慧榮科技 (SIMO) 2009 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter 2009 Silicon Motion Technology Corporation earnings conference call.

My name is Eric, I'll be your audio coordinator for today.

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

We will facilitate a question-and-answer session at the end of the presentation.

(Operator Instructions).

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

This press release contains forward-looking statements within the meaning of the Section 27A of the Securities Act of 1933 and Section 21E of the Security 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 information and information from 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, implied in these forward-looking statements for the variety of reasons.

Potential risks and uncertainties include, but are not limited to, continued competitive pressures in the semiconductor industry and the effect of such pressures on prices, unpredictable changes in technology and consumer demands 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 discussions of these risks and uncertainties and other factors, please see the documents we file from time to time with the Securities Exchange Commission.

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

And I would like to turn your call over to Mr.

Jason Tsai.

Please proceed.

Thank you, Eric.

Good morning, everyone.

Welcome to the Silicon Motion third quarter 2009 financial results conference call and webcast.

My name is Jason Tsai and I'm the Director of IR & 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 recent business developments.

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

We'll then conclude with Q&A.

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

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

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

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 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 on our earnings release issued yesterday.

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

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

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

I will start by briefly recapping our third quarter operation performance.

After a challenging start of 2009, I am proud to announce a return to sequential revenue and unit growth in the third quarter.

Our third quarter revenue of $23.1 million and gross margin of 48.5% both surpassed our expectations.

Net income was $0.8 million, or earning of $0.02 per diluted ADS.

Riyadh will discuss our financial performance in more detail later on the call.

Before I begin to talk about the third quarter, I would like to highlight the recent US International Trade Commission's final determination in our favor.

SanDisk had brought a patent-infringement claim against us in 2007 in the US ITC.

It has always been our business practice and culture to respect the intellectual property of others.

We therefore vigorously defended ourselves against the allegation and are pleased that the ITC agreed that our controllers as well as products using our controllers do not infringe SanDisk IP.

It's time for us to move on.

Let me return to our review of third quarter.

In this quarter, we began to see improvement in NAND flash industry supply, as a result of higher fab utilization rates and continued progress in the transition to 40 and 30-nanometer processor technologies.

This increase in supply helped drive unit volume growth for our OEM business.

The NAND flash availability to the retail card vendors still remains tight.

While we are encouraged by this increase in supply, demand for NAND flash for new applications such as embedded memory solution in devices such as smart phones is growing at an even faster rate.

We believe this is one of the factors driving recent increases in the price of NAND flash.

In October, NAND flash price increased sharply.

NAND flash prices have stabilized; but if the price of the flash will continue increasing or is maintained at this level, the momentum of our recovery will likely to be affected.

High NAND prices have been negatively affecting the long anticipated adoption of SSD for netbooks and consumer PCs.

Until NAND flash become more economical for these applications, our SSD strategy will focus on targeting non-traditional applications such as industrial PC and office automation equipment.

Several of our SSD customers have also been using our controllers in enterprise, storage, and networking applications.

Our strategy is beginning to bear fruit.

Our sales of SSD controllers, while still small, have increased over 100% year-over-year, and are now well over 5% of our total sales.

Our SSD customers already include many leading global OEMs.

We believe that we continue to be well positioned with other technological changes taking place in the dynamic NAND flash industry, where , we expect to continue NAND flash geometry migrations, 3-bits per cell MLC, eventually grades of flash for high-performance storage devices.

The NAND flash industry has transitioned to 40 and 30-nanometer products.

These 40 and 30-nanometer products already account roughly 70% to 80% of total NAND flash output.

Almost all of the controllers that we are now shipping are for managing 40 and 30-nanometer NAND flash.

The NAND flash industry process geometry migration is continuing.

This year, most of this flash are 40 nanometer; next year the majority will probably be 30 nanometer.

The flash industry is also actively developing 20-nanometer products.

We continue to be well positioned as a controller industry leader in supporting 40 and 30-nanometer products as well as the upcoming 20-nanometer products.

This quarter we launched new controllers that support low cost 3-bits per cell MLC flash that Toshiba, SanDisk and others are only just beginning to release to the non-captive market.

The amount of X3 MLC flash available in the marketplace is still very limited.

But according to iSuppli, X3 MLC could potentially account for a quarter of the overall flash market next year.

