慧榮科技 (SIMO) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2008 Silicon Motion Technology Corporation conference call.

My name is Dan, and I'll be your coordinator for today.

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

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

(Operator Instructions)

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

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 condition and business prospects.

Although such statements are based on our own information and information from other sources we believe to be reliable, you should not place undue reliance on them.

These statements involve risks and uncertainties and actual market trends and our results may differ materially from those expressed or implied in these forward-looking statements for a variety of reasons.

Potential risk and uncertainties include, but are not limited to, continued competitive pressure in the semiconductor industry and the effect of such pressure on prices, unpredictable changes in technology and consumer demand for multimedia consumer electronics, the state of and any change in the 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 call over to your host for today's call, Mr.

Jason Tsai, Director of Investor Relations and strategy.

Please proceed, sir.

Thank you very much.

Good morning, everyone.

Welcome to the Silicon Motion third quarter 2008 financial results conference call and webcast.

My name is Jason Tsai.

I recently joined Silicon Motion as Director of Investor Relations and Strategy.

I spent most of my career on Wall Street on the sales side, where I covered a lot of exciting wireless and semiconductor companies.

Now I'm very excited to be joining what I believe to be a very successful one.

One of my initial responsibilities will be responding to the needs of investors as the primary contact person here.

I have met some of you already and I look forward to speaking with and hopefully meeting each of you in person soon.

Please don't hesitate to call me in the future.

With me here is Wallace Kou, our President and CEO, and Riyadh Lai, our Chief Financial Officer.

The agenda for today is as follows.

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

Riyadh will then discuss our third quarter financial results and provide our outlook.

We'll 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 on the US SEC.

Please also note that we are using presentation slides for our webcast, which offer highlights from the quarter, so I would encourage anyone who has dialed into the conference call to click on the IR portion of our website to 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 market closed yesterday.

The webcast will be available for replay on our website, www.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 enable you to perform comparisons of our operating results in a manner similar to how we analyze our own operating results.

The reconciliation of the GAAP to non-GAAP financial data can be found in our earnings release issued yesterday.

We ask that you review it in conjunction with this call.

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

Thank you, Jason, and thank you to everyone who joined us today.

The third quarter was yet another challenging period for us, as global economic weakness and the weak consumer confidence continued to pressure demand for consumer electronic products.

Despite these challenges, we met our guidance for the third quarter and we saw overall margin improvement as well.

While overall demand has weakened, we continue to believe that our long-term prospects remains quite promising.

Riyadh will take us through the financials in more detail, but before that I would like to take a moment to provide a very brief recap from our third quarter performance.

Our revenue declined as expected to $45 million, which was the mean point of our guidance.

Net income was $8.7 million, or $0.27 per diluted share.

Our gross margin was 50%, which is the high end of our guidance.

Overall, we faced a few specific challenges but would like to reiterate that our key growth drivers remain intact and that we continue to execute well, despite macroeconomic issues.

Let me first talk about our mobile storage business.

Our mobile storage products performed in line with our expectations, and demand for mobile storage products remained lukewarm.

But, importantly for us, our customers have been aggressively working down inventory and rebuilding.

Overall, mobile storage expensively rebounded 3% sequentially after declining 10% in the previous quarter.

In fact, our card controller volume in the third quarter increased 12% sequentially, a nice recovery after declining over 10% in the second quarter.

End markets, both in our retail and bundled business were weak, although the China in gift markets was somewhat stronger.

Sales to Samsung as a percentage of total sales increased below 10% in the previous quarter to slightly above 10%.

Samsung is our only 10% plus customer.

Despite weak consumer confidence in most global markets, rapidly following NAND flash continued to help drive total worldwide volume growth.

To give you a sense of flash memory card market growth during these challenging times, Gartner and IDC in their recent research report expected the market of flash memory cards to grow between 16% and 40% in unit terms this year.

Let me state that for the first nine months of 2008, our mobile storage controllers increased a solid 46% compared with the same period last year.

We continued to benefit from the price elasticity, as well as market share campaigns.

We're out-executing our competitors in delivering to customers trust products, with best-in-class technologies and excellent host device compatibility, plus the good values that have made our customers very competitive in the end markets.

Our relationship with our established customers remains strong, which we believe will be particularly important in the uncertain times ahead.

NAND flash is currently beginning to transition to next generation, sub-50 nanometer flash.

We have been invest considerable amounts of resources to bring to market controllers that support the next-generation flash for all the leading NAND flash vendors.

We have supported construction of controllers that support Samsung 42-nanometer flash and are in the sampling phase for controllers that support Intel Micron's 34-nanometer, Hynix 41 nanometer and Toshiba 43-nanometer flash.

Many of these new product controllers are expected to enter production by year end.

Next-generation flash is weaker in terms of endurance and more prone to data disturbance issues.

It therefore, requires a new generation of controllers that have more sophisticated, well-leveling algorithms to enhance overall storage device product life and more robust error correction codes to ensure data integrity.

