慧榮科技 (SIMO) 2009 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to Q4 2009 Silicon Motion Technology Corporation earnings conference call.

My name's Juanita and I'll be your coordinator for your call.

During the presentation, your lines remain on listen-only.

(Operator Instructions).

And now ladies and gentlemen, I'd like to read you out the Safe Harbor statement that goes like this.

This press release contains forward-looking statements within the meaning of 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 operation, 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 risks and uncertainties, and actual market trends and our results may differ materially from those expressed or implied in these forward-looking statements for a variety of reasons.

Potential risks and uncertainties include, but are not limited to, continued competitive pressure in the semiconductor industry and the effect of such pressure on prices, unpredictable changes in technology and consumer demand for multimedia consumer electronics, the state of and any change in our relationship with our major customers, and changes in political, economic, legal and social conditions in Taiwan.

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

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

And now ladies and gentlemen, I would like to hand you over to Jason.

Jason, please go ahead.

Thank you very much.

Good morning everyone.

Welcome to Silicon Motion fourth quarter 2009 financial results conference call webcast.

My name is Jason Tsai; I'm the Director of IR 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 the review of some of our recent business developments.

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

This 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 in 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 to Wallace.

Thank you Jason and thank you everyone for joining us today.

I will start by briefly recapping our fourth quarter operating performance.

Our fourth quarter revenue was $22.8 million, declined 1% sequentially and gross margin was 42.2%.

Net loss was $7.8 million and a loss of $0.28 per diluted ADS.

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

Let me start by discussing our revenue performance.

While our overall revenue performance for the quarter was largely flat, our Mobile Storage business continued to improve.

Our Mobile Communication product line, on the other hand, went through a temporary and transitionary slowdown.

This slowdown affected our quarter overall performance but before I talk about this, let me return to our Mobile Storage business.

Our Mobile Storage business continued to improve in the fourth quarter, following a rebound in the third quarter.

Our Mobile Storage business improved because of several key factors.

NAND flash industry supply improved further in this quarter though modestly.

Our 3-bit per cell MLC controller products are ramping nicely.

Our core card and USB flash drive controller sales continue to grow.

Our emerging SSD controller itself continued to grow strongly.

NAND flash industry supply remained tight.

Although NAND flash industry supply has been improving for about two consecutive quarters, availability of flash components through module maker remained tight because of continuing strong demands on OEMs.

Demand for NAND flash continued to escalate with the new classes of product requiring solid state storage continuing to emerge from Apple's iPhone and other smartphones to eBook and now iPad and other tablet devices.

We remain convinced that NAND flash remains one of the fastest growing, exciting segments of the semiconductor industry.

We forecast that this year NAND flash bit supply could grow 85%, double the supply bit growth in 2009.

The transition to smaller geometry NAND flash is happening at an accelerated pace, as demand continued to outreach supply.

In 2008, the industry was predominately 50 nanometer flash.

In 2009, it was 40 nanometer and 30 nanometer.

And in 2010 the industry will be producing mostly 30 nanometer and migrating to 20 nanometer NAND flash.

While this technology transition helped drive overall bit growth, the move to smaller geometry NAND also created weaker and weaker NAND flash that need to be compensated by more advanced controller technology.

Silicon Motion has been at the forefront in facilitating this rapid technology transition.

We have developed a new cost controller to overcome the weakness in the 30 nanometer 3-bits per cell as well as 20 nanometer 2-bit MLC flash.

In order for this next generation more (inaudible) product to come to market, our controllers utilize more advanced ECC engines, digital signal processing and global wear leveling algorithm to help improve and maximize daytime endurance, integrity and retention.

We work closely with NAND flash vendors themselves to ensure that when they transition to next generation NAND, our controllers are there to support their products.

Better performing controller not only improves the consumer experience, but also helps improve yield and profitability for the NAND flash vendors.

This strategic advantage significantly improves our competitive position with both the NAND flash vendors as well as our customers.

With advanced controllers, the quality of consumer storage devices using X3 MLC become comparable to early X2 MLC.

Industry analysis believes X3 MLC could be as high as 25% to 30% of all NAND flash supplies this year.

We've started ramping our X3 MLC controller in the fourth quarter.

