慧榮科技 (SIMO) 2010 Q2 法說會逐字稿

Good day and welcome to the second quarter 2010 Silicon Motion Technology Corporation earnings conference call.

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

(Operator Instructions).

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

Before we begin I would like to acknowledge the following.

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 limitations, statements regarding trends in the semiconductor industry and our future results of operation, financial condition and business prospects.

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

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

Potential 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 technologies and consumer demand for multimedia consumer electronics, the state of and any change in our relationship with our major customers and changes in political, economic, legal and social conditions in Taiwan.

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

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

I will now turn the call over to Mr.

Jason Tsai, Director of IR and strategy.

Please proceed.

Thank you very much.

Good morning everyone.

Welcome to Silicon Motion's second quarter 2010 financial results conference call webcast.

I'm 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 a review of some of our recent business developments.

Riyadh will then discuss our second 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 SEC.

For more details on our financial results, please refer to our press release, which is filed on Form 6K 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 financial information on 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 results can be found in our earnings release issued yesterday.

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

With that I'd like to turn the call over to Wallace.

Thank you, Jason, and thank you everyone for joining our second quarter earning call today.

I am pleased to announce our outstanding results for the second quarter.

We are excited that the NAND flash industry and more specifically our controller business continues to see a strong recovery.

This quarter we increased our revenue 25% sequentially, and 60% compared with last year.

Our gross margin increased to almost 48% from about 47% in the prior quarter as our higher value-added product ramped.

We also delivered our second consecutive positive operational profit following the recent economic downturn.

Operational margin increased to over 7% from under 1% in the prior quarter as we benefited from the positive operational leverage.

As a result of our increased revenue, better margin and operational leverage, we posted a net income of $2.9m and a GAAP net income of $2.2m, our first positive GAAP profit since Q3 2008.

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

Let me focus instead on discussing our second quarter business performance.

The stellar performance of our mobile storage business was the primary driver of our overall outstanding corporate performance.

We benefited from the continuing expansion of NAND flash industry supply, especially the availability of 3-bit per cell TLC NAND flash.

We were able to capitalize on the trend of rising availability of TLC flash because of key investment in controller technology that we made last year.

We made those investments because it was our strong belief that the NAND flash technology advances, whether in terms of higher bit per cell or finer process geometries, controller technology will play an increasingly critical value-added role.

We are now seeing some of the fruits of our investments, and expect the momentum of our product to remain strong.

We also continue to benefit from growing SSD and embedded flash controller business.

We saw very little TLC flash in the merchant marketplace at the end of last year.

Correspondingly, in the fourth quarter of 2009, about 5% of our controller scale fell for TLC flash.

Since then the proportion of TLC controller as a percentage to all our controller sales has grown to over 10% in Q1, and growing further to about 25% in Q2.

We believe this trend will continue and are confident that, with our emphasis on TLC as well as the 20-nanometer flash, our controller shipment should grow meaningfully faster than overall NAND flash industry in terms of component unit growth.

Analysts estimate roughly between 5% to 15% of all flash output last year were TLC.

Analysts estimate roughly 20% to 25% of all flash this year will be TLC, and 30% to 45% next year.

Over half of SanDisk's NAND flash output is already TLC.

In the marketplace our customers are currently seeing significant volume of SanDisk TLC, ramping of (inaudible) Samsung TLC and more limited amount of Toshiba and Micron TLC.

NAND flash manufacturers are interested in producing TLC [attached] NAND flash as a way to increase capacity without significant capital expenditures.

We believe that the proportion of all flash produced based on SLC and 2-bit per cell MLC attached will continue to decline.

And in a few years time the majority of all flash will be TLC.

We are now providing TLC controllers to support all the TLC flash available in the marketplace, whether it's from Samsung, SanDisk, Toshiba or Micron.

Our controllers support all of their older 40-nanometer TLC flash as well as newer 30 nanometer TLC-flash.

