慧榮科技 (SIMO) 2007 Q4 法說會逐字稿

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

My name is Clarissa and I will be your coordinator for today.

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

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

(OPERATOR INSTRUCTIONS).

I would like to advise you that 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 as amended.

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.

Also, such statements are based on our 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 any changes in our relationship with our major customers, and changes in political, economic, 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.

Riyadh Lai, CFO of Silicon Motion Technologies.

Please proceed.

Good morning, everyone.

I am Riyadh Lai, the CFO of Silicon Motion.

Thank you for joining us for our fourth quarter 2007 conference call and webcast.

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

The agenda for today is as follows.

Wallace will start with a review of some of our recent business developments.

I will then discuss our fourth quarter financial results and outlook.

We will then conclude with Q&A.

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

For a comprehensive overview of the risks involved in investing in our securities, please refer to our filings with the U.S.

SEC.

Please also note that we are using presentation slides for our webcast, which offer highlights for the quarter.

So I would encourage everyone who has dialed into the conference call to click on the IR section of our website and view the slides there.

For more details on our financial results, please refer to our press release, which was filed on Form 6-K after the closing of the market yesterday.

This webcast will be available for replay on our website, siliconmotion.com, for a limited time.

With that, I would now like to turn the call to Wallace.

Thank you, Riyadh, and thanks to everyone for joining us today.

Overall, 2007 was a solid year for us, despite a fair amount of NAND industry volatility.

For the fourth quarter we delivered $53.4m in revenue, which exceeded the upper end of our $50m to $52m guidance range.

For the full year, we grew our revenue 70% to $180m.

In fact, as many of you know, we have considerably grown our revenue every year for the last five, with a CAGR of 61%.

We have done this while at the same time keeping our gross margin constantly high and operations expense under control to achieve earnings per ADS growth consistent with our high revenue growth.

Our gross margin has been at least 52% for the last 10 consecutive quarters.

Operating margin has steadily improved over the last few years.

It was about 32% last year and 29% '06.

Because of revenue growth and strong margins, we are able to increase our earnings per ADS 58%, from $1.04 in '06 to $1.64 in '07.

Riyadh will take you through the numbers in greater detail and give the guidance later in the call.

We are very proud of our '07 result, and I want to thank our teams for their remarkable efforts in making this such a successful year.

We have made significant strides toward our goal of building our business with multiple engines of growth, with each a leader in its class.

I would like to start by updating everyone on our business profile.

A year ago, our revenue was much more dependant on our storage business, controllers for flash cards and, to a much smaller degree, USB and card reader controllers together accounting for 90% of our revenue in 4Q '06.

In 4Q '07, storage dropped to 71% of our total revenue, with the addition of our communications business in the second quarter of last year.

In the quarter just completed, communications reached 22% of total revenue.

We are quite happy with the diversification in revenue that we have been able to achieve here.

I would like to point out that the smaller share of revenue from storage does not mean that this business has become less significant.

Storage remains very important to us.

In fact, revenue from storage increased 50% in 2007.

My main message is this - Silicon Motion is no longer mostly dependant on storage for growth.

The future growth of Silicon Motion will be driven by both our storage and communications businesses.

Within these two businesses we have multiple drivers of growth, which I will go through next.

Moving on to the next slide, I would like to update everyone about our mobile storage business, which includes controllers for flash cards, USB and card readers, embedded flash controllers, but increasingly also SSD controllers.

Our storage business was very strong in the fourth quarter.

Revenue increased 15% sequentially, to $38m.

Unit shipments increased 26% sequentially, to about 90m units.

Full year storage revenue increased 50% to $139m, and controller shipments increased 85% to almost 300m units.

We strongly believe our strong performance validates our business model of being the strategic partner to most of the leading flash vendors, including Samsung, Hynix, ST, Intel and Micron.

Our controllers are designed to support the vast majority of products manufactured by our flash partners.

Our extensive product support means we have been able to attract perhaps the broadest storage customer base in the industry.

Our controllers are found in more cards in the marketplace than any other supplier, and that includes cards marketed by Transcend, Lexar, Kingston or others.

We are also a leading supplier of controllers for cards that are bundled with handsets marketed by most of the leading handset OEMs.

We also continually expand our flash controller product portfolio to target new growth applications, such as SSDs.

2007 was the first year in which we shipped SSD controllers, and by the fourth quarter we already reached an important internal milestone by shipping 1m SSD controllers.

We are very excited about the market opportunity for SSD, and believe the [niche] is a big volume opportunity for Samsung's low cost PCs such as Asus eeePC.

However, we believe volume will also ramp with the mainstream notebook PC as NAND flash prices continue to fall rapidly and more advanced SSD controllers designed for MLC become available in the second half '08.

Our card controller business performed strongly in 2007.

