慧榮科技 (SIMO) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2011 Silicon Motion Technology Corporation earnings conference call.

My name is Tanya and I will be your conference moderator for today.

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

Later, we will conduct a question-and-answer session.

(Operator Instructions)

Before we begin today's conference, I have been asked to read the following forward-looking statements.

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

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

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

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

Potential 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 to hand our presentation over to our host Mr.

Jason Tsai, Director of IR and Strategy.

Please proceed.

Thank you very much.

Good morning, everyone.

Welcome to the Silicon Motion second-quarter 2011 financial results conference call and webcast.

My name is Jason Tsai.

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 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 US SEC.

For more details on our financial results, please refer to our press release which was 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 investor's 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 the 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'd like to turn the call to Wallace.

Thank you Jason, and thanks to everyone for joining us on our second quarter earning call today.

I'm excited to announce another outstanding quarter for Silicon Motion.

We grew revenue 15% sequentially, our sixth consecutive quarter of growth and delivered $50.5 million in revenue, the second biggest quarter of revenue in our Company history.

We also increased our operation margin to 21% and delivered earning per ADS of $0.29.

Riyadh will be discussing more about our financial results, but at first let me share with you about our business performance.

We are pleased that the strategic initiative which we have put in place over the last two years have been delivering solid result in terms of quality, revenue growth, and improvement in profitability.

Our strategic initiatives includes focusing our OEM customers, investing in [memory] card technology to deliver higher value end products, and targeting higher growth as you see for the embedded opportunity, especially the eMMC.

Through our strategic initiatives, we continue to build on our strength in our brand budget card and USB flash drive controller business and are about to enter our second phase of growth in the SSD plus embedded space.

I'm exciting to be sharing with you today more about how our eMMC solution have been progressing.

Let me first provide some color on the overall NAND market dynamics as they pertain to our controller business.

Over the last few months, NAND flash prices have fallen dramatically, as new supplier had come to market ahead of the OEM with few others.

NAND flash price volatility affected our module maker customers and a limited appetite to build.

Our OEM business on the other hand grew 40% sequentially, more than overcoming module maker weakness.

OEM sales as a percentage of are our overall mobile storage revenue increased ahead of our plan to about 50% of mobile storage revenue from 40% in the previous quarters.

OEM have been aggressively building bundled cards to support continuous strong Android smartphone growth, as well as for the retail business.

New NAND for our industry capacity, about three new challenged tabs that are coming online in Singapore, Japan and Korea will gradually ramped over the balance of the year.

And continue ramping over the next two years.

We believe in NAND, we'll also continue to scale and as well absorb the incremental supply.

We also believe that OEM will be returning to the table soon through stock NAND flash for second half 2011.

Apple's iPhone and iPad continues to sell very well.

Android smartphone are selling even stronger and more Android tablet will be rolled out.

All these smartphones tablet, whether from Apple or BlackBerry are using Android or Microsoft OS platform use NAND flash for embedded memory.

We are currently one leading supplier of controller for microSD card bundled with Android and other smartphone with card slots.

In addition to cards, we are also about to provide a second solution, our eMMC controller to managing embedded memory content in these smartphone and tablets.

We are pleased with the progress so far of our controller of eMMC, the most common form of embedded memory in Android phone and tablets.

As well as other platforms using ARM based processors.

Customers are pleased with the superior performance of our eMMC controller versus the competitors in demanding application such as smartphone and tablets.

Whereas they are complex interaction between the system applications and internal memory.

Our eMMC controller performed very well and are among the best in card in terms of important benchmarks such as random and sequential data read and write.

In critical power cycling requirement to prevent data loss.

We're in customer qualifications for our eMMC 4.1 controllers, which is currently is the mainstream and very popular data standard for embedded memory.

We continue to tuck-in each volume in the third quarter and more meaningful revenue in the fourth quarter.

Additionally, by early 2012, we expect to take our eMMC 4.5 controllers to the next generation of embedded memory standard, which provide two times data rate increase as well as improved reliability and functionality.

We already are executing on over 12 eMMC projects for flash markets.

For flash makers and the specialty module makers and applications for our eMMC project improve smartphone for the top three global handset OEMs, as well as the tablet and other smartphone developed by Taiwan and China OEMs.

Our product include sub 1-gigabyte to 32-gigabyte capacity solution using SLC and MLC NAND flash.

In order to meet the compact controller requirement for meaning -- for managing eMMC solution.

We have developed a new series of silicon platforms using 32-bit RISC processor technology.

32-bit processor are a significant increase in horsepower, but the 8-bit processor that are we used to power our card and USB flash drive controllers.

