慧榮科技 (SIMO) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2008 Silicon Motion Technology Corporation earnings 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 conditions and business prospects.

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

These statements involve risk 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 our relationship with our major customers, and changes in political, economic, legal and social conditions in Taiwan.

For additional discussion of these risks and uncertainties and other factors, please see the documents we file from time to time with the Securities and Exchange Commission.

We assume no obligation to update any forward-looking statements, which apply only as of the date of this press release.

I would now like to turn the call over to your host for today's call, Mr.

Jason Tsai.

Please proceed, sir.

Thank you.

Good morning, everyone.

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

My name is Jason Tsai and I am the Director of Investor Relations and Strategy.

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 most recent business developments.

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

We'll then conclude with Q&A.

Before I 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 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 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 market close yesterday.

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

To enhance investors' understanding of ongoing economic performance, we will discuss non-GAAP information during this call.

We use non-GAAP financial measures 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 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 thanks to everyone for joining us today.

The fourth quarter was an especially challenging period for us as the global economic recession deepened.

And the weakened consumer confidence naturally affected demand for consumer electronic products.

Despite the challenges that we face in the difficult environment, we believe we continue executing well.

I will also add that while near-term market conditions are unfavorable, we believe our long term growth prospects are largely intact and remain 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 of fourth quarter performance.

Our revenues declined as expected to $32.3m which was around the mid-point of our revised guidance.

Net income was $3.2m, or $0.11 per diluted share.

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

Overall, we faced a few different specific challenges.

But I would also like to reiterate that our key growth driver remains intact.

And that we continue to execute well despite macroeconomic issues.

We are taking proactive steps in order to maintain our industry-leading position despite a weak demand outlook.

We continue to invest strategically in next generation products to better serve our customers and partners, but also prudently cut programs that no longer create shareholder value.

NAND flash is still very much a growing industry, far from maturity, but bit growth this year will be significantly less than in past years.

We are confident that when the dark clouds of the current economic recession clears, our flash partners will continue investing in flash capacity and bit growth will rebound.

NAND flash, whether it is finer geometry nodes and higher level MC structures or using 3D and other technologies will continue requiring a flash containing controller, increasingly powerful microcontrollers running increasingly sophisticated algorithms.

And application for NAND flash storage, whether embedded or removable, continues to expand beyond mobile phones, [SoC] and MP3 players into PCs, a large number of consumer electronic devices and industrial applications.

These applications require an increasing amount of storage for digital data, and flash-based storage devices are often the ideal solutions.

We continue to work closely with OEMs to expand the total addressable market for NAND flash and NAND flash controllers.

A good example of creating new [class of] application is our partnership with Samsung in providing high performance SSD controller solution for Samsung's flagship HMX series of camcorders which they unveiled at the CES in January.

A 64GB SSD can record an impressive 12 hours video in high definition.

SSD solution provides instant-on boot-up capability, are lighter and more compact than HDD, are shock and vibration resistant, therefore more durable and operate more [quiet] and with less power requirement, all important features for consumers.

We will continue to work closely with OEMs to help them develop SSD solutions for other new applications, and will continue to develop, to innovate technology, to support their product development.

Examples of our new SSD technology include our turbo MLC technology, hybrid SLC/MLC/SSD controllers, SSD lifeguard and SSD lifesaver technology.

These products are now available for OEM sampling.

Early next generation NAND products are typically more prone to low yield and endurance issues.

Utilizing our turbo MLC and hybrid SLC MLC controllers allow our customers to take advantage of lower cost next generation NAND memory without having to compromise on endurance and reliability, thus being able to bring lower density solid state storage device to markets sooner and in more cost-effective manner.

We are now adding SSD lifeguard and SC lifesaver capability to our SD controllers.

These solutions monitor the health of NAND flash cells and their degradation from usage as well as manage data backup.

We also have been investing in unique SD relayed technologies and believe that we're well positioned for the upcoming SD growth opportunity.

We believe the initial volume opportunity for SD will be for mass market consumer electronics, netbooks and industrial applications.

These applications require lower density storage devices.

And therefore SSD are ideal in providing optimal cost per (inaudible) even in current market price for NAND flash.

While we are optimistic about the launch and growth of SSD, OEM design cycles and new market penetration will take time and can be uncertain.

