慧榮科技 (SIMO) 2007 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the second quarter 2007 Silicon Motion Technology Corporation Earnings conference call.

My name is Loren and I will be your coordinator 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 call is being recorded for replay purposes.

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 limitation, statements regarding trends in the semiconductor industry and our future results of operations, financial conditions 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 customer -- consumer electronics, the state of and any change in our relationship 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 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.

Riyadh Lai, CFO.

Good morning everyone.

This is Riyadh Lai, CFO of Silicon Motion.

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

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

We're going to have a slightly different format than we used to in past calls.

We posted a PDF version of our results presentation on our website and for those of you viewing this on Internet webcast you should be able to see the presentation pop up automatically.

Our prepared remarks will correspond to the presentation.

We will discuss the following topics, financial results for the second quarter, an update on our business, guidance, and then we'll leave time for Q&A.

Before we start I'd like to remind you of our Safe Harbor policy, which was read at the start of this call.

Starting with our operating results, this is page three of our presentation, as we disclosed in our press release issued this morning, overall unit shipments increased 168% from second quarter '06, and 20% from first quarter '07.

Our Core Storage Business in particular remained quite strong.

We shipped a record 73m flash storage controllers, 152% more than last year and 14% more than the previous quarter.

USB controllers increased significantly while memory card controllers grew in line with seasonal expectations.

For our non-storage products we shipped 2.2m Multimedia SoCs in 2Q '07, almost double first Q '07 because of very strong MP3 and graphics shipment.

FCI contributed over 3m units in May and June, the two months during which we consolidated FCI numbers.

Based on strong volume growth and a slightly higher blended ASP, as well as revenue from FCI, our revenue increased 23% quarter on quarter to a record $44m.

Our blended ASP increased 3% from first quarter '07.

Excluding FCI, our revenue was up 12% quarter over quarter, and 91% year over year.

By products, our Mobile Storage revenue increased 7% quarter over quarter to almost $35m and now accounts for about 79% of our total revenue.

Mobile Storage ASPs declined about 6% from first quarter '07, well within our expectations.

Our Multimedia SoC revenue, which is now 12% of our overall revenue increased 64% quarter over quarter to $5m.

This was led by an almost twofold increase in MP3 revenue and a 44% increase in graphics revenue.

ASP for MP3 and graphics both increased quarter over quarter but blended multimedia ASP declined 13% because of a product mix shift towards the lower ASP MP3.

FCI contributed a little over $4m for May and June, a little below expectations due to a delayed initial launch of our electronic call collection RF IC.

Production issues relating to this have been resolved and ETCS RF IC shipments will begin in third quarter '07.

For eight consecutive quarters we have been able to maintain a gross margin of 52% or above.

In second quarter '07 we achieved a standalone gross margin, excluding FCI, of 53%, about flat compared to the previous quarter and on the standalone operating margin, excluding FCI of 28.8% versus 27.8% the previous quarter.

We were able to achieve a favorable operating margin due to lower R&D expenditure, as a percentage of sales.

On the following slides we will discuss in more detail about our earnings and profitability.

In our discussions about operating results we will talk about three sets of non-GAAP numbers to help our audience better understand our performance.

The first non-GAAP is our performance, excluding FCI, so you can better see the performance of just our Mobile Storage and Multimedia SoC businesses.

The second is consolidated results but excluding amortization of intangibles and in-process R&D, which we exclude to facilitate our review of our ongoing operating performance because these transaction related charges are not directly related to our ongoing operational performance.

The last is consolidated results excluding share based compensation.

As I have previously mentioned, in second quarter '07 we generated sales of $40m without FCI compared to $36m in first quarter '07.

The results the quarter before we acquired FCI, first quarter '07, the quarter before we acquired FCI.

Without FCI our gross margin remains above -- about 53% and our operating margin increased to 28.8% from 27.8% in the previous quarter.

Diluted earnings per ADS increased from $0.31 to $0.37.

On a consolidated GAAP basis with FCI, our revenue was $44m, with $4m from FCI.

Gross margin was slightly lower at 52.6% due to a delayed initial ramp of a significant new high margin FCI product.

We're resolving this manufacturing issue and expect shipment to begin in third quarter '07.

