could just sort of address what's going on in the multimedia. [Inaudible] see the market looks like, the percent of revenues dropped pretty meaningfully there.

Is that just -- did you see the display business slow down?

And can you also comment just sort of what trends you're seeing in the MP3 player segment.

In the Q1, we see the strong demand increase for multimedia SoC controller business.

However, in the Q2, there's some of the major programs being now ramped up as we expected.

So, the volume did now reach the Q1 level.

MP3 product also -- certain major design, they now are moving to volume production stage.

I think in Q3, the embedded graphic business is going to recover, slightly, for the MP3 product line due to the rich volume production so we're going to see strong growth in MP3 controller business.

Okay, great.

Then on the -- you sort of talked about the competitive landscape and seeing it sounds like some new folks in China, maybe Taiwan.

Just kind of wondering are these - are there any thoughts about M&A opportunities there?

I mean, are these competitors that have good technology that could add to portfolio if you go out and acquire such company?

Maybe it's removed some of the pricing risk in the market.

Or are these kind of fairly low end and you're not really concerned - not really worried about their technology and you don't really see them as a competitive threat?

Any opportunity that can accelerate our growth and add the value to our business model, we will consider.

For a certain China player, I think the low end.

It's not that we don't want to play, because of course, margin is very, very low.

We're looking for the landscape.

We think for probably one or two players, that you have [some] technology.

But however, it's overall in major center or a combined ASP and gross margin.

So, definitely, we would like to look at it seriously to see whether they can speed up our growth, if they really add value to our whole company.

Okay and then just two last questions.

One, can you just give us an update on the PC camera business and how design wins, and the delivery of that product is going?

And then, second, just an update on the process technology transition, especially as you look to bring the flash controllers to smaller geometries.

Thanks.

Well, in the PC camera, we just start to do sampling based on 0.16 micron and we went from 1.3 million to 1.2 million resolution for high-end USB, the high-speed product line.

It's delicate design for embedded for notebook.

Currently, I think we working some nature see more sensitive players as Omnivision, Micron, and Samsung to fine tune some camera module.

Seeing the design cycle is very long, at least about six months, so typically we'll only see small volume production in late Q3 and Q4.

It won't have a major financial contribution until probably Q1 of next year.

In our product line for USB, it's [all simply] moving 0.16 micron technology.

For MP3, second generation product all moved with 0.16 micron technology.

For flash memory card controller will stay in the 0.18 micron technology, due to some special [cost requirements].

For our four generation flash [micron] controller, we adopt a special low [leakage] process to achieve a lower standby current for mobile phone market.

Okay, great.

Thank you.

And we'll take our next question from Rob Adams of Montgomery.

Good evening, gentlemen.

Congratulations on a good quarter.

Can we talk again a little more about that SM370 card?

How should we look at ASPs and margins for that business as we start to roll that into the income statement in the next couple -- in the next few quarters?

The current market is safe for such a product for notebook embedded solution is about $1.72 to $2 range.

We believe to the next two quarters, supply is probably going to drop to $1.50 range to $1.70, so that's about [inaudible].

Also, in the notebook, I've seen mobile solution going to stay with minimal 1.3 million pixel up to 2 million pixel for the next year.

Maybe it can move to 3.2 million pixel.

It's quite [inaudible] with that, alone, PC camera application [inaudible].

Okay, great.

Thanks.

And margins for that part at a 0.18 micron line width?

How should we look at that?

We will - I think this part will be compliant with standard company gross margin, just slightly below our standard gross margin.

Okay, great.

Thanks.

And then, maybe just longer term just for fun here -- I mean, what do you look at a product shrink on that one to a [0.16] geometry lower?

We will have 0.16 micron being late Q4 and early Q1.

Okay, great.

Thanks much.

Congratulations.

We'll take our next question from Adele Mao of Susquehanna International.

Hi, guys.

You mentioned you're likely to sign up one more customer for micro-SD in third quarter.

Is this factored into your guidance already?

Or are we going to see most of that in 4Q?

It probably will start to shift in September timeframe, which obviously will come from Q4.

Okay.

And taxes, you guys have extremely low tax, this quarter.

Is this sort of the one-time benefits you guys are getting from your restructuring program?

The tax instruction program that benefit from has actually not kicked in yet.

Okay.

I think for the full year, it's probably safer if you model tax rates of about 8% to 10% for the rest of the year.

Okay.

And for this quarter, is this a type of rebate that you guys are getting?

Yes, we had some tax credit that were due to us.

Okay, great.

And in terms of headcount growth, what's your plans for the end of the year?

We're probably going to focus on R&D growth in both Taiwan and China region.

Okay.

And interest rate, probably we go to total, around 350.

350.

You added 47 pretty much in R&D.

Did you add most of the people in Taiwan or mostly in Shanghai?

Including [ShenZhen], as well.

Including ShenZhen, as well.

Okay.

Alright, great.

Thanks a lot.

And we'll take our next question from Pranay Laharia of Deutsche Bank.

Yes, hi guys.

Looked like your ASPs and mobile storage came up to be a little bit firmer than you guided to down in the single digits.

Can you talk about what happened there?

If you can talk about rising trends, separately, for each of those segments that would be great.

Yes, I think mix in Q2 was a [little better] than I thought.

We had some new products that came online, and so that helped the ASP.

I think for Q3, we're looking for somewhere in the mid-single digit range.

ASP [decline] for mobile storage products.

For [inaudible] SoC, as you'll see, probably a little less than that.

Again, that depends on the mix.

The graphics chipsets have fairly ASP, whereas the MP3 ASP is brought to be lower.

And so it can whichever goes faster, you could have a fairly skewed blended average.

