慧榮科技 (SIMO) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter Silicon Motion Technology Corp Q3 2012 earnings conference call.

My name is Lachonne and I will be your conference operator for today.

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

Later we will conduct a question and answer session.

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 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 operations, 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 pressures in the semiconductor industry and the effect of such pressures 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 hand our presentation over to our host, Mr. Jason Tsai, Director of Investor Relations and Strategy.

Please proceed.

Thank you, operator, and good morning, everyone.

Welcome to the Silicon Motion third-quarter 2012 financial results conference call webcast.

With me here is Wallace Kou, our President and CEO and Riyadh Lai, our Chief Financial Officer.

The agenda for today is as follows.

Wallace will start with a review of some of our recent business developments.

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

We'll then conclude with Q&A.

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

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

For more details on our financial results, please refer to our press release, which was filed on Form 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 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 will now turn the call over to Wallace.

Thank you, Jason, and thank you, everyone, for joining us on this third-quarter earnings call.

I am happy to report another record-setting quarter for Silicon Motion.

Revenue in the third quarter of $77.1m, net income of $18.7m and diluted earnings per ADS of $0.54 are all record quarterly highs for Silicon Motion.

Our strong third quarter performance was a result of continued strength in our new growth products as well as recovery of our card controllers.

Overall, I'm very pleased with our performance and delighted that we are on track in terms of meeting our full-year 2012 revenue growth objectives and building our business to deliver further growth next year.

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

The third quarter was another quarter where strong revenue growth was led by the continued success of our new growth products.

Revenue from new growth products, which are comprised of LTE transceivers and embedded and SSD controllers, grew 39% sequentially and accounted for 40% of our total quarterly revenue.

Both our LTE and eMMC controllers grew sequentially.

Our LTE products grew stronger than expected as Samsung accelerated its procurement of our LTE transceivers.

This accelerated procurement led to revenue originally planned for the fourth quarter being booked in the third quarter.

Without Samsung's accelerated orders, our new growth product revenue would still have increased by a solid 20% sequentially and our overall revenue would have grown at a rate within our guidance range.

We are extremely pleased with our LTE performance for 2012.

We are on track to increase our LTE revenue about 65% this year and grow rapidly again next year.

This year we will have 15 design wins with Samsung LTE smartphones including the Galaxy S3.

We are working on building our LTE project pipeline with Samsung for next year and believe it is reasonable to expect that we can grow our LTE revenue 50% to 75% next year.

Wireless carriers globally continue to aggressively roll out LTE services, which will drive demand for LTE smartphones.

Samsung has been the market share leader in LTE smartphones and a significant proportion of Samsung's LTE smartphones use their own baseband and our transceivers.

We believe Samsung will continue to be a LTE market share leader next year and that a significant proportion of Samsung's LTE smartphones will continue to use their own baseband and our transceivers.

Additionally, we believe Samsung remains very committed and focused on using their own LTE baseband paired with our LTE transceivers.

We are about to release a newer LTE transceiver with better integration, better performance and more cost effective to support our 2013 LTE projects.

In the third quarter, our LTE sales increased better than expected due to Samsung's accelerating build of the Galaxy S3 smartphones for the Korean domestic market.

Two LTE plus CDMA versions and one LTE plus CDMA EV-DO version were very successfully launched in July by Korea's three wireless carriers, KT, LG U Plus and SK Telecom.

To meet the revised product launch plan, Samsung accelerated its build of Galaxy S3 by procuring several million dollars of our LTE transceivers that were originally planned for the fourth quarter in the third quarter.

Our fourth quarter LTE sales are going to be lower because of our third quarter accelerated sales.

For the fourth quarter we will have six new LTE design wins that will go into production.

These are all lower volume projects for lower-cost Samsung LTE smartphones for Korean and US carriers.

Now turning to our eMMC products, we are excited by the progress of our eMMC controller business and market penetration achieved so far.

You will recall, we started shipping our eMMC controller to our first NAND Flash partner at the end of the first quarter of this year and started shipping to our second NAND Flash partner in the second quarter.