Our shipments increased 82% to almost 250m units.

The total market for cards, we estimate, increased about 50% to approximately 660m cards, implying that 37% of all cards in the market use our controllers, which is up from 31% in 2006.

We believe that we continue to earn our leadership position in the market, because of our competitiveness and reliability of our technology.

Our established product track record, with the broadest set of customers in the industry, and our extensive capability compared with our competitors for supporting storage device customers and NAND flash partners.

We believe we continue to provide a solution that our customers want, such as more advanced world-leveling technology and high pin count ECC.

We believe our card controller growth, which is rising faster than the overall market growth, and related market share gain, is a testament to our traction with customers and the overall competitiveness.

Moving on, I would like to take a few minutes to discuss the competitive landscape.

I had previously mentioned that our storage revenue increased 50% in 2007.

This is significantly more than the storage controller business of many of our competitors, such as Phison and Skymedi.

Not only are we bigger.

We estimate that our card controller revenue was five to six times Phison and Skymedi last year.

We are also growing a lot faster.

Our storage revenue grew 50% versus 15% for Skymedi and 17% for Phison.

In fact, neither Skymedi nor Phison exceeded their 4Q '06 revenue in any of the four quarters of '07.

Our 4Q '07 storage revenue was 17% higher than in 4Q '06.

We therefore believe our superior performance is the reason why we increased our card controller market share from 31% in '06 to 37% in '07.

Additionally, we believe our storage shipment momentum continues to be strong relative to our competitors going into '08.

Our card controllers to Samsung, for example, will probably increase at least 35% sequentially in our seasonally weak first quarter.

We will, however, encourage our audience to focus attention on longer-term relative market share positions.

There is a lot of noise for monthly and even quarterly data due to timing of sales, product transitions and other issues, which limits the relevance of short-term data such as monthly sales figures.

Internally, we plan, manage and measure our business based on longer-term perspectives.

Let me also mention again that we are not just a storage controller company.

Our revenue for our overall business, which also includes communication and multimedia solutions, increased 48% in 4Q '07 compared to last year.

Now, turning to mobile communications, as you know, FCI became a part of Silicon Motion with the completion of our acquisition in the end of April last year.

We are very pleased with the performance so far.

The business delivered $24m in revenue beginning May 1.

For the full year communications generated revenue of $31m, roughly double that of the previous year.

In the second half '07, our revenue from mobile TV accounted for about 7% of our total revenue, a much more larger revenue exposure to the mobile TV silicon market than any other publicly listed company that we are aware of.

Our mobile TV tuners are very well positioned in the Korean market, where we have been fast (inaudible) market share, and count Samsung LG as well as smaller handset OEMs as customers.

Mobile TV was launched in Korea in 2005, and the Korean government believes the country had 7m users of mobile TV last year and predicts that by the end of this year there may be 40m users or over a quarter of the population.

Korea T-DMB standard is also available on a limited basis in Germany and France.

Several local operators in China, including MCCTV in Beijing, are currently operating T-DMB services in preparation for the Olympics.

We started shipping T-DMB tuners in very limited quantities to a few handset OEMs in China last year, and are excited about the potential opportunity in this large handset market.

Our product's also able to support China homegrown mobile TV standard, CMMB.

According to In-Stat, the communication research company, they believe there will be 23m mobile TV broadcast viewers by 2011 in China.

We also have our own silicon solution for DVB-H, the other major global mobile TV standard, and this is currently being tested by potential customers.

We are also targeting the digital audio market.

We have already begun sampling our DAB chipset with customers.

Our DAB chipset is the first joint project involving our communications business and multimedia business.

This chipset combines the audio technology of our MPC program and our FCN mobile TV tuner technology, and is an example of synergy from our FCI acquisition and example of our ability to integrate FCI and jointly develop.

As we have stated before, we are very excited about our communications business and believe we have some of the best mobile TV tuner solutions in the market right now, and technologies that meet or exceed global best in class.

In order to strengthen our technological capability in this area, we completed a smaller mobile TV related IC acquisition in Korea at the end of November '07.

The cost of this acquisition was less than $5m.

We believe that this acquisition will bolster our ability to bring new integrated mobile TV silicon solutions to the market faster.

Let me now hand over to Riyadh to talk about our financial performance.

Riyadh?

Thank you, Wallace.

I will outline our financial results for the fourth quarter, as well as for 2007, and then I will provide our first quarter 2008 and full year 2008 guidance.

We delivered a solid fourth quarter, with storage and communications both delivering strong results.

Our fourth quarter revenue of $53.4m exceeded our guidance of $50m to $52m.

Our full year earnings per ADS of $1.64 came in squarely within our $1.60 to $1.70 guidance range.

Let me first start with our revenue performance.

