慧榮科技 (SIMO) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Silicon Motion Technology first quarter 2007 earnings conference call.

My name is Onika and I'll be your operator for today.

At this time, all participants are in a listen-only mode.

We will conduct a question and answer session towards the end of this conference.

[OPERATOR INSTRUCTIONS].

As a reminder, this conference is being recorded for replay purposes.

Before we begin, the Company has asked me to read the following.

The statement released contains forward-looking statements within the meaning of the Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

Such forward-looking statements include, without limitation, 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 our results may differ materially from those expressed or implied in these forward-looking statements for a variety of reasons.

Potential risks 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 relationships with our major customers and changes in political, economic, legal and social conditions in Taiwan.

For additional discussions 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 at the date of this press release.

At this time, I would now like to turn the call over to Mr.

Riyadh Lai, CFO.

Please proceed, sir.

Good morning, everyone.

This is Riyadh Lai, CFO of Silicon Motion.

Thank you for joining us for a review of our first quarter results and for an overview of our strategy and outlook.

With me here is Wallace Kou, President and CEO of Silicon Motion.

During today's call we will discuss the following topics - our financial result for the first quarter, an update of our business, and guidance.

Following that, we will open up for a Q&A session.

I will try to keep the financial review fairly short, since most of you will have seen our earnings release by now.

To start with, total revenue, our revenue.

Total revenue for first quarter '07 was TWD1.172b, representing a 107% year-on-year increase from TWD566m in first quarter '06.

Overall unit shipments increased 214% from first quarter '06, and 4% from fourth quarter '06.

The blended average selling price per unit fell 4% from fourth quarter '06.

Gross profit for the quarter was TWD627m or 53.5% of revenue, compared to TWD626m or 53.5% of fourth quarter '06 revenue.

Operating profit was TWD325m or 27.8% of revenue, compared to TWD297m or 25.4% of fourth quarter '06 revenue.

Net income was TWD326m or US$9.9m in first quarter '07, an increase of 138% from TWD137m in first quarter '06, and a decrease of 3% from TWD335m in the fourth quarter '06.

Non-GAAP net income was TWD365m or US$11.1m.

The net margin was 27.8%, which was up from 24.1% in first quarter '06 and down from 28.6% in fourth quarter '06.

The non-GAAP net margin was 31.2%.

Diluted earnings per ADS were TWD10.19, or US$0.31, up 133% from TWD4.38 or US$0.14 in first quarter '06, and down 4% from TWD10.60 or US$0.32 in fourth quarter '06.

Non-GAAP diluted earnings per ADS were TWD11.18 or US$0.34.

Again, for full details, please review our earnings release and full financials that were sent out earlier this morning.

I would now like to turn the call over to Wallace for a discussion of our business, and to provide some thoughts on the quarter.

Thank you, Riyadh.

Good morning.

Welcome to everyone who has joined on the call today.

I would like to touch on the highlights first, then provide further detail on our performance and some key activities that we expect will have an impact on our business.

As Riyadh mentioned, we've posted first quarter earnings per ADS of $0.31 per share, up 133% from $0.14 in first quarter '06.

Our result of the quarter even tops the revised guidance that we provided last month.

Growing demand from our mobile storage customers was the primary reason for our solid performance.

Unit shipments of our mobile storage products grew 216% year over year and 3% sequentially, to a record 64m units.

This was a significant accomplishment for Silicon Motion.

We saw fairly strong demand for our controllers, LRUs in flash memory cards, as well as USB flash disk drives.

However, we are also challenged by erratic market conditions.

The broader NAND flash market experienced significant volatility during the first quarter, as spot prices softened in the early part of the quarter, which resulted in limited visibility for some of our customers.

Despite this unpredictable pricing environment, we were able to build our momentum from the fourth quarter and continue to grow our business in what is usually our seasonally weakest quarter in Q1.

In fact, we've experienced a MicroSD card controller business rebound as the leading blue-chip mobile phone makers increased their bundling of cards with their new phone models.

I would also like to highlight that during this quarter we managed to buck the seasonality trend in our multimedia SoC business, increasing our sales by 103% sequentially to a record 1.18m units.