We are currently shipping to both Samsung and SK Hynix.

For full year 2012 we believe our eMMC controller market share should be around 5% to 10%.

We believe the overall market for eMMC this year is over 600m units and will grow about 20% in 2013.

Based on our current pipeline of eMMC controller projects, we believe we should comfortably account for 15% to 20% of the market next year.

We are providing eMMC controllers to both Samsung and SK Hynix.

These two NAND Flash makers have secured eMMC design win using our controllers with over half of the top-10 smartphone OEMs as well as the majority of the leading Android and Windows 8 tablet OEMs.

HTC, Huawei, ZTE, Lenovo and other OEMs are already delivering smartphones to the global consumers using our eMMC controllers.

A few tablet models using our eMMC controllers that are mainly Android and Windows 8 design wins are already shipping to consumers and many more will reach consumers by the year-end holiday season.

Beyond smartphones and tablets, our eMMC controllers have also entered the initial production in a few smart TVs.

By partnering with leading Flash vendor and providing them with eMMC controllers, that are both technologically and cost competitive, we have been able to help our Flash partners quickly secure design wins from many OEMs, to enter our production with our Flash partners, eMMC and eMCPs and therefore help Flash partners both grow to overall market as well as winning market share.

Our technologically and cost competitive eMMC controllers include data management, power system and power drop protection measures that enable us to significantly improve random IOPS performance, reduce power consumption, reduce cost as well as protect and retain data.

Another important competitive advantage that we bring to our Flash partners and their OEM customers is our experience in ground engineering support, infrastructure in Korea, China, Taiwan, the US and elsewhere that help OEMs manage issues and improve performance to smoothly enable our Flash partner eMMC to enter mass production.

We continue to working aggressively with both Samsung and SK Hynix to bring newer generation of higher performance, lower cost eMMC controller to market as well as enlarge the overall eMMC market to include newer classes of applications.

We are on track in terms of bringing eMMC 4.5 to the market and that will tape out in the first quarter.

Moving to our core products, revenue from our core products declined 2% sequentially.

Our card controller sales increased 21% sequentially.

This very strong card controller growth was however, not sufficient to offset weak USB flash drive controller, mobile TV IC, China CDMA EV-DO transceiver and embedded graphic processor sales.

Our card controllers rebounded strongly as our OEM customers used more memory card for bundling with smartphone and for the Tier 1 brand retail market.

Manufacturer supply was relatively tight this quarter, which limited availability of Flash to module makers.

On the other hand Flash makers and other OEMs with a close procurement relationship with the Flash maker was not affected.

This quarter one of our major Flash maker customers built significant amount of cards to bundle with new smartphone, especially those with smaller embedded memory that are being launched for the second half of 2012 seasonal sales specifically for the low-cost China smartphone market.

Looking into next year, we are confident that our card controller business should continue to grow but at a modest rate.

Though overall card bundling may continue to slide, we believe we can continue generating growth by working closely with the Flash makers for bundled cards, using low-cost smartphone market from China and elsewhere, by targeting high performance, differentiated cards for Tier 1 brands and application specific cards and by gaining controller outsourcing market share.

To further execute the [moderate] growth strategy, we will continue working closely as a partner of choice to Flash makers and other OEMs as well as by expanding our controller technology leadership.

Overall, I'm very pleased by our record-setting third quarter and believe that our business remains on track to deliver strong long-term growth.

With that I will now turn the call over to Riyadh to 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, we delivered a record $77.1m in sales this quarter, an 11% increase compared to the prior quarter and a 22% increase compared to the third quarter of 2011.

In the third quarter, sales from our new growth products increased 39% sequentially.

New growth products accounted for 40% of total sales, up from 32% of total sales in the prior quarter.

Let me recap the performance of our two key product lines.

First, mobile storage.

Mobile storage revenue increased 4% sequentially and 36% year over year.

Mobile storage controller shipments increased 13% sequentially and 21% year over year.

Mobile storage controller ASPs decreased by 8% sequentially but increased 12% year over year, our 11th consecutive quarter of annual ASP increases.