Therefore the timing of any meaningful increase in SD revenues is uncertain.

Sale volumes of our core flash card and USB controller business declined in the fourth quarter as global macroeconomic conditions worsened and consumer confidence deteriorated.

Because of a weak end demand there were also higher level of finished cards and UFD in the food chain.

Additionally, our bundled card controller business was affected by the weak sale of handsets.

Furthermore output of NAND flash components from the major vendors, while still growing rapidly in the (inaudible) began to decelerate as less productive fabs were retired.

However, in spite of the weak end market conditions for full year 2008 our total flash storage controller unit shipment increased a solid 32%.

This growth rate is towards the higher end of the 18% to 39% range forecast by Gartner and IDC.

We continue leveraging our strong R&D and sales capabilities as well as unparalleled relationships with card makers and the NAND flash business partners to aggressively support the current ramp of next generation NAND flash components with a portfolio of best in class controllers.

NAND flash has begun transitioning to next generation sub-50 nano flash.

We have been investing considerable amount of R&D resources to bring to market controller that will support this next generation flash for all the leading NAND flash vendors.

Samsung began volume ramp of their 42 nano in last quarter and [IEM] will begin soon on their 34 nano.

We are largely on track in supporting our customer in partner on this.

Now I will like to turn to our mobile communication business.

We made a good progress in rolling out our T-DMB SoC.

Our T-DMB SoC combined a tuner with a demodulator and came out in Q2 '08.

By Q4 has already started shipping to customers.

We currently have a series of design wins with Samsung, LG, Pantech and other OEMs.

Despite the good progress that we have made, it is also important to note that our mobile TV business has been impacted by economic slowdown in Korea.

Domestic handset sales contracted about 30% sequentially in Q4.

Let me summarize by emphasizing that although we have been executing well, market conditions are not favorable because the timing of economic recovery is uncertain.

We must therefore act prudently and focus on reducing unnecessary expenses and maximize cash flow generation.

We are therefore reducing about 10% of our headcount globally, together with across the board salary reductions.

In Q4 we also significantly reduced bonus payments and reversed related compensation expense accruals, despite excellent work performed by our employees.

We have also terminated certain projects that no longer generate shareholder value.

We are, for example, no longer investing R&D resources for low end MP3 SoC card reader controller, [DM BTS] tuner and CDMA amplifier.

2009 will be difficult year, but we are fortunate that NAND flash bit growth will continue and mobile TV adoption will increase, even in recessionary times.

Additionally we have no debt owed to the banks and other financial institutions.

And our business does not require significant capital expenditure to either maintain or grow.

And we will careful balance the need to tighten operation expense with important requirements to (inaudible) that in R&D.

I would now turn the call to Riyadh.

Thank you, Wallace.

First, I will outline our financial results for the fourth quarter and then I will provide our guidance for the first quarter 2009.

Our fourth quarter revenue of $32.3m decreased 28% sequentially.

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

Mobile storage products accounted for 76% of sales, mobile communications 14% and multimedia SoCs 8%.

Mobile storage controller shipments decreased 11% sequentially although revenue decreased a faster 23% because of declining ASPs.

Card controller shipments decreased 10% sequentially this quarter.

For full year 2008 mobile storage controller shipments increased 32%, although revenue declined 4% because of declining ASP.

2008 full year ASP declined 27% compared to the previous year.

Mobile communications revenue decreased 46% sequentially.

Multimedia SoC revenue decreased 35% sequentially.

Both our core mobile TV IC and graphics processor products were also affected by economic slowdown.

Gross margin was 50% and was unchanged compared with our third quarter.

This quarter we experienced rapid card controller ASP degradation caused by fierce legacy 50 nano controller competition.

Despite this we maintained margins by aggressively reducing production costs both in terms of manufacturing costs as well as introducing redesigned lower cost solutions.

Operating expenses were $12.2m in the fourth quarter which was lower than in the third quarter due to the reversal of accrued compensation expenses relating to bonuses.

Operating margin was 12%, lower than the 19% in the previous quarter because of lower revenues this quarter.

Net total other income was $0.3m, down slightly from $0.4m in the third quarter.

Net income of $3.2m decreased from $8.8m in the third quarter.

