慧榮科技 (SIMO) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2010 Silicon Motion Technology Corporation earnings conference call.

My name is Tawanda and I will be your coordinator for today.

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

Later we will facilitate a question and answer session.

(Operator Instructions).

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

Before we begin, the Company has asked me to read the following statement.

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 as amended.

Such forward-looking statements include without limitation, statements regarding trends in the semiconductor industry and our future results of operations, financial conditions and business prospects.

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

These statements involve 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 Commission.

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

I would now like turn the conference over to Mr.

Jason Tsai, Director of Investor Relations and Strategy.

Please proceed.

Thank you.

Good morning, everyone.

Welcome to the Silicon Motion third 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 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 is 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 financial 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 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 thanks to everyone for joining us on the third quarter conference earning call.

I am pleased to report another solid quarter, with revenue increasing 5% sequentially and 48% compared with third quarter last year.

We continued to benefit from our best-in-class controller technology and this has resulted in strong profitability in the third quarter.

Gross margin improved again to 48.4% in the third quarter compared to 47.7% in the second quarter, as a result of continuing strength in our higher value added products.

Our operation profit margin increased again in the third quarter to 9.8% compared with 7.6% in the second quarter and our EPS increased by 76% sequentially to $0.16 in the third quarter.

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

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

In the third quarter we benefited from solid growth on our two main product lines, mobile storage and mobile communications.

Weakness in multimedia SoC dragged down overall growth.

For our mobile storage business we continued to benefit from our leading edge best-in-class NAND flash controllers, while flash industry supply was constrained and many consumer end market were lackluster.

We saw pockets of strength especially relating to Android and other smartphone that have card slots as well as relating to our SSD and embedded controllers.

Because of the pockets of strength relating to Android, our overall card controller sales increased by an exceptional 40% sequentially.

We were able in partnership with a major flash vendor to grow our bundled card sales nearly 50% sequentially.

We were able to achieve this rapid bundled card growth because of our controller technology leadership, close relationships with the major flash vendors as well as the rapid rise of Android and other smartphones with card slots.

Our bundled card sales continued to account for well over half of all our card controller sales.

We continue to be the leading supplier of controllers using cards bundled with mobile phones and are benefiting -- benefit from the rapid growth in Android and other smartphone that have card slots.

Android has rapidly become the number one OS for smartphone this year and will likely to grow faster in 2011.

Let me also point out that the bundled rate of the memory cards with smartphone is very high, significantly higher than the bundled rate of feature phones.

In addition to our card business, we are also seeing continuing strength in our SSD and embedded controller business.

In the third quarter, our SSD and embedded controller sales increased by almost 30% sequentially.

SSD and embedded is a key area of focus for Silicon Motion and we are investing in the R&D resource to develop the next generation solutions.

We are currently shipping primary controllers for memory module using PATA, SATA as well as embedded USB interface for networking equipment and industrial devices, manufactured by Tier 1 OEMs.

Many of our SSDs and embedded memory controllers are industrial grade products that can withstand extreme environment including very low and high temperatures.

One of our most important customers has started mass production of SSDs using our solutions for several Tier 1 Japanese automotive telematics OEMs.

SSD and embedded memory controllers continue to account for nearly 10% of our total corporate revenue.

Outside of this pocket of strength, many mobile storage end markets were not strong this quarter, as a result of continuing global economic uncertainties.

Our USB controller sales fell 21% sequentially, primarily because of a weak retail demand.

Flash industry supply also affected our growth.

This quarter many flash vendors limited their sale of flash components into the market to maintain market price discipline.

While limiting supply provided support to flash prices, this action affected the availability of flash components to our module maker customers.

We believe these moves to limit supply are temporary as NAND fab output will now reduce and flash makers continue their capital expenditure plans including shifting CapEx dollars from DRAM to NAND.

The move by the flash makers to maintain price discipline also temporarily decreased their output of TLC flash.