Our fourth quarter revenue of $53.4m represent a new quarterly record for us.

Our revenue grew 16% quarter over quarter, with storage growing 15% and communications 46%.

A strong 26% quarter-over-quarter shipment growth contributed to the storage revenue growth.

Communications revenue benefited from both shipment growth, as well as an increase in blended ASPs from increasing sales of higher ASP EDC RF ICs.

Our full year revenue of $180m exceeded expectations and was 70% higher than in 2006.

Our FDI acquisition contributed about $31m.

Without the acquisition, our revenue would have been $149m and would still represent a respectable 41% growth over 2006.

Turning to ASPs, in particular the ASP trend of our storage business, as we previously noted, the rate of ASP erosion has been decelerating over the last three years.

In 2005 our ASPs declined 48%; in 2006 ASPs declined 35%.

Last year ASPs declined 19%, which is in line with what we have been saying.

The decelerating rate of ASP erosion for storage is a result of increasing barriers to entry.

We believe economies of scale are increasingly important in the flash controller business because of three key reasons.

One, increasing R&D is needed to keep up with NAND flash technology advancements.

Two, more significant engineering support is required for our NAND flash partners, with increasing frequent product introduction.

And three, there is an increasing proliferation of electronic devices that use flash cards, for which compatibility still needs to be ensured.

Now, over to margins, first gross margin.

For 10 consecutive quarters, we have delivered a gross margin of more than 52%.

Our gross margin in fourth quarter was 53%, which was unchanged compared to the previous quarter.

Full year 2007 gross margin was also 53%.

GAAP and non-GAAP gross margins are largely the same.

Non-GAAP operating margin was 32% in the fourth quarter and also 32% for the full quarter (sic).

GAAP operating margin was 24% in the fourth quarter and 23% for the full year.

Our press release contains reconciliations of our non-GAAP measures to the comparable GAAP measures.

Our fourth quarter gross and operating margins were in line with our previous guidance.

Our fourth quarter non-GAAP earnings per ADS were $0.47, which was 24% better than the $0.38 in the same quarter last year.

Full year earnings per ADS were $1.64, which was 58% higher than in 2006.

Our fourth quarter GAAP earnings per ADS were $0.35, which was 6% better than the $0.33 in the same quarter last year.

Full year earnings per ADS were $1.21, a 30% rise over 2006.

Let me also share some highlights from our balance sheet.

At the end of December we had cash and cash equivalents plus short-term investments of $104m.

We continue to have zero debt.

Accounts receivable days were at 47 days, down from 64 days a year ago.

Inventory days were at 61 days, down from 72 days a year ago.

I will now turn to our business outlook, first our outlook for the first quarter.

We expect overall first quarter revenue to decrease 14% to 18% sequentially to $44m to $46m, because of seasonal factors.

However, this should still represent a rise of 22% to 27% compared to the first quarter of 2007.

Our first quarter card revenue should be less impacted by seasonality and is expected to decrease 8% to 10% sequentially to $34m to $35m.

We are cautiously optimistic about the full year.

Our business model is therefore as follows.

We expect full year corporate revenue of $225m to $235m, a 25% to 31% increase and in line with our long-term annual growth rate target of 25% to 35%.

We expect full year gross margin to remain in the 52% to 53% range.

Our 52% to 53% gross margin expectation includes expectation that storage ASPs will decline by about 20% this year, similar to 2007.

Operating expense, excluding stock-based compensation, amortization of intangibles and other one-time items, should increase 10% to 15% from 2007 because of incremental headcount costs and infrastructure spend required to support our growth, as well as the need to account for full year FCI SG&A.

Our target effective tax rate is expected to remain at 10%.

We expect full year non-GAAP earnings per ADS of $1.95 to $2.05 and GAAP earnings per ADS of $1.55 to $1.65.

The difference in GAAP and non-GAAP earnings includes $8m to $9m of stock-based compensation, $5m to $6m of intangible amortization and $1m to $2m of litigation expenses.

Total ADS outstanding on a fully diluted basis should be about 35m to 36m shares -- ADS, I am sorry, under GAAP and 36m to 37m under non-GAAP.

And that concludes our prepared remarks for today.

Now, I would like to turn the call over to the operator and we will begin the Q&A.

(OPERATOR INSTRUCTIONS).

And your first question comes from the line of Quinn Bolton of Needham and Company.

Please proceed.

Hi, guys.

A nice job on the results.

I wanted to ask, you mentioned the Samsung business in the first quarter, where your expectation is for unit growth of at least 35%.

Can you first give us sort of a sense where that was in Q4?

Did the Samsung controller shipments increase in Q4?

I know that's been a big point of controversy.

And then, second, can you just talk about what is driving that growth?

