慧榮科技 (SIMO) 2006 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the fourth quarter 2006 Silicon Motion Technology Corporation earnings conference call. My name is Danielle and I will be your coordinator for today. At this time all participants are in a listen-only mode. And we will conduct a question and answer session towards the end of the conference. [OPERATOR INSTRUCTIONS]. And as a reminder this conference is being recorded for replay purposes.

Before we begin, the Company has asked that the following statements be read. This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements include, without limitations, statements regarding trends in the semiconductor industry and our future results of operations, financial condition and business prospects.

Although such statements are based on our own information, and information from other sources we believe to be reliable, you should not place undue reliance on them. These statements involve risks and uncertainties, and actual market trends and/or results may differ materially from those expressed or implied in these forward-looking statements for a variety of reasons.

Potential risk and uncertainties include, but are not limited to continued competitive pressure in the semiconductor industry and the effect of such pressure on prices, unpredictable changes in technology and consumer demand for multimedia consumer electronics, the state of, and any change in, our relationship with our major customers and changes in political, economical legal and social conditions in Taiwan.

For additional discussion of these risks and uncertainties and other factors please see the documents we file from time to time with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements which apply only as of the date of this press release.

I would now like to turn the presentation over to your host for today's call, Mr. Wallace Kou, President and CEO. Please proceed, sir.

Thank you. Good morning. Thank you for joining our conference call today. This is Wallace Kou, CEO of Silicon Motion. Welcome to Silicon Motion's fourth quarter 2006 phone conference. Today we'll follow our usual format. I will have Jason Chiang, our Acting CFO, briefly summarize the financial detail on this past quarter and then I will provide overview of our operation.

The level of detail will be comparable to previous call. Following our brief overview, we will open the call to question. 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 expectation and beliefs, and are subject to a number of risks and uncertainties that could cause actual results to differ materially, including risks that are beyond the Company's control. For these risks please refer to Silicon Motion's filings with SEC in the U.S.

Now I will pass the call over to Jason. Jason?

Thank you Wallace. Hello everyone. As you have seen from this morning's announcement, the results for Q4 '06 are very encouraging and we have exceeded the targets that we set for ourselves at the beginning of the quarter.

We had a solid revenue growth and we saw improved momentum in the most of our key business. Revenue grew 34% year over year and 13% sequentially to $35.6m. We saw strong demand for our mobile SoC controllers as our customers further ramped up their high density microC card and the SD card production for the retailer market.

Unit shipments of Mobile Storage Products grew 106% year over year and 25% sequentially to 62m units.

Unit shipment of Multimedia SoC grew 47% sequentially to approximately 581,000 units.

We continue to maintain a balanced approach to revenue growth and operating margin improvement. Operating margin, excluding a one-time charge, increased from 28% in Q3 '06 to 29% in Q4 '06.

Net income increased 36% year over year and 16% sequentially to $10.2m. The net margin was 28.6%, up from 28.2% in Q4 '05 and 27.9% in Q3 '06.

Diluted earning per ADS were $0.32, up 36% from $0.24 in Q4 '05 and 15% from $0.28 in Q3 '06. Now I will hand the call to Wallace.

Thank you Jason. And that concludes our review of fourth quarter result. By and large, it was an outstanding quarter from my perspective. One of the major highlights of the quarter is addition of Kingston technology as our customer. They are independent global leader in memory products. I may now take the opportunity to sit back a little to look at our progress over the past year and where we are going as a Company.

Our diversification challenging high-volume consumer products is working very well. And we are also pleased with our achievement in launching high performance products. New mobile phones with [removable] flash memory cards continued to be a major market driver, and we believe we are well positioned for continued improvement in this area and in our broader product portfolio. We think we have a well defined road map for success. And we expect more upside potential from the handset OEM market in 2007.

In keeping with Silicon Motion's trends of delivering universal compatibility by supporting multiple standards, we continue to try to expand SD, MMC, CompactFlash controller family.

The Company continues to gain market share in the highly competitive USB flash drive controller market with top tier customer. And we have made significant inroad into the [card reader] MP3 Player and Digital photo frame device market.

As we look forward to the first quarter, we believe that the impact of seasonality that we saw in Q1 '06 will be less severe in Q1 '07. While this may be optimistic, but we are convinced that our broader product portfolio and new design wing will help alleviate the impact of seasonality better than our competitors in the first quarter.