As a result, our TLC controller sales experienced lower than expected growth and the proportion of our TLC controller sales to overall controller sales stay unchanged at 25%.

We believe TLC ramp will restart early in 2011 which will be more price competitive against the same geometry MLC Flash.

Let me highlight that TLC flash remains an economically attractive technology and with rapid advancement of flash and controller technology, TLC is increasingly comparable to MLC in terms of endurance and reliability.

Already one of the leading smartphones selling in the market is using TLC embedded memory.

We remain committed to develop leading edge controller for NAND flash and to maintain our market dominant position in TLC controllers.

We are well positioned to support the next generation 20-nanometer MLC and TLC NAND flash that will be introduced to the market in the first half of 2011.

Despite unfavorable NAND industry dynamics this quarter, our mobile storage business managed to sustain a solid 11% sequentially revenue growth by continuing our focus on technology leadership, close relationship with our flash partners and customers, as well as targeting growth opportunities.

Looking ahead, in terms of technology, we will continue investing to further our TLC and 20-nanometer MLC controller leadership.

In terms of applications, we will continue investing to grow our SSD and embedded memory products.

In terms of customers, we will continue focusing our activity as value added partner to the major NAND flash makers and our module partners.

In terms of the NAND flash industry we continue to be the firm supporter of the rapid long term growth, witness the large CapEx of new fabs that continue to be made to manufacture NAND Flash and the growing NAND Flash output will all require controllers.

Let me now move to our mobile communication business.

We are excited about the mobile TV opportunities and design wins that we have in the third quarter.

These new design wins especially with Android-based smartphones will drive strong growth of our mobile TV business in the coming quarters.

We are proud to announce a mobile TV win for our ISDB-T SoC destined for Brazilian market with Samsung in their flagship Galaxy handset.

We have also more than doubled our win on Android-based handsets for the Korean market in the third quarter.

We continue to believe that mobile TV adoption is a worldwide phenomenon and we expect to see continuing long term growth around this business as it continues to scale from Korea to Latin America and China.

Overall, I am pleased with our performance in the third quarter.

Despite difficult overall market conditions we continue to focus, persevere and grow.

We continue to actively invest in our business to ensure that we remain ahead of our competition and offer the leading edge best-in-class products to our customers.

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 third quarter and then I'll provide our fourth quarter guidance.

As Wallace had mentioned, this quarter we increased our revenue 5% sequentially and 48% compared to the same period a year ago and delivered a $34.2m in revenue.

In the third quarter, mobile storage increased to 71% of sales, from 68% in the second quarter.

Our mobile communications business also increased in the third quarter and accounted for 17% of sales, up from 16% in the second quarter.

Multimedia declined slightly to 11% this quarter from 12% of sales in the second quarter.

While NAND flash supply was constrained and consumer demand was lackluster, our mobile storage business in particular, our card controller as well as SSD and embedded flash controller businesses were able to generate strong growth.

While our overall storage sales increased by 11% sequentially, our card controller sales increased nearly 40%.

Weak consumer demand resulted in a 21% decline in our USB flash drive controller business this quarter.

TLC revenue grew about 5% sequentially and continued to account for about 25% of overall controller sales.

Our SSD and embedded flash business remains robust with sales growing almost 30% sequentially and continues to account for nearly 10% of our overall total corporate revenue.

Our mobile communications business increased 11% sequentially.

We saw the continuing recovery of our mobile TV business in Korea, with the initial round of our second generation T-DMB SoC.

Shipments of mobile TV ICs to China, Brazil and other non-Korea markets continued to exceed our mobile TV IC shipment in Korea, demonstrating our success in expanding our mobile TV sales beyond our home market.

Our multimedia SoC revenue decreased 10% driven by weak embedded graphics processor sales.

Our corporate gross margin increased 70 basis points to 48.4% from 47.7% in the previous quarter as we sold more higher value-added, higher margin products.

Third quarter operating expense of $13.2m increased slightly from $13.0m reported for the previous quarter.

Operating margin increased from 7.6% in Q2 to 9.8% this quarter.

