慧榮科技 (SIMO) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the fourth-quarter Silicon Motion Technology Corp.

Q4 2012 earnings conference call.

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

At this time, all participants are in a 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 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 condition and business prospects.

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

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

Potential risks and uncertainties include, but are not limited to, continued competitive pressure in the semiconductor industry and the effect of such pressure on prices and predictable 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 the IR and Strategy.

Please proceed, sir.

Thank you, Edwin and good morning, everyone.

Welcome to Silicon Motion fourth-quarter 2012 financial results conference call and webcast.

My name is Jason Tsai; I am 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 fourth-quarter financial results and provide our outlook.

We will then conclude with Q&A.

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

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

For more details on our financial results, please refer to our press release, which was filed on Form 6-K after the close of the market yesterday.

This webcast will be available for replay on our website, www.siliconmotion.com, for a limited time.

To enhance investors' understanding of our ongoing economic performance, we will discuss non-GAAP information during this call.

We use non-GAAP financial measures internally to evaluate and manage our operations.

We have therefore chosen to provide this information to enable you to perform comparisons of our operating results in a manner similar to how we analyze our own operating results.

A reconciliation of the GAAP to non-GAAP financial data can be found on our earnings release issued yesterday.

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

With that, I would like to turn the call over to Wallace.

Thank you, Jason.

Hello, everyone and thank you for joining our earnings call.

I am pleased with our execution and results for the fourth quarter and the significant progress we have made as a company over the past year.

Our fourth-quarter results were largely as expected and as I communicated to you three months ago and provide a solid finish to our record strong 2012.

In 2012, we delivered our highest annual revenue and EPS in our Company's history.

We believe that our business remains very well-positioned for the (inaudible) growth [at our] Company New Growth Products.

Riyadh will go into our financials later in the call.

First, let me start by taking you back to before 2012 when we had set ourselves two important goals -- that we needed to grow and quickly scale up our New Growth Products and that we needed to manage well our large, but maturing core products.

We have executed well on both goals.

Our New Growth Products, primarily our eMMC controller and LTE transceivers grew almost 140% and account for 31% of our full-year revenue.

Our core product, (inaudible), our card and USB flash drive controllers, grew 5% year-over-year.

As a result, we grew our overall revenue 25% for full-year 2012.

I am very happy with the tremendous success that we have achieved with our eMMC controller business.

2012 was our first full year of eMMC revenue and already for the full year.

eMMC accounts for roughly 10% of our overall revenue and we have become the eMMC merchant controller marketshare and technology leader by a mile.

We are now supplying our eMMC controller to both Samsung and SK Hynix.

Our flash partners are supplying eMMC memory solutions using our eMMC controller to seven of the top 10 smartphone OEMs.

These seven smartphone OEMs are already mass-producing smartphones where the global (inaudible) models are low-cost phones whether involving Android OS, Windows 8 or BlackBerry OS using our eMMC controllers.

In addition to smartphones and tablets, we have broadened our eMMC controller wins and have now been designed into smart TVs, (inaudible) set-top boxes and two leading game consoles.

eMMC has become the industry standard SoC for mobile devices.

All now IOS smartphones and tablets with eMMC with the embedded memory solution (inaudible) operating system running software applications and for storing data.

The smartphone and tablet market for eMMC was over 600 million units in 2012 and we expect these two segments of the market to grow in excess of 30% this year.

In these two eMMC market segments combined, we had an overall marketshare of 5% to 10% in 2012 and are confident, based on the projects that we have currently [brought in], the two flash partners, that we can grow our marketshare to 15% to 20% this year.

Our strategy to build a successful eMMC business has always been to work closely with the NAND flash vendors themselves to enable their flash and allow them to go to the market in (inaudible) handset, tablet and consumer electronic OEMs.

Let me highlight some of our advantages and applying our strategy where it drives strong growth for our eMMC products.

First, the eMMC market [belongs] to flash vendors.

It is very difficult for any module maker to compete in this market today.