We believe we remain the clear market share and technology leader for TLC controller, and are ready to start shipping 20-nanometer TLC and MLC flash controllers in Q3.

Engineers in the NAND flash manufacturers have been making progress, improving the quality of TLC.

What is surprising is how quickly progress is being made.

Endurance and data retention of TLC used to be vastly inferior to MLC.

This is no longer the case.

The endurance and reliability of some of the newer TLC products that will come to market starting later this year, in conjunction with an advanced controller, will approach the quality of MLC.

We are playing a key role enabling the greater reliability of TLC flash as our advanced controller sees significantly improving endurance and performance of these components.

This progress is a factor in motivating NAND flash makers to increase their output of TLC flash.

Otherwise it will be very difficult for flash vendors to sell TLC flash.

Because of the improving quality of TLC flash and the advancement being made in controller technology, OEMs will start using TLC for embedded applications beginning next year, much earlier than currently expected by most analysts.

Our unique value-added solutions are receiving strong interest from OEM and are strengthening our relationship with NAND flash manufacturers.

This quarter we received a significant design win with Samsung for their OEM SD and microSD card business.

We also become the sole supplier for a Tier 1 Japanese OEM for their memory stick and UFD products.

Our SSD and embedded flash controller products continue to scale.

In the second quarter SSD and embedded controller again accounted for nearly 10% of the overall Company revenue.

Shipment increased over 25% sequentially and nearly 350% compared to a year ago.

Most of our SSD and embedded controller solutions are industrial grade.

We saw a significant portion being used in enterprise networking equipment manufactured by a leading US networking OEM for providing (inaudible) management and other solutions.

We are also developing embedded flash controller for TLC NAND flash and target initial sales sometime next year.

I will now move to our mobile communications business.

In the second quarter our mobile communication business declined sequentially due to lower shipment of our CDMA transceivers.

Our mobile TV products, on the other hand, continued to rebound, with our Korean TDMC SoC sale increasing three-fold sequentially.

During the quarter we secured several new T-DMB design wins for Android smartphones.

Our T-DMB sale in Korea increased strongly.

Sales of CMMB to China and ISDB-T to Brazil and Japan once again exceeds T-DMB sales, as mobile TV continued expansion into new markets.

Overall, I'm delighted with our performance in the second quarter.

We are actively investing in our business and technology to ensure the progress we have made in the first half 2010 continues, and to maintain Silicon Motion's market leadership in an aggressively growing market.

I will now turn the call over to Riyadh to discuss our financial results.

Thank you Wallace.

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

As Wallace has mentioned, this quarter we increased our revenue 25% sequentially and 60% compared to the same period a year ago, and delivered $32.5m in revenue.

For the reasons previously discussed, we believe we are very well poised to deliver further growth in the upcoming quarters.

This quarter, with the exceptional strength of our mobile storage business, our revenue mix changed slightly, with mobile storage gaining significantly and mobile communications declining.

Mobile storage increased from 65% of sales to 68%.

Mobile communications declined from 23% to 16% of sales.

Multimedia SoCs remained constant at 12% of sales.

We saw a significant increase in availability of TLC flash in the second quarter, which drove a 31% sequential revenue growth for our mobile storage business.

Unit shipments for our mobile storage products increased 16% sequentially.

Blended ASPs increased by 13% sequentially, as sales of our higher value-added products, such as controllers for TLC flash, SSDs and embedded flash, ramped significantly in the second quarter.

Mobile communications revenue decreased 13% sequentially.

Continued recovery of our mobile TV business was more than offset by weakness in our handset transceiver business relating to VIA CDMA baseband solutions.

Our multimedia SoC revenue increased 31%, driven by sales recovery of our embedded graphics processors in the US, Europe and Japan.

Our corporate gross margin increased 60 basis points to 47.7% from 47.1% in the previous quarter, as we sold more higher value-added, higher margin products.

Second quarter operating expense of $13m was higher than the $12m reported for the previous quarter, largely due to higher R&D expenses this quarter.