Our card controller revenue increased by 21% sequentially and our USB controller revenue declined by 12% sequentially.

Over 50% of our controller sales are for 19 to 21 nanometer NAND Flash.

As a comparison, in the second quarter, controllers for 19 to 21 nanometer NAND Flash accounted for over 25% of our controller sales.

OEM revenue increased by 25% sequentially and accounted for almost 65% of our controller sales in the third quarter as a result of increased eMMC and card controller sales this quarter.

Moving to mobile communications, mobile communications revenue increased 40% sequentially and 8% year over year.

Our LTE revenue increased significantly in the third quarter and was slightly offset by declining sales of mobile TV ICs and China EV-DO transceivers.

Our corporate gross margin decreased in the third quarter to 46.4% from 49.1% in the second quarter and is below our third-quarter guidance range, which had anticipated a slight reduction in our gross margin due to product mix shifts and product cycle transitions.

Our third quarter actual gross margin came in lower than guidance because we strategically traded lower pricing for larger and longer program wins with a few of our important OEM customers for several of our major existing parts, primarily relating to our core products.

This strategic pricing should help our business partners become more cost competitive and will be EPS accretive to us next year.

This strategic pricing will result in several quarters of lower gross margins.

In the fourth quarter our gross margins should fall to 44% to 46% as revenue shifts more towards core products.

In the third quarter of 20 -- in the first quarter of 2013, our gross margin should be similar to the fourth quarter, if not slightly better.

We're going to be rolling out newer parts that are either higher value added, lower cost or a combination of value and cost over the next few quarters.

So we anticipate our gross margin reverting back to our 48% to 50% range by third quarter 2013.

We reduced our prices for strategic reasons.

Even after reducing our prices as an example of apples-to-apples comparison, our blended card controller prices are still much higher than they were a year ago and even higher than they were two years ago.

We have some pricing power because of our technology leadership.

Because of our controller technology leadership, we have been bringing to market over the last two to three years, a continuous series of higher value added controllers with higher ASPs.

Now to ensure strategic alignment with our OEM customers, whose storage device ASPs have been falling rapidly, we need to rebalance our pricing.

We believe closer strategic alignment with important OEM partners is an increasingly important criteria for success as Flash supply bit growth slows down a bit next year.

We are confident that we will regain our margins when we roll out our next set of next generation controllers.

Currently most of our controllers are manufactured using 110-nanometer processes.

Our new products which we have recently launched or will be releasing soon are all significantly lower cost and most of these new products are or will be manufactured using 55-nanometer or finer process geometries.

Despite lower gross margin in the third quarter, our operating margin increased to 25.9% from 24.3% last quarter.

In the third quarter, operating expense decreased to $15.8m from $17.2m due primarily to the push out of several product tape outs.

We had 677 employees at the end of this quarter, 7 more than at the end of the previous quarter.

As a result of record revenues and higher operating margins, we generated a record diluted earnings per ADS of $0.54 in the third quarter, up from $0.42 per ADS in the second quarter and $0.40 per ADS a year ago.

Stock-based compensation in the third quarter was $3.4m similar to the second quarter.

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

Inventory days decreased to 77 days in the third quarter from 87 days in the second quarter.

DSO decreased to 47 days in the third quarter compared to 54 days in the second quarter.

Payable days increased to 47 days in the third quarter compared to 42 days in the second quarter.

In the third quarter, our cash balance increased to $33m -- increased by $33m to $146.6m at period end.

In terms of primary sources of cash we generated $18.7m in net earnings.

An increase in payables generated $12.1m and a decrease in AR generated $4.2m.

In terms of primary uses of cash, an increase in inventory consumed $4m.

We also invested $1m for testing equipment, software and design tools.

I will now move on to our guidance.

For the fourth quarter we expect our overall revenue to fall slightly primarily due to third quarter's accelerated sales of LTE transceivers to Samsung.

Our eMMC controller sales should be flat sequentially due to strong pre-holiday sales build in the third quarter.

Because of the sequential decline in LTE sales and flat eMMC sales, our fourth quarter new growth products sales should decline sequentially.