Diluted earnings per ADS of $0.11 decreased from the third quarter.

Our full year 2008 revenue was $175m, about 1% less than previous year.

Our full year 2008 earnings per ADS were $1.09, which is 34% less than our earnings in the previous year of $1.64.

Previously mentioned numbers are all non-GAAP.

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

I'll now move to our balance sheet and cash flow.

Although we report a GAAP net loss of $0.9m we generated $7.3m in terms of cash flow from operations.

We spent about $11m on capital expenditures, repayment of short term borrowings and share repurchases.

These cash flows reduced our total cash equivalent and short term investments to $51.9m from $59.5m in the third -- at the end of the third quarter.

We spent $2.7m on capital expenditure, with a large part of the total capital expenditure relating to the implementation of our new SAP ERP system as well as for EDA design tools.

During the quarter we successfully rolled out SAP and began using this new system.

We also repaid [$3.3m] of expensive short term bank debt in Korea, and we currently have zero bank debt.

Prior to the suspension of our share repurchase program early in the quarter, we have repurchased $4.5m of our shares.

Our inventory days increased from 93 days in the third quarter to 128 days in the fourth quarter.

This is a result of reduced revenue and a higher than required level of inventory.

As you may recall, we originally forecasted a flat to down 10% revenue target for Q4.

Our actual revenue declined 28%.

The higher level of inventory is the result of a two to three month manufacturing cycle at our foundries and testing partners and result of large orders that we placed with our foundries in Q3 when our revenue forecast for Q4 was much higher.

We will need a few quarters to burn off our excess inventory.

Our AR days increased from 71 days in the previous quarter to 99 days in the fourth quarter.

Again, this is mathematically the result of reduced revenue in the fourth quarter.

Actual dollar AR declined from the third quarter to the fourth quarter although by a rate less than for our revenue because of extended credit terms for a few strategic accounts as well as a few customers with extended payment terms.

Excluding our strategic accounts, extended payment customers and adjusting for revenue timing, our AR days are at the two-month levels that we expect.

We are comfortable with the financial strength of our strategic customers.

And so far our extended payment customers have been paying largely according to our agreed schedules.

Improving our working capital levels is an important management priority and requires a few quarters to reach a lower level, especially given the volatility that our business has been experiencing.

I will now move on to our guidance.

As Wallace has previously discussed, we believe that although we are executing well with our next generation flash controllers, SSD controllers or mobile TV IC solution, and are optimistic about the longer term growth potential of our business, we continue to see a difficult environment over the next few quarters.

We therefore expect first quarter revenue to be down 20% to 30% sequentially.

We believe our first quarter gross margin will remain relatively stable within the 48% to 50% range, we are targeting operating expenses excluding stock based compensation, acquisition related charges and other one-time items to be in the range of $12m or $13m.

We will now open the call for your questions.

(Operator Instructions).

Your questions will be taken in the order received.

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

Please proceed, sir.

Thanks very much for taking my question here.

Good job here on your gross margin, Lai.

I just want to dig into the resiliency of gross margin.

You mentioned that you saw a pretty rapid ASP degradation in your card controller bid.

What was that degradation and -- I'm guessing that that degradation was almost completely offset by reducing costs.

Can you give me the magnitude of that degradation in ASP?

ASPs fell approximately 30% on a year-over-year basis in the fourth quarter.

We've also managed to take out a lot of costs with similar magnitude, and therefore we were able to keep our gross margins at the same level as the previous quarter, the third quarter.

Okay, so the card controllers are dropping in terms of ASP at the same rate as actually the commodity NAND flash chips, and you can keep up with a 30% year-over-year degradation in terms of cost?

How much can you continue to do this going forward?

So by continue working cost reduction plan to move to 0.13 micron.

And also through the proper product mix, we can maintain between 48% to 50% gross margin for 2009.

Okay.

Okay, great.

And looking at your guidance, you've not really taken OpEx down that much.

Am I to assume that basically R&D is still in this $8m per quarter range?

All in including stock based comp?

There will be fluctuations in terms of R&D expense from quarter to quarter based on the timing of tape-outs.

Certain quarters will be higher, other quarters will be lower.

Net in first quarter, we will -- we're expecting total OpEx of about $12m or $13m, generally about half of our OpEx is compensation related.