The continuing expansion of our operating margin is the result of higher revenue, higher gross margin and operating expenses that remained firmly under control.

Operating profit increased from $2.5m in Q2 to $3.4m in Q3 as we leveraged our fixed operating infrastructure.

Diluted EPS improved from $0.09 in Q2 to earnings of $0.16 this quarter.

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 third quarter our cash balance decreased by $6.1m from $64.5m in Q2 to $58.4m this quarter.

The decrease in our cash balance is attributed primarily to a $10.6m increase in inventories as we restocked to more normalized levels.

Inventory days fell to 64 days in Q2 due to tight foundry conditions and in Q3, inventory days increased to 87 days, a more normalized level since we typically keep approximately three months' worth of inventory to adequately support our customers' needs.

DSO increased from 48 days in the second quarter to 55 days, a level in line with past performance.

I will now move on to our guidance.

We continue to believe that 2010 is a year of gradual recovery for Silicon Motion and have delivered three quarters of consecutive revenue growth and solid EPS improvement.

But we must be realistic and prudent in setting expectations.

While we continue to believe that our leading edge controllers could drive strong sales in our mobile storage business, we must point out that NAND flash vendors have not relaxed their tight control over NAND flash components sales in the short term.

This could negatively affect our module customers' ability to procure NAND flash components and the sale of our controllers that are paired with them.

Furthermore, we are not certain that in Q4, the strength of our bundled card as well as SSD and embedded flash business will continue to offset weakness in our more retail-oriented products such as USBs, especially when these products are more affected by limited flash supply.

Additionally, while we expect further growth in the fourth quarter from our mobile communications business, we expect continued weakness from our multimedia business.

Now let me provide actual guidance targets for Q4.

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

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

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

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

Our target model tax rate remains 15%.

We will now open the call for your questions.

Thank you.

(Operator Instructions).

Your first question comes from the line of Jie Liu with Auriga USA.

Please proceed.

Hi.

Good evening, everyone, a couple of questions for you.

So how should we think about the gross margin longer term as your mobile TV revenue continues to ramp and your transceiver business recovers?

Jie, 50% has been our target gross margin for many, many years and this continues to be our target gross margin.

We have products that are higher gross margin and products that are lower gross margin.

And it's always been our strategy to blend the higher with the lower in order to target -- to reach our target, 50% gross margin target.

Okay.

So do you think that you can reach that 50% target anytime in 2011?

We're working on that.

There is no fixed time horizon for us to reach our gross margin target.

But we're approximately within shooting range.

In the last few years, it's been below 50%, in previous years it's been higher.

But we're approximately within that range and continue to be within that range.

Okay, all right.

So the second question is --

Think of this as more as a model gross margin target for us.

Sure, okay.

So what is your view of the SSD market in 2011 and in particular, your opportunities as well as the competition that you are running into?

So, our current SSD business is in the low end, especially in the embedded area.

We do maintain very good gross margin and maintain a decent market share.

However, we do see the potential opportunity to grow quickly in 2011, particularly in the second half of 2011 when the NAND flash pricing meet the consumer demand.

We expect it will be -- might enter mainstream sometime in the later part of 2011, for the mainstream notebook.

We will have the mainstream product ready at the time to support 2X nanometer MLC as well as 20-nanometer 3-bit-per-cell.

We should have a better opportunity to grow in 2011 to enter SSD market.

Okay.

So are you running into any kind of competition in the stuff that you are already doing?

So as I said, we start from the lower density and low end for embedded area.

Now to move into the mainstream you need a [real performance] jump.

We believe we have studied many of the competitors' products in the market today.

We are not trying to be the high end server solution, but we are a controller provider, with (inaudible) volume.

So we're targeting mainstream notebook or tablet-related product applications for 2011.

I see, okay.

Just one more question from me.

Regarding your inventory level this quarter, could you just give us the mix of the inventory?

The $10m additional inventory was mainly due to MLC or TLC controllers or something else?