We expect both our card and USB controllers to be up modestly while our other core products to be down sequentially in the fourth quarter.

For full year 2012, we expect our total revenue to grow 25% to 27% and our new growth products to account for 30% to 32% of total sales.

We currently expect new growth products to scale further next year and account for 40% to 45% of our 2013 sales.

While we are not prepare to provide official revenue growth guidance for next year, we can envision a scenario where we grow our revenue at least 15% next year based on moderate card growth, card controller growth, eMMC controller market share gains and continued solid LTE transceiver growth.

For our fourth quarter guidance we expect fourth quarter revenue to be done 3% to 9% sequentially.

We expect fourth quarter gross margin to be within the 44% to 46% range.

We are targeting operating expenses to be in the range of $17m to $18m.

Stock-based compensation expense should be approximately $3m to $3.5m.

Our target model tax rate remains at 15%.

Lastly, before the Q&A part of our call, let me update you on our discussions with our Board of Directors regarding a share repurchase program.

Management recently proposed to our Board a new share repurchase program.

This proposal was not approved.

Our Board strongly believes that a repurchase at this time will reduce the liquidity of our shares and will not increase shareholder value.

We will now open the call for your questions.

(Operator Instructions).

Operator, we see several questions lined up in the queue.

Okay.

And our first question comes from the line of Anthony Stoss.

Hi guys.

Riyadh, can you take us through with a little bit better detail on your product cost down, help us understand it on a quarterly basis maybe.

You talked about gross margins bouncing back in Q3, but I'd love to hear LTE, eMMC and your cards, how you think you can bump up each of those three different segments and if you can give us a sense by quarter that'd be definitely helpful.

And also if you have a view on Q1 2013 tax rate.

Thanks.

Let me first start with our product costing and work towards the tax.

Overall, we took some important decisions this quarter about providing strategic pricing to some of our important OEM customers.

Probably this strategic pricing affected mostly our core products, specifically our card controllers.

We expect our gross margin, overall gross margin in Q4 to decline to 44% to 46%.

This is a combination of both the strategic pricing as well as product mix shifts.

In Q3 we sold a lot of LTE transceivers to Samsung and this also includes accelerated sales that were originally for the fourth quarter being sold in the third quarter.

With the reduced amount of new growth products taking place in the fourth quarter, our overall gross margin are also affected.

So through a combination of these two factors, our gross margins are going to be lower.

Now moving forward into the first quarter, we are also rapidly working on introducing newer parts that are more higher value-added as well as lower cost.

For example, right now a lot of our products, most of our products are still manufactured at 110-nanometers.

We're increasingly moving our newer products, products that recently launched or will be launched to 55-nanometer and so over time by the third quarter we're going to be targeting to get our gross margin back up to the 48% to 50% range.

Let me add specific color to your question.

Regarding SD, microSD card controllers, the majority of our controllers today are using 110-nanometer.

We are in the transition moving to the 55-nanometers and more cost effective high-end performance controllers.

So all these products are going to move production by late Q1 2013.

Regarding eMMC controller, most of our production, high volume production controllers are using also 110-nanometers.

We are in the transition moving to 55-nanometers.

We believe these also will move production around the second quarter of next year.

Regarding LTE, we are delivering newer LTE technology and more integrated LTE transceivers.

This product will be much more cost effective than existing transceivers for Galaxy S3.

So we believe we will have a cost advantage in 2013.

And by Q3 2013, we believe the overall gross margin will be back to 48% to 50%.

Okay, then tax rate?

And also, Riyadh, while you're on, could you give us a directional sense of March quarter revenue?

First on taxes, our model tax rate still remains 15%.

So there's no change on that.

In terms of direction, we're expecting the typical seasonal patterns that we've seen to apply in the first quarter and in March.

So we're going to be seeing our typical revenue decline in Q1 because of the typical seasonality patterns.

And then our revenue should begin to increase in Q2 and Q3.

Specifically for our key products, our card controller and other core products should be seasonally down in Q1.

But we expect our eMMC and LTE products to be slightly up in Q1.

Great, thank you.