Sure.

What are the current ASPs on your MP3 SoCs?

Our current [inaudible] MP3 controller is in the gift market.

It's about a $1.40 to $1.30 range.

Okay.

Very good.

And in the cell phone space, can you talk about how much of your flash card controllers where with the cell phone space?

I think you gave the microSD number, but I'm trying to get a bigger picture.

We currently ship around 24 million flash memory card controller.

In the 24 million flash card controller, it's probably around 16 million, a little higher for mobile space.

Beside microSD, we also ship an [MMC] micro and the mini SD card controller for specialty for Japan market.

So, that's about almost around 60% to 65% range for mobile phone.

Okay, that's good.

And what was the mix between SD and MMC?

In Q2, MNC product demand declined so the [ASD] to MMC, the ratio is about four to five range a little higher.

Okay.

And as much as you have visibility, can you talk about how much of your cell phone controls get actually bundled with cell phones and how much goes through the retail space?

In Q2, we total ship around 10 million to 11 million units microSD card.

For the bundled business, it should be around 6-million unit range.

So in other words, 60% or so.

No, 6 million to 7 million unit range.

And then, the second half, do you expect that [section] to grow, I assume?

Yes, I think that percentage-wise, it's going to grow but with a lead in the micro SD range, our bundle business, going to be higher than the retail business.

But it is, already.

So, you think it'll be --?

We think it might go even higher, due to we had the more customer due to more [customer] [inaudible] bill, to a major mobile phone [maker].

Okay.

And then, given that you have so much of OEM bundled business for your controllers, do you think that changes the pricing outlook for you guys, for the rest of the year and in 2007?

I would assume this business a little more stickier, and maybe not as price competitive.

On the contrary, naturally, the bundled business pricing is quite stable, is based on six-month [long] contract.

It's not like retail, because retail is a flash memory decline sharply, everyday, and most of our [inaudible] are going to stay on the sideline.

So naturally, we have a pretty stable pricing, than the bundle [inaudible] with a major whole year [inaudible] flash maker.

So, would you assume then -- is it safe to assume then sort of it will fall 20% a year decline, or it will be less than that?

We believe so.

Less or 20%?

Less.

Okay.

Very good.

And then, just one last question.

On the MP3 side, can you share some internal targets maybe for the rest of the year?

We believe that Q3, we probably going to shipping about 1 million units.

I see Q4 as going higher, especially at the low end [primarily] for some gift market.

There is some visible mend often in Q3 where we may announce the customer list.

I think in third-generation products, seems that we do not have [inaudible] in DC/DC converter.

So, we got the case for the low-end market with the flash or with the card reader base.

But our second-generation product will come [inaudible] in Q3 and Q4 timeframe.

We believe that will bring us into the mainstream market, next year.

Okay, great.

Sorry, I just got two more questions.

Do you have any additional comments on the Micron and [Lifestar] transaction and how that might impact you guys?

We believe there are certain changing management changing Lifestar are high.

I've seen the business is going to be as usual.

I've seen the Q3 seems Lifestar is going to be strong in the market, but we have a [logical] project with Lifestar, a [inaudible] with Lifestar [in] Micron getting tighter ,and do further in mobile business together.

So, we do not see any impact reaching our current relationship with Lifestar Media.

Further, we definitely would like to gain more opportunity with Micron, directly.

Okay.

Just one last question.

When do you expect to see [MLP] from Micron and are you prepared for it?

We cannot comment upon their schedule, but we believe we will be ready when they launch volume production.

Naturally, they do launch mass production with their major customer in Apple.

So, it really is natural for the capacity coming to the retail of your [operating] area.

Okay, good.

Thank you, guys.

And we'll take our next question from [Jill Marsaplonias], [Amarest].

Hi, guys.

Good quarter.

Can you talk a little bit about the present inventory situation?

Just overall in the macro environment and the inventory situation, if there is any, of the [inaudible] products, right now.

In our space, as far as customers, I think the inventory situation in entering the Q3 is not severe due to the flash memory, itself.

If you hold the inventory too long, you're going to lose more money.

So, I think currently, if we look at our customer or even their customer in the retail, naturally, the inventory situation is not as severe.

I think the July issue is due to the continuation of price decline, so a lot of the customer just want to wait the price to be stabilized.

But the demand's still there -- demands on both retail OEM, I think still are quite strong.

Just -- I think the pricing, so finally it's stabilized, so we start to see the strong booking for our customer.

Right, so having said that in that the inventories are pretty lean, isn't there going to be a time where your customers are going to have to spend for back-to-school, independent upon really where you try to negotiate prices at that point?

Yes, I think it all depends on the flash supply and [demand position] in August and September.

So far, looks like because all the major suppliers for NIM flash are looking toward August, September as demand's quite [fierce].

I probably won't say what would be shortage, but I think that it may reach a balance in the late Q3 and the Q4 timeframe.

Okay.

Alright.

Thanks a lot, and congratulations on good guidance, as well.

Thank you.

We'll take our next question from Quinn Bolton of Needham and Company.

This is just a quick follow up.

Can you guys talked about 10% customers in the quarter?

I don't think we have the correct customer that's over 10% in Q2 .

Any of the card assemblers?

It could be one close to, yes, close to 10%.

Okay, so -- but it looks like the customer base has become much more diversified over the last 12 months.

That's correct.

Okay, great.

Thank you.

At this time, I'm showing no questions.

We'll turn the call back over to presenters for closing remarks.

Okay.

Well, I guess thank you for calling into the conference, and we appreciate you interest, and we look forward to talking you next quarter.

If you have any questions in the meantime, please do give us a call or send us an email.

Thank you, very much for your time.