The good progress that we have made in bringing these next-generation controllers to market is a demonstration of Silicon Motion's continued position as a technology leader.

We are also investing in growth drivers to help drive long-term revenue and volume growth for our business.

An example of this would be our early investment in SOC controller solutions, as well as in embedded memory solutions in handset GPS and other applications.

We are also looking at providing controllers for other flash memory storage formats and the next generation of memory storage products.

Rapidly falling NAND flash prices continued to create new innovative indications using NAND flash memory and these new indications will all require new controller solutions.

While we are optimistic about the long-term prospects for these new growth drivers, the timing of this new product and the rate of adoption is uncertain.

Now I would like to turn to our mobile competition business.

Our mobile TV IC solutions now account for approximately 15% of our total corporate revenue and 70% of our mobile communication business.

Although our mobile communication business has been making good progress developing and rolling out SOC solutions and expanding our technological capability, it has been affected by economic slowdown in Korea.

In the second quarter, we announced that we have taped our T-DMB SOC and that is the product that is undergoing qualification process with field tests by handset OEMs.

We are proud to announce that we have achieved five T-DMB SOC design wins at LG, Samsung and Pentech.

In October, we announced that we have developed the world's smallest and lowest power consumption ISDB-T mobile TV SOC, in partnership with Japan's MegaChips for Japan, Brazil and other markets.

We are excited that we have put our high-performance silicon tuner technologies with MegaChips' best-in-class demodulator solution to develop this SOC and expect to begin sampling this product in the first quarter of next year.

For the China market, we have started shipping CMMB mobile TV tuners to Longcheer, one of China's leading handset design houses.

We have also launched a new CMMB mobile TV tuner design partnership with two of China's leading mobile TV demodulator IC specialists, Innofidei and Telepath for approximately 25 China handset OEMs.

China's start the state of attrition of radio, film and television has meant that China had a 1.2 million CMMB mobile TV users in October.

They expect users to reach 50 million in 2010.

Let me caution that this is just an estimate and could be affected by economic uncertainty.

Finally, in our mobile communication business, we recently received a design win for our tri-band RF SOC in the Samsung Knack for Verizon Wireless of the US.

This RF SOC combines CDMA and PCS with GPS, as well as an integrated LNA.

This is a unique example of our Company's selectively using our existing portfolio of technology to target high-quality niche business opportunities.

And this Samsung phone is an interesting product, using a non-photon baseband solution.

To summarize, in spite of challenging macro environment with weaker demands and competitive pricing, we have been able to maintain our market share, as well as increase our margin.

We remain cautiously optimistic about the long-term growth drivers of our business, which include flash memory card controllers, SOC controllers and mobile TV IC solutions.

We remain focused on protecting our margins and working with our partners to provide with the most advanced and cost-effective solutions for their products.

We remain committed to investing in our R&D in order to stay ahead of the curb and to effectively position our business when global economic conditions improve.

I would now turn the call Riyadh.

Thank you, Wallace.

First, I will outline our financial results for the third quarter and then I will provide our guidance for the fourth quarter.

Our third quarter revenue of $45 million decreased 7% sequentially.

Weak macro conditions had affected our key mobile storage and mobile communications product lines.

Mobile storage products accounted for 71% of sales, mobile communications, 19%, and multimedia SOCs, 9%.

Mobile storage revenue of $31.9 million decreased 10% sequentially.

Storage controller shipments increased 3% sequentially but ASPs had declined by 30% year over year, which is in line with our guidance.

Despite rapidly falling ASPs, our mobile storage gross margin remained unchanged from the previous quarter.

We remain selective about the business that we want to do in order to maintain target profitability, though I would like to reiterate that our storage volume is up 36% in the first nine months of this year, despite weak market conditions.

Strength in our mobile storage segment came primarily from sales of our flash memory card controllers.

Card controller shipments increased by a relatively strong 12% sequentially, although card control revenues were down slightly because of continued ASP erosion.

SSC controller shipments declined below a million units as we began to transition from SLC flash controllers to MLC flash controllers.

Mobile communications revenue of $8.5 million decreased 14% sequentially, primarily because of weak consumer confidence in Korea and our product transition from discrete tuners to SOCs.

Revenue from our mobile TV IC solutions is also down slightly sequentially, but is up about 70% year over year.

Multimedia SOC revenue of $4.1 million increased 30% sequentially.

Our embedded graphics processors delivered a good 15% plus revenue increase sequentially.

Gross margin was 50%, at the high end of our 48% to 50% guidance, and was higher than the 47% in the second quarter.

Gross margin improved largely because our gross margin in the second quarter was negatively impacted by a large one-time $1 million obsolete inventory writeoff.

Operating expenses were $14.1 million in the second quarter, which was lower than in the second quarter because of slightly lower R&D expenses.

Operating margin was 19%, higher than the 17.5% in the previous quarter.