Although the NAND flash memory prices have sharp decline lately, we believe that we will grow our momentum on the fourth quarter and continue to grow the business in a seasonally weak first quarter.

In addition, our major design win in Samsung SD and micro-SD card for retail business will expand our market share and speed up our market penetration.

The Company currently expects sales in the first quarter of '07 to be approximately around $28.5m to $30m which represent a sequential decline of 15 to 20%. And the gross margin in Q1 '07 should be similar to gross margin in Q4 '06. And operating margin will be in mid-20, a little higher.

For the full year '07, we believe significant growth opportunities remain in the NAND flash controller market. And we think we are well positioned to capture a substantial portion of the growth opportunities in both NAND flash controller and multimedia SoC market. We are optimistic in our ability to ramp up high performance USB 2.0 card reader controller and the second generation MP3 controllers. So we expect to achieve full-year earnings per ADS between $1.20 and $1.30.

Additionally, we have more than 10 major contract projects in the pipeline with a number of NAND flash makers and other industry leaders. We continue to execute well against our strategy for delivering long-term shareholder value.

Before we move to Q&A session, I want to make a few comments about our change in management and Richard Wei's resignation that we just announced yesterday.

Jason Chiang, who has been with Silicon Motion since the year 2002, will have some additional responsibility of Chief Financial Officer until a replacement of Richard is named. Jason has been an integral part of our finance team since he joined the Company and, in fact, he was our CFO for more than three years prior to our public listing. With a strong background in finance and corporate accounting, we are confident in his ability to immediately resume Richard's responsibility while we conduct our search for a new CFO.

As a personal friend and a colleague, I am sad to see Richard go. As I am sure most of you are aware, Richard has a great background, making quite a target for a number of companies in the region. We did everything we could to keep him but in the end he was lured away by pre-IPO company in Shanghai, China.

We are grateful for his contribution and wish him well in future endeavors. For us, we have a tremendous finance team and an equally strong team on the operations side. We think this change will have very little impact on our ongoing business.

This concludes our prepared remarks. Thank you again for joining us today. We are happy to answer any questions now. Operator?

Thank you sir. [OPERATOR INSTRUCTIONS]. Your first question will come from the line of Pranay Laharia with Deutsche Bank. Please proceed.

Yes. Hi guys. Wallace, if you can please give a split between USB flash drive controllers and flash card controllers?

You mean the unit shipment?

Yes.

In Q4 we shipped around 7.2m USB [flash drive] controllers. We shipped around 500,000 USB card reader controllers. We shipped on total around 34m flash memory card controllers.

Okay. And what was the ASP differential between USB flash drive controllers and flash card controllers?

The average in low and high-end pricing was almost similar between flash memory card controllers and USB flash [drive] controllers. However, I think we sell a majority for flash memory card controller with [a die], but with the USB flat drive controller it was a total package.

So on a blended basis you're suggesting flash card controller is lower than USB flash drive controller.

Yes.

Okay.

Because the margin's lower, including the packaging part.

Okay. Fair enough. And then the unit split between MP3 and your displayer processes?

I think MP3 we're shipping close to 400,000 units.

Okay. Excellent. And then you sound like you're more confident this year versus last year, but I still want to do a little bit of comparison. Last year you had given the original guidance of down 19 to 23%, but you actually came in a lot weaker than that. And it was about as far into the quarter that you had given the guidance. Can you just help us explain -- can you just explain what gives you the confidence this year that you might not see a repeat of last year?

For this year, because we have much broader product offering and, in addition, we do see very strong demand going into year 2007. Since Samsung started selling the SD card and micro-SD card for retail business, so we have much better visibility in our forecast.

Okay. Excellent, and then one other thing. [SIA] data that was released last night showed that NAND units are only growing 30% year on year, but your units are growing, it looks like north of 100% year on year, so clearly you're taking share. Can you just talk about exactly who you're taking share from and how long do you think such growth rates is sustainable for you?

I think we're taking share, not just taking maybe from some of the competitor groups, but we're taking share from other product lines, such as in bundle business and content preload business. [A data] [inaudible] they are density growth, so there probably not entering in the very low density flash memory card business. But we [had] unit growth. So it doesn't matter high density, low density, we have enjoyed the growth.

Thank you. And how long do you think you can sustain your growth rates near 100% -- unit growth rates? Or let's just put it this way then, for your guidance of EPS -- for your EPS guidance, what sort of revenue growth is assumed and, within that, what sort of unit and ASP assumptions are built in?