And so ability to -- there are certain limitations in terms of our ability to take out costs based on headcount reduction and salaries reductions.

But for the first quarter we are targeting $12m or $13m.

Okay.

I'm just wondering about the future flexibility of this R&D just further out.

You're at this pretty high run rate compared to 2006 and '07 when you were more in the $5m, $6m per quarter run rate.

It sounds like most of your design tape-outs have taped out, for example, the sub 40 nanometer NAND flash generation, the hybrid MLC SLC controller.

What exactly is sustaining R&D at the $8m per quarter level?

We still have a lot of new products that we have to tape out.

We are now a lot bigger company than we were in 2006, early 2007.

We have a growing mobile TV business that we're continuously investing in, as well as previously mentioned on the card side in order to move to lower costs, moving to 0.13, and on mobile TV side we will continue to roll out new SoC products for a wide range of standards.

And all these expenses will require R&D for tape-out as well as other expenditures.

So we'll keep our spend at the current levels.

Okay, final question before I go away.

Just in terms of longer terms ASP trend, when you start to migrate in more high volumes, the sub 40 nanometer card controllers and also the MLC SLC hybrid card controllers, what kind of magnitude ASP recovery should we be modeling or expecting with those products being adopted?

I believe when our controller moving to support 30 nanometer and Bi3 technology becomes (inaudible) a high end error correction engine and the randomization engine.

So at that time (inaudible) ASP slightly moving up.

But we cannot predict exactly time.

It could be second half '09 or early 2010.

Okay, great, thank you.

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

Please proceed, sir.

Thanks a lot, thank you for taking my questions.

A couple of things here.

In terms of the mobile TV, Korea we've seen, obviously there's domestic problems there that's hurting your business.

So what type of visibility do you have into 2009?

What are the opportunities there, assuming that maybe Korea's going to be challenging?

As we're go in mobile TV tuner business in SoC, now we have a better visibility for 2009 in Q1 and second quarter.

Q2 I think both Samsung and LG have a [clear] majority of inventory in end of this fourth quarter.

We start to see they order for our mobile TV tuner for Korea domestic as well as overseas.

So there we have better visibility than our NAND flash controller.

And in terms of opportunity beyond Korea?

Or is it pretty much going to be (multiple speakers)

We start looking forward to China then for CMMB.

But we don't know whether really is -- what's happening in first half or second half 2009.

That's uncertain right now.

Okay.

And on your SSD, it seems like the market is starting to move in the direction.

The netbook category, I guess it originally started with SSDs and then it moved mostly to hard disk drives.

Do you think that it's going to -- the pendulum is going to swing back to SSD?

And if so, is it an '09 event or more 2010?

I think for mainstream notebook, the opportunity to take a solid state drive in 2009 is very, very small due to the hard drive still much more cost effective.

Therefore the low end for netbook, for UMPC, for consumer device and in [varied] applications, many companies start to take lower density solid state drive.

But that's our sweet spot, we'll keep our focus in the lower density solid state drive in 2009.

We believe from 2010 the mainstream notebook will start to use solid state drive because transitioning to 30 nanometer and solid state drive will be more cost effective, improving.

Okay, my final question is what are you seeing in the current competitive environment in product roadmaps of your competitors, at least what you know, and where you're seeing them in the marketplace?

It seemed like by your commentary you feel confident in terms of your market position.

So where do we stand there?

At this moment we still don't see near competitors in our field, although the ASP declines become our [loss of] competitor is affecting survival time.

So we have confidence in moving transition to 30 and nanometer in the [pipe stream] we have much broader technology to support much broader line to offer for our customers.

Okay, thanks a lot.

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

Please proceed.

Hi, guys.

I apologize, I got dropped from the call earlier so I missed some of the prepared comments.

But was just wondering, Wallace, if you could -- what are the 30 nanometer or Bi3 controllers sampling to customers?

Are those already sampling or is that more a second half of the year event?

We believe our controller's ready to support all the leading manufacturers' 30 nanometer including IEM, Toshiba and Samsung.

Okay, these are the current controllers.

Our new controller.

Okay.

And are the new controllers already out sampling.

Yes.

Yes, okay.

And second question for Riyadh, you mentioned the increase in the inventory on the balance sheet.