Net total other income was $0.4 million, slightly down from the $0.6 million in the second quarter.

Net income of $8.7 million decreased slightly from $8.8 million in the second quarter.

Diluted earnings per ADS increased slightly from the second quarter, despite slightly lower net income due to the lower share count from our share buyback program, which reduced our total diluted ADSs outstanding from 34.4 million ADSs in the second quarter to 34.8 million ADSs.

A full reconciliation of GAAP to non-GAAP financial measures can be found in our press release.

At the end of the second quarter, cash, cash equivalents and short-term investments were $59.9 million, down from $95 million at the end of the second quarter, primarily because of repurchases of our ADSs and purchase of property and equipment.

In the third quarter, the Company made the final $2 million payment for office space acquired for our R&D team in Shanghai.

We purchased $24.7 million of ADSs and spent $4.4 million for SAP software, IP licensing, design tools and other assets.

Negative cash flow from these expenditures were partially offset by strong cash flow from operating activities.

Our business continues to generate strong cash flows from operations and we continued to maintain a very strong balance sheet with $60 million cash balance and next to no debt.

Third quarter year to date, we have repurchased 5 million ADSs.

In the third quarter alone, w repurchased 3.5 million ADSs, after repurchasing 1.5 million ADSs in the second quarter.

The Company had 93 days of average inventory in the third quarter, similar to the 92 days in the same period last year.

Days of sales outstanding increased from 47 days last year to 71 days this period, primarily because of longer payment terms provided to customers in China.

I will now move on to our guidance.

Looking forward, although we believe we are well positioned and have a strong balance sheet, we continue to see a different environment over the next few quarters for companies involved in the NAND flash and mobile communications food chain.

Additionally, weak macro market conditions in Korea, as well as a volatile Korean yuan, ForEx may affect our business.

Our strategy of focusing on long-term OEM customers and on protecting our margins remains unchanged.

Additionally, we continue to be prudent in investing in projects for next-generation solutions, cost containment and cost reduction will remain a top propriety for our management team until market conditions recover.

We expect fourth quarter revenue to be flat to down 10% sequentially.

We believe our fourth quarter gross margin will remain relatively stable at the 48% to 50% range.

Operating expenses, excluding stock-based compensation, acquisition-related charges and other one-time items will also remain in the $15 million to $16 million range, up slightly sequentially due to new product takeouts.

Before I conclude, would like to remind everyone that while the economic outlook is indeed unclear over the next few quarters, we are making excellent progress bringing a new generation of flash controllers to market, which is critical for the successful rollout of next-generation flash components and we continue our own uninterrupted track record of gaining market share and maintaining profitability.

On our mobile communications business, while we are making great progress bringing to market new SOC products for a wide range of mobile TV standards, expectations about continued market growth over the next few quarters could be significantly delayed by economic uncertainty.

While this is clearly a tumultuous time, we are optimistic that our strong financial position and ongoing profitability will allow us to remain the strongest player in our industry.

Given these economic uncertainties, beginning in 2009 we will no longer be providing full-year guidance, but we will continue to provide quarterly guidance.

We will now open the call for your questions.

(Operator Instructions)

Your first question comes from the line of Daniel Berenbaum from Cowen and Company.

Please proceed.

Yes, hi, thanks for taking my call.

Riyadh, maybe we can dive into the working capital a little bit more.

You mentioned that days sales were up on longer payment terms to customers in China.

Is that something that you expect to last into 2009 or should we expect DSOs to come down to a more normalized level, and same question on days payable.

It sounds like you got aggressive in paying back folks.

I mean, how should we think about that going forward?

This is working capital management.

Because of the uncertain economic times, at least for the next few quarters our DSOs will probably remain at these current levels.

We are rapidly, however, aiming to reduce our working capital requirements, but for the next few quarters DSOs will probably remain at these sort of levels.

Inventory, we are working to get that down.

Our accounts payable we are probably going to be keeping it at these current levels.

Okay, and then just looking at gross margin, it seems like you're starting to maybe improve the gross margin in mobile TV from the shift to system and package to SOC a little bit more rapidly than you expected.

Am I interpreting that correctly?

Is that the primary dynamic making gross margin at the high end, or was it just a mix shift away from mobile TV in the quarter, and how do you expect that to trend over the next couple of quarters?

We are aggressively trying to get our gross margin up across the board from all our products.

We are on the communications side expecting improvements when the SOCs roll out more significantly.

But in the near term it'll probably stay at these levels.

For the fourth quarter we're expecting 48% to 50% gross margins.

So, the gross margin improvement in the third quarter, most of it came from just not having that 1 million obsolete inventory writeoff that we had in the second quarter.

So, your sort of mix in terms of units in mobile communications was about the same?

There are improvements across the board for most of our products.

It's not entirely coming from our communications products.

Okay, thanks.

Your next question comes from the line of [Dunham Winoto] from Avian.