I think we definitely feel very comfortable growth very strongly in this year, even with the unit growth.

Okay, thank you.

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

Congratulations on a nice quarter. I was wondering if you can break out the number of micro-SD controllers that you shipped to the handset market in the fourth quarter.

In the fourth quarter we're shipping around 48.4m units-SD card controller. Among this 48.4m, we're shipping around 30m units for micro-SD controller.

Right, thank you. And is it possible to handicap your overall drivers that you're looking at for 2007 in the handset market? You're viewing that, I'm assuming, as your strongest growth driver, and then how does your new products that you just introduced factor into your guidance as well? And you are seeing new customers?

In '07 I think first we really enjoy to have Kingston become our major customer. They have much broader market share, and very strong [Intel] in retail business.

We start to see strong demand growing for micro-SD cards from China [reaching] from Q4 timetable last year. And China handset, I believe this year, 30% in the removable storage flash memory card and 90% of these cards in the micro-SD format. So we start to see a big demand, not only from handset makers, also in China region, a growing momentum for this application for COB technology to produce micro-SD card. So there is one of the elements for to grow.

In addition, I think we are well positioned with Nokia, Motorola, Samsung Mobile and LG Mobile. So we believe we will definitely grow with the market growth in the bundle as well as high density micro-SD card.

Alright. Thank you. Can you break out any 10% end customers that you had in 2006?

I believe the only one exceeded 10% was probably Samsung Semiconductors.

Okay. And then do you have any specific ASP assumptions for the first quarter? I am assuming, if you look overall at the year, are you expecting steeper ASP declines in the first quarter versus what you will see on a quarterly basis going forward? Or are some of these new products offsetting that?

Although we [see] our old products, probably do see the price pressure from competitor, because we offer some new products rolling out. So if we see the ASP mix we believe the ASP decline probably stay within single digit in Q1.

Right. Thank you.

Your next question will come from the line of Quinn Bolton with Needham and Company. Please proceed.

Great, thanks. I just wanted to sort of follow up on the visibility question for Q1. It sounds like you've got a number of programs at Samsung that helps give you an increased visibility. You mentioned micro-SD and SD cards going into the retail market. I think you also have some xD picture controllers, starting to ramp at Samsung. But can you just talk a little bit more about if there are other programs or if there are other customers that may also give you visibility into Q1?

I think we also have very reasonable MP3 customers moving along with us. It's been designed for almost nine months. The major customer, I'm sorry, from the Hynix, from [AFT], from Micron, I think we all have a pretty decent visibility with the -- in Q1 timetable.

Okay. Great. And then just looking at -- you had mentioned the digital photo frame opportunities. Is that something that you're shipping today or, could you just talk about how you see digital photo frames as a new product in '07?

Starting from last year Q4, I think the market started to demand the photo frame device. There is two different trends. One is in 3 inch, low resolution. The other is 7 to 9 inch TFT panel. Our digital media SoC controller perfectly feeding the photo frame device because we can decode [geopak, motion geopak] and play MP3 in the background. So we start to be designing in several major designs and the product going to ramp up in late Q1 timetable.

Would that be under the MP3 player product line in the multimedia SoC, or are you going to do a derivative products specifically for [inaudible]?

It's serving the multimedia SoC category.

Okay. Great. And then just, I think at the last conference call Wallace, you did mention a number of drivers for 2007; solid state discs embedded flash in cell phones, the graphics opportunity in servers. But could you just give us an update on maybe timing or any new programs, or visibility into the ramps on some of those new applications or opportunities?

I think as far as say discs, the whole year, worldwide probably less than 10m units. The year 2008 is a most important year to ramp up. But we are well positioned to offer two product lines. Two to three is ideal in the phase. Two to four is [inaudible] in the phase. We will provision and design all major OEM customers.

In addition, is the embedded MMC product line. We work with Samsung, Hynix, [CMicro] and Micron in designing the [inaudible] for mobile phone makers, I think it will start to ramp up in the second half of this year. This year volumes still low but they'll continue growing into '08. I think volume tremendous.

Okay, great. Thank you.

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

Thanks gentlemen. Excellent quarter. Sorry if I missed this. Micro-SD, can you just talk about what kind of seasonality we should expect from that business in Q1?

I think starting from Q4 we see the soft bundle business for micro-SD, because most of the bundle business for the lower density, 3, 4 megabyte and 128 megabyte, our customer maybe see some inventory in the [channel side]. But I believe, in Q1, in March the inventory issue will be resolved and I think the major order will continue.