Just trying to get a sense, how much of that is the older 50 nanometer inventory versus newer sub 50 nanometer controllers.

I'm guess I'm just a little worried, you talked earlier about some pretty aggressive pricing for the 50 nanometer controllers.

I'm just trying to get a sense what your inventory balance looks like.

Well, a lot of our inventory actually relates to build for new products.

We've been ramping down our inventory of older 50 nano.

We do still have 50 nano products in inventory but obviously have not been building that.

But overall even on the newer products we have perhaps more than we need at our current revenue run rate and overall that will take us a few quarters to consume.

But we don't expect any obsolescence issues on inventory that we have relating to legacy flash.

Yes, I was less worried about obsolescence just trying to get -- sounds like the 50 nanometer controllers are still facing a much more aggressive pricing environment than the sub 50 nanometer controllers.

Is that true?

That's correct.

Okay.

Would you say that the 50 nanometer inventory is less than half of the overall inventory?

Yes.

Okay, great.

And then just the last question on the OpEx.

You talked about a reversal of bonus accruals in the fourth quarter.

Usually as you go into a new year you have to set a bonus accrual, a new bonus accrual levels, was just wondering if you'd done that and whether the first quarter 2009 OpEx guidance includes some level of bonus accrual coming back into the numbers.

Given the tough year that we're facing and our level of profitability we're obviously going to be accruing at a much lower level than we were planning for last year.

Okay, great, thank you.

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

Please proceed.

Hi, guys.

Thanks for taking my question.

First question, I wondered if you guys can talk about the competitive situation with the sub 50 nanometer controllers with respect to what the other guys are bringing out there.

Currently we believe Intel microns 34 nanometer will be in mass production very soon in this quarter.

And we expect to see Samsung 35 nanometer assembly in late Q1 or early Q2.

And Toshiba also 32 nanometer maybe in late Q2 or mid Q3 timeframe.

We definitely believe there'll be other control makers preparing but we have working very closely with IEM as well as Samsung, so our product lines are ready.

Okay.

Can you also -- I know you have discussed it, but your own inventory that most of those sounded like they're of the newer controller products.

But can you talk about channel inventory, what you guys are seeing out there?

If you believe there's an excess inventory of controllers within the channel itself.

It's very unlikely to see channel inventory for controller only because our customer, if they don't secure NAND flash they don't place orders on controller.

So even if you might see finished good products in the channel, you won't see any controller inventory in the channel.

Okay.

So it sounds like you believe the channel inventory's pretty clean at this time.

Well, there's no controller inventory, there'll be finished good products in channel.

And what's your sense of --?

Dunham, let me add there, there's never been controller inventory in the channels.

Okay.

What's your sense of finished product inventory out there?

Currently we see the channel inventory appears high but because (inaudible) the Chinese New Year and Chinese New Year break.

So the activities are slow but we do see our customers start to taking order although it's still soft but do start to take orders.

Okay, one final question maybe this one is for you, Riyadh.

What level of cash would you feel comfortable in order to run your business?

Right now there's a lot of uncertainty about the macro environment.

And so naturally the more cash we have the more comfortable we feel.

At our fourth quarter level of revenue, fourth quarter level of cost, we were generating $7m of cash flow from operations.

That gives us confidence.

But revenue levels will be lower in the first quarter and so as much what we like we will try to target maintaining our cash balance at these sort of levels.

Okay, that's all I have.

Thanks a lot, good job in managing your business during difficult times.

Thanks.

(Operator Instructions).

Your next question comes from the line of Mike Crawford from B.

Riley & Company.

Please proceed, sir.

Thanks.

Around the middle of '08 the big NAND flash producers really put the brakes on capital investment.

So what are the implications of less capital investment in and NAND space for your business going forward?

Well, I -- we very hard to comment flash maker what it's going to do with the dampening because everybody can see that NAND demand is slow so all the major flash makers slow down investment, the capital investment for the fabs.

But we believe when really the recession is clear and the demand's getting better, the investment will come back.

Currently, I think our business, the unit growth, we don't really depend just on bit growth, although that's related.

But we will focus both lower density product lines as well as higher density product lines.

Whatever type of NAND flash, whether it's 50 nanometer or even more advanced technology we're selling controller for device.