Please proceed.

Hi, guys.

Good morning.

Thanks for taking my phone call.

Riyadh, maybe we can start with a housekeeping question, first.

What are you guys seeing in terms of tax rate guidance?

10%.

10%.

Internally, we use 10% for our modeling purposes.

Okay, thanks very much.

And then can you give us a little bit of detail as to what ASP trends were in the quarter and what you think it might be going forward?

The previous guidance we headcount given was ASPs would be down up to 30% this year.

In this quarter, the third quarter, it had indeed declined about 30%.

In the fourth quarter, our expectations remain the same, also about 30%, up to 30%.

Is that 30% Q on Q?

No, year over year.

Year over year?

That's correct.

So, what was it Q on Q in Q3?

Q on Q, it was down in the low teens.

Low teens.

Yes, but it's better to look at it on a year-over-year basis.

Right, and then are your expectations in Q4, again, Q on Q, is low teens?

No, on a full-year basis.

Our preference is to look at the numbers on a full-year basis because it gives you a clearer picture of longer-term trends.

Okay, what are some of the factors you think that might be impacting ASP degradation there in Q4?

Is it competition or mix?

Yes, it's exactly the same that we have previously talked about in the last call.

There is competition and there is competition and we are also in transition from the legacy generation flash to the next generation of flash.

And, as we previously discussed, the competition is coming from competitors who have built a lot of inventory.

They're working that down, but as they're working them down on the legacy end, it is providing a lot of competition on ASPs.

Okay, thanks very much.

Wallace, maybe one question, or a couple for you.

Can you give us an update on your embedded controller efforts there and what are your thoughts in terms of sampling or maybe even volume shipments?

So, we are starting small volume shipments for mobile handsets and GPS makers.

However, the volume is still quite small.

We believe probably moving into 2009, the volume will start to grow vis-a-vis the low volume.

Okay, how about your SSD controller.

Anything to add from what you said to us recently?

As we announced in the press release, we did launch three new generations of solid-state driver controllers, which is focused on MLC, as well as hybrid.

Hybrid means SLC, MLC mix, and we're starting to sample to customer qualifications we believe in late Q1 or Q2.

This part we're moving to mass production.

Okay, thanks very much.

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

Please proceed.

Hey, guys, just wanted to come back to sort of the pricing question.

I know you've talked about a 30% year-over-year price decline the last couple of quarters, or at least Q3, and again for Q4.

It seems to me one of the big fears for the stock and I think the reason the stock's down as low as it is is fear that pricing pressure will be greater than your ability to reduce costs.

So, I guess two questions for you.

One, have you seen any recent acceleration in pricing pressure and then, second, can you talk about your long-term ability to reduce the cost of the card controllers.

If pricing is going to stay at a down 30% year on year rate, can you reduce the cost of the card controllers through die ranks or die size optimization to stay ahead of that curve?

Thanks.

I believe lately we do see more severe price competition due to some controller makers that have active inventory.

Also, because we started seeing NAND flash transition to from 50 nanometer into 30 nanometer and 40 nanometer, many legacy controllers won't work for the new generation NAND, so we're probably going to see in the next two quarters, we're going to see a price competition.

However, we believe when the NAND moves to 30 nanometer and 40 nanometer technology, that requires new-generation controllers to provide better leveling technology, error conduction and endurance issue.

So, then the controller itself might also increase internal buffer size, you've got page size changing from two kilobytes into four kilobytes, or some it's eight kilobytes.

So, we're seeing the [AC] itself probably going to maintain stable up to -- moving to 2009 second quarter.

We are in transition on some products, moving from 0.16 microns into 0.13 microns or 0.11 micron technology.

We believe we can take advantage and use the challenge wafer fabs so that we can achieve lower costs in our controller positions.

Wallace, are the controllers today die pad limited, or as you go to the sub 50 nanometer, given the more complex algorithms for wear leveling and ECC, are they no longer die pad limited?

Well, I think it's not as simple as to just whether it's a pad limit or a die limit.

You've got controllers, when you go to a microSD you can only have a one row or two rows to have a pad with bundling requirements, so you have to have a very specific design, limiting your pad count to a certain angle and a row.

That will allow the flash memory to go into a smaller package, such as microSD or a memory stick micro.

So, your designing is much more complicated than the pure count is it die limited or pad limited.

However, I think for certain customers 0.13 micron for tier one is not an issue.

For China customers, it might be an issue because they don't have a proper equipment to receive challenge wafers.

Go ahead.

To manage challenge wafer handling.

Okay.

The second question I had is you've talked about you're sampling now the controllers for the Samsung 42-nanometer generation.

Can you talk about -- it seems to me that with each change or die shrink in the NAND device there's an opportunity to gain share.

Can you talk a little bit about the competitive landscape for Samsung 42 nanometer or just generally the sub 50, whether or not you're seeing your competitors similarly positioned to previous generations.