Are there new programs at Samsung that ramp to give you that much better than seasonal pattern in Q1 with that customer?

Hi, Quinn.

This is Riyadh.

Our business with Samsung continues to improve quite well.

In fact, in the fourth quarter our business with Samsung increased as a percentage of our total revenue.

Our business with Samsung increased.

Additionally, when you look at our revenue with Samsung, this is both including and excluding FCI, they both grew about 35% to 40% quarter over quarter.

So we do have that momentum behind our backs that we do expect that we will be able to continue going into this year.

And is that, just again looking at that growth that you broke out for the first quarter, is that based on strength in the retail channel, is that based on new bundled programs with mobile phone vendors?

Can you just, again, give some color as to --?

We believe both bundled and retail business.

Okay.

Okay, great.

The second question, just you mentioned an expectation for the year of about a 20% price decline.

How do you think that factors in over the course of the year?

Do you expect bigger price cuts in the first half and then more stable pricing in the second half?

What we believe is that it will be more stable in the second half '08 due to the better product mix (inaudible).

Okay, great.

And then just a question on the litigation.

You mentioned $1m to $2m of litigation expenses in 2008.

Wondering if there's any updates you can provide on the SanDisk litigation.

Well, Quinn, there is not a heck of a lot of an update that we can provide right now.

As we've previously noted, it's our policy to respect the IP of other companies.

We do not believe that we have infringed on SanDisk's IP and we will certainly vigorously defend ourselves against these allegations.

We have engaged experienced ITC litigation counsel and the legal process has obviously began, and this process will probably last about 15 months.

Okay, great.

And then the last question from me, just can you give a little bit of color on expectations for the MP3 and the graphics display controller businesses heading into either Q1 or all of 2008?

I think for MP3 business this year we are changing our strategy.

We will slow down the low-margin product lines and reposition with better margins.

We believe we will continue growth, starting from the second quarter of '08.

For graphics business, we believe this year we are going to grow 20% compared to '07 revenue.

Great, thank you.

And your next question comes from the line of Vijay Rakesh of Oppenheimer.

Please proceed.

Hi, guys.

Just looking at the flash card market, it's still about 70% of your revenues.

People have been talking about that weakening, especially SanDisk, those guys saying weakening since November.

And it looks like everybody is now ramping 35% up Q-on-Q into Samsung.

Do you see -- is there inventory building somewhere in the channel?

Do you see a pick-up here and then it starts going down in June, collapsing in the June quarter, because it looks like things start to slow down in number here?

Well, we cannot read about the retail, but we feel the momentum is pretty strong, especially coming into January '08.

Okay.

So what -- SanDisk said handsets and retail was slow since November.

So you are saying you are not seeing that, you seem to be picking up double digit into Q1?

I think we -- our business model is quite different from SanDisk.

We are uniplay.

SanDisk [is probably density].

As we know, starting from '08 the lower-density flash memory card will become more popular, because it's cheaper than higher density.

So with bundle -- so even in the retail, the sweet spot will be lower density, such as 2GB or 1GB.

That's why we believe we probably can take advantage of the market trend, especially in the downturn of economics.

Yes, okay.

Just looking at the FCI side of the business, it looks like you did about $11m plus, $11.7m on the FCI business.

Can you break it down into mobile TV, road toll and the transceivers?

Vijay, our -- this is Riyadh.

Our business, our mobile TV business is obviously ramping quite strongly, but we are also seeing very strong growth from our EPCS business in the fourth quarter.

There are multiple cylinders within our communication engine that is powering away quite nicely, and we do expect good things out of this business in 2008.

Absolutely.

I am just wondering how much mobile TV was in revenues for you in Q3 '07 and Q4 '07, as part of your FCI.

Yes.

In the second half of the year, mobile TV was roughly about a third of our total segment revenue.

Okay.

And how do you see that in Q1, just the total FCI business in Q1, how is it and where is mobile TV as part of it in Q1?

Mobile TV for the full year 2008, probably up to -- between 50% to two-thirds.

Okay.

But yet you -- is it kind of flat or is it down or you don't know yet?

The business has seasonality, of course, and so we are not planning just for the first quarter.

Our business is all about driving it both into 2008 and beyond.

And so there is a lot of work that we are doing.

There is a lot of pieces that we are putting in place.

We have a great team.

We have great technology.

As Wallace has mentioned during the call, we have best in class technology.

And so we feel that we are very well positioned, and as the year progresses we will be expecting better and better things out of FCI.

Got it.

And on the OpEx side, how should we see it for the rest -- I mean 1Q '08, how is OpEx, where should it be?

OpEx for the full year, as I'd previously mentioned, will increase about 10% to 15% compared to '07.

And here for first quarter, any guidance, no?

We do not provide guidance for that.

Okay, great.

Thanks a lot.