We believe that X3 MLCs supported by advanced controller technology is well suited for meeting the cost and performance requirements of consumer storage applications, and could in a few years time become the mainstream type of flash for the consumer market.

With a more limited amount of CapEx being spent by the NAND flash industry for new fabs during this global economic recession, the expansion of X3 MLC production and improving X3 quality create meaningful incremental NAND flash supply to meet the industry demand with little incremental CapEx.

We will be bringing more X3 MLC controllers to market as the supply expands.

Manufacturers are also becoming more differentiated as flash becomes inherently weaker technologically and also the end applications become more varied in terms of requirements such as low cost, high performance, high endurance, and better reliability.

Our value-added controller include products used to manage a low grade of flash as well as controllers for high-performance applications.

As the NAND flash process migration continues into finer geometries and more bits per cell MLC technologies, a greater portion of the industry output will be lower grade.

We have been bringing to market controllers that maximize the value and usefulness of lower grade NAND flash.

Separately, as performance capacity of memory cards and other solid state storage devices increase, certain application segments of end consumer will continue to seek higher performance storage devices including memory card with faster data rate.

This quarter we began shipping the world's fastest 600x compact flash card controller which enable a 90-megabyte-per-second data rate.

We also won business at two leading card vendors for their ultrahigh performance 133x SD cards.

Now, I would like to turn to our Mobile Communications business.

Our Mobile Communications business did see a slight sequential decline in revenue this quarter.

Our IC shipments increased almost 20% sequentially.

We have a strong backlog of new product and design-in for the fourth quarter and for early next year.

This quarter, our Mobile Communications business started shipping our ISDB-T SoC to Samsung for the Brazil market, a design win that we had announced last quarter.

Most of the shipment growth in communications business this quarter came from our mobile TV products.

We will be releasing a new T-DMB SoC for the domestic Korea market next year.

We also secured two new CDMA transceiver design-ins with leading handset OEMs for the rapidly growing China market.

Both of these design-ins, as well as the CDMA transceiver design-in that we had announced last quarter, will start shipping in the fourth quarter.

We believe that these and other new design-ins will serve as a strong base for our long-term Mobile Communications growth.

Overall, we remain proactive in investing and developing new products and technology to better serve our customers.

Despite the challenging operating environment, we are pleased that we returned to sequential revenue growth this quarter.

While the supply of the NAND flash remains tight, which will impact the momentum of our recovery, we believe that the design wins and new product introductions we have made will help drive long-term growth for Silicon Motion.

Our relationship with our business partners and customers remains strong, and our new product and technology will extend our addressable market in coming years.

While the rate of recovery in the short-term is still uncertain, we remain confident that our long-term prospects are sound.

I will now turn the call to

Thank you, Wallace.

First, I will discuss our financial highlights for our third quarter and then provide guidance for our fourth quarter 2009.

For third quarter 2009, our revenue of $23.1 million increased 14% sequentially above our guidance range of flat to up 10%.

Mobile storage products accounted for 60% of sales, mobile communications 27%, and multimedia SoCs 13%.

With the increased availability of NAND flash components, our mobile storage revenue rebounded this quarter and grew 27% compared to the second quarter.

The relevance of our mobile storage revenue increased to 60% of total sales from 54% of total sales last quarter.

Unit shipments increased 21% and blended ASPs increased 5% sequentially.

Our unit shipment gains were led by our card controller business, specifically by growth in our SD MMC card controller sales.

Our bundled card business also increased strongly this quarter.

Our card ASPs declined sequentially in the single digits while overall mobile storage ASPs increased because of growing sales of higher ASP SSD controllers.

SSD controllers are now well over 5% of our total corporate revenue.

Mobile communications' revenue fell 8% sequentially.

Unit shipments led by mobile TV IC sales increased almost 20%, largely because of increasing T-DMD SoC and RFIC sales.

Blended segment ASPs, however, fell sharply because of product mix shifts towards lower ASP T-DMD products and away from sales of higher ASP, but lower margin, module products.

Multimedia SoC revenue increased 18% sequentially due to improvements in our graphics and PC cam sales.

Our corporate gross margin was 48.5%, unchanged compared to our previous quarter.

Our operating expenses in the third quarter were significantly lower than originally anticipated.

We had forecasted $14 million to $15 million of OpEx, but only actually spent $12 million, largely because of push-outs of R&D projects.

Over $1 million of these postponed project spends will now likely take place in Q4.

Project spends include photomask, foundry shuttle costs and testing expenses.