We offer flash makers and eMMC controllers that is very robust, power efficient, high (inaudible) sequential data performance (inaudible) and all at a low cost.

The eMMC associate design and firmware structure are much more complicated than card or USB controllers.

Second, in order to achieve greater high performance with very good power protection, the controller maker needs to have very deep knowledge of both NAND and controller architecture.

NAND makers have to release their confidential information, such as hidden commands, to their selected controller partners.

This builds engagement and reliable joint development post-partnership and mutual trust.

We have to provide dedicated resources in different physical locations with these NAND makers to ensure customers' confidentiality.

Third, the success of the eMMC business relies on SoC hardware design, firmware algorithms, robust qualification process and good partnership with leading mobile chipsets of platform makers.

The solution needs to be prequalified by leading chipset application processor of platform makers before they send their resin design to their end customers.

Fourthly, the final step to make our eMMC program successful is to have strong technical support teams in major geographic regions.

(inaudible) mobile handset and tablet makers might use the same chipset or AP.

They typically encounter different problems during initial development.

Strong local technical support teams with solid systems design, (inaudible) level design, OS know-how, chip level design and eMMC firmware know-how are the keys to solving customer issues quickly.

We have been building up our global support team infrastructure for more than 10 years now.

EMMC is strategically very important to Silicon Motion.

It is a primary area where we are focusing our controller R&D resources.

Currently, all our high-performance cost-competitive eMMC controllers are for eMMC 4.41.

We are already sampling our next generation eMMC 4.5, with double the relevant data (inaudible) speed and (inaudible) the (inaudible) speed.

This product manufactured using 55 nanometer is being sampled by our flash partner and we expect this partner to go into mass production in the first quarter of 2013.

We are also planning to bring to market this year an eMMC controller that will support TLC flash, marketing the low-cost solution, investing for emerging markets, like China.

Our product roadmap also includes eMMC 5.0, which will be available later this year and [USS] 2.0 next year.

The performance of USS 2.0 is comparable SATA 3.0 and target both high-end smartphones and tablets.

Now let me turn to our LTE transceiver business.

We started shipping our LTE transceiver to Samsung with 4G LTE smartphones and tablets starting in 2010.

Our LTE revenue growth in the two years since then has been phenomenal.

In 2012, our LTE revenue increased 65% and accounted for approximately 15% of our total corporate revenue.

In 2013, we believe we can grow our LTE revenue by another 50% to 75%.

Samsung is currently testing our fifth-generation LTE transceiver with their baseband and we believe our new transceiver is on track (inaudible) incorporate into some of the years since our flagship LTE smartphone.

Last year, our LTE transceiver was used in all of Korean domestic (inaudible) smartphones.

We believe, this year, our transceiver will more likely be designed into some of the US/European models and less likely the Korean domestic model built to the changing carriers' requirements.

Industry analysts estimate that, last year, approximately 110 million LTE smartphones and tablets were sold while LTE revenue expectation this year is based on the market for these LTE devices doubling.

Samsung and (inaudible) LTE device marketshare and Samsung using a similar portion of their baseband and our transceiver for their LTE devices.

Our LTE revenue this year could be more or less than planned depending on how these factors play out.

Based on our experience over the last two years, our LTE revenue is very lumpy quarter-to-quarter.

In the last two years, almost half our annual LTE sales took place in the third quarter.

First-quarter sales are the weakest.

Sales picked up in the second quarter as Samsung built for launch of a new product for the second half of the year.

In the fourth quarter, sales ramped down.

While we cannot provide assurance that our LTE sales pattern, which has experience in both 2011 and 2012, will repeat itself, we believe that the past sale pattern may happen again this year.

Furthermore, the timing and the rollout of Samsung's product may vary by geographic and carrier even for the same flash model as was the case with (inaudible) last year.

Our LTE sales visibility will not improve until Samsung confirms the specific program that we have won.

We believe that, in 2012, Samsung's own LTE baseband account for approximately 25% of total Samsung mobile LTE smartphone shipments.