SG&A remained constant at $5m.

Operating margin increased from 0.9% in Q1 to 7.6% this quarter.

This significant increase in operating margin was the result of higher revenue, higher gross margin and operating expenses that remained firmly under control.

Our increasing operating margin is indicative of the strong operating leverage in our business, because our current infrastructure is essentially the same operating infrastructure that we had when we were generating $50m of revenue a quarter.

Stock based compensation in the second quarter was $1.5m, an increase from $1.1m reported in the first quarter.

Acquisition-related charges were unchanged at $0.5m.

This quarter we received a one-time settlement payment of $1.4m from ASE.

This payment was related to our claims against ASE for products damaged in a fire at ASE's factory in 2005.

Diluted EPS improved from a loss of $0.01 in Q1 to earnings of $0.09.

Overall, we are very pleased with our P&L performance this quarter.

I will now move to our balance sheet and cash flow.

In the second quarter we increased our cash balance by $3.5m from $61m in Q1 to $64.5m this quarter.

This quarter we received $1.4m in cash from payment by ASE for settlement of our claims.

This cash inflow, however, was largely offset by $1.2m for CapEx relating to software and design tools.

Most of the $3.5m increase in our cash balance was therefore the result of cash operating profit and working capital flows.

Our cash conversion cycle improved as our accounts receivable turnover and inventory turnover both improved in this quarter.

DSO decreased to 48 days from 51 days in the first quarter, while days inventory decreased from 88 days in the first quarter to 64 days in the second quarter.

Improvements in DSO and DIO are indications of stronger than expected demand for our products this quarter.

I will now move on to our guidance.

We continue to believe that 2010 is a year of gradual recovery for Silicon Motion.

We delivered solid operating results in the first half of 2010, and believe the market for our products remains robust for the rest of the year.

We should see quarterly growth for the balance of 2010.

In the [first] half of 2010 we anticipate that the overall industry supply of NAND flash will continue to grow because of the following reasons.

TLC flash will continue to grow.

20-nano flash will start to ramp and new capacity will come online from new production tools installed in existing NAND flash fabs.

We should grow faster than the overall NAND flash industry component growth given our large share in TLC controllers and our focus on 20-nano flash products.

While we are optimistic about supply improvements in the second half of 2010, it is important to remember that this is a highly volatile industry where ongoing supply and demand imbalances can have a significant impact on our customers' ability to source NAND flash and, in turn, affect their demand for our controller products.

Let me now provide guidance for Q3.

We expect third quarter revenues to be up 5% to 10% sequentially.

We expect third quarter gross margins to be within the 46% to 48% range.

We are targeting operating expenses to be in the range of $12m to $14m.

Stock based compensation expense should be approximately $1.8m, and acquisition-related charges should be approximately $0.5m.

Our target model tax rate remains 15%.

We will now open the call for your questions.

(Operator Instructions).

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

Please proceed.

Thanks a lot and congratulations on a good quarter.

A couple of questions here.

Can you give a bit more visibility into the opportunity in the embedded market for you guys?

And also as it relates to your comment that TLC is starting to be qualified in OEMs, does that open a new opportunity for you as well?

And I have a couple of follow-up questions.

Regarding the first question, we do have a product, a controller product, ready to support embedded application.

However, the qualification take longer than card business or USB business.

So we believe we will start to ramp maybe in ending of this year or early next year which will support 20-nanometer MLC as well as 30-nanometer 3-bit per cell.

Regarding our position in TLC, we strongly believe we are leading position in technology in 3-bit per cell for all different manufacturer.

We support all type of TLC today, [that] come from Samsung, Toshiba, SanDisk as well as Micron.

We also ready to support upcoming Hynix 30-nanometer TLC, as well as Intel, Micron 35-nanometer TLC.

So we're having that [dramatical] technology in advanced ECC engine, data shaping, digital signal processing, as well as backhaul management and threshold voltage management.