And our next question comes from the line of Monika Garg.

If you look at NAND producers they are guiding to lower bit growth next year.

How do you see that first of all impacting your business?

And secondly, we have seen very strong price increase recently in the market.

Do you think that impacts some of your core business next quarter?

I think bit growth in 2013 could be a little bit lower than this year.

Sandisk has talked about 30% to 40%.

Hynix talking 50% to 60%.

We will let other flash vendors speak for themselves.

Overall availability could be tight depending on the trend of smartphone, tablet, SSD and other device sales.

So we expect to be better protected from any availability issue because our OEM customer base continues to increase, especially OEM program for eMMC and card.

Some module makers might have some difficulty to access NAND memory but we believe we are -- we will -- more supply will come online in the second quarter and next year with a greater supply in second half compared with the first half.

Thank you.

And do you expect any revenue from cache SSD products next year or any products you are thinking you will get design wins over the next couple of quarters?

Yes, we plan to sample our SATA III controller by the end of this year.

This will allow us to have a more competitive SSD solution targeting NAND cache full-size SD products in 2013.

We believe we will have some of strong interest for this product coming into the market from competition.

Okay.

I also have a question on the eMMC guidance for next quarter.

Given that you have just started ramping the eMMC solution and that fourth quarter is a stronger handset sell-through quarter I just want to understand more your guidance of flat quarter-over-quarter guidance for eMMC?

Yes, I think we are two steps removed from the end consumer.

We ship our controllers to flash makers who then ship eMMC solutions to OEMs.

So while holiday sales are stronger in the fourth quarter, most of the component procurement and build is happening in the third quarter.

This is why we expect to see only flat revenue in the fourth quarter of our eMMC controller.

But we believe that growth will resume in the first quarter next year.

Okay.

And just a last question on the cash.

Cash has increased on the balance sheet.

You talked about no buybacks.

What are the other uses of cash you're looking at?

Well, during these times our Board believes we should retain a larger cash balance.

Also we continue to evaluate strategic opportunities including M&As.

And also while a share buyback is not on the table right now we will continue to explore ways to return cash to our shareholders.

Okay.

Thank you so much.

And our next question comes from the line of Daniel Amir.

Yes, thanks a lot.

A few questions here.

First of all, your comments on the eMMC, just to clarify, you quantified the market as 600m but then you said you have 15% to 20% share next year or is that 15% to 20% revenue growth in that segment for next year?

And then I have a follow-up question as well.

So we believe this year we have a -- the total market in 2012 is about 600m units and we believe in 2013 the total eMMC unit growth will be around 20%.

We estimate we're about 5% to 10% share for this year and with -- from the current design pipeline we have confidence we will win around about 15% to 20% in 2013.

Okay, thanks.

Now with regards to the strategic pricing, this is the first time in a while that you've taken this approach.

In the past, you've always had the opportunity with OEMs to offer them better pricing to capture more business and you tend to not take that approach and been able to maintain high gross margins or average gross margins in the high 40s for a very long period of time.

And it seems like suddenly you've decided to break with that tradition here.

Is it because you just see the controller market changing here and the fact that you have a technology edge you want to take advantage of that?

Or is this a profound change in just the growth rates of cards as they're slowing down that you really need to find new ways of growing that business?

Well, we've historically not taken this approach, strategic pricing initiative approach, as you mentioned.

We have taken it -- decided to take our strategic initiative given the opportunities that [lie] and also it's part of our plan that we should be more flexible with our strategic partners as well.

While we do not plan on providing strategic pricing deals regularly we also need to be cognizant that we need to be flexible with our strategic partners.

Our business, as you know, is fairly dynamic and we will react quickly to lock-in opportunities if the benefits outweigh the costs.

If there are strategic deals that provide large revenue opportunities over multiple quarters and if they make sense then we may consider acting on these strategic -- these opportunities going forward.

And, Dan, as you can see, some of the markets are mature and some flash maker also announced there is the possibility of NAND also slowing down.

I think that's the leading controller maker.

We also in certain programs we understand we need to share certain pain.