This was mainly a result of reasonably strong demand for MPC controllers.

I'm particularly happy with our performance here, because I think it demonstrates a successful execution of our long-term strategy by diversifying our product portfolio and broadening our customer base.

More importantly, I would like to point out that our relatively moderate 4% sequential ASP decline from Q4 '06 is in sharp contrast to NAND flash price decline.

And despite some mild pressure we did see, we were still able to deliver a gross margin level over 53%, which is in the sixth consecutive quarter that we have been able to do this.

We believe this strong performance is a key factor in our continuous strong relationship with an increasingly diversified portfolio of important customers.

One of them is Samsung, which began volume production of an OEM of flash memory cards using our controller for leading global card brands.

We also added Philips Electronics, a global leader in consumer electronics, as a major customer for a number of products.

We have already started shipping to Philips with MP3 SoC controllers, USB flash disk controllers and embedded flash memory controllers for DVD devices.

While encouraged by [NAND's] recovery in the NAND flash memory market, and contrary to some of the concern we have been hearing about supply issues, we believe that this uptrend in prices bodes well for a seasonally strong second half.

We expect revenue to improve during the second quarter and even more strongly throughout the rest of the year.

We are also keen to explore the high-growth potential mobile TV and DAB markets with our recent acquisition, FCI, therefore this acquisition.

I mentioned this on our conference call last week and I will repeat shortly myself here.

We are very upbeat about the prospect of FCI, since we believe it provides us with [our] design expertise, which we think is very much complementary into our existing digital multimedia capability and will allow us to provide a comprehensive [pipeline] of solutions to our customers.

FCI's local capability and support also will help us build stronger strategic relationships with leading Korean OEMs; some of them are our existing customers today.

As we mentioned earlier, we expect the transaction to be slightly accretive in '07 and meaningfully accretive in '08, excluding [fresh] accounting adjustments and other acquisition-related expenses.

For all the reasons I just mentioned, we are delighted with our performance this quarter and we continue to be optimistic about the outlook for the rest of the year.

The Company currently expects sales in the second quarter of '07 to increase 5% to 10% from first quarter '07, to about US$37m to US$39m.

This revenue range excludes any contribution by FCI.

If Silicon Motion is able to consolidate two months of FCI revenue in the second quarter, the Company expects total sales to increase 19% to 24%, to US$42m to US$44m.

Excluding the operational result of FCI, gross and operational margins in second quarter '07 are expected to be similar to those in first quarter '07.

As we anticipate the trend underlying our business to seasonally improve throughout the remaining of the year, management expect to achieve, excluding FCI, full-year earnings per ADS of between $1.40 to $1.50, which is higher than our previously announced guidance, $1.20 to $1.30.

And now I would like to turn it over to the Operator so we can begin the Q&A.

Operator?

Thank you.

[OPERATOR INSTRUCTIONS].

Your first question comes from the line of Jennifer West from Merriman.

Please proceed.

Hi.

Congratulations on a nice quarter and guidance.

I was wondering if you could break out any 10% customers that you may have had during the quarter?

I think our top 10% customers do include Samsung, A-Data, Transcend, Kingmax, Lexar Media, PQI, [Finmars] and ATP, as well as [Momap] in the U.S.

Okay.

Specifically, can you maybe talk to how much Samsung accounted for your total revenues?

The direct revenue is about 10%.

Combined with indirect revenue it's close to 18% to 20%.

Okay.

And then can you -- is the reason why -- talking about why Samsung has been pretty strong for you, is it that they're taking some share or is it additional products that they're adopting?

I think, as we mentioned before, Samsung, the retail bundle business is really helping us for visibility and the guidance.

We're also shipping to our existing customers, selling to Lexar Media, to Kingston, to [Finbotax], A-Data and Transcend.

But, however, we do have multiple [business engaged] with Samsung through the bundle business, retail, as well as compact flash controller, XD picture controller and USB controllers.

Okay.

And then can you break out maybe your units within your USB versus your flash card units?

So I think we're shipping in total about [34m] controllers for flash memory controllers, about 8m units is for USB-related portion, the remaining the flash memory card controllers.