We believe that Samsung could double their LTE shipments in 2013 as compared to 2012.

And the main growth areas this year are in the United States and Europe.

Our main goal is to deliver the best LTE transceiver product to meet Samsung's specification and match their new product launch schedule.

Samsung mobile keeps multiple sourcing strategy to maintain price competitiveness and maintain (inaudible) plans for fast ship products in given countries.

LTE is Samsung's first opportunity to demonstrate their own capability to use their internal modem with their own application processor.

We believe Samsung is fully committed to their internal chipset and AP development program as their long-term strategy.

We continue to work very hard as we partner long-term internal LTE solution and as a value-added partner to Samsung.

We are sampling our fifth-generation LTE transceiver and expanding to MTM2 production (inaudible).

This is a highly integrated product that can manage in a single die, GSM, EDGE, HSPA, plus TD-SCDMA and both PDD and FDD LTE.

Our transceiver can also manage all 40 frequency bands defined for LTE service.

Our next solution in LTE advanced transceivers for Samsung is scheduled to begin initial sampling later this year.

Overall, we are pleased with the progress of LTE transceiver business with Samsung and continue to feel good about meeting Samsung's technical and cost targets.

Let me now turn to our core product, specifically our card and USB flash drive controller business.

The market for both card and USB controller are mature.

The market for memory cards may have started to decline modestly last year and will likely decline again modestly this year.

And this secular decline will continue as smartphone OEMs invent more memory and bundle fewer cards.

We have been fairly good at managing our card business despite the secular decline.

Our card controller revenue increased 18% last year and our USB revenue increased 4%.

They are managed well by mainly focusing on supplying controllers for low-density [micro-OC] card [testing] the China low-cost smartphone market.

We have also benefited by selling cutting-edge controllers for managing the newest and most difficult to manage flash.

Roughly half our card revenue growth in 2012 was from higher (inaudible), a testament we believe to the value add technologically we bring to customers.

In the fourth quarter, controllers for our (inaudible) sale increased sequentially while our retail card controller sales declined.

Bundled cards are now over two-thirds of our card controller sales.

Our USB controller sales were up modestly.

Sales for both card and USB controllers were limited by time availability of NAND flash to [multi-makers] with flash maker basing their inventory during peak sales seasons.

In 2013, we believe the card controller market will continue to decline modestly.

Smartphone card bundle rate in developed markets like the US have already fallen too low, but stable levels, with the average embedded memory for Android phones are now already over 10 gigabytes.

The fastest-growing card market right now is in China and other developing countries.

Serving this more cost-sensitive market are low-cost smartphone manufacturers by Chinese OEMs.

These low-cost smartphones currently have an average of only 1 to 2 gigabytes of embedded memory.

So there is a strong demand of micro SD cards to provide incremental data storage.

We are managing the secular decline of the card market by focusing on China market and higher performance, higher value add markets such as Class 6 and higher data rate cards, as well as [UH1] cards.

These high-performance cards are required for recording full HD video such as 1080 pixel resolution and higher frame rate, the function increasing variable with both digital cameras and smartphones.

In the first quarter, our sales card and USB controller to module maker customers will be seasonally down as expected.

Flash mainframe have also been limiting the sale of flash wafers to module makers to support prices.

More importantly, however, our larger OEM customers have been rebalancing its card and wafer sales and this will naturally affect our controller sales temporarily.

This customer has been reducing its card production and very recently has begun to release wafers on its inventory into the market.

We expect our card and USB business to rebound in the second quarter as more flash inventory is made available.

We believe it is likely that the China bundled card market will increasingly be supplied by Chinese module makers, the largest of which are all our long established customers.

Overall, I am pleased by the progress that we have made in managing the slowdown of our core products and delivering rapid growth on our New Growth Products.

Our eMMC and LTE will continue to be our star products.

We are planning later this year to talk more about our high-performance, cost-competitive SATA 3 USB controller for both NAND cache, SSD and full size (inaudible), as well as our unique (inaudible) SSD solution for embedded applications.

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

Thank you, Wallace.