You don't need to give us a precise number, just maybe you can tell us what accounts for the most of it.

It's a broad and well balanced mix, Jie.

As you know, our inventory days in the previous quarter was on the low side, compared to the inventory days that we've had in previous quarters and previous years.

Typically we target around three months of inventory for our products and it was below that in the second quarter.

So in the third quarter, it was just a matter of getting our restocking and getting our inventory back to the levels where we have adequate safety buffer for our customer and for the business that we pursue.

In the second quarter, inventory days were on the light side because of the tight foundry capacity allocation that everyone had experienced back then.

Okay.

So going forward then your inventories should remain above $20m or somewhere between $15m and $20m?

It should remain approximately around the 80 plus days, so about three months of inventory.

Okay, understood.

Thank you very much, guys.

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

Riley & Company.

Please proceed.

Thank you.

With one of the issues being tight NAND flash supply already, isn't that something that is just going to be exacerbated next year, if indeed SSD notebooks hit the mainstream in the second half?

It all depends on price and the performance targets.

We believe the NAND flash, the price will become much more attractive, when it move into the 20-nanometer MLC as the mainstream.

So that will happen in probably second half of 2011.

But we definitely cannot predict about the price trend, but we believe -- we consult with many flash maker.

They believe their cost structure and the momentum about the output from the NAND flash in the second half of 2011 could be a very attractive model for the mainstream SSD into the mainstream notebook.

Okay, thank you.

And then I don't quite get the problem where you're saying on one hand, you've been NAND constrained, but on the other hand, that demand has been lackluster.

Those don't seem to be problems in the same direction.

It would seem that if demand was lackluster, it wouldn't matter that you were that NAND constrained.

With demand being lackluster, you would expect pretty much a fixed and increasing output of NAND flash for prices to fall and prices did fall.

But to a certain extent, the flash vendors have limited the output of flash.

For example, they limited the amount of TLC that were made available to the market in order to support prices in the marketplace.

So this sort of bridges the two ends, weak demand as well as on the supply side, how do you continue with your production as well as better support prices.

Okay, thank you.

And then final question relates to timing of slowdown.

You said that some segments of your storage business along with the rest of the market are weak now.

When did you first start seeing that and what, if any, changes have you seen there lately?

We start to see that in late August, the retail market demand become slowed down.

The OEM trend stable.

So retail module maker demand is soft.

And is that something you expect to continue for a long time?

What type of insight do you have into that phenomenon?

Thanks.

From our understanding, we believe the flash makers, they're going to produce and (inaudible) TLC output from late even this year or beginning of next year.

And we believe that demand will be recovered because the price will move to the next generation, so price will become more attractive.

And let me add to the comment to Riyadh.

When the NAND flash price start to decline, a lot of the module makers they were waiting on the sidelines.

They hesitate to purchase large volumes of NAND components.

They worry the price will continue to drop and they're going to lose money.

So they're waiting for when the price going to be settled.

Unfortunately, we start to see the price decline and continue decline, although the magnitude wasn't that big.

But most of the module maker they won't -- they're not willing to purchase large volume at a time.

Okay, thank you.

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

Please proceed.

Thanks a lot.

A few questions here.

First of all, on the guidance, can you give us an idea whether this is more related to retail weakness or more related to supply constraints?

And I have a couple of other follow-up questions.

We believe it's related to both.

We cannot name particularly because the majority of flash maker, they shift the capacity for embedded application because that's where the volume comes from and that was really most profit they can get for the retail business because the demand is soft.

And so they really did not deliver as many what we want to be for the 3-bit-per-cell.

And I think both may impact our potential Q4 performance.

And related to the 3 bit, can you give us an update about the competitive front there?

You obviously had a significant early lead which has been great.

Has competition caught up yet?

Or do you feel you still have a lead there?

We believe that today the major production technology for TLC is 30-nanometer.

And moving to next year, technology will move into 20-nanometer 3-bit-per-cell in the first half of 2011.