However from the better product mix and from the cost-down reduction we believe that we can manage gross margin very well and bounce back to 40% to 50% by the second half next year and maybe even sooner.

But I think as of today for the poor economic situation we have complied with the OEM customer for some strategic programs in this lower cost market.

Okay, great.

And then my final question on the LTE business here.

So can you reiterate the revenue growth rate that you expect for that business next year and also do you think that the further integration that you're doing on the LTE transceiver, is that going to change in any way your share forecast that you see in that business for next year?

I think we are working on more specific solutions and we are about to release our latest-generation transceiver which offers much more integration function, better power management and we are positioned to win more flagship devices in 2013.

So that's why we have a strong confidence with current design pipeline in Samsung we see the growth will be even higher than 2012.

And what was your (multiple speakers) growth rate you were saying?

I'm sorry, can you repeat.

Yes, can you just reiterate the growth rate that you were talking about for 2013 on the LTE business?

We're expecting to grow our LTE revenue 50% to 75% next year.

As well, as I mentioned, we're expecting the market to continue to grow rapidly as wireless service providers continue to roll out LTE service globally.

Samsung, as you know, has been the market share leader for LTE smartphones.

We expect Samsung to maintain their market share leadership.

We also expect Samsung will continue to use the same proportion of their own LTE baseband paired up with our transceiver going forward.

So we're fairly confident that with the pipeline of projects as well as the rollout of our new LTE transceiver which has better costs and better performance, more integration, that we're fairly confident that we're going to be able to grow our business 50% to 75% next year.

Okay, great.

Thanks.

(Operator Instructions).

And our next question comes from the line of Rajvindra Gill.

Yes, thanks for taking my question.

Just a follow-up on the LTE comment.

You talked about growing LTE sales 50% to 75%.

I just want to get a sense in terms of units and pricing, that's pretty big growth.

Are you expecting, that would imply that units will be growing somewhere in the range of 50% to 100%.

If you could talk about how you see pricing in the LTE transceiver market, especially with the integration that's happening and where do you see the units coming from in 2013?

That's pretty impressive growth on the LTE side.

I think in order to grow 50% to 75% we have to win flagship models, more flagship models, and to win more global models.

And I cannot comment regarding the price for ASP because it's confidential.

However what I can tell you is our new release LTE transceiver will be single-chip single-die including all band.

It's a wide-band single-chip solution.

So that can cover all regions and all the carriers, all the services.

And if I did my math right it seems like the core products business has been declining three quarters in a row on a sequential basis and it's going to decline again in the fourth quarter.

So we're talking about four sequential quarters of declining business.

Now clearly you're offsetting that with the new products but how much confidence do you have that the core products will be able to grow next year?

Do you think that a lot of the fall-off that you're seeing -- that you've seen maybe in the other areas outside of the card controllers such as mobile TV and multimedia SoC, that is pretty much behind you and that you think the card controller business could chug along or maybe some clarity on the core products business in 2013 would be helpful?

Let me just comment first regarding the mobile TV.

As you have seen, mobile TV market is almost saturated but however we believe we still have opportunities to grow in Japan or other regions for ICBT and TMM.

But the revenue increase is not significant for our core sales revenue.

Regarding for USB flash drive, we believe although the market will remain flat or increase slightly in 2013 but by introducing our new USB 3.0 and by providing more products in emerging markets and (inaudible) market and like Windows to go, we believe we can continue to grow USB products but with a modest growth in 2013.

So overall for our core products we believe can maintain and slightly grow in 2013.

And last question on the pricing front, in 2012 you talked about gross margin in 48% to 50% range.

You expect to try to get back to that level in the third quarter?

How do you look at 2013 overall gross margins?

Do you expect to see that dip carry on into the first half of '13 and what makes you confident that you'll be able to increase that 300, 400 basis points on third quarter when we could be in a situation which there's even more pressure on bundle cards, more pressure on demand?

Trying to get a better sense of why margins would go up or conversely why margins wouldn't fall further.

Well, we're guiding to our gross margin to be 44% to 46% in the fourth quarter and our gross margin to begin slight improvement in first quarter of next year and improve throughout 2013.