Our GAAP operating expense includes a $1.7m FCI transaction related amortization of intangibles, and a one time $2.1m expense for in-process R&D.

With these transaction related charges our GAAP operating margin was 18.8% and diluted earnings per ADS $0.25.

Our operating margin, excluding amortization of intangibles and in-process R&D was 26.6%, lower than our standalone without FCI operating margin of 28.8%.

The lower margin was due to investments in overhead expense in Korea to support FCI's future growth.

Earnings per ADS, excluding amortization of intangibles and in-process R&D, were $0.36, similar to our standalone without FCI of $0.37.

Another way to appreciate the strength of our business is to look at our consolidated results excluding stock based compensation.

Without stock based compensation our gross margin would be in the 54% to 53% range.

Our operating margin, excluding stock based compensation, amortization of intangibles and in-process R&D was 32% in 2Q '07, higher than the 31.2% in 1Q '07 and 27.4% in 2Q '06.

Our diluted earnings per ADS excluding stock based compensation, amortization of intangibles and in-process R&D, was $0.43 in 2Q '07, significantly higher than the $0.35 in first quarter '07 and $0.20 in 2Q '06.

More details are included in financials that accompanied our press release, issued earlier this morning.

I would now like to turn the call over to Wallace for a discussion of our business.

Okay, thank you Riyadh and hello everyone.

I would like to touch on the highlights first and then provide further detail on performance and industrial issues impacting our business.

We had solid revenue growth in the first quarter and saw improved momentum in most of our key business.

Revenue grew 111% year over year and 23% sequentially, to $44m.

Our business continued to benefit from strong handset bundled sales and we remain optimistic about continued growth driven by the handset industry.

The growth of the multimedia handset is a very important growth driver for us.

Retail handset bandwidth with 2.5G and 3G and increasing penetration of camera phones require storage for data.

Sales for microSD cards, a primary flash memory card type used for handsets, has been surging because of this reason.

Camera phones now make up half of all phones and penetration rate is still growing.

We estimate that at end of the last year about 22% of all phones had a flash card slot, and by the end of the year this will grow up to 30% or higher.

microSD, a primary card type used by handsets, accounts for about half of our revenue.

We believe we continue to be one of the leading suppliers for controllers for flash cards that are bundled with handsets.

I would now like to take a moment to emphasize that we're not a one engine growth company.

We have multiple growth engines that leverage our core technologies and we have focused certain [application] such as mobile phones and key customers.

Through our shares in flash controller technologies we have expanded into related technology such as USB flash drive controllers, card reader controllers, SSD controllers, embedded flash controllers, MP3 SoC.

All of these products target growth markets.

Many of our NAND flash related solutions target exciting new opportunity for handsets and other portable multimedia devices, as well as for PC and peripherals.

Centrally we also target the same devices and customers with other related technological solutions, such as mobile TV tuners and an imaging processor for the PC camera.

I'd like to share with you an example.

Samsung is a very important business partner for us.

Our controllers are instrumental in helping Samsung sell NAND flash to their customers.

In addition, we provide controllers to Samsung for their own SD, microSD, MMCmobile, and xD-Picture Card, as well as USB flash drive devices.

We also provide the advanced embedded solid state controllers for Samsung AV division for camcorders and some of the industry's highest performance mobile TV tuners for Samsung mobile phones.

A new area of growth for us is solid state controllers.

Let me share with you, a recent design win.

If I look at the chart we are particularly excited about our design win for the ASUS Eee PC, the $199, joint ASUSTeK/Intel notebook PC development project.

This is a low cost notebook PC that ASUSTeK expects to launch in August.

This notebook PC will come with either a standard 4GB or 8GB solid state drive and have multiple USB ports to connect to external memory.

We are very excited about supplying the solid state controller for the ASUS Eee PC.

We believe low cost, portable PCs utilizing NAND flash storage could become the next wave of momentum for embedded solid state controllers.

While we are encouraged by preliminary indication of recovery in the NAND flash memory market and are looking forward to seasonally strong second half, the recent up trend in NAND spot prices has created some supply bottlenecks.

Continued 50 nanometer yield issues at some of the NAND flash makers as well as speculative hoarding by flash distributors are contributing to very tight supply conditions and high spot prices.