In order to support this new generation technology, controller maker have to be selected to support the NAND flash vendor and have to work closely in the very beginning.

We can say at the moment we are ready to support all the major 20 nanometer 3-bit-per-cell in the first half next year.

We are ready with the right controller.

Okay and your bundle card business looks quite strong here with the smartphone Android cards.

It's now north of 50% of your card business.

I mean can this go higher or is this the right mix in terms of bundled and non-bundled, because this is probably a stickier business for you.

We believe in the first quarter, the bundled card business might go even higher for first quarter, because some major OEM programs kick in.

And for the year it would be more at the level that it is right now?

Really it is difficult to forecast.

Let me chime in, Daniel.

There are two elements to this.

One is the end-markets and the smartphone, especially the Android and other smartphones that require card slots, what their bundled strategies are you, and the second bit of this strategy is our relationship with the NAND flash vendors and what they want to do in terms of how they sell their flash.

If they want to do more bundling and we are the selected partner, then we're going to be doing a lot more bundling.

On the other side, if the Android and other smartphones with the card slot, if they choose to do more bundling or hold the current bundle rate at these high levels, then our bundle business should continue to hold up well.

But on the flip side, if the bundle rates become reduced or the flash vendors choose to pursue a different strategy in selling their flash, and diversify away from the bundled side then that could affect our rate of bundled.

But if you look at our business over the long run, we've been holding bundled at about half of our total cards, and for the last many quarters it's been well north of 50%.

Okay, and my final question.

Can you give an idea of what's going on in your multimedia division?

It was down in Q3, looks like it's going to be down again in Q4.

Is anything specific going on there?

A lot of it is -- of our multimedia business, relates to our embedded graphics processors.

And for Q3, our sales of these products to our customers in North America, Japan and other parts of the world just has been slow.

It's a fairly diversify customer mix, with products going into office automation and so forth, and part of this equipment may have been caught up with the general global economic uncertainties.

We don't really see a major change in the multimedia product line.

Some because it's the end of the life so that's why the orders decreased, but I think we're going to see it back to normal again very soon.

Okay, thanks a lot.

Your next question comes from the line of Rajvindra Gill with Needham & Company.

Please proceed.

Yes, thanks for taking my questions.

Just some follow-up questions on the whole NAND flash supply environment.

What is your estimation of the growth, the supply of NAND flash in the second half versus the first half?

Because I think before you were talking about probably higher growth, as Toshiba and Samsung start to fill their fabs I just wanted to get a sense of if you can maybe estimate that supply growth?

What -- it seems like there's going to be a delay in the availability of supply until the fabs move to a lower process node.

So once again you get into a situation where you could have stagnant sales and then competition could start to ramp on the next node.

So if you could just provide color or some insight on those two that would be helpful.

Rajvindra, on your first question, it's still our belief that this year the flash output in terms of bits and components is there's a lot more in the second half of this year, compared to the first half of this year.

What I'm talking about is fab output, production out of the fab.

But the output in terms of sales, the sale of components by flash vendors, that could be a slightly different story and how they timed the release of their inventory into the marketplace.

There's also the question of that proportion of the output of that is sold into the marketplace for the module makers as well as for our end application, primary end application relating to cards, USB flash drives and others that may distort the whole picture.

But our general belief is more flash in the second half than the first half.

If you could please repeat your second question again, Rajvindra.

I think -- the question is what -- SiMo is adversely affected when there's tightness in the flash supply market, and it benefits when it's more readily available supply.

So it's kind of counterintuitive to other flash memory companies.

So if there is this overhang that could exist where we could see a tight flash environment for quite some time until the flash vendors move to a lower process node and get a step down in price, I'm wondering how you're looking at that, in terms of your storage business?

And then as a derivative comment off that do you see competitors cashing up on to the lower process node while, if there is a pause in that type of supply availability going into the next year.

You are absolutely right.

Some of the non-flash makers they are preparing to launch a smaller geometry NAND for next year.