Okay.

And then, within that, what was the units MicroSD in their future handsets?

Within the 56m flash memory card controllers, we believe over 50% is through the mobile handsets.

Great.

Thank you.

Your next question comes from the line of Vijay Rakesh of Oppenheimer and Company.

Please proceed.

Hi, guys.

Good quarter.

Good guidance.

Obviously we are a bit concerned, but congratulations.

I think you [inaudible] I guess.

Just looking at your Q2 numbers here, you gave a 5% to 10% growth guidance.

I just want to get a little bit more color.

Is your card, multimedia, all kind of growing in line with that?

Or is multimedia growing pretty nicely again?

Or how do you see that?

We do see our multimedia controller will continue growth, particularly for MP3 controller in the second quarter.

They will grow at the same rate as the March quarter, then?

We believe so.

Okay.

And just looking at this acquisition that you guys made, on the operating metrics near term, Q2, Q3, how do the margins look for that acquisition versus your current margin profile?

I mean [inaudible] but as you close it out in Q2, how will that look?

Yes.

We are seeing the company we acquired, FCI, they have a similar operational margin and similar gross margin as our Company.

So our target, up to the complete acquisition, our target remains the same.

We try to shoot for 53% gross margin and around 28% operational margin.

Okay, great.

Thanks a lot, guys.

Good job, thanks.

Thank you.

Your next question comes from the line of Quinn Bolton with Needham and Company.

Please proceed.

Hi, guys.

Nice job on the results and the guidance.

First clarification, I just want to make sure the new annual guidance of $1.40 to $1.50, that's a GAAP EPS guidance, right?

Right.

[Multiple Speakers].

Okay.

Okay, great.

Second question is just you talked about seeing continued strength in the second half of the year.

Obviously your first half has been much stronger than normal seasonality, and so I'm just kind of wondering do you have order visibility or backlog that gives you the confidence that the second half of the year shows seasonal strength?

Do you think it's -- I guess just talk about what you see driving the second half, given how strong your first half looks like it's shaping up.

Yes, start from late February and early March, we did see recovery for MicroSD bundle business on major OEMs for mobile phone makers.

So, through this bundle business, we do have a backlog visibility six to nine months, so we can see all the way to Q4 regarding the orders.

Because the bundle business recovery, we definitely will see the same momentum in the retail regarding the high-density MicroSD card.

In addition, our MP3 design win pipeline, we believe -- leads us to believe we are going to have a stronger second half compared with the first half, because most of design is going to move to mass production from late Q2 going to Q3.

In addition, we also have multiple new design wins in both embedded solutions as well as flash memory card business.

So that gives us the better visibility on our current customers in this business.

And then one new application, can you talk about just what you're doing on the solid state disk controllers?

Are you developing controllers there, both for the parallel ATA and the serial ATA interface?

Or just talk a little bit about how you see that market developing.

Currently, we provide a solution that's for IDE interface, which [a customer is] in the design preparation and the qualification process.

We believe some of design will move to production in late Q2, moving to Q3.

In early Q3, we're going to offer a SATA interface, solid disk controller, with the highest performance in the industry.

That will also add 8 to 15 bit error correction to support 50nm MLC from our manufacturers.

So we believe that will also help us design into pipeline late Q3, Q4, going to next year.

And any different -- assuming that you'll probably get a slightly better ASP on solid state disk controllers, is that something that could help stabilize, if not maybe even increase, the blended ASP over time?

For IDE interface, solid disk controllers, ASP's around 2.50 to 2.20 dollar range.

The SATA space, the ASP is around 6 dollar to 5 dollar range.

Great, okay.

I think that would help the ASP.

Great.

Thank you very much.

Thank you.

Your next question comes from the line of Gary Nackenson with Quillen Securities.

Please proceed.

Yes, guys.

Great quarter and guidance.

Could you address -- SanDisk talked about the obsolescence of 200mm.

Could that be a long-term concern for you guys?

We -- I think, as a controller vendor leader in this industry, we definitely love to support all types of different media and technology.

We believe when the technology is ready we will try to do everything we could to engage with the supplier that's including SanDisk.

