慧榮科技 (SIMO) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2008 Silicon Motion Technology Corporation earnings conference call. At this time, all participants are in listen-only mode. We will conduct a question and answer session toward 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 their forward-looking statement. 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.

Although such statements are based on our own information and information from other sources we believe to be reliable, you should not place any 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 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 will now turn the presentation over to Mr. Riyadh Lai. Please proceed.

Thank you, Frances. Good morning, everyone. I'm Riyadh Lai, CFO of Silicon Motion. Thank you for joining us for our first quarter 2008 conference call and webcast. With me here is Wallace Kou, who is our President and CEO. 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 first quarter financial results and outlook. We'll then conclude with Q&A.

Before we get started, I'd 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 from 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 close of market yesterday. This webcast will be available for replay on our website, siliconmotion.com, for a limited time.

To enhance investors' understanding of our ongoing economic performance, we will discuss non-GAAP information during this call. We use non-GAAP reporting internally to evaluate and manage our operations. We have therefore chosen to provide this information to you to enable you to perform comparisons of our operating result in a manner similar to how we analyze our own operating result. The full reconciliation of the GAAP to non-GAAP financial data can be found in our earnings release issued yesterday. We ask you to review it in conjunction with this call.

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

Thank you, Riyadh. Good morning. Thank you joining our accounting call today. As you probably saw in our earning release issued yesterday, the first quarter was a tremendous period for us. Our net sales came in well above expectations and we set a new first quarter record for both net sales and non-GAAP EPS. Sales of our mobile storage products, in particular, were fantastic. Abundant availability of NAND flash created a buoyant market environment for storage controllers and is an important factor why our result for the quarter exceeded our initial expectations.

Our overall IC unit shipment increased 73% year over year and 17% sequentially to approximately 113m units, which was a record high. This [trend] in shipments was led by storage controllers, principally flash memory card controllers, but also USB flash drive controllers and solid [state] drive controllers. Strong shipment growth enabled our first quarter net sales to increase 35% year over year to $52.2m. Incremental sales from mobile communications also provided a boost.

Rapidly falling NAND flash prices was an important reason for the strength of our first quarter. NAND flash price fell 30% to 40% in the fourth quarter of '07 and continued decline another 15% to 20% in the first quarter of '08. Retail prices for flash memory cards also fell rapidly as the benefit to cheaper NAND component costs were passed on to consumers and consumers benefit from improved affordability. We believe these are important reasons why our card controller unit shipments increased 60% year over year and 24% sequentially and why our USB flash drive controller unit shipments increased 111% year over year and 8% sequentially.

As a result of these favorable conditions, our mobile storage sales in the first quarter were unseasonably strong. Customers, both traditional card makers as well as NAND flash vendors, took advantage of rapidly falling prices to manufacture cards. Our sales of the controllers for cards bundled with handsets of global OEM and Chinese handset makers was especially strong. We believe flash memory cards are increasingly becoming the media of choice for consumers when it comes to disposable data storage, as affordability continues to improve and OEMs increase their adoption of card solutions for their storage requirements.

Our SSD controller business also had another great quarter. We shipped almost 1m SSD controllers in the first quarter of '08. Looking back, it took us the entire year of 2007 to ship 1m units. So our performance in the first quarter really does show not only the traction that we have with important global OEM customers and the rapid growth that we are experiencing, but also the ability to [invent] and successfully deliver mission-critical solutions for innovation products.

Last year Q4, ASUSTeK, launching their Eee PC, the world's first mass production high-volume notebook PC using only a solid state disk. We were ASUSTeK's first source for controllers for their SSDs and continue to be the leading supplier of controllers for ASUS Eee PC product family. There are now other low-cost ultra-mobile PCs and our solid state drive controller sales momentum and relationship with OEMs remaining strong. Our SSD controllers are now also used in HP's recently-launched small but powerful Mini-Note PC and will be used in Dell's soon to be launched ultra-mobile PC.

We are excited about the market potential for low-cost ultra-mobile PC. The success of the Eee PC defines a completely new market segment of notebook PC, which therefore established a new market for SSD controllers. This segment of notebook PC are Internet centric and are also designed with small internal storage capacity, using mostly low-density SSDs.