So we are working with them very closely, our goal is to be the main enabler when they launch the new generation TLC into the market, especially for the retail market business.

So I think we prepare in the foreground and to be honest with you we have been working with this kind of flash maker for almost 10 months preparing 20nanometer 3-bit-per-cell launching in 2011.

So we believe we are ahead of our competition.

I cannot say who is better or weaker, but we will definitely be the main enabler for the new generation NAND flash.

Okay, and have you seen, from your vantage point, Apple coming into the market and consuming a lot of supply of NAND flash.

I believe they buy it in advance, in bulk, but they've had a lot of products now that they've introduced obviously the iPad and the new iPods and touch, and now we're talking about a potential iPhone 5 that's coming out in June next year.

Any feedback on Apple's impact on the overall supply of NAND flash?

Rajvi, we can't provide a direct answer because we are not directly involved in this whole process.

But, what we've been hearing from analysts is that Apple consumes roughly 20% to 25% of all flash produced.

So unfortunately we can't provide you with any more color than that, since we're not part of that food chain.

Okay, great.

Thank you very much.

Your next question comes from the line of Betsy Van Hees with Wedbush Morgan Securities.

Please proceed.

Thanks.

I'm sorry, I'm really having a hard time understanding the difference in what affected you in Q3 and what's affecting you in Q4 from a NAND pricing standpoint.

So it sounds like, if I understand this correctly, supply was constrained because demand was outstripping supply in Q3.

Then you also were being impacted by weakness in the retail market.

And now it sounds like demand is continuing to be weak, but the supply is artificially controlled by the NAND suppliers to maintain a certain pricing foothold, so they don't have a cascade in NAND pricing.

Is that what is happening or am I just not understanding that?

Thanks.

Yes, that's pretty much how we see the situation.

Beginning with weak demand with constant output, restriction of -- or limitations of how products are sold into the marketplace, therefore, you are able to support prices.

So that affects availability of flash components in commercial marketplace and affects the procurement of controllers related to the flash that are paired --- that are purchased and paired with our controllers.

Looking into the fourth quarter, we believe the same situation is continuing.

End demand continues to be weak and we don't see any relaxation of the tight control that the flash vendors have in the release of their products into the merchant marketplace.

Thanks, that's very helpful.

So given that it's kind of a different dynamic then for you, because that hasn't been an issue where the NAND suppliers have actually controlled supply to control pricing.

I understand that they don't want to have a free fall of NAND pricing happen because they want to maintain profitability so they can increase in future fabs.

So it seems that now both sides are hurting your ability to grow, are you looking to instead of being an agnostic supplier of controllers, to maybe partnering with a NAND supplier in the future so you can have more -- have a secured supply?

Or how are you going to -- because if nothing is going to change next year, it's going to be pretty challenging I think.

Well, we think that the current tight supply situation is temporary.

We believe in the beginning of 2011 there will be much more supply, much more output for the 3-bit-per-cell NAND.

Because there is a transition period from 30 nanometer into 20 nanometer, and so most of the NAND players they are in the transition process to prepare for the new launch for the new generation NAND.

So the supply trend is temporary.

If you remember two years ago, all flash makers lost money in the fourth quarter of 2008.

That's exactly what happened, supply is bigger and much more than demand and they really did not control the supply.

So really the price went down dramatically.

And everybody lost.

If I could just add to what Wallace was saying.

We are also working, as well as I mentioned a little earlier in our call, we're also working increasingly closer with the NAND flash vendors, with the upcoming generations of flash so this allows us to be in a more solid foothold when new flash products come on the market, including products where we can sell them into the marketplace without the products going into the merchant marketplace.

Okay, thanks very much.

I appreciate you taking my questions.

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

Please proceed.

Hi, guys.

I just have a couple of questions.

First of all, you guys mentioned that there is a headset OEM that has adopted TLC in embedded.

Can you first of all share the name of that headset OEM, and also how quickly you think that other OEMs will be adopting TLC in their embedded applications in 2011?