So many technologies we work very closely with the flash maker in very early stage to define better technology to improve the endurance and data retention.

So we have very high confidence in TLC marketplace.

Okay, great.

And with regards to the guidance, plus 5% or plus 10%, is that assuming -- what's the assumption there in terms of mix, considering your mobile communication was down in Q2?

Do you expect the same situation in Q3 as it relates to CDMA transceivers, or do you expect a pick up there?

Overall we expect improvement from all our -- continuing improvement from all our product lines for the upcoming quarter, for Q3.

So our total revenue expectation is up 5% to 10%.

We expect continued growth from our mobile storage.

We expect recovery from our mobile communications, and we expect continued strength from our multimedia business too.

Okay.

And then on the OpEx assumptions of $12m to $14m, is that the level we should be modeling for the rest of the year?

That's correct.

And final question related to the SSD opportunity.

Is that something that we should be starting to look at, considering that you have a lot of activity around the tablet space.

Is there an opportunity there for SIMO here in the next 12 months, or is that a little more muted?

Currently, most of SSD is related to embedded or lower density SSD product applications.

But we believe we will become a stronger player, to enter mainstream in high end in 2011.

So in 2011 we believe we can offer very competitive product to compete in the market because we will be the first to provide solutions for 20-nanometer MLC as well as TLC.

Okay.

Thanks a lot.

Our next question comes from the line of Jie Liu with Auriga.

Please proceed.

Hi.

Good morning.

Could you talk about your gross margin longer term, given the increase in your NAND flash controller ASP?

We've been targeting our gross margin around the 50% level.

In the last many quarters it's been a little bit below 50%, but it's roughly within the range that we've been targeting and that we've been delivering for the last many years.

So it's still our target that we will continue to maintain our gross margin at these sort of levels.

Okay.

Do you foresee to achieve 50% in three to four quarters or two to three quarters?

It's difficult to say exactly when we can hit exactly the 50% level, or whether we can go above 50% level.

It all depends on a large number of things, including our product mix, how the various product lines within our portfolio products how they ramp.

But generally our target is we would try to get our gross margin, and keep them at our current levels, whether higher or at these levels.

Okay.

Then could you give us an update on your mobile TV efforts in China.

Do you think China has an opportunity to become the biggest revenue contributor to your mobile TV business this year?

In China, should see -- currently CMMB will be only designing [TD-SCDMA].

In China market I think the momentum up and down.

It was very strong early this year.

It went down in middle of -- beginning of second quarter and start come back.

So we believe in the long term China government definitely will endorse CMMB as the China standard for mobile TV.

And we see it will be a much bigger momentum push for China Mobile TV -- for mobile TV in China, operated by China Mobile in the market.

So we -- but everything could change.

ISDB-T also become stronger.

It went to South America.

And we're looking for other standard and come to US and Europe too.

Okay.

How are you guys doing with the non-mobile phone devices in China such as MP3, MP4 or other terminal devices?

Since we have a limited resource and we select specific D modulator partner and work together.

So initially we just target mobile handset maker.

I see.

Okay.

Just one more question.

Who is your largest customer of the TLC business right now?

Is it still SanDisk or it's Samsung?

Could you rephrase your question?

Are you referring more to whose flash components are our controllers most frequently paired up with, or are you referring to our end customers?

I'm referring to who is your biggest customer for your 3-bit per cell NAND flash controllers, not the flash controller overall.

Because they -- we supply our TLC controllers to all of our customers.

As you know our controllers are sold to just about everyone of the NAND flash card makers as well as USB flash drive makers.

Most of the largest customers, players in the space are our customers.

These are customers that we have been selling MLC controllers to and earlier SLC controllers.

And now we're beginning to sell TLC controllers to these customers.

They're all very important customers of ours.

Okay.

I was hoping that you could rank maybe Samsung, SanDisk, Toshiba, Micron just based on the business you do with them or with their customers.

Let me put it another way.

The vast majority of our controllers are being paired up with Samsung, SanDisk flash.