Your next question comes from the line of David Duley of Merriman.

Please proceed.

Yes, congratulations on some nice results.

I was wondering, is it typical for your unit volume shipments to be up so much with Samsung in the first quarter, or is there something else going on here where you won some incremental share there?

And along the same lines, the level of revenue that you did in the first -- fourth quarter and what you're guiding Samsung to be or the kind of growth to be in the first quarter, would this suggest that you are gaining share at that customer?

Well, I think we won't see the typical [beginnings] the business with Samsung in the first quarter.

So we believe we are gaining momentum with Samsung with multiple businesses going through the whole year for '08.

It's not just Samsung.

We believe we've developed multiple businesses with all major NAND flash partners, including Hynix, ST Micro, Intel and Micron.

So I think we believe many of the flash vendors are going to participate for card business in '08.

Were there any 10% customers in the fourth quarter or -- and/or in 2008?

And if so, how big was that?

Hi, Dave.

This is Riyadh.

Samsung was our largest customer in 2007.

For the full year, they accounted for a little over 10% of our total revenue.

They're the only 10% or above customer.

Okay.

And in your guidance statements on revenue, I guess the midpoint's $230m or so, how should we think about both the (technical difficulty) FCI revenue growth of the core controller business?

Yes, it's -- the incremental revenue versus 2007, it's roughly about a third coming from communications and two-thirds coming from storage business.

As Wallace had mentioned earlier in the call, we have -- we now have two strong engines of growth.

Communications is still -- is growing nicely and storage is also growing quite solidly.

We believe communications business from FCI in '08 is about 20% to 25% of our revenue.

Okay.

And a final thing from me, in your prepared remarks, Wallace, I think you mentioned some data about Phison and Skymedi and their amount of growth.

I couldn't -- I didn't get the details.

Could you just repeat that again?

I said our storage revenue grew 50% versus 15% with Skymedi and 17% for Phison in '07.

15% for Skymedi and 17% for Phison.

So you grew three (multiple speakers) times faster than these guys did?

For revenue, yes.

Yes, okay.

Thank you.

And let me just add - that's just Phison's IC revenue, not their total corporate revenue.

Okay.

Your next question comes from the line of Daniel Amir of Lazard.

Please proceed.

Thanks a lot.

Congratulations on a good quarter.

A couple of questions here.

Can you expand a bit on the solid state drive opportunity?

It seems like you've done well, shipping 1m here for Q4.

You're largely designing to one specific product right now that's been obviously very successful.

Can you just expand a bit what's the opportunity we should see in '08 for you guys there and what's your competitive advantage in that market?

Our 1m unit shipment milestone is for whole year of '07, not just Q4.

So we believe we'll continue gain market share, expand our solid state controller business through low-cost PCs, so such as Asus eeePC, or UMPC below $500 PCs.

We believe in the second half of this year we're going to benefit, because we're going to have delivered MLC-based controllers for solid state drives.

In the second half this year, some of the major leading PC makers, they're launching the mainstream solid state drive with MLC-based devices.

So should we see that doubling, tripling in '08?

If you did 1m units in '07, what's the range that we should potentially look at '08, solid state drive unit business?

We should be able to grow 100% in amount.

Okay.

Now, a bit on some of the other growth drivers.

Can you expand on some of the other things that you want people to focus, I guess outside of FCI and SSD?

Is the PC camera business going to be something that's going to grow this year?

Is the graphics server business going to be something that you want people to focus on?

What are the other areas that you feel that have potential growth this year, as well?

So PC cameras this year probably will be around 2% of total revenue.

Our embedded graphics business will continue to grow from '07 to '08, as I mentioned.

We predict they're going to grow 20% from '07 to '08.

We also repositioned MP3 product line, in order to gain higher gross margin.

We re-transitioned some customers to new design.

We believe we'll start to re-launch in the second quarter of '08.

We also believe our embedded flash memory controller solution will continue to grow in '08 through the mobile handset, as well as consumer devices.

Okay.

Now, finally, what's your product roadmap in terms of manufacturing on the lithography side?

All your products are at 0.13 or 0.18.

What's the roadmap, I guess, for your different products there?

Most of the flash memory controllers are staying in 0.16 microns.

We might have some USB flash drive controllers migrate to 0.13 microns.

MP3 product line today same 0.16 microns and we're transitioning to 0.11 microns.

FCI product lines today (inaudible) by CMOS are 0.18 CMOS.

We are transitioning to 90-nanometer in this year.

And -- excellent.

So should that -- should we expect a positive up-tick in margins there on the FCI business for the year?

We believe 52% is our target.

Okay.

And is the FCI below or above corporate gross margins?

Probably in line.

In line, okay.

All right, thanks a lot.

Congratulations on the good guidance.