Dunham, unfortunately we can't share further information about the situation.

But from the call, some of the TLCs, the next-generation TLCs that we've seen, some of it is quite good and the quality increasingly approaches the quality of 2-bits per cell MLC.

And is that coming from both the raw NAND and the controller -- the improvement in the controller performance?

Can you elaborate?

It's a combination of both.

The flash component, the raw flash components are getting better and better with each generation of 3-bits per cell that are being designed and manufactured.

So you have improvement in actual design, improvements in production and improvements in the sorting and so forth.

So that's quite beneficial.

And also on the controller side, our controller technologies are getting better and better with each generation of design.

So when you couple a better part with our better controllers you get an increase in the exceptional solution.

Okay, my second question is really a technical question.

Correct me if I'm wrong but I had heard that there is a limit as far as density in the micro-SD, that there is a limit.

How do you see that being overcome in the future?

You're talking, referring to number of gigabits per component?

Not for components but for cards.

The density for the card?

Yes.

We do not see that.

We believe you will see 32 gigabyte will come into them mainstream for smartphones next year.

But beyond 32-gig, is there a technical limitation beyond 32?

No, it's not a technical limitation.

And when you move to SD 3.0 and you go into 32-gigabyte, or maybe even 64-gigabyte.

So when NAND transitions to smaller geometry you can stack about eight or even 16 dies into the one microSD card.

Okay, got you.

Thank you.

(Operator Instructions).

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

Please proceed.

Yes, hi, thanks for taking a couple of questions here.

A couple on TLC.

With regard to some of the commentary around the flash vendors limiting some availability, or at least perhaps shifting their priorities around TLC versus MLC, was that an across-the-board phenomenon for the flash vendors that ultimately you would work with?

Or was that limited, maybe, or isolated to one major vendor?

I cannot speak for all of them, but I believe the majority of NAND flash maker and they probably produce more MLC than TLC, compared with the first half of this year.

Right, okay.

No, I guess my question was some of the change in output that you saw in Q3, was that a phenomenon that was similar across all of the NAND flash vendors who were making TLC or was it maybe just one of the vendor's deciding to pull back?

It seems to be quite consistent across the board amongst all the vendors, reduction in the percentage of TLC.

But one of the key factors in all of the decision making includes a geometry node transition.

TLC going from mostly 30-nano to 20-nano as Wallace has mentioned earlier in the call, moving to 20-nano sometimes at the beginning, either end or early next year.

So part of this is this geometry transition, so this is also affecting the total output of TLCs, especially when they ramp down the 30-nano in order to begin the 20-nano TLC later down the road.

Got it, okay.

Was there an accompanying increase in the availability of MLC during the quarter, because of the ramp down of TLC, or did it just feel like an across-the-board fall in availability, in actual aggregate NAND flash components?

You're absolutely right, MLC availability increased sharply.

A lot of those MLCs wound up in bundled card business and we were an important beneficiary of that.

Okay, and then maybe one last question around your business as it pertains to TLC.

Can you talk about where your controllers are going from an end product standpoint?

How much of your TLC business is for cards, how much is for USB drives and if any, do you have any business yet on the embedded side?

Well, for our TLC we state in the third quarter 25% of our controller in third quarter using TLC.

In the second quarter, almost 83% -- 70% of our controller USB flash drives are TLC.

It went down dramatically 21% from the second quarter to the third quarter.

In SSD controllers it's about similar, 25% range to 30% using TLC.

Got it.

Great.

Appreciate it, thank you very much.

Ladies and gentlemen, that's all the time we have the questions.

I would now like to turn the conference over to Mr.

Wallace Kou for closing remarks.

I would like to thank all of you for joining us today and your continuing interest in Silicon Motion.

We will be presenting at the AEA conference in San Diego and the Deutsche Bank Small Cap conference in New York in November.

Thank you and goodbye now.

Thank you for joining today's conference.

That concludes the presentation.

You may now disconnect and have a great day.