First, I will outline our financial results for the fourth quarter and then I will provide our first-quarter and full-year 2013 guidance.

As Wallace had mentioned, we delivered $70.6 million in sales this quarter on an 8% decline compared to the prior quarter and a 5% increase compared to the fourth quarter of 2011.

In the fourth quarter, sales from our New Growth Products decreased 27% sequentially, primarily because of Samsung's third-quarter accelerated LTE orders.

New Growth Products accounted for 32% of total sales, down from 40% of total sales in the prior quarter.

For the full year 2012, New Growth Products accounted for 31% of total revenue, up from 16% in 2011.

Let me recap the performance of our two key productlines.

First, mobile storage.

Mobile storage revenue was flat sequentially and up 12% year-over-year.

Mobile storage controller shipments decreased 7% sequentially and 2% year-over-year.

Mobile storage control ASPs increased by 8% sequentially and 14% year-over-year, our 12th consecutive quarter of annual ASP increases.

For the full year, ASPs increased 11% in 2012 compared to the prior year.

Our card controller revenue decreased by 5% sequentially and our USB flash drive controller revenue increased by 1% sequentially.

Over 50% of our SD and USB controller sales are for supporting 19 to 21 nanometer NAND flash.

This portion is similar to our third-quarter sales.

OEM revenue was unchanged in the fourth quarter as compared to the third quarter and accounted for 65% of our controller sales in the fourth quarter.

Moving to mobile communications, mobile communications revenue decreased 32% sequentially and increased 2% year-over-year, driven largely by the accelerated build and shipment of our LTE transceivers to Samsung in the third quarter.

Our corporate gross margin decreased in the fourth quarter to 44.6% from 46.4% in the third quarter and in line with our guidance range.

As we had indicated last quarter, our short-term gross margin decline was the result of a strategic pricing initiative we undertook with one of our strategic partners.

We believe that the fourth quarter represented the lowest gross margin level for us and we should see modest improvements beginning in the first quarter and throughout 2013.

We expect to return to our historical range of 48% to 50% by the third quarter of 2013.

We are making good progress in transitioning to more cost-effective 55 nanometer products and expect this to significantly help gross margins in 2013.

Currently, the vast majority of our cards and USB flash drive controllers are manufactured at 110 nanometer or older processes.

Our existing eMMC controller, while above average gross margin product, is also manufactured at 110 nanometers.

All of our new products, including new card and new eMMC controllers that we have recently taped out or will be taping out, are at 55 nanometer, except a new USB controller that has been redesigned to be very low cost even manufacturing at older process nodes.

We target a third of our products to be 55 nanometer by the fourth quarter.

Additionally, our gross margin will improve as our product mix shifts towards New Growth Products.

The gross margin of which are above corporate average.

Our eMMC sales will grow quickly throughout this year.

Our LTE sales should ramp sharply in the third quarter.

We expect 40% to 45% of our sales to come from New Growth Products this year and this will help our gross margin.

Our operating margin in the fourth quarter was 19.5%, a decline from the 25.9% in the third quarter.

In the fourth quarter, operating expense increased to $17.8 million from $15.8 million in the third quarter as project expenses, including 55 nano tapeouts that were delayed in the third quarter occurred in the fourth quarter.

We ended the fourth quarter with 688 employees, 11 more than at the end of the previous quarter.

Earnings for ADS in the fourth quarter were $0.36, a decline from the $0.54 in the third quarter as a result of core revenue, gross margin and higher operating expenses.

Stock-based compensation in the fourth quarter was $3.4 million, similar to the third quarter.

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

Inventory days increased slightly to 78 days in the fourth quarter from 77 days in the third quarter.

DSO increased slightly to 48 days in the fourth quarter compared to 47 days in the third quarter.

Payable days increased to 61 days in the fourth quarter compared to 47 days in the third quarter.

In the fourth quarter, our cash balance increased by $23 million to $169.6 million at period end.