Your next question comes from the line of Bob Gujavarty of Deutsche Bank.

Please proceed.

Hey, thanks, guys, and a good quarter.

Hey, could you expand a little bit?

You mentioned you'd made a small acquisition in November.

How many heads is that and can you just recap a little bit what it's about?

Hi, Bob.

This is Riyadh.

It's a small acquisition.

It came with about 20 -- a team of 20, mostly engineers.

Due to competitive reasons right now, we're reluctant to disclose a lot more about this little exciting gem of acquisition that we've just done.

But it will certainly help us provide more integrated solution ability and also improve our ability to take our products -- new products to market at a faster pace.

Okay, fair enough.

The other question is, in terms of just what's driving mobile card demand these days, is it still -- is it phones that is really driving the demand or is it -- do you think it's relatively broad based that you're still getting good demand drivers from digital still cameras and other markets?

Or could you characterize what you think is really still the unit demand driver there?

We believe mobile handset's the major driver for the demand of micro-SD cards in the market today.

Digital cameras, they demand higher density flash memory cards.

Got it.

And is that -- and could you characterize it, is it mostly bundling or is it retail or is it half and half?

Well, we cannot see through right now but we believe certainly both lower density phones or retail cards are strong right now.

Okay.

And then, if you could characterize what you think the supply/demand environment in flash is, that you feel pretty comfortable that it's supportive of your business model?

I think in '08 we believe supply will be bigger than demand.

However, our business model is very unique.

We are uniplay, not density play.

Through this economic downturn, we believe lower density flash memory price decline will be smaller than higher density NAND flash.

So we're going to benefit for unit shipments for lower density flash memory cards.

Great, great.

Thanks, guys.

Your next question comes from the line of Andy Schopick of Nutmeg Securities.

Please proceed.

Yes, thank you.

I'd like to follow up on some discussion here on the gross margins, and how you've been able to achieve such a steady performance in the face of the declining ASPs and your comment that communications is basically in line with storage gross margins.

If you could just take a few minutes to just comment on the steps that you have been able to take and the reason for your optimism about being able to maintain these gross margins in this 52%, 53% range?

We do a lot of things.

On the product side, we actually manage our product mix within each of our businesses.

For example, in communications we have products that are higher margin and products that are lower margin.

Same with storage, our products have higher margin and lower margin and it's also the same in the multimedia space.

So we can shift the amount of products that we can sell, as well as sell more products that have lower margins when we have better sales, better revenue coming from the higher margin products.

So that's one thing we do.

The other things that we do include we do actively try to design our silicon smartly, so that we get more dies out of a wafer.

We also do geometry shrink, like everyone else in the semiconductor space.

So through various means, we've been able to maintain our gross margin at this level.

And you're confident that in the years ahead there's really no major changes that would be of a concern?

That's correct.

And any comment on currency?

Was there any real currency effect on the Company's performance?

No.

Effectively, we price our products in dollar terms.

So at the time of each transaction, in order to have a natural hedge, some of our products are then sold in NT dollars.

So pricing is all in dollar terms.

We have our costs.

Most of our -- a lot of our engineers are in Taiwan, so there's the Taiwan dollar exposure, but we have a natural hedge through the choice of currency at the time of the transaction.

Thank you.

And your next question comes from the line of Gary Nackenson of Monness, Crespi and Hardt.

Please proceed.

Hey, guys.

Congratulations on a great quarter and guidance.

So I think you guys -- I've heard you guys are kind of frustrated with the valuation of the stock here at eight or nine times 2008 numbers, growing 25%, 30%, and I'm wondering if you guys are considering using your cash to do a buyback.

Well, Gary, we do continuously explore various options in order to help improve our shareholder value.

That of course includes share buybacks and other strategic decisions.

And any moves that we'll make, we'll announce in due course.

Okay.

Could you drill down a little bit on where you see the growth in FCI coming from, the biggest growth drivers for 2008?

The big driver will be -- there's a couple of drivers within their business.

We have mobile TV, as Wallace had spoken about earlier in the call.

Right.

That is growing quite strongly.

You have great growth in Korea.

We're also targeting China, as well as other markets.

We also have DAB, which we are now sampling, and then we have the ETC business that ramped quite nicely in the fourth quarter of last year.

EPC, you're referring to solid state drives when you say EPC?

No.

ETC, ETC RF IC, that's the toll-way RF IC.

Oh, toll-way, right, right, okay, okay.

And just is -- do you think Korea is getting close at all to being saturated?

And where do you think the other markets will provide the most growth in 2008?

Will China be the biggest or if you could go into that?

China has the biggest opportunities but we believe Europe in second half '08/'09, DVB-H also will start to grow.

And as far as Korea, when do they reach saturation in Korea?