Let me also add this year with the reduced bit growth that we're expecting in the industry, NAND flash did grow.

The impact to us would be into the less flash components available to the card makers and other flash based storage device makers.

And hence that will affect number of controllers that we were supplying to our customers.

Okay.

And then with you I think in the guidance you suggested that revenues will be challenged I think you said several quarters.

And then you gave a 20% to 30% revenue decline, sequential decline expectation for Q1.

I know you can't see too far out but where do you think it bottoms.

You think it bottoms next fall, this summer?

Visibility is fairly limited right now.

At this point in time now I think it would only be prudent for us to only provide what we feel we have comfort and where we have comfort is providing guidance for this quarter.

And hence that's -- hence we're only providing one year guidance as opposed to a longer period guidance.

Okay.

And then with the structural changes you've already made, without making any more, at what point would you start to move into the negative free cash flow situation just from -- after considering CapEx?

Well, for us, we, for this upcoming quarter we're expecting operating expense, this is non-GAAP so it's the cash related, largely the cash related operating expense items of $12m to $13m.

And we're expecting to maintain gross margin 48% to 50% range.

So that'll give you some indications of where we're expecting in terms of non-GAAP breakeven on P&L side.

And as on the balance sheet side, as our revenue comes down a bit and we improve our working capital management, hopefully we can generate a little bit more cash flow from managing our balance sheet to improve our cash balance and cash float.

Okay, great, thank you.

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

Please proceed.

Thank you, good evening, thanks for taking my questions.

I wondered if you could back to the netbooks.

Could you give us your view on penetration rates in 2009?

What are you estimating as you look at the market we're going to see SSDs as a percent of netbooks in 2009?

We cannot see through the whole 2009, we believe we can see there's a slow growing momentum in Taiwan as well as strong growing one in China for the netbook.

It's based on either Intel or [Vaio] solutions.

OEM solution for the netbook.

And majority adopt solid state drive solution, will be below 32 gigabyte.

Anything about thing about 32 gigabyte will use a hard drive.

Okay, great, thanks.

And going back to channel inventory, can you help us a little bit and give us a little bit more color as to in terms of what level do you see channel inventory at?

Is it eight to ten weeks, five to six weeks, or where are you guys seeing it when you talk to your end customers?

I think it will be very difficult [fashion] for us.

We do not see clearly about channel inventory.

While we heard that channel inventories they're high, could be at least about two months range.

But we don't know the detailed number on the channel.

Thanks, Wallace.

And then another question on the competitive landscape.

Can you give us a little color in terms of how you feel you continue to stack up against your competitors?

You mentioned that it's a tough time for everybody.

And what advantage do you feel that you have at this point in time as we continue to struggle through this very difficult economic time.

The advantages we have are many.

We have the skill, we have the technology, we have many products lines.

We have a very capable selling force worldwide to support international OEM customers.

So we are very unique position.

We have built the technology around many, many different areas, not just solid state drive but also the new SSD (inaudible) standard, the JEDEC standard as well as the advanced compact flash controller.

So with our technology and we are able, we are working with several top tier OEM customers to provide exclusive solution for them.

So I think we have differentiable technology advantage compared with the small player, the controller maker.

And that's why we have the confidence we can continue growth even in recession time.

Thanks, Wallace.

And then I have one last question and, Riyadh, this is for you.

In regard to OpEx we're looking at you on a GAAP basis, what type of one-time charges can we be looking at in Q1?

Are you going to be taking any type of charge for the layoffs?

In terms of the non-GAAP items, the key ones are stock based compensation that runs about $2m a quarter.

We have acquisition amortization of intangibles, that's about $1.5m.

And for the full year we're budgeting a little bit more than $0.5m for litigation expenses relating to the SanDisk claims.

And so those are primarily the key items, the differences between GAAP and non-GAAP for operating expense.

Okay, great.

Thank you so much, I really appreciate it.

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

Please proceed.

Yes, hi, just a quick question.

Wallace and Riyadh, I think both you guys were talking about -- referenced at least some slower bit growth for the industry 2009.

Are you -- what are you guys modeling or maybe, said another way, to what levels of bit growth are you trying to manage the business in 2009.

We're not managing a particular bit growth.

We -- I guess what you're trying to get at is what are we expecting in terms of card and USB growth for this year.