But we are also beginning to pair our controllers with Toshiba and Micron flash.

Okay, alright.

Got it.

Thank you.

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

Riley & Company.

Please proceed.

Thank you.

Is there a way you could break out within the FCI business, how much is TV tuners versus transceivers RF ICs?

They're roughly two-thirds mobile TV and one-third transceivers.

Okay.

So the slowdown you're seeing in the CDMA business, that's not really expected to be a drag going forward, or do you expect that to wind down?

Well, I think as of today CDMA business is very compelling in China market.

But however we expect EV-DO could be the next growth driver, start from maybe Q4 this year or early next year.

We believe EV-DO will be the main focus from China Telecom.

And also we're shipping products through Samsung to Verizon Wireless.

Mike, let me also add that our solutions are paired with VIA Telecom spacebands.

VIA is essentially the only alternative supplier of CDMA solutions alternative to Qualcomm's and are very well positioned as the [MediaTek] of the CDMA space.

So we're fairly optimistic about their business model.

And longer run if they can deliver well, then we should see great things from our business.

Okay, thank you.

And then getting back to the mobile storage side, so you have this great technology lead over Skymedi and Alcor and other competitors.

Do you see them now with more robust solutions in TLC, or how is that competition shaping up today versus three months ago?

We really do not see that many competitors in the market today.

Okay.

We don't know whether they improve or they make better, but it's just we believe we are still stronger player in the market today.

Okay, thank you very much.

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

Please proceed.

Hi.

Maybe we can start with Wallace first.

Wallace, can you give us some of your thoughts in regards to mobile TV opportunities, particularly in the US?

I know that Qualcomm recently has been saying that they have, for the most part, given up on mobile TV, at least in the US market.

Can you share with us your thoughts on that please?

Yes.

We really do not have too much thought about the US market because we've been waiting for a long time and the [growth wouldn't] change.

We are just planning, as the market becomes mature, it really -- and we see the market ramp up, we believe we will have solution ready.

How about the rest of the developed markets, besides obviously China and Korea and maybe Japan?

But outside of those key markets, even into Europe, how do you develop the market?

How do you see the market develop over there?

We see mobile TV as one vehicle for us to expand our superior technology in the tuner side.

Especially we also, in some markets we have SoC solution including D modulator.

But we also, for example, in Japan ISDB-T become so popular, also moving to digital broadcast.

So just ISDB-T itself is not just using for handset, will be used for cars, for the home entertainment.

So our technology, our strategy is leverage our mobile TV technology in tuner expand to broader space, into the digital TV.

Okay.

Second thing is I know you talked about supporting some of the NF suppliers including SanDisk.

There's been some chatter recently that SanDisk is having some difficulty in getting or supplying controllers for NAND.

Is that something that you feel that you might be interested in doing?

Sorry, can you repeat that again?

Supporting SanDisk with controllers?

Is that something that you think that you would consider doing?

Well, I can only say that we're improving our relationship with Toshiba and SanDisk.

We are supporting Toshiba, SanDisk in the 32-nanometer 3-bit per cell TLC.

We're also looking forward in the future for direct business engagement for both Toshiba and SanDisk.

Okay.

That's all I have.

Thank you.

Our next question comes from the line of Raji Gill with Needham.

Please proceed.

Yes thanks.

And congrats on good results.

Just going back on to the margin side, you clearly are taking significant share.

You have a strong technical position in the 3-bit MLC.

Just wondering why is it we're not seeing that margin expansion on that share gain and technical leadership.

Maybe you can talk a little bit about some of the puts and takes, maybe specifically discuss what's going on in the foundry side in terms of wafer costs, things of that nature.

I think it's a very complicated question.

It's very true that we all try to sell higher ASP supporting 3-bit per cell NAND.

However, because our controller they do support not only TLC but also MLC, we really have difficulty of smart way to identify customer buying the controller using MLC or TLC, because that is the way we leverage our manufacturing ability to ramp up our controller quickly.