The low cost of these computers has made them not just popular in emerging markets, where consumers have much less disposable income, but also developed markets, where there are large group of consumers who are buying less expensive second or third PCs for their homes, are focused on mobility or primarily use their PC for surfing the web or for emails.

Based on the strength of the current consumer interest, we believe the market segment will grow very rapidly over the next few years. Intel forecasts the notebook segment to grow 10 times from 2008 to 2011 for the low-cost notebook PC. By 2011, Intel expects a market volume for almost 15m units.

As design for SSD improves and NLT flash [becomes] more widely [adopted] for SSD solutions, we believe solid state drive will also be increasingly found in more mainstream notebook PCs. We expect to launch our controller for NLT based solid state drive solutions before the end of this year and believe 2009 could be the first important year for mainstream notebook PCs, as volumes become more material and growth accelerates.

In summary, in the first quarter, our mobile storage product performed exceptionally well. And we believe this product line will continue to do well during the balance of the year, especially as affordability of NAND flash storage device continues to improve. Additionally, we also expect our mobile communication business to pick up in the second quarter as sales of our mobile TV solutions rebound from a seasonally low flow first quarter.

Let me now turn the call over to Riyadh, who will talk about our financial outlook.

Thank you, Wallace. I'll outline our financial results for the first quarter and then I'll provide our second quarter 2008 guidance. Our first quarter revenue of $52.2m exceeded our expectations, primarily because of very strong mobile storage sales. This helped offset a seasonally [and] expected slowdown in mobile communications and multimedia SoCs in the first quarter.

Mobile storage sales did not experience the seasonal weakness that we had originally expected. Mobile storage sales increased 18% year over year and 1% from fourth quarter '07. Mobile storage unit shipments increased 21% quarter over quarter and 68% versus a year ago, primarily because of strong card controller sales, but also because of positive contributions from USB flash drive controllers and SSD controller sales.

Our other two product lines performed as expected. Mobile communication sales decreased 38% sequentially, primarily due to lower but more normalized levels of ETC RFIC sales, as well as moderate seasonality for handset products, such as mobile TV tuners and transceivers. Multimedia SoCs were down 25% sequentially, mainly because of MP3 product transition and slower sales of graphics products.

Now, over to margins. First, gross margins. Our non-GAAP gross margin in the first quarter was temporarily distorted by timing differences between our sales and cost of sales, as a result of the strengthening NT dollar foreign exchange rate. Overall, however, our gross margins remain at very healthy levels and are roughly in line with their historical averages. Our gross margin was 51.2%, which was slightly lower than guidance. If foreign exchange rates had not changed, our gross margin would have been approximately 52.7%, which is right in line with our 52% to 53% guidance.

The reason why we have this temporary foreign exchange issue is because we maintain our financial reports in NT dollar. The majority of our products, however, are priced in U.S. dollar and the majority of our cost of sales, which are mainly foundry and testing costs, are also priced in U.S. dollar. However, this natural hedge is not perfect. There is approximately a two-month lag between the foreign exchange rate for sales and the foreign exchange rate for our cost of sales. We expect this issue to disappear when foreign exchange rates stabilize. We may, in fact, benefit in the future as the NT dollar weakens.

Also important, in our opinion, is that we continue to focus on controlling expenses. Our non-GAAP operating expense of $11.9m in first quarter '08 was slightly less than the $12m in fourth quarter '07. Our non-GAAP operating margin of 28.4% was, however, negatively impacted by the lower gross margin and would have been 30.2% if foreign exchange rates had not changed. Stock-based compensation in GAAP OpEx, on the other hand, was $2.1m (sic - see press release) in first quarter '08, which was slightly lower than the $2.2m (sic - see press release) in fourth quarter '07.

Now, turning to earnings per ADS, our first quarter non-GAAP earnings per ADS was $0.44, which was 19% higher than the $0.37 a year ago. GAAP earnings per ADS was $0.25, which was 26% lower than a year ago, primarily because of acquisition-related charges and non-operating foreign exchange losses.