We also benefited from fewer headcounts and lower related compensation expenses due to delayed upgrades of our organization, timing differences related to certain compensation expenses, and lower professional service expenses.

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

Although we reported a GAAP net loss of $4.7 million our net cash flow was only a negative $0.7 million and our cash and cash equivalents stayed largely constant at $61 million in the third quarter.

Our accounts receivable turnover and inventory turnover have both improved.

DSO decreased to 71 days this quarter from 90 days in the second quarter, and days inventory decreased to 115 days this quarter from 127 days in the second quarter.

I will now move on to our guidance.

As Wallace had commented in our earnings release, while we have seen an improvement in NAND flash industry supply, the rising prices of NAND flash resulting from the volatility of supply in the short-term could hamper our recovery momentum.

We do however believe that progress on the ramp of 30 and 40-nanometer flash, 3-bits per cell MLC and lower grade flash will continue and demand for higher performance memory cards and other solid state storage devices will increase.

We believe we remain very well positioned to capture opportunities in these long-term growth areas.

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

We believe our fourth quarter gross margin will remain largely stable within the 46% to 48% range.

We are targeting operating expenses excluding stock-based compensation, acquisition-related charges and other one-time items to be in the range of $14 million to $15 million.

SG&A in Q4 is expected to be roughly similar as in Q3.

Q4 R&D will be higher than in Q3 and will include over $1 million of delayed but planned Q3 project spend.

We will now open the call to your questions.

Operator, we are ready to take questions.

(Operator Instructions) Your first question comes from the line of Gary Hsueh from Oppenheimer.

Please proceed.

Thank you for taking my question.

Just -- first question here, just on the back of your R&D spend in Q4.

What tape-out activity actually pushed out, and I guess why did it push out?

Just curious if you are pushing that out or deferring that because you are getting a better pricing environment on the memory controller side.

If you could help explain, that would be helpful.

Thanks.

The project was pushed out due to the decision we are changing certain feature and function.

And so because the China C-MMB market is not there yet.

So in order to have a fully support for cover multi-location, multi-standard mobile TV, we decided to delay fourth quarter, to add more feature and to prepare better.

Okay.

Any kind of visibility on when you could get a regulatory decision that would actually make that more concrete?

As you know the China market is changing almost monthly for C-MMB launching.

So we anticipate the launching either in first half or second half of 2010, we don't know yet.

So it's very difficult to predict when it going to happen.

Okay.

And second question, it's just based on the CDMA RFIC kind of business, and I guess the two design wins.

You said, I think, on the prepared comments that as a percent of mobile communications revenue, CDMA RF transceivers are still pretty small or minimal in terms of a percentage of mobile communications.

Is that right?

And if I remember correctly, you currently are shipping CDMA RF transceivers in volume to the US handset market.

Is that true?

And what are expectations for a percent of mobile communications product revenues as you get the other two design-in wins to start kicking in, in volume in 2010?

Thanks.

Gary, in our communications product line, our mobile TV products are the largest part of that segment, but the CDMA products are also quite significant.

And we've had some important design wins.

We've announced in the past that we had a design win with Samsung for products going into the US.

Those products have already started shipping.

In addition to the US market, we now have wins for products in the China market, several wins for the China market.

We are quite excited about the potential of the CDMA market in China.

It is an emerging and fast growing market with a lot of support from the telcos as well as the central government.

So we expect important things from these products going forward.

Okay, Riyadh, last question from me.

What is the tax assumption here for the December quarter and 2010?

Taxes are very difficult to forecast right now because we are in a loss position.

We have for the last few quarters enjoyed some tax benefits; positive taxes on the P&L.

And these result largely from two items.

One, deferred tax assets relating to R&D tax credits; and also NOLs.

In terms of what it's going to be in the fourth quarter, if we hold everything constant, it would probably be similar, a similar amount.

But with higher R&D spend, there is a possibility that the tax benefit may increase.

But that said, there is also a potential downside that we also have to be aware of.

That is, if our deferred tax assets are not utilizable, then we may also have to write those down, impacting our tax line.

Okay, great, thank you.

Next question comes from the line of Daniel Amir with Lazard Capital Markets.

Please proceed.

Thanks a lot and thank you for taking my call.

In terms of the guidance, flat to plus 10%, can you comment whether -- are you going to see an increase in all three segments here in Q4 or is only one of the segments going to grow?