So, I think there is some other new technology coming to compete with the potential NIM technology.

But I think this is -- we will prepare, try to do everything we could as a leading controller maker, if that technology become mature.

Okay.

Fair enough.

Then, one more question.

Could you address -- there's been some chatter about Samsung trying to bring controllers in house.

Could you address how tough it is for them to make that happen?

I think Samsung [certainly say] always have their own development for flash memory card controllers, since four years ago.

It's not something new.

For certain business, Samsung will use their own controller to support their OEM customers.

For certain business they will use a third party, as a Silicon Motion solution.

So far we think we probably own majority over their own design.

But I think it's a natural complication.

As long as we can keep ahead, keep our performance leading, I think Samsung will have good business for us.

So they are finding it tough to meet your price performance and your ability to roll out new models quickly, is that a fair statement?

It's very hard to comment Samsung's own development.

But it does mean we'll keep our performance and costs very competitive to compete in the market.

Okay, thanks.

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

Please proceed.

Thanks a lot, and congratulations on a great quarter and great guidance here.

A couple of questions here, first of all on the embedded flash controller market for handsets.

Can you a bit expand on the opportunity for there, here in 2007?

And then the second is related to -- going to this Philips DVD device with embedded flash for the DVD, can you expand on that?

I think that's a first from the perspective of the market hearing about that opportunity.

So, can you a bit expand on what you are seeing there as well?

We work with all major flash makers, including STMicro, Samsung, Micron and Hynix, to develop embedded solutions, prepare for mobile handset applications.

We believe some customers will move to mass production in late Q3 to early Q4 this year.

However, the volumes are still quite small in '07.

We believe the momentum will move into next year, '08.

So we think that will be the major growth driver for us going forward to '08 and beyond.

We also see the embedded solution, flash memory with the controller together in the BGA package, moving beyond mobile handsets, particularly in consumer electronic devices.

These -- I cannot expand in detail, but I think our solution will be in some model for the DVD device, as well as certain LG -- LCD display LCD monitor devices.

We are also going to move into major certain game device, our MP3 device.

So, I think embedded solution is going to move beyond mobile handsets, will be everywhere.

[Virtually] every design needs an embedded solution with the higher density of the MLC solution.

They probably need embedded solution with the controller inside.

This consumer electronic, is this a 2007 opportunity here, the LCD monitor, the game devices?

I think LCD monitor will be late '07, game device probably will be '08 opportunity.

And what's the ASP on this product?

It's the same controller we are using today for flash memory card.

Okay.

What was your blended ASP for the quarter, on the card side -- on the card and on the USB side?

Our blended ASP for first quarter for flash memory controller is around 51 cents.

For USB it's around 48 cents.

Okay.

Now, can you expand on where we stand right now on the whole graphics side of the business?

I think in the past your Company has commented related to Intel business.

Where do we stand on that and when should we see meaningful revenues from them?

I think we're going to see meaningful revenue growth in the second half of the year, together with Intel service business.

We also develop a new server graphic controller for '08, with PCI to flash interface.

So I believe start from Q3 we are going to see more, I think more visible revenue growth for embedded graphic product line.

Okay.

And then the final question is, it's more of a big long-term picture, but some of the major NAND flash manufacturers have been doing investments in some of your competitors in Taiwan.

How do you think that strategy by some of these companies, if at all, impacts your -- the competitive landscape?

Do you think that that will change in any way the fact that they are trying to team up with controller companies or do you think it's a non-event?

Well, I think every controller maker will look for opportunity to compete and survive in this dynamic market.

Same token is the flash maker.

Especially for some late comers, they will try to find alliance to expand their business opportunity.

As the leader in the controller industry, we definitely try to welcome as many as possible flash maker to grow the business.

I think as long as we can show our leading technology, continue acting well for product line, and deliver the high performance and lower cost, manufacture [ground leveling] technology and error correction technology, and sound management, we can win business.

Eventually, all flash makers think on how they can gain market shares, selling for NAND flash memory.

That's the bottom line.

Same as the controller maker wants to sell more units controller.

Okay.

Thanks a lot.

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

Please proceed.

Hi, guys.