Currently, spot prices are above 30%, or higher than contract price.

This factor in the short term are limiting the availability of flash for our customers and naturally affecting our sales.

We believe this issue is short term in [nature], that the end consumer demand remains strong, in fact, capacity will increase following improvement in production yield and output ramp.

Based on similar previous experience, yield problems and speculative hoarding are very rarely long term issues.

Despite our long term optimism we face some near term uncertainties that are naturally impacting our business that I just explained last page.

Although we believe these issues are short term in nature, these are real issues that are affecting our business.

So we are therefore adjusting our revenue and earning guidance.

We expect 3Q revenue to be amount above $43m to $45m, flat, quarter over quarter.

We expect to maintain our current gross margin in the 52% to 53% range.

We expect to maintain our operating margin, excluding in-process R&D and amortization of intangibles in the 27% to 28% range.

In light of those short term issues we are revising our 2007 full year earnings per ADS.

If you remember, at the end of the last quarter we raised our guidance to $1.40 to $1.50 from $1.20 to $1.30.

This was there before our acquisition of FCI.

Right now, we continue to believe we can exceed our $1.40 to $1.50 target but it will include earnings generated by FCI.

Our new earning target excludes in-process R&D and amortization of intangibles.

Finally, let me summarize by reiterating that although our business is facing uncertainties, these uncertainties are short term in nature.

The end application of our Silicon, whether in mobile phones, MP3, PMPs, notebook PC, DSC or camcorder are all large and growing markets.

Additionally, we are targeting some of the fast growing segments through these devices.

Certain multimedia handsets that require embedded flash memory controllers, removable memory cards [all have] mobile TV and notebook PC, high end digital camera and camcorder with solid state drive.

We are addressing the near term uncertainties and more importantly, continuing investing in future growth opportunities.

And now I would like to turn it over to Riyadh, our CFO.

Thank you Wallace and all of you, again, for your attendance.

I'll turn it over to the operator and we'll begin the Q&A.

(OPERATOR INSTRUCTIONS).

And your first question comes from the line of Daniel Amir from WR Hambrecht.

Yes.

Hello.

A couple of questions here.

First of all, let's start with some housekeeping questions.

This $1.40 to $1.50 guidance, this is basically including FCI but not -- and includes stock based comp, is that correct?

This includes FCI and also includes stock based comp.

Okay.

So it's basically not a GAAP and it's not a pro forma, it's somewhere in the middle.

Is that correct?

This is a GAAP number.

What I meant was stock based compensation is expensed within the $1.40 to $1.50.

Okay.

So it's stock based.

Okay.

So what is -- just some housekeeping then.

What is the stock based comp that we should be modeling going forward?

The stock based comp for our second quarter, which we had provided details in our second quarter press release, we feel that it was an amount that was probably fairly appropriate for modeling (multiple speakers)

I think the dollar amount could be $1.25m to $1.5m per quarter?

$1.25m per quarter.

Okay.

That's much less than what it was this past quarter.

Hello?

Yes.

Go ahead.

Okay.

With regards to the amortization, intangibles and in-process R&D what should we be looking at going forward here?

Is it the same level as it was in Q2?

It will be a bit higher since we only consolidated two months of FCI and therefore, amortization amounts will correspond to just the two months.

There are a couple of key parts to this.

We have the in-process R&D, which is a one off.

That is $2.1m and only hits our current -- our second quarter.

What we also have is our amortization intangibles.

That all together is being amortized over four years.

The total amount for that is about $20.8 -- $21m.

If you take that over four years and put that into quarters, that will give you a rough amount.

Okay.

And what type of tax rate should we be looking at going forward?

We believe a tax rate around 10% is appropriate.

Okay.

Now, I have just a couple of other housekeeping.

On the USB units, card units, what type of units did you ship this quarter on the USB front?

We are shipping total around 13.3m USB controllers and the card reader controller.

Among that, 9.8m USB flash drive controllers, 3.5m card reader controllers.

Okay.

Now, as you look at your guidance, just to understand here, this of course includes a full quarter of FCI, which if we monetize it over one quarter to maybe around $6m or so, compared to $4m in the June quarter.

So your core business will actually be down Q over Q.

I mean, what's the thought process on this guidance?