While we believe our mobile communications probably will stay flat.

The mobile storage product line really depends on the supply from the NAND.

And at this moment, it is very hard to predict that supply will be sufficient or be in shortage because the price still maintain high.

So most of the growth will be coming, if there is, from the multimedia SoC then?

It's going to be -- there is a combination of factors that may affect.

We are taking a balanced and blended approach to our revenue guidance.

We've been looking at the NAND flash situation, the tight supply as well as the volatility and how that could impact our revenues for the fourth quarter, as well as potential strength in our other product lines.

As Wallace has mentioned, our communications product will probably be flat, but there is a balance of activities in our other two product lines that will allow us to get to a flat to up 10% revenue range.

Okay, and considering the NAND market is continuing to stay clearly balanced here and maybe stay balanced into 2010, how do you really prepare the Company for this type of an environment, that you may not see a lot of new capacity coming in any time soon?

And what type of other growth drivers could actually drive your top line considering that we might be in a just a slow growth period here for you guys?

So Daniel, it's a very good question.

Naturally, I think we don't -- we cannot just count on NAND supply to grow the Company for top line.

So we do well to prepare to develop multiple new products and new applications to expand our topline growth.

This is including mobile storage, mobile communication, as well as the multimedia product line.

And especially for mobile storage, we need to get more OEM customers which -- who have the contract with the NAND supplier.

When we have much more OEM customers and contract development controllers, then that will help us to grow stably and strongly in 2010.

So this would be like handset OEMs that basically buy flash directly from the large NAND manufacturers?

Including handset makers, leading digital camera maker as well as some embedded system maker too.

Okay.

And then my final question is on the gross margins.

You commented that you expect a majority of the industry to move to 30x next year and 3-bit to increase as well.

I mean, how would that impact your gross margins profile considering that it seems like you feel that you have a competitive edge there in terms of technical capabilities?

Well, Dan, for our product lines, all our products go through cycles.

Initially, margins are higher and as they, over time with competition, they -- our higher gross margins diminish.

But at the same time, we constantly bring new products as well as new variants of old products that enable us to maintain our margins.

This is not a new development in our industry.

NAND flash went from SoC to MoC; it went from much wider process geometries to the fine geometries that we are seeing, but throughout we've been able to hold our gross profitability at these levels.

So we don't believe it's going to change materially, going forwards.

Initially, there may be some benefits, but we also have to balance that with older products, and therefore we will be able to deliver gross profitability that are similar to what we've been able to deliver.

Okay, great.

Thanks a lot.

And your next question comes from the line of Quinn Bolton with Needham.

Please proceed.

Hi guys.

First congratulations on the final determination at US ITC.

Wallace, could you just talk a little bit more about the mobile communications business being flat in the fourth quarter?

It sounds like you've got a number of CDMA transceiver wins.

You've got the ISDB-T solution shipping out for the Brazil market.

So I would have thought there may have been growth quarter-on-quarter.

Are you seeing perhaps a slowdown in the existing business as we get past the seasonal build in handsets?

Or is there something else going on that leads to kind of that flat outlook for mobile communications?

Well, it's region by region.

In fourth quarter we do see slowdown in Korea region due to some [excess] inventory from a major carrier.

But for other region, we also see strong demand such as Brazil and China.

That's outside the slowdown in Korea region.

So overall, we feel very comfortable moving into 2010.

We definitely believe we have a strong growth in 2010 for mobile communications product line.

Okay, let me also add, we're going through a bit of a transition on our mobile TV products.

We saw very strong growth in the third quarter.

In terms of units, our products grew almost 20%.

But the transition is coming from less sales of lower margin but higher ASP module business, and that being replaced by lower ASP, but higher margin products.

So it's a transition that we are going through and already we saw very strong growth of these lower ASP products in the third quarter.

Yes, I guess that was going to be my follow-up question.

I think you'd said that the reason for the blended ASP decline was a mix shift to T-DMB products.

But I just wanted to clarify.

Are those T-DMB products SoC products or are they still tuner-only products?

Why are they lower ASPs than some of the other products you've been shipping?

And then I had another question just related to that.

To the extent that the CDMA transceiver business picks up as you ramp the new wins in China, how does that affect overall blended ASPs in mobile comm?

Yes.

For your first question, a lot of the products that we are shipping are T-DMB.

It's a combination of SoCs as well as standalone RFICs for T-DMB.