The difference between our non-GAAP $0.44 and GAAP $0.25 comprises $0.06 of stock-based compensation, $0.05 of acquisition-related charges from amortization of intangibles, $0.08 of non-operating foreign exchange loss from the translation of non NT dollar denominated current assets and current liabilities, as well as certain other balance sheet items, and $0.02 of litigation (inaudible).

On the balance sheet, cash, cash equivalents and short-term investments increased from $111m to $113m in this first quarter. Our cash conversion cycle improved this quarter compared to the previous quarter, due to slightly longer payable terms, which more than offset slightly longer DSOs. Inventory days are similar to the previous quarter at 69 days, which was lower than a year ago because of tighter inventory management discipline on our part.

In the quarter, we had CapEx of about $18.5m, $12m related to earn-out payments to the former shareholders of FCI. We have determined that FCI has substantially met its earn-out, revenue and product margin target and made $12m payment to them in the first quarter. We also spent $4.6m for the purchase of office space in Hsinchu to house our expanding R&D team.

I'll now turn to our business outlook. Our strong first quarter performance was led by our mobile storage products. We believe our second quarter will be led by our mobile communications products, as sales for these products rebound from a seasonally slow first quarter. We have reasonably good visibility for our mobile communications products and expect a pickup in mobile TV and transceiver orders. Momentum from mobile storage could be more muted in the second quarter because of temporarily -- temporary [firmness] in NAND flash pricing, but we expect mobile storage sales to pick up again in the second half of this year as seasonality factors kick in.

We therefore expect overall second quarter revenue to increase slightly on a sequential basis to $52 to $54m. We expect gross margin of 52% to 53% in the second quarter if the NT dollar stabilizes at current levels with respect to the U.S. dollar. We reaffirm our confidence in meeting our 2008 full year revenue of $225m to $235m and EPS of $1.95 to $2.05. We continue to believe that our full year guidance is realistic and appropriate against a backdrop of global macro uncertainties.

We will now open the call for your questions.

Thank you. (OPERATOR INSTRUCTIONS). The first question comes from the line of Dan Morris with Oppenheimer. Please proceed.

Hi guys. Congratulations on the quarter. Thanks for taking my questions. Just first off, looking at your outlook, it seems like -- outlook for flat to up 3%. I know it's off of a large quarter. It seems maybe a little bit conservative compared to the past couple of years. Did you have some order pull-ins in 1Q or is this just how order trends in April have prompted you to be a little bit conservative? I know you mentioned mobile storage maybe taking a pause from these NAND prices.

We don't have an order pull-in for Q1. I think we just give a very fair judgment. We see the -- normally, the second quarter is a flat quarter compared to Q1. So we see (inaudible) a very strong exceptional first quarter for mobile storage. We believe that revenue will be maintained, but we believe -- also believe (inaudible) bottom line (inaudible) in second quarter.

Okay, thanks. And SSD had a pretty good -- really good quarter in 1Q. Seems that -- maybe that the 2m units you've talked about in the past for '08 might be a little bit conservative. Could you talk a little bit more about what we might expect for the rest of the year?

So we believe solid state drive controllers in the low end, especially low-cost PC, ultra-mobile PC, starting to (inaudible) up, especially second half this year. So I think our previous expectation about 2m units, it seems conservative. We think probably the total number might grow another 50% to 100%.

Okay. Could you remind me what the ASPs are on that SSD controller?

We cannot release ASP pricing because it's confidential.

We have decided that, for competitive reasons, it's probably best for us not to talk about specific ASPs for our product lines. Our calls are also being listened to by our competitors.

Okay. But it's safe to say that it's significantly higher for the storage business.

That's correct.

So I guess you'd also see some favorable impact from that mix shift going forward. You talked about 20% full year ASP declines before. Is that still a good number to use?

That is still a good number for the full year.

Great, thank you.

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

Hey guys. I first just wanted to talk about the NAND price pickups and what impact that might be having on your retail card business. I think you'd mentioned that a number of the NAND vendors actually manufactured cards in the first quarter to move inventory. If NAND pricing is picking up, my guess is that that activity may slow down. So just curious what you're seeing on that front, the outlook for the retail card business looking into the second quarter. And is any potential weakness or slowdown in that activity offset by continued strength in the mobile bundled business? And then I've got a couple of follow-ups. Thanks.