So that we believe when the market move to 20-nanometer process technology, the competitor or the controller maker who has ability to develop controller to serve the market will become (inaudible) [or fewer], and we believe ASP can be even increased potentially and definitely will increase the margin.

Okay, that's great color.

And maybe if you could discuss a little bit about some of the trends that are going on the foundry side with respect to wafer costs.

Are you seeing -- are you trying to mitigate any price increases on the wafer cost if there are any going into this year?

So we still have very challenging times to increase our wafer capacity.

And it is supply shortage in second quarter.

We also see some foundries manufacturer increase wafer price.

However I think from now we're going to focus on our major manufacturing partner, TSMC.

We do have signed the contract.

We believe our wafer price will be relatively stable.

And moving forward, even into 2011, we will use TSMC our major supplier, probably will occupy around maybe 80% of our capacity.

And the remaining wafer would be signed from IC and [Cetera] and others.

Last question.

Maybe you could describe the demand landscape.

What are some of the drivers that are producing a lot of this growth in mobile storage?

Is it cyclical recovery?

Is it just expanding supply?

Is there any specific applications on the end market that you can talk about?

We believe the low cost smartphone from second quarter was one of the biggest driver to drive demand for microSD card.

And we also see the USB flash drive also increase dramatically from second quarter.

Consumer and customer tend to use a higher density USB drive with TLC.

And the microSD bundled business increased due to the strong demand from smartphone especially even in China.

And on the T-DMB market on the mobile phone business could you talk a little bit about the competitive landscape there?

Are you starting to regain share in that market?

Maybe you can walk us through that.

Also what's happening in the Japan market, the ISDB-T?

Thank you.

In T-DMB we probably only one competitor from Korea.

We believe our new SoC product line have a better power consumption, have a greater sensitivity.

And that's why we are designing many, many different new models including smartphone and feature phones.

That's why we have high confidence to see the ramp in second half this year.

In ISDB-T because in Japan there are many, many competitors, we did not see a great improvement because start from zero we definitely improved.

However in Brazil because we are designing both Samsung and LG, so we grow with Samsung and LG in the Brazil market.

Okay, great.

Thank you very much.

And congrats on good results.

(Operator Instructions).

Our next question comes from the line of Betsy Van Hees with Wedbush.

Please proceed.

Thank you.

Congratulations on the quarter.

I did have a couple of questions.

First, in regards to the guidance, you guys guided 5% to 10% quarter-on-quarter growth.

How does that compare to typical seasonality trends for you guys?

Seasonality is difficult to apply.

Historical seasonal patterns is difficult to apply in the new world.

So our expectation is second half year there's going to be greater availability of NAND flash components in the marketplace.

But at the same time we also have to be reasonably conservative, bearing in mind that the second half year, as we go into the second half year with the holiday season there's also going to be strong demand for NAND flash components from OEMs for devices, NAND flash for embedded -- embedded NAND flash for devices, be it smartphones or iPads or what have you.

So it's going to be a combination of increasing supply, but also increasing demand from alternative applications that may limit the availability of NAND flash to our customers.

But all in all, we believe conservatively 5% to 10% growth is realistic in the third quarter.

Thanks, Riyadh.

That was very helpful.

If I can go to my next question which is touching back on the competitive landscape, in the past it's been a very, very competitive arena for you guys in the 2-bit per cell.

But you're commenting that the 3-bit per cell you're just not seeing the competition there.

Can you tell us how much of a lead you think you have in that area?

And why you think that the competition isn't there or coming?

I think the technology we invest one and a half years ago really starts to pay off.

We cannot comment our competitive controller -- other controller maker how they deal with the new technology and how they develop the new technology.

But we believe the technology we develop is not just for TLC.

All the 20-nanometer MLC require similar technology because the new NAND in smaller geometry, endurance -- both endurance and data retention it become weaker.

They really need a new, advanced technology in controller side to compensate the weaker endurance and data retention.