But what's -- the products that we are ramping down are the sales of modules relating to S-DMB.

S-DMB is not a growth business in Korea, and the ASPs for those products are much higher than the ASPs for the T-DMB products.

Okay, so you're ramping down the satellite version, you're ramping up the terrestrial version of DMB.

And that's what's accounting for the mix shift to lower ASPs.

That's correct.

I assume, but I just want to clarify, over time you should ship less RF-only and more SoC products both for the T-DMB market, but then also for some of the other standards you are supplying worldwide.

That's correct.

The overall trend is to go into SoCs and we've been doing that.

Got you, okay great.

And then just switching over to the mobile storage business.

I was just curious; you'd referenced the iSuppli data that said perhaps 25% of shipments of NAND next year could be 3-bits per cell.

Just wondering; if that forecast holds, what percent of your controller shipments do you think could be 3-bits per cell?

It sounds like the OEMs are getting the lion's share of this supply rather than the card manufacturers, and so just not sure how to be thinking about 3-bits per cell as a percent of your mix next year.

Well, we cannot predict what percent we can be.

We definitely want it to be as many as possible.

We do have multiple product line ready to support Samsung, SanDisk, Toshiba and Hynix; the upcoming 3-bits per-cell MLC.

These all require very unique technology, not just wear leveling and not just randomization.

There's many different technology to stabilize and reduce the noise injection and to maintain the performance.

So it depends.

But we believe other flash maker, they also predict maybe much higher percentage output will come to 3-bits per cell in 2010.

Okay, great.

Thank you very much.

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

Riley.

Please proceed.

Thank you.

Regarding the continuing difficulties in securing adequate supplies of NAND, I mean what is the minimum volume you would need to guarantee the -- to secure contract pricing on your own or maybe one of your card customers to do so?

Well, for starters, we're not in the business of buying flash and so we don't enter into contract arrangements with NAND flash vendors for the procurement of flash.

But our customers do.

Our customers, for example, the module guys, they buy flash both on the spot market, some of them also have access to contract arrangements and they buy flash from the flash vendors.

And for us, our role is to supply controllers to them, controllers for them to pair up with the flash for them to convert into memory card products for the market place.

Right, but there's been this lingering problem of your customers can't get adequate supplies.

So are they just unable or are they unwilling to enter into contracts with the likes of Samsung, Hynix, et cetera?

The market is -- it's a free market.

They have access to the market, they have been buying a lot of flash, and they continue to buy a lot of flash.

And they've been buying a lot of flash this quarter.

In periods where supply is tight, they've been able to buy flash.

It's really a matter of price.

If you're willing to pay market clearing price, whether on a spot basis or on a contract basis, you have access to flash.

But with high prices of flash, it does affect their ability to do business and procure flash.

Let me comment a little bit here.

In last year, all flash makers, they lost money due a higher supply than the demand.

So all flash makers, they try to manage their supply cautiously for this year; they reduced capacity.

They may ship a majority of the NAND to the major OEM customer or embedded solution.

They ship much less NAND component to retail player, or the player without contract.

So a lot of our customer, because mainly they do not want to be binded with a single supplier; they don't want to sign the contract.

So in this year it is difficult for them to get a sufficient NAND supply from flash maker.

Especially now, the flash pricing maintains very high.

So a lot of card maker, they hesitate to buy high volume immediately, and they are waiting for the potentially price decline in the near future.

Okay, thanks.

Regarding a little bit further on this 3-bits per cell MLC flash.

So in the consumer space where you are supplying controllers what -- do you think you're poised to grab a greater share of that market than you've had overall today?

Or are you looking for about the same market share there?

But I can not predict all the flash maker, their strategy.

Some flash maker, they supply for their own product, some really supply for other card maker, USB flash drive maker.

But we'd love to grab as many possible we can because our controller for 3-bits per cell have a high ASP than MLC.

All right.

Maybe I believe I'll try a different tack, so.

I think a year ago, the case was made that your technology -- you felt that your controller technology in particular was better than competitors such as maybe Skymedi or other smaller competitors, but that with the slowdown in the market and the slower migration to more advanced geometries and processes, that you weren't able to enjoy the benefits of that technological edge.

So do you think the market is starting to pick back up and we can expect improving gross margins, or has the lull given your competition time to catch up?

Well, we still believe we have a strong technological edge over many of our competitors.

We've been doing very well.