Is this an opportunity for the Company to take share?

So, I can give you general guidance.

For example, for 30-nanometer NAND flash, the majority of the NAND vendors require only four ECC for 500 kilobytes.

When you move to 40 and 30 nanometer, you might require more than 12 bits -- some of them move 24-bit ECC for one kilobyte.

S o that means you need a very sophisticated ECC error correction code engine to quickly error detection and correction.

That requires new-generation controllers, so legacy controllers won't work for the new generation NAND flash.

That's why when you're a controller maker, you have the technology of all the different product lines ready to ramp up when the flash makers, to ramp their new generation of NAND flash, we can take advantage here.

Okay, and then lastly, just you guys had talked about excess card controller inventory in the channel exiting Q2.

It sounds like the channel worked off some of that inventory, but was wondering if you could just give us an update on the inventory situation, heading into Q4.

Do you still think that there's excess controller inventory in the channel and, if so, how much and how long do you think it takes to work that down?

Well, we still don't have very clear visibility.

We believe the movement is still slow.

However, we think all the players in the NAND 2-gen worked very hard, tried to move the actual inventory, for both card and controllers.

But the good thing is, we see the lower density and lower priced flash devices that move faster, so that's why we count the unit shipments to the China market or gift market.

Okay, great.

Thank you.

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

Please proceed.

Thanks a lot.

Thank you for taking my call.

A couple of questions.

First of all, can you expand a bit more about the RF SOC opportunity?

It seems like that could be an interesting growth driver in your mobile communications space, which you've just got this design win.

Were you talking about the Verizon product?

Yes.

Yes.

This is the first product for Verizon to use NAND focus solution for both RF and baseband.

We believe we've got tremendous opportunities to continue to ship multiple models through Samsung, in addition with LG, through Verizon next year.

We cannot comment the volumes.

We also believe we might also ship a single-band CDMA RF to other countries, such as China and India in 2009.

I mean, is this an opportunity that in the future could be as big as the mobile TV side, or is this going to be a really niche product for you guys?

It depends on the timing and market.

There could be a reasonable revenue for us in 2009 and mobile TV does need much bigger market in the future.

Okay, with regards to the guidance and kind of your visibility, how much is related to the weakness in the card controller market and the ongoing inventory situation there?

And how much is it more related to kind of the weakness in Korea with what's going on there, and related to your mobile communications side?

In Korea, we see that in the third quarter -- we see the mobile TV solution slowing down, due to the poor economic conditions.

I think we did not see China CMMB market conditions also did not match our original expectations.

So, I think we believe the current market condition for mobile TV adoption will be impacted by the current economic situation.

We are looking forward to seeing potentially improvement in moving to 2009.

So, the way to look at it is a good portion of your guidance is more related to the weakness in the mobile TV or is it still the majority of that is all the flash controller side?

Some comes from mobile TV.

Okay.

Now, I guess from a strategic perspective, I mean, it seems like you're focusing on higher gross margins, trying to keep your gross margins in the 48% to 50% range.

I mean, is this a long-term strategy and basically you would be walking away from business which is lower-margin business as we see obviously competition here is trying to dump a lot of inventory that they have on their books.

But are you going to just focus more on the higher-margin applications and try to diversify your product portfolio in order to walk away from the traditional, some of the low-density stuff that you've done?

Well, Daniel, I think you've known the business for a long time, the NAND business.

We won't walk away from customers if we are able to.

The current situation is because many controller players have excess inventory with legacy products, so they have to dump the legacy product very quickly because NAND transitions from 50 nanometer into 40 nanometer and 30 nanometer.

So, within a quarter or two, all these legacy products could be a bad inventory, so I think that the current situation could be temporary and manageable.

So, our goal is try to focus to put down gross margin and to be more selectively in the customers and the business.

However we believe in the long run, should the product mix, we're still able to maintain 48% to 50% gross margin and still remain competitive in certain product lines, we could be more aggressive to pursue customers, even if it's lower to probably average gross margin.

Daniel, let me also add that we have a mix of products that are higher gross margin that allows us to be competitive in winning business that may have lower gross margin and through a blend of bases we still get to our target range, our current target range of being in the 48% to 50% range.

Great.

And then the final question on the SSD side, just in terms of design activity, is most of the designs right now in the market, people are just shifting to MLC SSDs, or is it still the large majority of it is still SLC, as not all your competition has MLC SSD right now?

I think the transition to move to SLC based is obviously still slow.

Customers are looking for 40 and 30 nanometer MLCs to be more cost effective.

Unfortunately, a majority of 40 and 30 nanometer MLCs, the endurance is still so low, so I think that we have to work harder for both controllers, suppliers and the flash makers to deliver a total MLC base and cost effective solution.

It takes probably a couple quarters to get to the goal.

Okay, thanks a lot.

Your next question comes from the line of Gary Hsueh from from Oppenheimer & Company.

Please proceed.

Yes, thank you.