Are you just taking your July kind of estimate and just moving it through the quarter, at the same rate, or is this more of a down shift, a bit more than what we're seeing right now in the market?

Well I think we didn't say our Q3 card readers were going down compared to Q2.

However, I think the flash supply uncertainty is really impacting our business.

So, in addition we did see increasing demand from Samsung card business and some are major tier one customers, they are able to secure NAND flash.

But from the balancing and mix of all the customers today, we believe we would like to take conservative move with the flat guidance compared to Q2.

Dan?

Let me just also add, a flat guidance is still a very significant increase over the previous year.

Our $43m to $45m third quarter guidance, that is 36% to 42% above the same quarter in '06.

Okay.

Thanks for the clarification.

I'll just go back into the queue.

Thanks.

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

Hi.

I was wondering if I could just follow up on Dan's questions.

Can you maybe just talk a little bit on what gives you confidence that it is a short term industry situation and maybe talk to what your visibility is right now?

I think late June and early July we started to see the tight supply for NAND flash.

But just about last week, we did see some slight positive moves in the NAND flash.

It's really -- that's all related to how Samsung, Hynix and other maker is improving the 50 nanometer process for the yield.

So I think we see our top tier customers look like they are improving their ordering, and Samsung particularly, start increasing their card business.

So I think from the [mix level we take on certain moves], and we believe the August to September business should be getting much better than July, current knowledge.

So the current I think -- although we believe that [downside] supply is still very tight through the end of the whole year '07, but our business I believe or maintain very confident, very strong, particularly the bundle -- the microSD bundled business is getting stronger and stronger.

Jennifer, let me also add to what Wallace said -- has just talked about, and this is further to what he had also mentioned in the presentation, which is these sorts of conditions we've seen in the past, these sort of very tight supply conditions, pricing going up, distributors hoarding inventory, manufacturers having yield issues, we've seen this all in the past and the experience in the past is this sort of uncertainty, periods of uncertainty, are usually short term in nature.

They usually last just a few months and go away as manufacturers -- the NAND flash vendors improve their yield problems and increase ramp of output.

Okay.

Thanks.

Can you maybe -- how big was Samsung as a percentage customer in the second quarter?

Samsung was about 10%, 15%.

And that's all direct or is that direct and indirect?

Direct is around 10%; indirect is around 5%.

Okay.

And then can I also get the breakout between the MP3 and display processor units in the quarter?

I'm sorry?

The breakout between your MP3 units and also your display processor units within your Multimedia SoC business?

Yes.

The MP3 is about around 1.95m units and the embedded graphic processor is about 192k.

Okay.

And then, is there any new development on the embedded flash side for the handset market?

Yes.

We believe the -- will be production in May Q4 timetable, for the handset.

But you haven't announced the customer yet?

We won't until Q4.

Okay.

Thank you.

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

Quillen Securities.

Yes.

Hey guys.

So what was the ASP increase or decrease that you based your guidance on for this quarter?

Our guidance was based on a 5% to 10% ASP price decline.

So you had a 3% increase.

So you benefited to that extent, the difference?

That's correct.

That's correct.

Part of the reason is we also have the higher ASP products from FCI being blended into our overall product mix.

FCI's overall, their blended ASP is more in the $1.25 range, versus our blended ASP is more in the $0.55 range.

Do you guys have a sense of what the notebook PC, what kind of price points the ASUSTeK notebook PC will be at?

We cannot -- you mean the notebook's selling price?

Yes.

For ASUSTeK, right.

It's $199 on a base.

It will go up to $299 and $399 based on the density of the NAND flash.

Actually I was asking about the price of -- the cost of the notebook itself, in terms of the demand for the product.

Right now we don't know.

Okay.

We can't comment on other manufacturers.

Got you, and finally, is there -- what would you be looking for over the next few weeks to see that things are loosening?

I mean if you think Samsung could be tight for the rest of the year, then what other factors could allow for an improvement over the next few months?

The base of our sourcing, we believe both Samsung and Hynix will improve their throughput in September.

Oh, okay.

So that's a little bit different from tight for the rest of the year?

I think the overall capacity supply is still very tight, but it started to improve as a current situation back in July.

One more question?

Hearing that there were some issues with a controller for Hynix, could you comment on that?