We've been holding our gross profitability at these levels.

These are profitability levels that are much higher than many of our smaller competitors.

So yes, we believe that it's -- the profitability and the revenue momentum that we have is a good indication of the strength of our business, and we believe that going forwards, we'll still be able to enjoy the benefits that come from our position as the industry leader as well as the player with some of the best technologies in the marketplace.

Okay.

Thanks.

And the final question is back to mobile comms in Korea.

So the excess inventory at the carrier, is that all carriers or a specific carrier?

Can you mention?

We believe, in Korea, they are transitioning from a [DS/]CDMA into the WCDMA.

So that's why a carrier, if they have a [passenger] for CDMA, they probably won't demand more RF product in fourth quarter.

Okay.

Thank you.

And your next question comes from the line of Betsy Van Hees with Wedbush Securities Inc., please proceed.

Thanks and good evening, guys.

Congratulations on a great performance in Q3.

I was wondering if you could elaborate a little bit more for us on where things stand with the impending lawsuit from SanDisk.

It's wonderful news that the ITC has ruled in your favor.

And so what are the next steps and what are we looking for as we move forward in 2010 with this?

Hi, Betsy.

It's great that the ITC had ruled in our favor.

It's a position that we've maintained all along.

It's our policy and our culture to respect the intellectual properties of other companies.

But in terms of our next step, the final determination has been given by the ITC.

But that said, SanDisk does have the right to appeal if they choose to do that, and there is also a litigation that continues at -- well, will start if SanDisk chooses to do it, litigation at the District Court in Wisconsin.

Okay.

Great.

Thanks so much for that additional color.

In regards to the guidance, it seems that given your typical Q4 seasonality and the expectations that we are looking for, for Christmas this year and Chinese New Year, it seems as if the guidance you guys gave is particularly conservative.

Can you let us know what variables that we should be looking for to see as to whether that guidance could be higher than the flat to 10%?

Betsy, the key issue that we are facing -- or our industry as a controller maker, we are facing -- is the volatility in the NAND flash marketplace specifically the tightness of supply.

Just in October, flash prices went up sharply.

And this is obviously impacting both on the short term as well as the long term.

And in the short term, our customers are hesitating about buying prices because they are expensive, and they are also trying to gauge whether these prices will be maintained at these higher levels or will go up further or will come back down.

And if they do come back down then that may be beneficial.

But if NAND flash prices continue to be held at high levels, they could potentially also affect the level of demand at the end-consumer side.

Thanks, Riyadh, for the additional color.

It seems that, if I am doing the math correctly, in Q3 that ASPs declined about 7% on the 67 million units which increased 24%.

Is that correct?

Our ASPs for our mobile storage products actually increased.

This would be your blended ASPs?

They actually increased, but -- yes, the blended ASPs for our mobile storage products actually increased.

But they decreased somewhat -- decreased slightly just for our card products.

The blended ASPs for mobile storage were held up -- went up largely as a result of the blending in of higher ASP, SSD products.

Okay, great.

And then as we're looking at Q4, how should we look at ASPs, should we be modeling our ASPs for that?

Well generally, on a full year's perspective, we expect our ASPs for our products to decline, mobile storage ASPs to decline roughly around 20%.

Okay, great.

And then the final question I have, Riyadh, is on the gross margin.

So with the guidance at 46% to 48%, you've been able to hold flat for the last couple of quarters.

Can you give us a little color as to why you're giving us that type of a guidance versus more in line with what you've historically done these last couple of quarters?

We have a lot of moving parts in our business.

There are -- some of our products have higher ASPs, some have higher gross margins, others have lower gross margins.

And it's a combination of the blending of these products as well as the product cycles, individual product cycles of every one of our products.

And through the blending of all these products, as well as what we expect to sell in the fourth quarter, we believe that a 46% to 48% gross margin range is appropriate one, both internally as well as for us to communicate to our investors.

Great, thanks.

And once again, congratulations on the nice performance in Q3 and the ITC favorable ruling.

Thanks, guys.

Thank you, Betsy.

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

Please proceed.

Hi guys, thanks for taking my call.

I will start off with my first question, maybe with this report that Samsung has moved into the retail space; can you tell us what kind of an impact does that have on your Company?

We can really not tell whether this impacts our Company or favor our Company.

What I can only tell you, some are products using our controlling site.

So we, some of the products, they'll use their own solutions, and if we have a better solution they will use our solution.