We're targeting to return to 48% to 50% gross margin range by third quarter.

Our long-term target still remains at 50%.

We are ramping up more cost-effective solutions.

We're also introducing more higher value-added solutions and through the ramp of these products we are fairly confident that we can improve our gross margins from the value additive as well as the cost reductive approaches.

These are two different approaches.

In addition let me also comment that most of our products right now are still at 110 nanometer.

We have started rolling out newer products at 55 nanometer.

We will roll out most of our products at 55 nanometer.

As we transition more and more of our products from 110 to 55 nanometers we're going to get significant cost savings.

So through these approaches we're fairly confident we can blend up our gross margin back up to the 48% to 50% range.

All right, very good, and congrats on a solid quarter.

Thank you.

And our next question comes from the line of Tom Sepenzis.

Hi, guys.

Just a follow-up on the LTE ASP.

I know you can't give us the ASP but can you talk maybe a little bit about what kind of declines we should expect in 2013?

We're not going to comment specifically about that because it's a unique product that we have designed specifically for Samsung.

It's only for Samsung and there are confidentiality undertakings that we have in place.

But you've seen last year we grew volume sharply and through that we are able to also generate fairly good revenue growth.

Our expectation is units for smartphones are going to grow very rapidly next year and through the continued growth of the market as well as Samsung being the market share leader, maintaining their market share leadership, Samsung maintaining the use of a significant portion of their handsets using their own baseband plus our transceivers.

We're going to be getting pretty good unit shipment as well as revenue growth next year.

Do you still expect kind of a 50/50 split on the new phones, the LTE phones coming out of Samsung or has that shifted?

Yes, we can't comment exactly how they're going to plan but we're fairly confident as well as I mentioned about our very cost competitive next generation transceiver that we're going to have a good share of Samsung's use of our transceivers.

They're going to be bringing out even more competitive baseband solutions and you add that with our more competitive transceiver solution.

It's a win-win combination that we have and we believe it works well with Samsung's overall strategy of wanting to use more their internal solutions.

Great.

And just in terms of OpEx, you obviously did a great job of getting expenses down in the current quarter.

Is that kind of the new normal going forward that we should be modeling from those levels?

For the fourth quarter we're expecting operating expenses to be about $17m to $18m.

Looking into next year we think we're going to be able to have some operating leverage.

Our SG&A should come down a little bit in terms of percentage of total revenue while our R&D project spend should increase next year while holding at the same proportion of revenue as this year.

So we're expecting to increase our R&D project spend further but as I mentioned this R&D spend as a percentage of revenue in 2013 should be similar to 2012.

Our R&D project spend should increase more next year than this year as we increase the number of 55 nanometer tape-outs.

But let me also add that we're also going to be adding fewer incremental R&D headcount next year versus this year.

Great.

Thanks very much.

(Operator Instructions).

And we have a question from the line of Mike Crawford.

Thank you.

On eMMC market how many different controllers are you offering now and can you [clear up] the functionality of your SM2712 part?

I think we offer more than two or three different controllers in the market today.

We -- based on the special need and tailor for special NAND type, for example SLC or MLC.

Different NAND manufacturers have different requirements, they have different specialties regarding certain technologies like (inaudible) or data retention, how to improve endurance.

So each of the projects for each of the different NAND or density we have tailored the software framework to develop for our NAND flash partner.

These are one and two-channel solutions or --?

I cannot comment one or two channels because it's confidential.

I think the -- however, we are -- value provide low cost high performance controllers and to deliver lower density for our major NAND partners.

So the NAND density could be found 1 gigabyte all the way to 32 gigabyte.

But I think higher density NAND makers may have their own controllers to serve their special needs.

Okay.

And with your geometries moving to 55 nanometer next year where -- do (multiple speakers)?

All our eMMC controllers we're moving to 55 nanometer in 2013.

Yes, where to your knowledge is the competition producing today?

At what geometry?

That might give us a better sense of what their costs might be.

Today we're using 110 nanometers in TSMC.