Do you mean our controller with Hynix?

Yes.

Can you restate your question again?

I'm sorry.

There was some chatter that there were some issues with a new controller that you were developing for Hynix that there were maybe delays?

Well, we did not develop a particular controller for Hynix.

We've got [media] supporting Hynix's upcoming 60 nanometer and 57 nanometer of flash memory.

We believe the 60 nanometer is in full production.

We believe they are [stumbling] 57 nanometer and now see right now.

So we believe that Hynix, based on their current plans, they should be able to improve their throughput in September.

So, maybe what people were interpreting as delays were related to Hynix's production schedule for the new products?

We cannot comment --

Yes.

I understand.

Yes.

Thanks guys.

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

Hey guys.

I just wanted to follow up on Dan's question about the stock comp.

It looks like stock comp charges about doubled to about $2.5m, $2.4m in the quarter.

Can you walk us through why it was such a big jump and why you think it goes back down in the third quarter?

The stock comp is a big part of our compensation and it's generally difficult to forecast based on how you actually do the valuation for stock comp -- for the share based valuation.

But if you just look at the trend, there is a significant increase.

But, based on our internal projections, we're expecting about $2.5m in the third quarter, so pretty much in line with previous quarters.

That's why we state I think Q3 should be around $2.5m.

Okay.

So, this $78m into the $2.5m is the rate, steady state going forward?

Okay.

The second question, just wondered if you could talk about the bundled business versus the retail business heading into the third quarter?

It looks like the bundled business has been pretty strong.

Would you expect bundled sales to continue to increase in the third quarter?

I mean it's a seasonally strong period for handsets.

I was just wondering if you could comment about that business?

Based on the current backlog and the customer forecast we believe the microSD card bundled business will continue getting strong in Q3 even under the tight supply issue for NAND because the majority of our bundled business is the low density flash memory.

I think particularly for Nokia, [I think that] Q3 are getting even stronger than in Q2.

We also start to see the market trend.

China market is (inaudible) and several others are getting the -- also increasing orders for the microSD card.

Okay, so bundled business looks like it will increase.

So it looks like it's a combination of bundled increasing, FCI being -- getting a full quarter of FCI, there's going to be a pretty -- well, maybe not pretty meaningful but, a good drop in the retail business quarter to quarter.

Is that the right way to look at it?

I mean if overall sales are flat, your bundled business is up, FCI gives you another couple of million, because you've got a full quarter that the shortfall has got to be coming from the retail card business?

That's correct.

But also --

Okay.

-- in addition we also see Samsung adding more card business for their retail OEM customers.

So that will offset some of our customers in Taiwan and China who cannot get their flash supply.

Okay.

But in aggregate the card business, the retail card business would be down?

That's correct.

And then, just last question, given that retail card business outlook, is there anything you can do -- just talk about whether or not you think you're losing market share?

I think there's been chatter in Taiwan that some of your competitors may be increasing their market share at your expense.

I mean clearly the numbers -- it looks like the retail card business is going to be down in the third quarter in this seasonally -- in a typically very seasonally strong quarter, certainly plays to some of these fears that you might be losing some share?

First of all I think we did not lose any customers.

We know we did not lose any market share.

Our current situation is purely related to the short term NAND flash supply [in chip].

Okay.

Thank you.

And your next question comes from the line of Tim [Man] with Citigroup.

Thank you for taking my question.

Good afternoon Wallace and Riyadh.

Just a couple of questions.

One question on the MP3 BMP market.

Do you guys have a target market share you're looking to gain into for the second half of this year?

And can you comment a little bit about the pricing environment?

We are still a small player today but we believe we are getting more movement in the second half of this year.

But I don't know exactly what market share we will be, but our goal is to try to reach a stable 1m unit per month run rate in the second half of this year.

Our MP3 strategy is not just MP3 players, also together target for [CAB] total platform system.

We believe that we will have a total solution ready in Q4 this year that together with FCI TV tuner and [our R&D] modulator.

So you're actually going to have a bit of functionality on top of the MP3?

That is correct.

I see.

Just another follow up question that Quinn has mentioned earlier, in terms of the local competition, is Silicon Motion looking to partner with some of the Taiwan distributors for the microSD card and other card business in terms of going forward, because there is some chatter in the market, talking about the other companies looking to have alliances with other memory makers?