I think while we see some NAND flash [-- well, a pick-up] (inaudible) from beginning of April the price went up from $2.50 [up-rise] to $3.20 today. So that increased almost 30% within a month. And so the -- for small player card maker, that might impact a little bit, because they have to think in other way to reduce the total manufacture cost. But it also gives a tremendous opportunity for (inaudible) Micron, Intel to [selling] their excess inventory. So I think -- we also believe the price increase could be temporary. The price probably will maintain stable in May and might slightly decline after May.

Well, it's just in terms of -- if the flash card manufacturers -- I think a number of them had excess inventory of NAND wafers first quarter and I think they were manufacturing cards as a way to clear that NAND inventory. I'm just sort of curious what your outlook is on that business. It seems to be much more of a temporary or seasonal business for many of the wafer manufacturers. And just trying to get an outlook for that business.

I think probably everybody knows the main reason NAND flash price went up due to Samsung. They raised the price. We cannot comment for Samsung, their planned strategy. But I believe the remaining players, probably they all have their manufacture production capacity to sell. Most of our business [for] bundled business with lower density. For 128Mb, 256Mb, 512Mb, the price was not impact a lot. So lower-density price maintained very stable. So we see that business running very well.

Okay. So looking at the second quarter, it sounds like the higher density card business may slow, given the pickup in NAND pricing, but still the mobile bundled business still looks to be pretty strong heading into the second quarter, because you haven't seen a pickup. Okay. Great. And then, just looking at card pricing, can you just talk about what kind of ASP pressures you're seeing here in the first quarter, second quarter? Is it in line with seasonality or any significant changes in pricing on the mobile storage side?

For -- this is a topic that we decided that we will try to shy away from, since we were getting a lot of indications that our competitors are monitoring our conference calls and using it for competitive reasons. But what we can say is that the ASP decline for this year that we expect from our card product is -- it should be fairly consistent what we've been expecting in last two years.

Okay. So nothing out of the ordinary, it sounds like.

Yes.

Okay. And then, lastly, just a question for you, Riyadh. Can you give us a sense -- it looks like your tax rate jumps around a little bit quarter to quarter. For the rest of 2008, maybe looking into 2009, what's a good tax rate to be using for our models?

10% has been the guidance that we've suggested.

Okay. Even though it looks like, for the last number of quarters, you've come in below that, 10% is still a good number?

Yes. From a planning perspective, we used 10% internally.

Okay. Great, thank you.

There's generally some differences quarter to quarter, but, full year, 10% is what we use to model our numbers.

Okay, great. Thanks.

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

Congratulations on a nice quarter. And I apologize if my first question if you've already answered, but I was wondering could you give us the details as to why your revenue came in basically better than, I think, your guidance and where we were all expecting it? What was the key factor there?

The key factor there is we had very strong sales in -- from our mobile storage products. And that really led the way and offset the seasonal weaknesses that we'd expected for our other two product lines.

[But we] also announced in our Q4 earning call [and] Samsung is also one of the important contributor in Q1 revenue.

Yes, that was going to lead me to my next question, Wallace, which is who -- what -- who were the 10% customers in the quarter and what, roughly, were the percentages?

We only have one 10% or larger customer and it's been the same customer that we've had -- that's been 10% or more, and it's Samsung.

And did they achieve I think you had said, what, 30% or 35% sequential growth on the Q4 conference call? Was that the number that you suggested?

30%, yes.

That's correct.

And they [give] you what you expected.

Very much so.

And maybe you could just update us. There still seems to be a little bit of chatter out there about Samsung and its business levels and who the primary controller provider is. Could you give us an update there about what you think your position is and what you think is going to happen going forward?

(Inaudible) we cannot comment Samsung their strategy and their plan, but Samsung will maintain multi-source controllers policy for the entire company. So whoever has a better product line, give better service and attractive pricing, they will use the controller. Here today, we do maintain a very large share of the Samsung [relationship chain] and will continue and deliver good product for Samsung.

So you're still the number one provider, then.

I think, overall, yes.