It is important to emphasize that an eMMC controller is very different from card controllers, requiring greater personality performance and endurance.

We are confident that our eMMC solution are on track for a significant growth next year, and will become important drivers of our overall growth.

We are investing a significant part of our R&D and management resources in support of our eMMC, as well as our broad portfolio of SSD plus embedded memory solutions.

We are also developing mSATA controllers to enhance Intel notebook PC performance with Smart Response Technology and Fast Flash Standby Technology, provide solutions for especially in low density embedded SSD and in embedded SSD solutions.

On our [TRE], eMMC solution event, our card and USB flash drive sales comprised a majority of our mobile storage revenue.

Overall, our mobile storage revenue increased 9% sequentially which actually increasing 12% that we emphasized have value-add solutions for OEMs and module makers.

Sales to OEM increased 40% sequentially.

Sales of our TLC controllers, which are ideally suited for cards bundled with smartphone increased 45% sequentially.

Well over 50% of our controllers sold are used in the management of the latest 20-nanometer NAND flash whether MLC or TLC.

We also won three of the top six channel vendors for their ultra high-speed SD UHS-1 card controllers.

UHS-1 card can support data transferring that's about 10 times faster than traditional SD 2000 cards.

The fact that majority of our controllers sold are for managing the most advanced next generation NAND flash are variable.

As the strong endorsement of superior performance and capabilities of our technologically and controller solution.

Our mobile storage business also benefited from the rebound in our SD plus embedded products.

Our SSD plus embedded revenue, which are currently most around the sales of controller for both SD and SSD for industrial and now working application.

They increased 30% sequentially.

We are expanding strong improvement in our SSD plus embedded business by the end of the year.

Let me now talk about our mobile communications business.

I'm excited to report a phenomenal 55% sequential growth for this product line in the second quarter.

Our $12.8 million mobile communications revenue this quarter is a record revenue quarter for this business.

During this quarter, we saw a strong growth across all segments on this business, with especially strong growth our Mobile TV IC of the weakened T-DMB market shares in Korea.

Our handset transceiver also delivered a solid growth this quarter from the revenue rollout of 4G LTE in the US and now account for about 5% of our overall corporate revenue.

Samsung is the leading 4G LTE smartphone vendor to Verizon and major TCS for their rollout of LTE wireless broad service.

Our 4G LTE transceivers and the CDMA, EV-DO transceivers are both in the Samsung 4G LTE smartphone marketed by the Verizon and MetroPCS.

In the second quarter, we began shipment of our LTE transceiver for Samsung Charge and the recently announced Samsung Galaxy Tab 10.1 for Verizon.

We are excited about our LTE business with Samsung and our pipeline of LTE transceiver is designing for handset and tablet remained strong for the balance of the year and in Q2 2012.

Overall, we are very pleased with our strong performance in the second quarter and our business outlook.

I would 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 will provide our third quarter guidance and updated full year 2011 guidance.

As Wallace had mentioned, this quarter we increased our revenues 16% sequentially and 56% compared to the same period a year ago and delivered $50.5 million in revenue.

In the second quarter mobile storage mix was 67% of sales, down from 72% in the second quarter.

Our mobile communications business increased to account for 25% of our revenue mix in the second quarter compared to 19% in the first quarter.

Multimedia was unchanged at 7% this quarter as compared to the first quarter.

Let me recap the performance of our three key product lines for the benefit of our audience.

As Wallace had mentioned, we saw continued -- continuing strong demand for our mobile storage controllers.

While unit shipments did decrease by 3% sequentially, this was more than made up by the 12% sequential increase in our ASPs.

Our ASPs benefited from our growing OEM business as well as increasing shipments of our controllers supporting the latest 20-nanometer and MLC and TLC NAND flash.

Our card controller revenue increased 9% sequentially and our USB flash drive controller revenue increased by 5% sequentially.

Our SSD plus embedded revenue increased by 30% sequentially, OEM revenue increased by 40% sequentially to account for about 50% of our total controller sales.

And TLC revenue increased by 45% sequentially to account for over 35% of our total controller sales.

Our communications business increased by 55% sequentially from our rebounding Mobile TV IC sales and the continuing growth of our 4G LTE and CDMA EV-DO transceiver products.

Our multimedia SoC revenue increased 10% sequentially as our embedded graphic processor sales rebounded from a slow first quarter.

Our corporate gross margin increased 70 basis points to 46.9% from 46.2% in the previous quarter as our mobile communications margin improved with better manufacturing efficiencies and the rollout of more competitive products.

In the second quarter, operating expense decreased slightly to $13.1 million from $13.4 million, largely due to $1 million temporary R&D expense savings from delayed timing of new projects.