Korea, I believe last year the shipment was 6m to 7m units of mobile TV tuners.

This year probably it will grow to around 13m to 14m units.

In Japan it's last year about 25m units, this year probably will grow to 35m units.

Let me also add, in terms of saturation, even when we reach the end of this year, it will probably only represent about 25% of the entire population in Korea with access to mobile TV.

And so when these features are a standard feature on mobile phones, the penetration really could, in theory, be a lot higher.

Okay.

Thanks, guys.

I appreciate it.

Your next question comes from the line of Kevin Vassily of Pacific Crest Securities.

Please proceed.

Yes, thanks for taking my question.

A question back on Samsung.

Last year there was a -- late in the year there was a lot of discussion regarding Samsung getting into the branded card business.

It seems, at least near term, that they haven't really made much of a move there.

I was just curious what you guys think might be going on with them on that front, whether or not it's good, bad or neutral for your business, and just maybe a comment there.

Well, we cannot comment Samsung's strategy or plan.

We don't know either.

I think from time to time [there's a new strategy] how to move their card business to grow their market share.

Have you seen a branded Samsung card anywhere in the marketplace at this point?

No, we do not see.

Great.

Okay.

Then one additional question on solid state drives.

You were talking about having -- or in the process of developing an MLC controller for that business.

Can you talk a little bit about, if anything, what is different between the controllers that you have on an MLC-based flash card and what you would find on a solid state drive, and if there's some barrier you have to get over to develop that?

I think the challenge with today's solid state drive is two factors.

One is the cost, second is endurance.

The only way to meet the cost structure is to use MLC.

However, endurance is not comparison with the SLC.

So the controllers still have to find a way to improve the endurance and to allow the solid state drive use the MLC, equivalent to SLC quality.

Is that functionality that you provide that's above and beyond what you would provide in a flash card implementation?

(Multiple speakers).

I guess I'm trying to figure out how much more difficult it is for you to go from doing an MLC flash card controller to an MLC SSD controller, and if it is difficult, what kind of market lead you guys might have over anybody else trying to do something in the merchant market.

I believe we will be one of the players to participate in MLC-based solid state drive, but I think the technology challenge is a lot.

I mentioned just one of them.

There are many, many, host of related issues.

There's the endurance issue, the power issue, noise issue, noise integrity issue, power cycling issue.

So I think the controller maker needs to put much more effort to develop MLC-based solid state drive than standard flash memory card controller.

Okay.

Okay.

Thanks, guys.

(OPERATOR INSTRUCTIONS).

And your next question comes from the line of Vijay Rakesh of Oppenheimer.

Please proceed.

Yes, guys, just getting back on again.

Can you give me a little bit of color on where the inventory levels are on the controller side?

Vijay, in terms of our inventory, our inventory at the end of last year had come down significantly compared to the inventory that we had the previous year.

We had very solid sales in the fourth quarter, so that allowed us to absorb -- allowed the market to absorb a lot of the inventory that we had built in anticipation of the strong quarter.

So inventory levels for us are at -- where we wanted to be.

Yes, I was talking more about the channel.

Where do you see it your customers in the channel, where do you see the inventory levels?

Sorry, we don't have that information.

Okay.

And one more, what's the linearity you see here in the March quarter on flash controller shipments?

In terms of shipments, we are in a seasonally weak part of the year, but for our card business, as we previously mentioned, the seasonal down will be a lot less than for our business as a whole, significantly less.

Let me add that January/March was strong.

February, because of Chinese New Year, we lost two weeks in China, one week in Taiwan, so that's because of seasonality.

Got it.

And one last question on the ASP for the mobile TV.

What's your dollar content into the phone and what's the ASP --?

Depends on different standards.

For S-DMB, around $3.50, for T-DMB around $2.50 to $3 range.

Got it.

So, fair to assume that, if the market in Korea is about 14m units and a 30% market share, that gives about you about 4.5m units on about $3.

About 15m, 20m is the revenue opportunity in Korea?

I think the price also will decline in '08.

Got it, okay, okay.

Thank you.

And you have a follow-up question from the line of Andy Schopick of Nutmeg Securities.

Please proceed.

Thank you.

If it's available, I'd like to ask you what the cash flow from operations was in '07.

I believe it was just above $92m in '06.

Do you have that number?

Well, I don't remember exactly what our number is, but we do generate a fair amount of cash.

Our cash levels are up, over $100m right now.

We did use up about $50m for our FCI acquisition and so last year -- at the end of last year our cash balance was also above $100m.

Yes, but I see that it did fall from '05 to '06 for some of the reasons you stated but I just wondered if you could give any kind of color to what it was in '07.

Yes, we -- I don't have that number in front of me.

Perhaps we can talk about this offline.

Okay, thank you.