Final thing from me is just a housekeeping question. I thought you mentioned CapEx being $18.5m and that $12m of that was for an earn-out. How -- why would the earn-out be in the CapEx line?

Well, this is not a CapEx defined that you would normally see in a cash flow statement. But from a perspective of letting our investors know how we're using cash, we've put that in the same line, for -- from a management perspective. This is a use of cash. We use our cash for acquisitions. We use our cash for purchases of fixed assets. And so, we also need to justify the returns from the use of this.

And the $12m is going to -- is part of our acquisition terms for FCI. We -- as part of our acquisition, we agreed to pay them an incremental $12m if they met certain revenue and product margin targets. And we determined that they substantially met both and have paid the $12m to the former FCI shareholders.

It's always good when somebody earns their earn-out. But will that eventually impact the P&L statement or is there no impact on the P&L from paying the earn-out out?

No. No, this is -- as part of the acquisition, a certain part of the acquisition cost went directly to the P&L as amortization of intangibles, IP R&D. So that's all taken care of.

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

Hey guys. Thanks for the [clean print]. So there's been some chatter in the industry and also sell side that there's about to be a product announcement of an MLC SSD from a competitor. I'm wondering where you guys are with MLC SSD and where you think Toshiba and Samsung are.

Well, I think really is [it depends on the definition] of MLC-based solid state drive solution. I would say that, today, there's no real ideal solution in the market for MLC-based solid state drive. Otherwise, you're going to see all the top-tier notebook manufacturers going to adopt MLC-based SSD. So I think there is -- yesterday, I think we heard about some player announced they're going to supply controllers for MLC SSD. You probably will find out I think HP Mini-Note use similar thing, because that's low density. So our controller also supports MLC.

For (inaudible) PC, they [prefer] to see no compromise performance compared with hard drive. So I think to deliver the solution to match hard drive performance, quality, endurance and power cycling, you need a very, very unique technology. We believe we're going to have a solution ready before end of 2008 and we'll move production in 2009.

Would you think that the big guys will also have solutions ready by the end of the year?

I think all the major flash makers and maybe the hard drive control maker, they'll want to participate in the market. Will be many, many players jump to the market. But we will be one of the major players to provide a solution.

If the competitor that we were talking about is talking about doing some kind of hardware tricks to get the MLC working, do you think that that will be non-optimal in terms of performance in some way?

I think we cannot comment other players' various marketing and promotion strategy or terminology. But a (inaudible) controller maker have to create a very unique architecture and specific software to overcome the challenge for MLC.

Okay. Well, I'll take that with you guys offline. Just a quick -- another -- on FCI, is there anything that's happening in the Korean market that created that -- a little bit more than seasonal slowdown that might be reversing itself in the second quarter?

There's nothing specific about Korea. We -- FCI had a very strong fourth quarter last year, driven by very large ETC RFIC sales. So what we're expecting, going from this point on, is more -- is lower but more normalized levels of ETC RFIC sales. So that segment of product had distorted fourth quarter sales, so it resulted in a lower -- sequential step-down in FCI sales. But for the mobile TV products relating to tuners, mobile TV tuners and transceivers, there is just the regular seasonality issues that you would expect for handset-related products for FCI.

Okay. Great, guys. Thanks again.

Your next question comes from the line of Daniel Amir with Lazard Capital. Please proceed.

Thanks a lot and congratulations on a good quarter. A couple of things here. Following up maybe to the previous question on the mobile TV opportunity, can you a bit attempt to quantify how big this opportunity could be this year, in addition to the fact that there is, I guess, continuing news flow out of China about their potential adoption of mobile TV? And I guess you guys have talked about that in the past, whether that's also an opportunity that you see maybe here in the next 12 months.

[Yes, see our] growing for mobile TV is by a new standard, not only answering China market, but also we're going to launch a DVB-H solution. So I think with the new standard, with the current TVMB, S-DMB, we will grow strongly second half this year for mobile TV solution. In China, we are in a very favorable position today. We cannot give details to you, but we are the leading provider in the field trial and we'll move production from June to second half this year.

Okay. And so, in terms -- I guess you've spoken on the FCI business, I guess, in the past. Is the growth rate that you're expecting for '08 similar like your previous expectation?