A quick question here.

You didn't talk much about the SSD controller business.

Just wondering, what is it right now as a percentage of the total storage revenue base?

It's currently quite small.

In fact, in past quarters, it was also quite small.

This quarter we shipped under a million units.

Last quarter, we shipped a little over a million units.

Either way, it's small part of our business.

We have pretty exciting expectations about our SSD controller business for the longer term, but in the shorter term, as Wallace had talked about just a little while ago, we are trying to get better technologies out to the marketplace that can better support the next-generation class that can help device makers get to the lower ASP price points that they're targeting.

Let me add a comment, is today the majority of solid state drives use SLC that's based on the 50 nanometer, so the cost structure cannot meet the consumer, assuming greater expectations.

That's why although NAND [book] is growing rapidly, but the higher percentage of NAND books are using hard drives today.

So, we're looking forward -- we believe it takes probably three to four quarters to have combined better controller algorithms and moving to 30 to 40 nanometer MLC solutions will be a variable to the end customers and the consumers.

And the cost will be more competitive.

Okay, that's great.

And then in terms of tapeout activity, you mentioned about guidance in your OpEx number for tapeout activity increasing in the December quarter.

Can you help me understand exactly what the flavor is of products that you're taping out on in Q4 and what the trajectory maybe in Q1, Q2, in terms of tapeout activity and the impact to OpEx?

So, Q4 taping out more product lines is to support the upcoming [IM] nanometer, Toshiba 43 nanometer, Hynix 41 nanometer MLC product lines and some by [three] product lines.

Since we have very, very broad product lines, just like other competitors are one or two products, so all the product lines from SD, MMC, compact flash, solid state drives, USB, we all need to convert into new generation.

That's why we have many, many products that need to be taped out.

Okay, great, and then --.

I'm sorry, in Q1, in mobile TV, we're transitioning into 65 nanometer technology for SOC so that is upcoming new technology going into Q1, second quarter '09.

Okay, great, and then just moving to the balance sheet really quickly here now that the ADS here in the US has kind of traded down significantly over the past two to three months, any kind of upcoming impairment test that you guys are thinking about performing or have to perform on goodwill?

Not at this point.

All of our businesses are still performing quite well.

There is a lot of economic uncertainty, but we're still a very profitable company through pretty much all of our product lines so it should not be an issue in the near term.

Okay, and then in terms of inventories Riyadh, if I look at the inventory number and where revenues are going and maybe going in Q1, it just looks like the inventory level is still pretty darn high compared to an equivalent revenue level back in early 2007, maybe late 2006, around more of the mid to high teens.

What are we doing here in terms of reducing the inventory number and also in terms of inventory, what is the potential for further writedowns in the inventory number in Q1, Q2 next year?

We're aggressively trying to manage our inventory, everything from managing when we start our wafers to how we can better move our products and what we need to move our products off our books.

But as you look at the number of days, in the third quarter we had 93 days.

Compare that to the third quarter of last year, approximately 92 days.

Both of these quarters are challenging quarters and we are aggressively trying to manage it to reduce the days and we believe it could come down over the next few quarters.

Okay.

Okay, great.

Thank you.

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

Please proceed.

Great, thanks for taking my question.

I was pretty impressed that you grew your flash card units 12% Q on Q.

Can you talk a little bit about that?

Was that in kind of the OEM space or the retail space and was it really you taking share, or can you talk about that a little bit?

I think the OEM and retail probably is a 50-50 split.

Both retail and [bounds] of business were weak in the third quarter.

However the China market and the gift market were strong.

That's why we balanced it from the lower market in China.

Okay, great.

And also talking a little bit about your guidance, it's a little bit of a wider range.

Could you talk about what needs to happen for you to get to maybe the high end of the range and what needs to happen for you to go into the low end of the range.

Just go through your thought process there.

Bob, there's a lot of uncertainty out there, unfortunately, both in our card market, as well as in the mobile TV market, uncertainty about what's happening in Korea.

They're also facing macro issues, as well as a credit crunch and a very volatile currency.

In our other markets, there is also a lot of uncertainty about consumer behavior in these sort of uncertain times.

So, with that in mind, we're trying to give ourselves a wider range, given that there will be a lot more variability in our balance sheet.

Okay, so it has to do mostly with your visibility into that market.

There are several factors.

For example, Korean yuan went down more than 20% in the third quarter, so it's very hard to bridge all the factors together.

That's why we would like to give a little wide range to be safe.

Okay, fair enough.

And then just a final question.

Generally speaking, I would think depreciating Taiwan dollar is helpful to your margin.

Is that true?

And it seemed like Taiwan dollar has depreciated a little bit.

Will that help out a little bit going forward?

It has been helpful somewhat, but on the foreign currency side it's very difficult to predict.

And as we talked about in earlier quarters, this is really a timing issue.

It'll catch up when currencies stabilize.

Okay, fair enough, thank you.

Thank you.