I think we're moving into 55 nanometer in TSMC for our all new eMMC controllers next year.

Okay, thank you.

And we have a question from the line of Bob Gujavarty.

Hi, thanks.

Maybe just to revisit the strategic decisions you made on the pricing side.

It seems to me this time it's a little different.

In the old days some of that pricing might have been more transactional, dealing with maybe some of the module makers.

This seems a lot more strategic.

Can you kind of contrast the current decisions with maybe some of the pricing decisions that happened three years ago or something like that because it seems a lot different this time around?

I think we have a very, very broad customer base, also very broad OEM customers.

In different products and different [disengagement] we will make different decision.

But I think the -- really the strategic pricing initiative we have taken in decision with a really selective view of strategic OEMs to allow our partner to be more competitive.

Because if certain programs they need certain price to win broader their end customer and they will discuss, negotiate with us.

And because this is a (inaudible) will create more accretive EPS for 2013.

So that's -- although it's a critical, difficult decision we believe that will be more positive for Company long-term growth.

Thanks, got it.

And maybe on the eMMC side, is there an ASP uplift potentially from tablets?

Are the eMMC controllers that go into tablets, are they ASP accretive to like some of the other markets or is it pretty much the same as everything else?

So eMMC market has a very, very wide range of products and offerings.

eMMC is not just in smartphones and tablets today, they're moving for smart TV, they're moving for digital cameras and also car navigation systems and car entertainment info systems.

So we see eMMC there's no way to have only one controller provide all the different -- to serve all the needs to meet all the performance and cost requirements.

So there's a tremendous opportunity for us to be complementary to the NAND maker to provide the solution for them.

Today we have more business than we can take and we need to quickly grow our R&D and supporting team in order to catch this great opportunity.

Because we are about one generation ahead of our competitor in the flash controller companies and so we feel very comfortable in our position.

Just we need to quickly grow our R&D resource and supporting resource in order to grow with the NAND makers.

Currently we only serve Samsung, Hynix but we believe we will add one more in 2013.

Got it.

And just a quick question for Riyadh.

Riyadh, you mentioned some tape-out expense is pretty lumpy.

You'll see some of that in Q4.

Is there going to be a big lump of that in Q1 or Q2 or is it pretty evenly spread out the next couple of quarters?

Well, we're planning tape-out expenses to be evenly spread out.

It may not necessarily work that way.

We were originally planning a few more tape-outs in the third quarter.

These tape-outs were ultimately postponed.

So these tape-outs can be -- can move around quite a lot.

But overall we're expecting more tape-out expenses next year so the tape-out expenses next year will be more than this year.

But ultimately when you look at our total R&D expense for next year the idea is it should grow around percentage-wise in line with our revenue.

So the percentage that you see this year should be what you'll see next year.

But the increase will be coming more from the project tape-out and less from the increase in headcount.

Great, thank you.

We have no further questions at this time.

Let me add a comment.

One of our analysts, I believe, had asked a question about the competitive landscape which I believe we did not adequately explain.

We're about one generation ahead of other merchant suppliers of eMMC controllers of similar performance and cost solutions.

The advantage of our eMMC controllers, as Wallace has pointed out, we incorporate better data management solutions, power loss protection as well as random -- higher random IOPS performance at lower power consumption at a much lower cost than competing solutions.

So we balance out our flash vendors' needs and allow them to focus more on high-end solutions while outsourcing the high volume mass market solutions to us.

So this is a very complementary approach.

While the flash vendors all have their own eMMC controller solutions, this is a complementary approach that we add value to them.

And so this is a continuation of the value-added services that we provide to the flash vendors that we have previously demonstrated and continue to demonstrate on the card controller side.

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

We will be at the following conference in this quarter.

In November, we will be presenting at the Lazard SSSD Conference in New York, Needham Storage and Memory Conference in Boston, UBS Technology Conference in New York, Deutsche Bank Conference in Taiwan and Canaccord Genuity Conference in New York.

Details of these events are available on our website.

Thank you and goodbye for now.

Thank you, ladies and gentlemen.

That does conclude today's conference call.

You may now disconnect.