That's correct.

Okay. And then on the -- back to the solid state drive side, obviously your design wins here are quite impressive, considering what's going on in the market and the competitive environment here. What do you feel is your major competitive edge here that you've been able to land Dell and HP and, of course, ASUSTeK in the past? And how do you expect to maintain that edge?

I think for low-cost notebook controller (inaudible) first have to be cost-effective. Secondly is you have to provide reasonable quality and endurance to pass through their internal tests. Because we have a very, very broad experience in NAND flash area. We're working with all major NAND flash makers, so [qualification], it took about six months to go through production.

We believe we definitely have an edge in our [algorithm of firmware] to NAND (inaudible), especially [well] leveling and power feed protection areas and (inaudible) management. That will make your customers feel comfortable regarding the result, so they can move production smoothly. [Definitely], (inaudible) PC give us also tremendous -- very valuable experience to serve the PC maker, how to work together regarding integrated buy-outs required even with consumer industry. So that gave us the leading-edge experience to moving forward to serve more broader customer base in the PC market.

Okay. And then, on the breakdown mobile cards versus USB, can you break down the revenues in the past quarter?

Dan, we don't provide that sort of breakdown, but approximately 80/20, which is the percentage that we've had in the past, still remains largely consistent for our current business.

Okay. And then, on your legal fees, I guess you had around $600,000 or so. Is that -- do you expect that to be an ongoing item here, as I guess you're fighting your -- I guess the patent losses, I guess?

Yes. They're going to be complete around late Q1 '09.

Okay, so for the remainder of the year.

That is correct.

Okay. And then, the final thing is, is there any new clarity regarding the graphics side? I guess that's an opportunity that you guys have talked about in the past with the x86 server -- where does that stand right now? Is that still, do you think, a big opportunity for you guys this year or not?

I won't say it's a big opportunities, but we will see embedded graphics business growing in the second half of '08. I think currently -- because design cycles take about 12 to 18 months, they really last very long. [After you] design win, you can secure three-year business, so that's very good business for us. But we believe the embedded graphics business will grow up in the second half of this '08.

So is this still going to be a fairly small part of your business, just a few million, or is it going to be a bit more meaningful than that?

Just a few -- still a few million dollars.

But much higher margins.

Yes.

Okay. All right. Thanks a lot.

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

Hey guys. Great quarter. And most of my questions have been answered, but could you give us -- you did have some one-time uses of cash. Can you go through what you foresee for the rest of the year? Do you expect to buy any more buildings or are there any other earn-outs that we should be aware of?

Well, the earn-outs, that program will last one year. We announced that in -- a few months ago, so that will run until early next year. So it is our intention to use the entire $40m to do the buyback. In terms of other usage, we're currently exploring the purchase of office space in Shanghai that will be in -- completed in the second quarter. So the cost of that is about $4m. Other than that, there is no significant other usage of cash, other than if we were to do another acquisition.

Okay, great. And just -- you talked a little bit about graphics already, but how about the multimedia SoCs? Is that -- in your view, is it more your products or is it the market changing? Or just can you give us some color about maybe when the -- when that business maybe turns around or is it just the market is not very good for that -- those product lines?

In the first quarter, we intentionally slowed down our MP3 business, due to the lower margin. And also that -- we play in the very low end segment, so the market was very [bloody]. But I think we will come to lever the new mainstream high-end product line with the MPEG4 solution and product will come in in third quarter this year.

It's our [prediction that we will] total solution. Standalone MP3/MPEG4 is just for one segment, but we believe our strategy provide total solution in DAB systems and digital media broadcasting systems. So that's our long-term goal. So in order to (inaudible) long-term goal, we need to deliver a standalone multimedia solution combined together our mobile communication product together provide a total platform solution.

Great. And maybe a final question. Clearly, you had some very good upside in the quarter. How does your supply chain look? Does it -- are you seeing any lead times extending or shortages or anything like that that we should be aware of?

We believe the second quarter, I think the supply chain will be challenged, especially from the foundry maker, such as SMIC and TSMC, because, in certain 8-inch fabs, I think they have over-booking. But we definitely are able to manage such a difficult, challenging situation, diversify our product. And we do use three different foundries simultaneously to minimize the risk and we do (inaudible).