Your next question comes from the line of Sal Kamalodine from B.

Riley & Company.

Please proceed.

Yes, good morning.

I was wondering if you could share with us what you're seeing in terms of your branded card customer behavior, like, what are they doing to balance their inventory with the fact that NAND pricing has come down significantly, just given the macro issues.

How are they behaving right now?

I think third quarter the major issue really is demand is very slow.

I believe you all listened to SanDisk's announcement and others.

I think the price will drop even 30% in August and September and all the players tried to move the inventory as quickly as possible.

The main issue is due to the China demand.

It's just weak.

I think October, it's no major difference from September.

So, we cannot -- we don't have a very high visibility at the moment for our customers.

Okay, so as of this month you guys haven't seen much of a departure from their standard MO?

Yes, we did not see significant improvement compared with September.

Okay, just going back -- Jesus.

If you could just -- the percentage of mobile storage revenue that was generated from Samsung, if you could just update us on what Samsung is doing with respect to its white label card business?

The improvement primarily is in microSD cards and lower density bundler business for handset makers.

Okay, what percentage of mobile storage revenue did Samsung account for.

Samsung as a whole accounted for a little over 10% of our revenue.

We don't break out or revenue beyond that.

Okay, but you're suggesting that the bulk of that revenue is tied to the card business, to mobile handsets.

We have improvements on that.

Samsung, we have several lines of business.

We have our card business, controller business at Samsung.

We also have our communications business with Samsung.

Okay, and then I just wanted to circle back to the balance sheet.

The extended payment terms to the customers in China, is that just sort of how you compete right now given the environment, and also I was under the impression that the gift card market in China was a NAND market that maybe you weren't too eager to go after because of the margins and just wondering if that's kind of where you're going to fall back on to drive volumes right now as you wait for the retail card market to turn.

That's correct.

In terms of the competitive elements required to be competitive in China, extended payment terms are part of the reality given these sort of economic times.

For us, the gift market, the margins are lower, but we do have a broad portfolio of products, products with higher gross margins that allows us to also pursue the lower-margin products and out-compete our competitors on that front and still get us to the overall blended gross margin that we're targeting.

Okay, and then maybe if I can just sneak in one more.

How do your unit shipments typically react to each node shrink?

As we go to 40 and below in the first half of next year, does that necessarily imply some kind of an uptick in your unit shipments in the mobile storage business, and share gains?

Well, I think it's very hard to predict, but however, I believe the players in flash memory controllers will become less.

Okay, thanks.

Your next question comes from the line of Ray Rund from Shaker Investments.

Please proceed.

Thank you.

I had a couple of questions.

One had to do with given the fact that the economic times aren't of the best, are you taking steps to try and conserve cash and kind of increase the cash on the balance sheet going forward?

And, also, I was wondering if you have any sense of what your market share at Samsung is now.

Let me answer the first question, regarding cash.

We are actively safeguarding our balance sheet.

We have a very strong balance sheet.

We have a fair amount of cash, enough to support us in good times, as well as in bad times.

We have business that continues to generate good operating cash flow.

That said, we have been using up some of our cash balance from the start of the year to do our buyback.

The speed of our buyback has come down somewhat, given the uncertainties out there and the need to protect our balance sheet.

But we do have flexibility, given the strength of our balance sheet and ability to generate cash flows.

And on the Samsung question, do you think you're increasing or decreasing your market share with them?

Well, on the second quarter to third quarter, we believe we increased the share in Samsung from the second quarter moving to the third quarter.

Overall, you may recall, based on third-party market forecasts about the growth of the card market this year, we're growing a lot faster than these forecasts, which suggests to us that we are indeed taking a fair amount of market share from our competitors.

Does the fact that Samsung dropped their attempt to purchase SanDisk, does that improve your position, your competitive position with Samsung, potentially, because they won't have access to a captively produced controller, like they would have gotten with SanDisk if they had managed to buy them.

We can't comment on that, but we maintain strong and close relationships with Samsung as a strategic partner.

We continue to engage with Samsung for their new-generation NAND flash.

Okay, thank you very much.

Your next question is from the line of Betsy Van Hees from Caris & Company.

Please proceed.

Thank you for taking my call.

I just wanted to circle back to the days of inventory.

When we look back at Q4 of '07 last year, your units increased 23% quarter on quarter and your revenue increased 17% quarter on quarter and you provided guidance for revenue to be flat to down 10%.

So, can you help us understand a little bit better what you're doing to reduce that inventory level as we move into what is normally your seasonally strongest quarter and then of course we're moving into Q1, which is normally seasonally down anywhere from 13% to 15%.

There is seasonality in our inventory.

As I previously said, the inventory levels that we're seeing in the third quarter is not too different from what we saw in the third quarter, but, that said, it is a large amount and we are actively trying to sell that down.

While one of the things that we can do, for example, is slow down our wafer starts in order to consume our inventory.