And to be honest this year even on the bit growth side there's a lot of uncertainty in terms of what that level could be.

It'll be below last year's bit growth but what the question is what sort of level bit growth should we be expecting for this year.

And that number continues to move around a lot and that is obviously affecting forecasts of cards and USB and other storage devices for this year.

And based on the volatility of all these assumptions we, to be honest, don't feel comfortable in releasing a device number -- a number of card or USB forecast for this year.

Maybe back to the bit growth side, just getting to the specificity of the card size sounds like it's a little too early to call.

Are you hearing upper bounds and lower bounds from any of your customers on the bit growth side that you can then begin to do that analysis for your own internal purposes?

The bit growth that we've been receiving from third parties research suggests that this year probably it could be anywhere between 65% to 85% though we're also reading about bit growth at a lower number.

Okay.

That's helpful, all right, thank you.

Your next question comes from the line of [Rajid Gill] from Needham & Company.

Please proceed.

Yes, hi, guys.

Thank you for my questions.

Quick question on the replacement cycle for the 50 nanometer.

Clearly the 50 nanometer has taken longer to transition over due to the overbuild in the competitive landscape and that's resulted in pricing pressure.

What do you see as the replacement cycle for the 40 nanometer?

And also on the 30 nanometer do you foresee a similar pricing situation when -- with that transition?

I think 40 nanometer transition is happening right now.

And we see both Toshiba, Samsung, even Hynix moving into 40 nanometer today.

But I think 30 nanometer, IEM will be the first to produce a 30 nanometer, to start from Q1, I think, will ramp up with the volumes there in second quarter.

But I think every new generation NAND flash, the ramp up it take time and it depend on yield, depend on lot of factors.

So we don't expect to see full ramp for 30 nanometer until probably 2010.

So there still be a pushing of NAND size remaining 50 nanometer, maybe a higher percentage in 40 nanometer and small percentage in 30 nanometer.

So that's helpful.

So it's fair to say then the majority of the market is still in the 50 nanometer segment and that is experiencing significant pricing pressure.

And in some extent it's excess inventory on the finished goods side.

Yes.

And a question on the mobile TV business.

If you could just provide some update on the T-DMB prospect and the ISDB tuners for the Chinese and Japanese mobile TV market.

How is that progressing?

So T-DMB SoC is design dedicated for Korean market.

In Korea, due to the cost (inaudible) all the SIT separate solution will transition to SoC solution to reduce the cost.

So we start to see majority of mobile handsets going to transition into T-DMB SoC solution.

As we mentioned, we have several design pipeline is in production right now, we're going to see the ramp up from late first quarter to second quarter.

So ICBT, we already introduced the first Soc solution with our Japanese partners [Omega Chip].

So we believe -- the design cycle takes some time however we're also selling to Korean makers such as Samsung, LG, selling mobile handsets into Japan market.

That design process is quicker than Japan promotion.

We believe we start to see the ICBT mobile TV solution revenue maybe about second half of '09.

For China market, CMMB is still big uncertainly although everybody they're so excited about the opportunity but we try to maintain conservative attitude.

We think it's going to happen probably in the second half of '09 but the volume probably will be around 3m to 5m total units.

But 2010 could be a big growth for China for mobile TV.

Okay.

And just going back to the channel inventory situation.

If you recall back in the summer of 2008 you had mentioned that there was about 30m excess of inventory of flash controllers in the market that you have worked through -- that you worked through.

And in this call you are saying that there is only finished goods inventory out there but there is not any excess inventory on the flash controller side.

So I'm having a little bit of difficulty reconciling those two dynamics given the commentary in the past.

The inventory that you're referring to, the 37m units.

Those are excess flash inventory sitting at our competitors' inventory not -- it's not inventory in the food chain.

Okay, that was Sky Media's inventory overbuild --?

Yes, our competitors.

Okay, 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.

I would like to thank all of you for joining today.

We will be attending the CLSA Asia Investor Forum in February, B.

Riley's Annual Investor Conference in March and the Merrill Lynch Taiwan Technology Conference also in March.

Thank you again for your interest in Silicon Motion.

Goodbye for now.

Thank you for your participation in today's conference.

This concludes the presentation, you may now disconnect.

Good day.