And clearly, with your volumes, you probably get a little bit preferential treatment than some of your competitors at the foundry. Correct?

That's correct. We do have about two months (inaudible). So that will be good buffer for us.

Okay, great. Thanks a lot, guys, and congratulations.

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

Yes, thanks for taking my questions. I've got a few. First, Wallace, the HP and Dell designs that you referenced, when do you expect those to begin ramping in any meaningful volume?

HP is ramping right now. Dell will be ramp in June. We cannot comment volumes.

Okay, yes. I was looking for the start. So HP is actually in volume now and Dell will be June. Did I hear that right?

That's correct.

Okay. Second question, and maybe both of you can address this, can you talk a little bit about timing in the supply chain for your products? And specifically, what I'm trying to get at is what's the lag between the shipments of NAND bits by the major memory manufacturers and the shipments of your NAND controllers? Is it simultaneous as it pertains to some of the third-party module makers? Is there a quarter lag? Because in the market, you're able to get fairly good information regarding industry-wide bit shipments quarter to quarter and I'm wondering if -- how closely it backtracks shipments for you guys.

In the NAND flash memory card business model, that is very tricky, quite different than other business models. So most of the card makers, if they don't secure NAND supply, they won't place orders to controller makers, because the NAND flash supply chain is a very dynamic one. So normally, our controllers [if they order] controllers shipping, they need to ship out within seven days.

Okay. So in periods where industry-wide bit shipments are fairly robust, your customers will be more than eager to be placing orders with you. And if they struggle to get product, they'll shut you down for a short period of time. Is that a fair way to characterize it?

But in addition, the reason they have to stay with [us is] because of [substrate]. The [substrate] lead times for the cards is very long. It might take about three months. So once they design with the Silicon Motion controller, they place order maybe a couple million in advance.

Okay.

Controller order probably [instantly], so they are prepare [substrate] in advance.

Okay. That's helpful. And then, finally, one last question. Obviously, Samsung is an important customer and has been for some time for you guys. How important has their white brand card - and if you want to call it business, maybe that's a generous way to describe it -- but their white card strategy in periods of oversupply been to your business? Has that been a meaningful contributor over time? Has that been a small contributor over time? How would you characterize that part of their business as it pertains to you?

I think, first of all, we probably won't be able to comment on Samsung's strategy. But what we can say is the (inaudible) Samsung private label card business is one way to move excess inventory, but, with a NAND flash price increase, they might use an alternative way. They might reduce supply for private label card business.

But does that mean we're going to lose the business on Samsung? The answer's no, because [then our] regular card makers, other customers, are going to place more orders to us, [usually order] NAND flash, and produce manufactured part themselves. So either they purchase the card from Samsung or they manufacture card themselves. But as long as they use Silicon Motion controller, I think we keep the same revenue.

Right. But in general, though, has that part of their business been as important than the other parts of their business, their bundled sales or the sales that they push through to their third-party module customers? Or has that been a less meaningful part of your business with Samsung? I guess what I'm trying to get at is does that part of the business drive a lot of your revenues? My sense is, based on conversations --

[Probably not]. 2007, Samsung first time entered the retail card business, [which imbalances] the Q1 revenue. But in Q2, they almost shut down, but I think we maintained our revenues. So -- which means we have got a big order from Samsung, we might get less orders from our regular customers when they start to do card business. So when they decide not to do it, then we'll ship the [PO] to other customers, so the -- for the same. The total market, it doesn't change.

Okay, great. That's very helpful. Thank you very much.

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

Thank you. Good morning. A couple of clarifications. Did I understand you to say that the litigation expenses that you've incurred here in the first quarter are what you expect to accrue for the year, related to SanDisk, that there will be no --

In terms of the litigation, lawyer fees, we're expecting a total for the whole case -- a typical ITC will run about 15 months. So for the full run of the course, we are expecting up to about $2m.

But in terms of the litigation expense that's been incurred here in the first quarter, will there be ongoing litigation expenses in the balance of this year that you also expect to incur, associated with this?

Yes. We do expect continued litigation. ITC case will not be over until early next year.