Operating margin increased to 21.1% this quarter from 15.5% last quarter as we benefited from operating leverage.

Our operating profitability improved as we scaled our revenue while maintaining stable gross margin and operating expenses.

We generated diluted earnings per ADS of $0.29 in the second quarter, up from $0.18 per ADS in the first quarter.

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

Let me also note that stock-based compensation expense increased in the second quarter to 2.5 million from 0.8 million in the previous quarter due to new restricted stock units granted to employees.

Also, amortization of intangibles declined to $0.2 million from $0.6 million as we reached the end of our amortization schedule relating to our 2007 FCI acquisition.

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

In the second quarter, our cash balance decreased to 55.1 million from 57.6 million in the first quarter.

Inventory days increased to 102 days in the second quarter from 96 days as we built inventory of new products targeted for sale in the second half of the year.

While previously built inventory of certain controller products will now take one or two quarters longer to sell due to customer changed flash sourcing strategies.

DSOs decreased slightly to 54 days in the second quarter compared to 58 days in the first quarter.

Payable days increased slightly to 60 days compared to 58 days in the first quarter.

In the second quarter, our cash balance decreased by $2.5 million.

In terms of primary sources of cash, we generated net earnings of 9.9 million.

In terms of primary sources of cash, an increase in AR consumed $3.1 million, an increase in inventory consumed $8.6 million.

A decrease in accounts payable consumed $1.9 million and we invested $1.4 million in testing equipment and design tools.

I will now move on to our guidance.

We had a very strong first-half operating performance with first-half revenue of 61% higher than the same period in 2010.

Our products are ramping quickly and new strategic initiatives are taking hold.

Revenue growth in our OEM segment is driving strong growth and better visibility for the balance of 2011.

As we have talked about over the past few quarters, we continue to anticipate tightness in overall flash supply availability in the second half of 2011 as demand from embedded applications such as smartphones and tablets offsets expected NAND flash supply increases.

In recent months with weak flash prices, flash makers have been actively managing the availability flash to module makers, while they and other OEMs have been taking advantage of soft flash prices to build cards for the rapidly growing smartphone market.

We believe that when tablet and smartphone OEMs begin reordering NAND flash for the second half 2011 product rollout, our business with module makers maybe further affected by NAND flash supply tightness, while our business with OEM should continue to doing well.

Already SSD plus embedded and LTE sales are two important growth drivers together accounted for 10% to 15% of our corporate revenue.

We expect this percentage of sales from SSD plus embedded and LTE to increase meaningfully next year.

For our third quarter guidance, we expect third quarter revenue to be down 5% to up 5% sequentially.

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

We are targeting operating expenses to be in the range of $14 million to $16 million, a range that is slightly higher then the previous quarter because of R&D project expenses postponed to the third quarter and higher headcount related expenses.

Stock-based compensation expense should be approximately $2.5 million to $3.5 million.

Acquisition charges will be zero.

Our target model tax rate remains at 15%.

Now, our updated guidance for full year 2011.

We are increasing our full-year 2011 revenue growth rate and now expect full-year 2011 revenue to increase 40% to 50%.

We continue to expect full-year 2011 gross margin to be within the 46% to 48% range.

We continue to target operating expenses for the full year 2011 to be in the range of $55 million to $58 million.

Stock-based compensation expense should continue to be approximately $8 million to $10 million.

Our target model tax rate remains 15% for full-year 2011.

We will now open the call for your questions.

(Operator Instructions).

Anthony Stoss, Craig-Hallum.

I have a couple of quickie questions here, on the embedded side, you talked about 12 wins.

Can you give us a sense of -- are those 12 wins to be launched in Q3?

Also, how many customers does that equate to?

And secondly, on the embedded side, gross margins, would you expect that to be above kind of where you are running in the corporate side?

There will be only one customer we are launching in late Q3, a few launching late Q4, majority would be in Q1.

Okay.

And then on the gross margin side for embedded, you still expect that?

Embedded controller gross margin will be better than our card controller, I cannot tell you specific number, but it is, it will be happening much better than our card controller.

Okay.

And then, one last one then, your top customers in the quarter, if you won't mind giving us the kind of your top two or three customers?

Thanks.

As usual we have one customer that is regularly a 10% plus and that is Samsung.

Other than Samsung, all other customers are below 10%.

Okay.

Great job, guys.

Thank you.

Raji Gill, Needham & Company.

Once again very good results.

Just if you could describe a little bit about the supply of NAND flash heading into the second half, I know on the DRAM side there has been a lot of CapEx cuts related to lower DRAM demand, wondering if -- what's your outlook is for supply of NAND flash in the second half and also kind of any view on 2012?