But, however, the major changes from Q4 and Q1 is really the Samsung [63] nanometer 4 gigabit MLC, that perfectly fits in the micro-SD card manufacturing process, which means our customer they are able to produce one gigabyte and two gigabyte micro-SD card to compete with Toshiba group and SanDisk. So that's why we start to see ramp up from micro-SD card with high density in the retail market. We believe the momentum will continue.

In March Samsung is going to go launch 31 nanometer MLC, the 8 gigabit 31 nanometer MLC, will also fitting micro-SD card, which means our customers are able to double the densities offered in retail market. So we believe in Q1 primary it's retail, but when you move to the Q2 we see both bundle and retail business for micro-SD will become strong.

Okay. Good news, thanks. And then maybe on while -- since we're talking about retail, can you talk about Kingston a little bit? Can you give us an idea of how big a customer they were and how you see that relationship growing?

Before Q4 we don't have any business with Kingston. It just start from Q4. We're moving two major designs. One is CompactFlash controller, the other micro-SD controller. I think moving forward we have a broader engagement with Kingston. Kingston business model, Samsung, [inaudible] and Toshiba from SanDisk or from Samsung. But they are also manufacturing at least about 50% themselves. So we believe Kingston will be a tremendous revenue growth for us this year.

Excellent. Thanks very much.

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

Hi. This is actually [Denham]. I'm calling in for Daniel. Great quarter, guys. Basically a housekeeping question to start with, for Jason maybe. Can you give us an idea what would be your guidance as far as gross margin, operating margin and tax for the year '07?

The whole year? I think the whole year I think that we can keep the similar gross margin as '06. I think that for the operating margin probably around the 28% in the whole year.

Okay. How about tax?

Tax?

Yes.

Our tax [lawyers] will make conservative assumptions, so it has to be less than 10%. I think result probably would be between 5 to 10% range.

Okay. Great. The second question is in regards to what's going on out in the NAND market, specifically with the price declines that you've seen in Q1 here. How do you foresee the rest of the year? And, with that, how do you plan to take advantage of the environment in 07?

I think '07 will be a very exciting year and everybody need to watch out carefully. Because this year there will be a new generation flash coming. Because, in Q2, most of the manufacturers were moving to 50 nanometer plasma technology. For 50 nanometer plasma technology you need 4 kilobyte per page and probably some memory you need the 8 bit ECC. So a lot of controller maker may not be able to support such kind of feature and the requirement, so that will be a thinning out.

I believe, in Q1, because Samsung already launching 53 nanometer from Q4, and in March they're going to launch a 51 nanometer process MLC. Hynix going to launch a 50 nanometer MLC in February and are going to vertical shift to 56 -- 55 nanometer in late Q2 timetable. So I think the pricing decline, because new technology coming, we are well positioned in this market, because I think the majority of our customer use both Samsung and Hynix memory.

I believe Toshiba are already moving to 56 nanometer with a low volume production. However, I think the challenge for Toshiba and SanDisk, because the memory requires 8 bit ECC, a more than 8 bit error correction. So that will increase the difficulty and challenge for Toshiba group or SanDisk to selling the flash memory if a controller maker not ready to support. So we're going to see a major change in the market from Q3 moving to -- from Q2 moving to Q3. I believe all our product lines we are ready to support upcoming 50 nanometer MLC pipeline.

Okay. Great. That makes sense. Now you -- I believe last quarter you talked a little bit about your new generation MP3 controller and maybe some of the products in the PC camera arena. Can you give us an update of where those programs are and when we can expect ramps and volume shipments?

Yes. MP3 will be one of the important product lines for us in '07. We believe that total revenue will occupy more than 10% of the whole year. We took position very well in MP3. We have a different strategy compared with Action, SigmaTel, ALI and others. So we do have certain major design in very unique product offering, we're going to announce probably in late Q1 going to Q2 timetable. I think we are very exciting to see the new product design roll onto mass production.

For PC camera for this year, I think the revenue is still very, very -- it's not significant. We do have some major design which [inaudible] and moving to HP, but the volumes there is very, very low. So I believe this year we focus on [mobile] development. We are only added two programs for standalone PC camera. So I think PC camera for this year [SGA] probably less than 4% in total revenue.

Okay. And that MP3 that you mentioned, 10%, is that units or is that revenue?

Revenue. More than 10%.

Okay. 10% in business for '07, right?

Yes.