Okay. Also, the presentation of the non-GAAP earnings per share is a little confusing to me, because there was a question asked earlier about the tax provision and I do see it was very nominal here in the first quarter. I'm not sure if you can just give us some basic explanation for why the tax provision was so nominal here versus the year-ago first quarter. And secondly, it doesn't look to me like there's been any non-GAAP adjustment to the tax provision when I look at the presentation, and that also looks just a little confusing.

Okay. Comparing this quarter, the first quarter, to the first quarter last year, taxes now are a little higher than what it used to be, because we now have FCI. Taxes in Korea is a bit higher than it is in Taiwan and other areas that we operate, so a reason for the slightly higher tax rate. But taxes in general, there are timing issues in terms of when we [accrue] for them. So it's one of the factors why there's some distortions in terms of modeling out, but internally, we generally just flat-line it and use 10% for modeling out our taxes.

We do take a fairly -- a simple approach with our GAAP versus non-GAAP. Certain items you can consider either way, but for us, the non -- the items that we exclude are stock-based compensation, our acquisition-related charges, one-time items, including (multiple speakers).

I do understand the items that you've excluded for non-GAAP purposes. What I don't understand is why there's been no offsetting adjustment to the tax provision associated with those eliminations.

Yes. For some of them, the items, they're either not tax-deductible or they're taxable -- they're tax deductions in certain jurisdictions. So overall, from a modeling perspective, it's quite complicated. And so, what we're trying to do is just provide a very simple picture.

Last question. 20-F filing for 2007, I know that you didn't file till July of '07 for the 2006 year. Are we going to have to wait till June, July again before we see the 20-F filing for 2007?

No. We'll be doing it much earlier this year.

Thanks.

Your next question comes from the line of [Vijay Rakesh] with (inaudible). Please proceed.

Hi. Well, it's a good quarter here. A couple of questions. How is the channel inventory in the NAND space?

Excuse me? Can you repeat your question again?

I said, how is the channel inventory in the NAND space?

Channel inventory -- I'm sorry.

We [didn't know] the channel inventory right now, but so far I think, based on a [per check], channel inventory is fine. It's okay.

Right then. Okay. And here in Q1 '08, looks like FCI was down about 38%. Do you see it rebound here in Q2, like up 10%, 15% quarter on quarter?

We can't comment on exact percentage of FCI rebound, but we do expect them to be a very important driver for the second quarter. As we mentioned earlier in our call, the -- we're -- FCI will be an important contributor for our business in the second quarter.

All right. Okay. And here, if you look at the June quarter, looks like -- the March was $52.2m, guiding June to about $53m on the midpoint. So if FCI is picking up, is the controller business kind of flat to down here for the June quarter? Was that -- because it looks like Q1 your controller is up 24%. I'm just trying to find out what's happening there.

As we mentioned earlier, we're expecting more muted growth from our storage business in the second quarter. Flash prices are showing more firmness and so the momentum is a bit slower than what it was in the first quarter, when NAND flash prices was dropping pretty quickly.

(Multiple speakers)

But the June quarter -- go ahead.

[Based on our] flash global storage product line, in the second quarter, will maintain flat, so the growing will come from mobile communication area.

Okay. And the SSD side, what -- how much (inaudible) was SSD revenues in Q1 versus Q4?

Well, we don't comment on particular product revenue, but SSD in the fourth quarter of last year, we shipped about 1m. And in the first quarter, we shipped almost 1m units.

Okay, great. Thanks.

There are no other questions in queue at this time. I'd like to turn the call over to Mr. Wallace Kou for closing remarks.

So thank you all for joining or coming today. We are in a very dynamic and challenging environment, as you know. However, we do have very broad growing product lines, [major] OEM customer base and a seasoned management team. Our 1Q '08 outstanding financial results prove again that we can continuously achieve well under such a difficult market environment. With the NAND market improved gradually and our mobile communications business picking up in second quarter, we will continuously do well in both mobile storage and mobile communication products during the balance of the year. So thank you for listening and we'll see you next quarter. Bye.

Thank you all for your participation in today's conference. This concludes the presentation. You may now disconnect and have a good day.