Wallace, in the past you've mentioned that a 20% annual ASP decline is normal for your business.

Has that expectation changed, now that 1Q pricing pressure seemed very moderate?

During the February 2 earnings call we mentioned, we guided this year ASP declines about 30% or less, although Q1 we are very happy to see only 4% ASP decline.

But we try to be more cautious for this year.

We believe, we'll try to manage 30% or below 30% for whole year guidance.

Certainly we see it for blended business, because on new product lines we can charge premium.

That's going to help us to maintain our ASP, especially for compact flash and solid state disk controller.

Okay, very good.

A few housekeeping questions.

What were the card reader controller volumes for you guys in the quarter?

Our card reader controller for the first quarter is just about 750,000 units.

The reason it did not match our expectations, because the -- some of the gross margins for the business are too low, we turned down the business.

[Multiple speakers] lack the customer for card reader business.

And what are the ASPs on that?

It's about 40 cents to 45 cents.

Okay.

And what was the unit split between -- what was the MP3 SoC volumes for you in the quarter?

Slightly over 1m units in Q1.

Okay.

And is your MP3 target for the year, can you remind us what it is?

I remember 10% of revenues, but I am not sure if that is exiting the year or for the full year.

10% the whole year, for '07.

Okay.

So you'll see a significant acceleration in the back half of the year, then?

We believe so.

Okay.

And then one big picture question.

You've taken a lot of market share over the last few years.

Do you expect to keep gaining share throughout 2007?

And when do you expect your share gains to start plateauing?

Well, I think we cannot say beyond '07.

I think this year we'll continue grow, expand market share.

For the flash memory card our target is for all configurations we shoot for 35% to 40% market share.

And what's your assessment, where you are right now?

Last year was about 30% market share.

Okay, great.

Thank you very much.

[OPERATOR INSTRUCTIONS].

Your next question comes from the line of Adele Mao with Susquehanna.

Please proceed.

Hi.

I've got a couple of questions, first of all is also related to MP3.

What is your MP3 controller ASP for the first quarter?

Our ASP for the first quarter is about 1.25 dollars.

Okay.

And although it's still a small percentage of your total revenue, where do you see your MP3 ASP going for the rest of the year, given that Silicon Motion is sort of a late comer in MP3?

First MP3 did not have integrated audio codec and a DC-to-DC converter.

That's [with software] regarding the gross margin and the ASP.

Our second-generation product is something right now that has integrated solution.

So we say it's the ASP going to main stream to 2.40 dollars to, low end, 1.50 dollars.

So that will help us to grow our ASPs for MP3 product line.

We also offer high-end product line in the second half of this year.

So that will give us a more complete product offering of the MP3 player.

I see.

Can you share with us who your major customers are in MP3?

Currently we are shipping volume with Philips.

We have Thomson, we have Mattel, we have Kobe, Apache Europe.

Okay.

In terms of Philips Electronics, you mentioned that they have become a major customer.

Did Philips contribute for the full quarter in the first quarter?

I cannot comment the units for Philips.

Okay.

Do you see its contribution become more of a 10% customer for the full year 2007?

It could be, yes.

Okay.

All right.

Great.

Thank you.

Your next question comes from the line of Steven Koffler with Shannon River Partners.

Please proceed.

Hi there.

I got on late, so I am sorry if you addressed this in the script.

I just wanted to ask about inventory.

It went up almost 20% sequentially.

What was the reason for that?

We normally prepare the ramp up because the lead time for the wafers is about three months from the wafer start to wafer out.

I think the half season normally starts from the late May, early June throughout the summer time, in order for us to prepare the wafers.

So all the inventory, including wafer out and wafer in the process.

Thank you.

At this time there are no additional questions.

I would now like to turn the call back over to Mr.

Wallace Kou for closing remarks.

Yes.

Thank you for joining our conference call today.

We are very pleased with our result in Q1, [although we'll put our full speed looking for] Q2.

And we'll keep our focus and try to achieve the result for our shareholders.

Thank you for joining the conference call.

Ladies and gentlemen, this concludes the presentation.

You may now disconnect.

Thank you and have a good day.