So Samsung definitely want to try the retail to see what outcome it would be.

The current price is very, very high ASP.

So we don't believe they will have very high volume initially.

And so we'll definitely also continue on to be in the socket when Samsung continue growth; if they can grow their own brand card business in the retail.

You say that their branded cards have higher ASP than the competition.

Is that what you are --?

In today, yes, in the retail.

And we believe these products are priced as premium products.

Okay.

All right.

And then we have heard from SanDisk, we have heard from Samsung that embedded was really the segment that contributed to the outperformance in their third quarter.

What are you guys doing in your -- on your embedded side?

I know that you are doing something, but are you changing your focus or changing your stance?

Can you give us additional color there?

We also believe embedded solution will become very important in the long term.

So we are also developing controller to be suitable for embedification for handset, consumer devices.

What's the challenge there though, I mean, compared to just a controller for a card, for instance?

The challenging for controller to be embedded especially for top tier OEM, the quality level to be higher, the temperature range has to be industrial range, not commercial range.

So there's a lot of quality requirement be tighter than commercial product line.

Okay.

And I am assuming they have better ASP than for a card controller?

They have a better ASP, but a longer qualification process.

Okay.

Can you give us a range of contribution to your overall revenue currently and what you hope it might be in the future?

Currently, it's quite small.

But another way to look at this business is a lot of our SSDs are really embedded solutions.

They are embedded solutions, they are solid state storage devices, they are configured as SSDs, but they are also often used as embedded memory storage.

And so we have developed these products with the rigors that you would expect for high quality embedded products that our competitors are also bringing to market.

And for us, our SSDs, if you classify them as embedded storage, they count well over 5% of our total revenue.

Okay.

Well, correct me if I'm wrong, but I thought that a lot of the embedded business that's currently going on is the -- what is going to the smart phone as opposed to be SSDs.

Is that correct or is that wrong?

There is a lot of (inaudible) going into smart phones, but there are also a lot of high value products going into a host of applications, in industrial PCs, in storage, networking, enterprise products.

Okay.

Great.

Riyadh, can you remind us again what's your long-term gross margin target?

If there has been any change or if it's still the same?

Given the volatility of the markets in recent quarters, since the mid of last year, it's been very difficult for us to maintain a long-term growth rate or long-term level of gross profitability, whether on the gross or the operating levels.

And we're not prepared to provide a long-term figure, both for top line or on the margins.

But for the upcoming quarter, the fourth quarter, the gross margins that we are expecting is 46% to 48%.

Okay, great.

Just one last thing.

With the ITC ruling being out, what can we -- how should we model legal expenses going forward?

Legal expenses right now are roughly less than $100,000 per quarter.

Okay, and that is lower than what it was in the past year?

It was higher when the litigation at ITC was in full swing.

Okay, great.

Expenses for district courts are generally less.

Okay, great, thanks a lot.

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

Please proceed.

Yes, hi guys; thanks for taking my call.

I'm not sure I heard this in the prepared comments, Wallace; did you comment on what the sequential unit growth was in mobile storage?

Yes, it's 21% sequential growth for our mobile storage controller unit shipments.

Okay.

And 27% on revenues, correct?

That's correct.

Okay.

Okay, helpful, thank you.

One other question was in reference to some of the comments you made about the 3-bits per cell.

You mentioned having -- if I heard this right, controllers for Toshiba and for SanDisk.

By mentioning SanDisk are you implying that you actually are shipping controllers to them?

Or are you possibly -- have you built controllers to support the wafers that SanDisk apparently is selling to third party -- to card makers right now?

I'm just curious about your reference to SanDisk here.

I mentioned Toshiba and SanDisk.

They have a joint venture and they produce 3-bits per cell MLC.

And as of today, I believe they use their own NAND, produce their own solution.

They also may be selling some NAND component to other customers too.

So we are supporting based on customer demand.

Okay.

So you've got controllers qualified to support their particular 3-bits per cell NAND output?

Well, what I only want to say is our controller is ready to support all the major flash makers' 3-bits per cell in 30-nanometer and 40-nanometer --

I got it, okay.

-- MLCs.

Okay, good, I just wanted to make sure I understood that correctly.

Thank you very much.

And we have no audio questions in queue at this time.

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

We will be attending the Collins Stewart TMT conference in San Francisco 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 our presentation.

You may now disconnect.

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