In the quarter our X3 controller already accounted for nearly 10% of our card controller sales.

Our X3 controllers already used by our customers who are managing Samsung as well as Toshiba SanDisk X3 flash.

Last year, our business was affected by the increased allocation of a more limited supply of a flat OEM in the wafer module makers.

Increased supply for NAND flash in general, as well as a rise of 3-bits per cell MLC components, will help balance the availability of flat OEMs and module makers.

Both our core card and USB flash drive controller cells continued growing modestly in the fourth quarter.

Combined sales with this product grew between 5% and 10% sequentially.

Our card controller sales was driven by a strong improvement in our bundle business.

Our bundle business has rebound strongly for two consecutive quarters.

Despite the elevated prices of the NAND flash in the fourth quarter, our SSD business continued to grow.

We have a focus on the NAND notebook, netbook market and are seeing increasing demand from other markets including industrial and medical equipment, (inaudible) portable computing devices such as MID, consumer electronics and the networking market.

While the overall adopting rate of SSD remained low, we believe that our controller targeting high performance lower [density] SSD offers substantial performance and cost benefits to HDD.

Our SSD shipment in the fourth quarter grew over 35% sequentially and now account for nearly 10% of overall corporate revenue.

We are encouraged by the strong backlog of design wins of our SSDs for 2010, but anticipate our revenue ramp of SSD controllers to be volatile as our segmented end market continues to grow.

Moving on to our Mobile Communications business.

Revenue for our Mobile Communications business weakened in the fourth quarter, but this weakness is temporary and [transitionary].

Our Korea handset OEM customers are transitioning their T-DMB mobile TV SoC [in common] to more advanced [application], such as higher sensitivity, lower power consumption and smaller package.

The sales of our existing product therefore declined as the OEM customers [ready] new handset models with the upcoming new SoCs.

We are confident that our Mobile Communications weakness is temporary and transitionary, because our design activity and extensive backlog of T-DMB SoC design-ins and design wins with all three leading Korean handset OEMs.

We are also ramping up our production of mobile TV solutions for new and growing opportunity in non-Korean market.

In China we are pleased to add Lenovo and LG to our list of customers using our CMMB mobile TV solution.

The China mobile TV market started to ramp in 2010 as the shipments of the TD-SCDMA handsets grow and the percentage of TD-SCDMA handsets with CMMB increase.

We continue shipping our ISDB-T SoC to Samsung for their key mobile TV handset models sold in Brazil.

We have secured a second ISDB-T mobile TV design-in for Brazil and also another ISDB-T design-in for Japan.

(Inaudible) we are also pleased to announce that we have begun shipping our CDMA transceiver for use in Nokia handsets for China domestic market and this product is already available in the market place.

Overall, while our recovery so far has been modest and NAND flash supply remains tight, we're excited about our opportunity in 2010, because NAND flash supply will increase and we have a strong pipeline of backlogs.

Let me briefly turn to our operation infrastructure.

During the economic downturn we had a conviction that our business model and opportunity were intact.

So we took out some costs and continued investing in key growth opportunities.

We removed almost 20% of our cash overhead in 2009, but maintained sufficient resources to pursue our important growth opportunity and operate our business at cash breakeven levels.

This year, even as our business rebounds, we intend to keep our operation expense at last year's levels approximately.

We will also keep our overhead at last year's levels.

With our current operation infrastructure we believe we can easily support the revenue level that we generated in 2008 and 2007.

I will now turn the call to Riyadh.

Thank you, Wallace.

First I will discuss some financial highlights from our fourth quarter and then provide guidance for our first quarter 2010.

For fourth quarter 2009 our revenue of $22.8 million decreased 1% sequentially.

Mobile Storage products accounted for 66% of sales, Mobile Communications 16% and multimedia SoCs 14%.

With the increased availability of NAND flash components and other reasons that Wallace has discussed, our Mobile Storage revenue increased further in the fourth quarter and grew 7% as compared to the third quarter.

Unit shipments increased 8% and blended ASPs decreased 1% sequentially.

Our unit shipment gains were driven by our three primary products; card, USB flash drive and SSD controllers.

Mobile Communications revenue fell 41% sequentially due to temporary and transitionary weakness in our mobile TV IC and CDMA RF IC sales.