I think 95% of Taiwan makers are a customer today.

So we are --- they are a customer and lots of volume for us, such as A-DATA, Transcend, [T Max], PQI, [Acer], all our customers.

Thank you.

And one other question is you made a comment earlier about improvement in the NAND supply business.

I think from the Hynix call earlier, we heard about expected big growth.

So, do you -- can we have a little bit more -- you mentioned that you see the improvement coming in September.

Is that mostly from the Hynix side or is it overall?

We believe both Hynix and Samsung will have a -- improving their output in September.

Thank you very much.

Your next question comes from the line of Bob [Wallace] with Deutsche Bank.

Hey guys and thanks for taking my question.

I just had a question, could you break out maybe a percentage of how much microSD grew Q on Q?

The first quarter we totally shipped about 51m SD controllers, about 55% -- I'm sorry, 60% are design microSD card.

In second quarter we shipped out 55.5m SD controllers.

We believe there should be more than 65% using the microSD card.

Okay.

Great.

Thanks.

And also, I mean, it looks like you guys built inventory in anticipation of a strong second half and then this NAND supply issue caught you a bit by surprise there.

Are you worried at all about the inventory?

Do you think you can work through that in the second half year or --?

Yes.

I think we pay closer attention to our inventory level.

We definitely continue discussion with the manufacturing partners, make sure we slow down the production, when we need it, it will be ready to ramp up, based on our needs.

Got it.

So you have cut some wafer starts at your factory?

That is correct.

Okay.

And then, just a final question, more on your customers.

I mean, clearly we've talked about things that stall the market.

If prices go down too fast, customers are a little hesitant to order NAND because they don't want to take the inventory write off, obviously prices are going up and there's a tight supply.

Can you talk a bit -- it seems like almost we need a very steady state supply/demand or otherwise your customers get disrupted.

Can you just talk about what's a good NAND environment for your customers?

I think as we mentioned before, the NAND business -- the NAND flash business is very dynamic.

It's very, very hard to predict.

I think we do not worry about the oversupply.

We do not worry about the price decline.

As long as the schedule declines, a steady decline, I think all the mass partners in the manufacturing chain is prepares for the price drop.

The current situation, the one is because of tighter supply.

That also triggers the up trend price, price up, so some of our customers, while they're waiting on the sideline, should see this stabilize regarding the supply, on price -- pricing has stabilized.

But we also have a very broad customer base.

Some of the customers, they are able to get a supply through their manufacturing contract on NAND supply, such as Sony and Lexar Media and several others.

So that portion of business is still quite stable.

So we believe we, that's why we give conservative guidance based on current situation when the flash supply becomes better without losing momentum for our business.

Okay, great.

Thanks.

The next question comes from, now your next question comes from the line of Adele Mao, with Susquehanna International.

Hi, a couple of questions.

Number one, just a follow up on ASP.

If you take out the higher ASP product from FCI, did you see ASP increase or decrease in your core business?

We saw a slight decrease.

ASP, blended ASP without FCI, declined about 3%.

About 3%.

Okay.

And also on your MP3 controllers, what is your current ASP and where do you see it trending in the second half of '07?

Our MP3 ASP to date is about $1.10, [because] that's at very low end with [audio slowdown] and it's easy to be seen.

But because our second generation integrated solution is ready, we'll start to ramp up.

Through the mix between our first generation and second generation, we should start to see ASP going up in the second half of the year.

Okay.

Great.

Would you say the outlook for FCI is above or in line or below your expectation from where you bought the company about three months ago?

I believe the second half of their revenue and business is in line with our expectation, although the second quarter, the ETC arc module, due to the back chain through the government, they were not able to produce in time, but they see now with the PO, so the shipment will be starting in August.

So we believe that revenues second half are in line with our expectation.

Okay.

So it's just pushed out.

Also, I was going through the numbers for FCI.

Looks like there's an outside tax expense.

Could you explain that a little bit?

FCI, their taxes are largely based on Korean corporate taxes.

In the past, when they were less profitable, they were -- they had benefit of net operating tax losses.

Most of that is being, or has, in fact, been used up and so they're now facing a much higher corporate tax rate and that really is the situation we have now.