With economic slowdown, this is part of what we need to do in order to get our numbers down.

Great, Riyadh, thank you.

My next question has to do with ASP declines.

You mentioned that ASPs are declining in line with your expectations of 30% year over year, that it has gotten particularly aggressive in the last several months and you expect it's going to continue to be aggressive because we're going to see inventory of your competitors, of legacy products trying to move that inventory out.

What gives you the confidence level that as we migrate to these next-generation NAND lower-density nodes that we're not going to have the same issue in terms of very price competitive environment where we're going to continue to see these tremendous ASP declines year over year.

So, you are always going to see the competitive pricing from competitors.

But, however, when moving to a new generation, the controller die sides become bigger.

For example, the page size almost doubles, or even triples, because NAND is moving to the next generation.

The ECC engine itself will be double and triple, so controllers just on the die side itself becomes bigger.

I won't say we're going to raise the price for the controller.

However, you won't see the sharp price drop going to the new generation NAND flash controller.

Betsy, let me also add, the amount of competition on the pricing side has not escalated over the past few months.

It's been at a tightened level for most of this year.

We saw a lot of aggressive pricing in the second quarter and we continue to see it in the third quarter, so it's really a continuation of what we've been seeing for a number of quarters, but, that said, we have a number of things we can do to manage our business to deliver on the gross margin that we target, including on the geometry node side that Wallace had previously talked about, managing our product portfolio and so forth.

Thanks, Riyadh.

You guys mentioned that you're not going to be providing full-year guidance for 2009, but I was wondering if you could help us understand, OpEx is jumping up a bit in Q4 as you're doing increased tapeouts.

As we look at next year, would that be a good number to use in terms of a range for OpEx, 15 to 16 million, or should we be using a lower number quarter on quarter.

At this point, it's a little premature for us to be providing guidance for next year, Betsy.

We will provide, however, enough guidance for you to model out the number, for you to get a good sense of what it could be when we provide our fourth quarter number.

Okay, thank you very much.

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

Please proceed.

Hey, Riyadh, just wanted to ask a quick follow-up.

Could you give us a sense of where you think the share count comes out in the fourth quarter given that you've repurchased 5 million shares to date?

Is the number around 30 million ADSs about where you think it comes out?

Approximately, on a weighted-average basis.

And that -- if you continue to repurchase shares in Q4, then it could go below that 30 million level mark out in 2009?

Well, we have been buying back our shares, but at the same time we are also cautious about how quickly we do the buyback.

On the one hand, our share price is very attractively priced for us to do a buyback.

On the other hand, with the uncertain economic times, we also have to be reasonably prudent.

And also from an accounting perspective, the amount of share buyback that you do in a quarter does not necessarily equate to the amount of shares that you take off from the total shares outstanding in terms of calculating earnings per share.

It's on a weighted average basis for that quarter, depending on where the purchases take place.

Right.

There's a lag effect and so all I was trying to say is that given your purchase activity through the end of the third quarter, shares in the fourth quarter are probably 30 million, plus or minus, if you continue to buy back shares, and obviously that would tell us where our shares are going.

That's right.

Right, okay, got you.

It'll take us down to about 30, yes.

Okay, thank you.

Your next question is a follow-up from the line of Daniel Berenbaum from Cowen and Company.

Please proceed.

Yes, thanks.

Riyadh, can you give us a little color on further litigation expenses in the year and also what CapEx is going to be.

CapEx, it surprised me.

I thought it was a little bit higher than I had expected.

Where should we think about CapEx in dollars or in terms of percent of sales moving forward.

For us, in terms of litigation, in the third quarter it was about $0.5 million, so you can assume that it will probably be about the same amount in the fourth quarter.

The litigation, the [IDC] litigation will probably end around April next year.

It's generally a pretty rigorous timetable.

To your second question about CapEx, there were a number of items.

We had $2 million relating to the Shanghai office space out of a total $4 million that we had agreed to in the second quarter.

We paid half of that in the second quarter and we paid the remaining half in the third quarter.

In addition to that, we also have CapEx relating to IP licensing relating to processor core.

We also have CapEx relating to design tools and a couple other items, but the numbers do fluctuate.

Part of it is the design tool purchases are not always -- that doesn't happen on a straight-line basis.

The processor core for example is a multiyear agreement.

Okay, so how should I think about your CapEx on an ongoing basis?

The third quarter was indeed a higher amount than what we normally see.

Okay, so is there a way --.

Normally it will be a number closer to $2 million or less per quarter.

The numbers would be less to $2 million or less per quarter.

I'm sorry, just I missed that?

Yes, that's correct, $2 million or less.

Okay, great.

Thank you.

At this time, there are no further questions in queue.

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

Wallace Kou for closing remarks.

So, I'd like to thank all of you for joining us today.

We will be attending the UBS Global Technology and Service Conference in November.

Thank you again for your interest in Silicon Motion, and goodbye for now.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.