Well, at this moment we -- I think no one have concern regarding NAND supply.

At this moment supply, it seems it's ahead of demand.

But we believe the major taker will come to table quickly, settle the demand of this second half.

So, around maybe late Q3 the supply and demand will reach balance, and so -- but we do not see any concern regarding NAND supply at this moment.

And maybe if you could touch a little bit about on your end market in terms of demand, there has been kind of softness around the consumer for electronics and other different lower-end handsets.

Are you seeing any kind of softness in any of your end verticals or where do you think the strength is coming from also?

The end market still maintain soft from June to July.

However, I think the OEM business there is some intense consistent and strong, module maker -- they has they to take more controllers due to the negotiation pricing with flash supplier.

We -- our overall business maintained, I think is fine, but the end market seems a little soft.

Let me add, the end market where we're seeing more of the softness is on the retail card market versus the card market that is so bundled with handsets.

Primarily with Android phones that part of our business continues to be very strong as you probably saw from our sequential growth of our bundled business.

And so there's that dichotomy in the marketplace with retail, but on OEM side continues to be very strong.

Very good.

And on the competitive landscape, maybe if you could update us in terms of where your competitors are with their MLC and TLC production roadmap?

Thank you.

As to 2X-nanometer, we do not see that many competitor in the market today.

Although there's just some player in Taiwan, such as Phison and the Skymedia, but we really did not see them that very much.

We -- I believe in major flash maker change their business models, we capture, create a lot of opportunities for their outsourcing business.

So, before, maybe (inaudible) compete with certain pleasing Tier 1 players, but now we can work together to join the business.

So, I think the competitive landscape now is much clear.

We see a lot of competition as we said last quarter.

All right.

Thank you.

Mike Crawford, B Riley & Company.

Few quick ones as well, first you said that customers, regarding the inventory build that some customers have changed their flash sourcing strategies, what do you mean by that?

We have -- as you know some of our controller, lot of our controller parts are designed specifically for supporting certain classes of products, certain flash vendors products.

So, as customers change their flash sourcing strategies, parts that we have built for some of our customers will take a bit longer, one, two quarters longer to sell.

And as I mentioned, this is a relating to customers that originally chosen to source flash from certain flash vendors and subsequently chose to source flash from other vendors, resulting in our company holding more inventory of those parts, then we would have slight going into the quarter.

But this is not going to be a significant issue.

This is -- it's just going to take one or two quarters longer to sell.

Okay.

Thanks Riyadh.

And then, getting to TLC production.

So, right now is -- our people finding NAND flash suitable for other applications beyond the types of card applications that SIMO controllers have been used in conjunction with TLC?

I think, TLC today primary figures commercial for card and UFD.

With today's technology and endurance and data retentions, it's very difficult to moving and doing value application or SSD.

I think flash maker all work very hard with controller maker, we just find it better technology, better algorithm to enhance reliability in data retention endurance.

Maybe I think, you might see a small very, very few application adopted because of the data assets is more predictable.

But they are very difficult to use in the eMMC SD today.

Thanks, Wallace.

Is that primarily made at Yokkaichi?

Excuse me.

Mike, can you repeat your question again?

The TLC NAND, is that primarily being sourced from Toshiba and Yokkaichi, Japan?

Well, I can only say today Toshiba, SanDisk or Samsung all provide very large volume in TLC, Intel Micron, they also provide certain amount of TLC.

Okay, great.

And then, two more quick questions, if I may.

One, what change in Korea that's enabled you to capture market share on the mobile side?

You're taking about our T-DMB SoC, our regain of our market share in that.

Is that your question Mike?

I'm sorry.

Yes.

So, originally our T-DMB design is in really feature phone from very last year.

As you can see the market trend shift from feature phone to smartphone.

So we see now it came eventually, early this year and now we're getting more and more smartphone designs.

As well along with LTE phone designs with T-DMB in Korea.

Okay.

Thanks.

And the last question relates to your industrial SSDs.

So I think you're showing them at this Flash Memory Summit Santa Clara in a couple of weeks, what are your current aspirations with the fairs SSD related products?

Well, I think we have -- we're going to talk more, it's an exciting summit, and also some of that LDTC developments that are leading in the industry today, that's one of the direction enable TLC into the embedded application in the future.

Okay.

Thank you very much.

(Operator Instructions).

We have no additional questions.

I'd like to hand the conference back over to management for closing remarks.

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

In August, we'll be presenting in a Deutsche Bank Small Cap one-on-one conference in Boston and the Pacific Crest Global Technology Conference in Vail.

Thank you and goodbye for now.

Thank you for attending today's conference.

This concludes the presentation.

You may now disconnect and have a great day.