Okay, so the 10% you, sort of, guided earlier already includes much higher tax rates than FCI?

Fully factored in.

Yes.

Okay.

Great.

That's all I have.

Thank you.

(OPERATOR INSTRUCTIONS).

And your next question is a follow up from the line of Daniel Amir with WR Hambrecht.

Thanks a lot.

One follow up question on the solid state drive business.

Can you, can you give some, maybe, quantitative comments a bit what you think the opportunity will be in 2008 both for the embedded, the e-market that you currently do with the camcorders, portable media market, etc., and maybe for the PC market as well now, following the speculation?

ASUSTeK, their numbers, they have to make some public announcement doing Taiwan country tax so they have set a target number in the next six months, start to ramp in August.

Each of the ASUSTeK Eee PC uses two of our embedded solid state drive controller because the solid state drive for the PC, one is for master, one, the other is for slave.

We definitely will benefit from the revenue growth of ASUSTeK Eee PC.

We also designed several other embedded solutions.

With Samsung, I think we're designing three models of camcorder and we believe we have another major design which I'm going to announce next quarter, in Q3.

So that will also carry tremendous growth.

We, at the moment, we only ship a small volume of solid state drive controllers to our customers in Q2.

It's around 30,000 units.

We believe for standalone solid state drive used for camcorder and used for other industrial applications, we believe the number is going, going much higher, higher in Q3 due to the design and into mass production.

We're also talking for other major manufacturers who also would develop similar like a ULPC and OLPC type of notebook from Taiwan and production will start from late Q4 or early Q1 next year.

Okay.

Thanks a lot.

Your next question comes from the line of Jim Colgan with Frontier Capital.

Yes, good morning.

Could you just follow up on that solid state disc drive and give us an idea of how large that market?

It seems like it started taking off for 2008 and units should increase significantly, and I assume that there's higher ASPs in that business as well?

We definitely see much stronger growth in '08 compared with '07.

For standalone solid state drive, we believe the total market in '08 probably should be around 10m to 15m units.

But with the embedded solution we do now anticipate strong momentum.

We believe that it can grow also very, very strong for embedded solution.

We cannot anticipate how the low cost portable PC will do next year, but we've attracted some clients we believe definitely are going to help the volume.

And did you say 10 to 50, five 0 units?

10 to 15.

15.

Okay.

And what's the ASP in that area?

For our embedded, for our solid state drive controller, ASP is around $2.50.

For [smart card] it would be around $5 to $6 range.

$5 to $6, okay.

Currently we're selling this IP interface.

And what will be the next largest growth market for you guys in 2008?

Definitely the solid state drive controller is one of them.

We also, we believe our embedded solutions for mobile handsets will be another major driver.

We have another very interesting design win which we cannot talk about it, I think, and it should be moving to production in Q1.

That is an area we cannot play today, but we believe that will also bring tremendous opportunity for us to grow.

So if you look at 2008, at least from where you stand today, are you expecting similar type of growth that you had in 2007?

We definitely, we believe FCI itself will grow at least about 50% or higher and ourselves, I think, we anticipate to grow at least 30%, 40% -- 30% compared with '07.

Great.

Thank you.

Your next question is a follow up from the line of Quinn Bolton with Needham & Company.

Thank you.

I just want to follow up on the USB business.

Looks like your USB controller business was up pretty nicely, quarter on quarter.

I know that business tends to carry a little bit lower than corporate gross margins.

Just wondering how you thought that business might trend into the third quarter, especially with the flash tightness?

Do you think that that business declines and you might get a positive mix shift back to BSD controllers as well as some of the other higher margin parts of the, higher margin products?

We hope so, but we don't know the final result yet.

We believe that with a tight supply situation, we definitely will reduce our growth and also supplies for the USB business, because that's a lower margin business for us.

Okay.

Great.

Thanks.

Sir, there are no further questions in the queue.

I now turn the call back over to management for closing remarks.

Thank you for attending and calling.

We believe the NAND flash situation is really a short term situation and we are very confident for our growth for our product line and we are customer based continued growth and, as I said, we did not lose single customer.

We continue to gain market share, we believe are continuing that R&D to prepare for future growth.

Thank you very much.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.