Okay. I guess that's all we have. Thanks a lot. Great quarter.

Thank you.

[OPERATOR INSTRUCTIONS]. Your next question will come from the line of Gary Nackenson with Gillian Securities. Please proceed.

That's Quillen Securities. So just to clarify a point you previously made. Are you saying that SanDisk that supplies its own controllers does not make 8 bit error corrections?

No, I mean the SanDisk Toshiba 56 nanometer, which memory requires 8 bit or more than 8 bit error correction. So that could create some slow momentum for controller maker to support them. Both Samsung, Hynix with their 50 nanometer or 51 nanometer MLC, they only need a 4 bit error correction for the [today's] NAND flash.

So what you're saying is that that could retard Toshiba's edge in being first to market in 56?

That's correct.

Just to piggyback on your discussion with Daniel, what's your sense of where the over supply has been coming from, in terms of breaking it out between Samsung and Toshiba, the largest players, and new entrants like Hynix, Micron and so forth?

I think all manufacturers suffer the price decline, so everybody try to ramp up new technology with a new process. However, I think the card maker and controller maker they are not ready to accept such a fast pace. In the past three years, I think in the past probably every two year have a new generation NAND flash. But today, because the price decline is so fast, so every year we ramp up two generation of new technology.

So I think all the manufacturer, they eager to try to speed up customer to accept the new technology, new generation NAND flash, and make the market uncertainty. That's what cause some [inaudible] in the inventory for old technology.

But we believe in Q1 and Q2 that the NAND flash price will continue to decline. And the Q3 timetable, with a high season, probably we can reach a certain balance. But the reason such as Samsung trying to selling the flash memory card, they try to speed up the customer to use a new technology NAND flash. That will help them to transition to a lower cost of the new generation NAND flash memory. I believe that some of the other memory manufacturer will try to do a similar model in the future.

That's helpful. And just one more point of clarification. You had said ASP declines within single digits. Normally you're about 20% per year. Is the pricing declines front loaded in Q1?

Just Q1, we believe ASP declines for our controller is within 10%.

So I mean are you still 20% for the whole year?

We believe so, yes.

So this is normal seasonality for the price declines to be largest in Q1?

Also because we offer much broader and high-brand product lines on Q2 and Q3, and move into mass production. So from product mix point of view for the whole year it is around 20%.

So mix is helping later in the year and it is not helping as much in Q1?

Because some high-end product not in mass production and [see] enough volume to offset the --

Okay. Got it. Thank you. Thanks a lot.

You have a follow-up question from the line of Pranay Laharia with Deutsche Bank.

Yes. Just a few follow ups. What are the ASPs for the MP3 SoCs that will be ramping this year for you?

The SoC product line we're ramping second generation will be from $2.50 to $1.50 range.

And the key customer engagements out here, do you believe these are new accounts that are entering the market or are you actually taking share from some competitors out here?

Both. We are taking some [socket] from our competitor. We are also engaged with some major customer who are entering into the new market for MP3, [such like a toy].

Okay. And your EPS guidance for the full year it's excellent and does that include stock option expense or not?

Yes.

It does.

[12 years gap].

Excellent. And your new controllers that are sampling right now, do you support the 70 nanometer NAND from IMFD with those?

70 nanometer -- can you repeat your question again?

Yes. Your new controller that you're sampling right now, do you support the flash from IMFD, the Intel micron, the 70 nanometer flash?

Yes. All our product lines support 70 nanometer. We're also working with Micron to prepare their 52 nanometer process technology.

And do you support SMICs and ROM based flash which is supposed to enter soon?

I cannot comment on that because it may take some time.

Okay. Excellent. Thank you guys.

At this time there are no more questions in the queue. I'm sorry we do have a question from Quinn Bolton with Needham and Company. Please proceed.

I just wanted to follow up on that last question about the guidance for the year. The $1.20, $1.30 is U.S. GAAP. If we're looking at it on a non-stock comp, it looks like the guidance would be more like $1.30 to $1.40? It looks like you've got about $0.10 of stock comp --

That's correct.

Okay, so $1.30, $1.40 non-GAAP is kind of the right range?

Yes.

Okay. Great. Thank you.

I would now like to turn the call back over to Mr. Wallace Kou for closing remarks.

Thank you again for joining us. I think we're really hoping we have a great year for '07 and we're going to see you guys in the next quarter. Thank you.

Thank you.

Ladies and gentlemen, this now concludes your presentation. You may now disconnect. Have a great day.