Your next question comes from the line of Betsy Van Hees of Cowen and Company.

Please proceed.

Thank you very much, and congratulations on a fantastic quarter and even better guidance.

I just wanted to circle around with you on the competitive landscape.

You talked about emerging companies and the difficulties with technology.

Can you give us a little bit of your thoughts on how that would translate to existing NAND suppliers, taking the controller and technology in-house and moving forward?

I think today, in the first half of '08, all flash makers were moving to 50-nanometer geometry.

Second half '08, all flash makers will move to 40 or 30 nanometer.

So increasing demand of high pin count ECC also advanced level in technology to include endurance.

So controller maker has to have the know-how and to continue to overcome the noise integrity issue and maintain high performance.

So that's the main challenge for controller makers.

And you think that, for example, companies like Micron or Intel or Hynix are going to continue to work really closely with partners like yourselves versus trying to take this technology in-house?

I believe so.

I believe most of the flash makers that find all different type solutions to ship their wafers and the NAND component.

Okay, great.

And then, on the mobile communications, that's been a fantastic acquisition for you.

Could you give us a little idea of how we should be modeling ASP declines year over year for that business?

There are various moving parts in that, and so it can be quite difficult to model.

The three big pieces in FCI, we have the mobile TV tuner business, we have the toll-way RF IC and then we also have our CDMA RF IC.

All three of these pieces have different ASPs and the range is quite significant.

As Wallace mentioned, he talked about the ASPs for mobile TV.

That's quite different from the toll-way, which is in excess of $10.

And then on the transceiver side, that's around $1.

So when these three pieces -- the product mix starts shifting, it does impact your blended ASP quite significantly.

But for each of the individual pieces, we expect to fall annually what you would expect for most digital semiconductor products, around 15%, 20% a year.

Okay, great.

Thanks very much for taking my questions and, once again, congratulations.

Thanks.

Your next question comes from the line of Gary Nackenson of Monness, Crespi and Hardt.

Please proceed.

Yes, it's Gary Nackenson.

So, could you guys talk a little bit about what trends you're seeing seasonally right now, especially in the handset market but also in any of the other end markets you played?

We're all still worried about the consumer slowing his spending and so forth.

Sorry, we cannot give you the right answer.

But we believe start from April/May there will be new model handsets coming.

So they're going to drive the growth for the bundle business of the micro-SD card.

And how about (multiple speakers)?

Currently, we believe China also will be another major driver, because what we see 85% to 90% new mobile handsets have a flash memory card slot.

They require micro-SD cards.

In China you're saying 85%?

In China market.

Okay, that's an interesting number, great number.

But how about just trend of demand right now, as you're seeing things in January?

Coming to January, surprisingly, we see strong demand for the flash memory card controller.

We see most of our customers it seems a -- not only strong demand, a demand urgently to ship out their product.

It seems their inventory level was quite good in their own warehouse, so -- but we don't know the detailed information from the channel yet.

I think we're going to check the channel after Chinese New Year to see how's the movement.

So far, we believe that most of the demand, as I said, the sweet spot is in lower density, 2GB and 1GB.

That's why Silicon Motion take advantage of uniplay.

Where do you think we are in terms of inventories of handsets in China?

There's been some chatter about that.

Just overall, not just so much for you guys, although if you could only address it in terms of you guys that's fine, but just an overall industry condition level.

Gary, it's quite difficult for us to comment on that, because we're not involved in the manufacture of handsets.

But so far, for our cards, they're selling very well.

Our controller is still selling very well.

The cards using our controllers are selling very well.

So from our perspective, the overall market still looks quite exciting.

Is your participation right now in China fairly minimal as a percentage of your handset-related revenue?

Our controller shipping to China is for retail bundle.

Most of the China gray market for the mobile handset, they do not bundle flash memory card.

Got you, okay.

Thanks a lot.

And you have a follow-up question from the line of Andy Schopick of Nutmeg Securities.

Please proceed.

Thank you.

For the record, I do need to correct a misstatement.

I'm embarrassed to say I had the wrong annual report in my hand when I looked at that cash flow statement.

And I do recognize the mistake and it does appear that your cash flow from operations in U.S.

dollars in '06 was about $18.3m, but I realize that you're unable to give me any further guidance at this time on the cash flow for '07.

Thank you.

As there are no further questions at this time, I'd like to turn the call back over to management for closing remarks.

Okay, thank you.

As you all know, sharp NAND flash price decline triggered many new applications.

We have limited resources and we might not be able to capture all this new opportunity at the same time.

We sincerely hope investors and our shareholders could use our management guidance to measure our performance and long-term growth.

We believe we will continue to gain market share in the storage and communications businesses in '08 and beyond.

Again, thank you for joining us and we wish everyone have a great day and great weekend.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.