There's the very complicated [broader] technology demand to support the new NAND.

In addition the flash maker also become smarter.

They are not just [believe or expect] the controller maker going to develop controller, because the technology become very complicated and much more confidential to their competition.

So flash maker will select the controller maker who they believe they can be successful, who are able to support their end customer.

So we are in the advantage, in the leading position to receive advance information with the flash maker to develop the new technology in early stage.

Thank you, Wallace.

That was very helpful.

And then my last question is in regards to inventory.

Inventory has been a pretty big issue for you guys and you have done a great job of working it down.

But given the constraints that you're seeing with your -- if I'm understanding correctly, what you said in terms of fab capacity and constraints that you're seeing from your partners, are you concerned, given that inventory has come down so much, that you might not have enough to support future -- this quarter or maybe future needs?

We believe that Q3 supply, the wafer supply will be much better than the second quarter.

Second quarter we did suffer some wafer constraints in supply.

But third quarter wafer supply from our major manufacturer will be much better and give a much -- a broader application in third quarter and the fourth quarter.

Thank you very much, Wallace and Riyadh.

And once again congratulations on a great quarter.

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

Please proceed.

Yes.

Hi guys.

Thanks for taking questions.

Maybe a follow-on to the previous question, to make sure I heard this right.

When you were referencing wafer constraints were you talking about constraints of NAND availability or constraints for product that you're making in foundries?

Constraints for our controller availability to our customer.

I got it.

Okay.

Okay.

So that does dovetail into somewhat of a related question.

So your assumption about Q3 top-line growth, what type of assumptions are you building into that guidance, relative to the availability of NAND for Q3, and in particular the availability of 3-bit per cell NAND.

There's been some discussion as of late that one of the major suppliers is potentially going to pull back a little bit in terms of supplying the greater Asia market with TLC, possibly because they think they've got more opportunity to supply MLC to some of their embedded applications.

I'd just be interested in your comments on that.

So Kevin, you're correct.

It's a very difficult question.

Flash maker they make their production monthly.

So every month based on the demand from their global customer and application, they decide what percent of wafer they use for what technology, TLC, MLC or SLC.

So we believe in the third quarter the output for total NAND flash will be increased.

However, we really cannot tell whether total output TLC will be much more than second quarter.

But we benefit some of it because major OEM design and major OEM project which are using the TLC, and that volume will be secure because they have the contract with the flash maker.

So based on all the picture and the analyses we believe 5% to 10% guidance, although it's conservative, but we believe it's reasonable.

Okay, okay.

So that potential for shifting availability is embedded in there.

The other question I would have is, you referenced that the majority of your TLC controllers are going into devices that are using either Samsung or SanDisk.

Have you seen at all, and are you expecting to see at all, maybe in third quarter, the availability of TLC products from other manufacturers, say Intel or Hynix.

Is that availability supposed to increase, or are you not seeing that yet?

Well I cannot speak for Intel, Hynix.

I can only say from this year definitely Intel, Micron will focus on MLC.

But next year they probably will increase very quickly for TLC in 25-nanometer.

But Hynix, because they have a capacity constraint, and how they're allocating NAND and DRAM is a Hynix decision.

We don't know, but they were prepared to make sure their 30-nanometer will be ready to ramp maybe next year.

Okay.

So you're not seeing it at all yet is basically the answer.

That's correct.

Okay.

Okay, great.

Thank you, guys.

(Operator Instructions).

And it appears there are no additional questions at this time.

I will now turn the call over to Mr.

Wallace Kou our CEO for closing remarks.

Thank you.

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

We'll be attending the Twelfth Annual Pacific Crest Technology Leadership Forum in Toronto, and the Thirtieth Annual Cannacord Genuity Global Growth Conference in Boston in August, and the Rodman and Renshaw Annual Global Investment Conference in New York in September.

Thank you again for your interest for Silicon Motion.

Goodbye for now.

This concludes today's presentation.

You may now disconnect.

Good day.