Multimedia SoC revenue increased 13% sequentially, due to continuing improvements in our graphics processor and PC camera SoC sales.

Our Corporate gross margin, excluding reserves for end-of-life and obsolete products, was 52.1%, up 2 percentage points sequentially.

Our gross margin, including reserves for end-of-life and obsolete products, was 42.2%, a decrease from the 48.5% in our previous quarter.

In the quarter we reserved $2.2 million for end-of-life and obsolete inventory relating to certain unsalable legacy controllers as well as Korea electronic tollway collection RF IC products.

Our operating expense was $14 million, $2 million higher than in the third quarter.

Of the $2 million, $1.5 million were because of one-time expenses.

We reserved $1.1 million in bad debt expenses, primarily relating to uncollectible AR from a Korea electronic tollway collection OEM customer.

We had a $0.4 million loss from the cancellation of a construction in progress.

We were an investor in a Korea office building construction project sponsored by the Local Government until its recent cancellation.

If this project were to have been completed it would have housed our mobile communications, R&D and operating teams.

We also incurred higher sales and marketing expenses and higher R&D expenses compared to the previous quarter.

Sales and marketing expenses were $0.4 million higher due to miscellaneous expenses relating primarily to product samples and HR-related expenses.

R&D expenses were about $0.1 million higher because of higher project expenses.

Our stock-based compensation expense in the quarter was $7.6 million, higher than the $2.2 million reported in the third quarter.

The increase in the fourth quarter was largely due to a one-time $5.1 million expense relating to the accelerated vesting of certain soon-to-be-vested restricted stock units and cancellation of a small portion of our outstanding restricted stock units that were previously granted to employees.

We are currently planning a new, more effective long-term employee incentive program and we are expected to implement this shortly.

In the fourth quarter we had a $3.5 million tax expense, mostly from the writing off of deferred tax assets.

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

Although we reported a GAAP net loss of $17.3 million, we generated positive cash flow of $0.7 million, and our cash and cash equivalents stayed largely constant at roughly $61 million in the fourth quarter.

Our accounts receivable turnover decreased slightly while our inventory increased slightly to support the ramp of new products in the first quarter.

DSO decreased to 68 days this quarter from 71 days in the third quarter and days' inventory decreased to 111 days this quarter from 115 days in the third quarter.

Due to weaker than expected performance of our mobile communications business and push outs of market opportunities we are assessing potential impairments to goodwill and acquisition-related intangible assets as it relates to our FCI acquisition.

As you may remember, we acquired FCI for $102 million in 2007.

The net carrying cost at the end of 2009, before potential impairment charges, was $72 million.

We will be appointing an independent appraiser to assist us in determining the extent of the non-cash impairment charge and will disclose this as soon as practicable and at the latest in our 2009 20-F filing.

I will now move on to our guidance.

As Wallace had commented in our earnings release, while we're seeing continuing improvements in our NAND flash industry supply and business pipeline, NAND flash remains tight in the short-term and this could hamper our recovery momentum.

We expect first quarter revenue to be up 5% to down 5% sequentially.

We expect our first quarter gross margin to be within the 46% to 48% range.

We are targeting operating expenses to be in the range of $13 million to $14 million.

Since we are keeping our headcount constant, core SG&A expense per quarter is expected to remain at about $5 million, plus/minus $0.5 million with R&D expenses roughly between $8 million and $9 million, depending on the timing of tape outs and other project expenses.

Stock-based compensation expense should be approximately $1.2 million to $1.4 million.

Our effective tax rate this coming quarter should be roughly between 10% and 15%.

We will now open the call for your questions.

(Operator Instructions)

Operator, are there any questions?

We still have no questions coming through yet.

(Operator Instructions).

Okay, operator.

There's no questions still.

We have no questions at all.

No questions.

Okay.

Well, we'll conclude the call then.

Wallace will have some closing remarks.

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

We will be attending the Oppenheimer 7th Annual Semiconductor Summit in New York in February and the 8th Annual Wedbush Management Asset Conference in New York in March.

Thank you again for your interest in Silicon Motion.

Goodbye for now.

Thank you, ladies and gentlemen.

That concludes your conference call for today.

You may now disconnect.

Thank you for joining.

Thank you.