In terms of primary sources of cash, we generated $12.4 million in net earnings, a decrease in inventory levels generated $4.7 million and an increase in accrued expenses generated $4.1 million.

We invested $1.3 million for testing equipment and software and design tools.

I will now move onto our guidance.

For the full-year 2013, we believe our eMMC revenue should roughly double and LTE sales should grow 50% to 75%.

We believe our New Growth Products should grow to account for 40% to 45% of our total full-year sales and New Growth Products could be as high as half our sales by year-end.

The majority of our total sales in 2014 should come from New Growth Products.

In 2013 and 2014, we believe our core products should be flat at best.

Our card and USB controller sales should decline modestly.

For the first quarter, we expect our eMMC revenue to grow sequentially and LTE sales to decrease as Samsung's flagship smartphone and tablet models are in transition.

Additionally, while our sales of card and USB controllers to module maker customers will be seasonally down as expected, our large OEM customer is rebalancing its card and wafer sales and this will temporarily impact our card controller sales in the first quarter.

In the second quarter, we expect our eMMC sales to continue growing, our LTE sales to pick up and our card and USB sales to rebound.

For our first-quarter guidance, we expect first-quarter revenue to be down 15% to 25% sequentially.

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

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

Stock-based compensation expense should be approximately $2 million to $2.5 million.

Our target model tax rate remains at 15%.

For our full-year 2013 guidance, we expect full-year 2013 revenue to grow at 10% to 20% as compared to full-year 2012.

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

We are targeting operating expense to be in the range of $73 million to $78 million.

Stock-based compensation expense should be approximately $12 million to $14 million.

Our target model tax rate remains at 15%.

We will now open the call for your questions.

(Operator Instructions).

Daniel Amir, Lazard Capital.

Thanks a lot.

Thank you for taking my call.

A couple questions here.

First of all, on the LTE business, Wallace, you said that there might be a shift in terms of carriers that historically have went with Qualcomm; they are now going to go with Samsung.

And the countries -- I guess the share in the countries might get split.

Can you expand a bit more what is exactly happening there?

And then second is how do you think your share shift will -- will sales stay the same?

Can you just reiterate kind of what you think the share is currently in the market?

And how do you think it is going to stay the same given the change of the geographical distribution of your product?

And then I have another follow-up.

Thanks.

Okay, hi, Daniel.

Let me clarify your first question.

First, we did not mention specifically regarding LTE and winning (inaudible) whatever supplier.

However, we did mention, in some carriers specifically in Korea region because requirements for carrier [application], so I think this relates to certain baseband solution whether you support carrier aggregation or not has nothing to do with LTE transceivers.

So we cannot comment and that is just a (inaudible) their own decisions.

Now regarding your second question, I think Samsung will continue to use their own baseband as a way to ensure that all their suppliers are offering the most capable solution for the best price.

Samsung also wants to differentiate their solution and using their own baseband allows that.

We are there to make sure that Samsung's solution is as competitive, as well as a relevant variable for other baseband providers.

Now we believe Samsung is using their own baseband in only about one-quarter of their LTE devices.

They would like to use more of their own solutions when their solutions become more stable and mature and then we think we can continue to keep the same portion percentage and for the Samsung mobile smartphone with LTE.

So just to follow up on that, so your share is somewhere around one-quarter, you think, something like that?

That's correct.

Okay, all right.

And then the follow-on question, two follow-ups, one is the eMMC area.

You highlighted that you have -- it seems like you have a number of big growth opportunities here.

Should we expect this to increase every quarter pretty significantly or is there a certain linearity here to the quarters as the year progresses because it looks like you are selling the game console, TV, set-top boxes?

I mean is the vast majority of the revenues basically from handsets in those other products don't really matter much and therefore, it should increase as the year progresses or is there a seasonality aspect?

I think we can only mention that our eMMC revenue will grow quarter-by-quarter in 2013.

We have high confidence regarding our current design pipeline.

We saw two major flash suppliers.

We don't want to comment (inaudible), but we are -- there are additional potential options to use if other NAND makers come to us.

When our resource will be available in the second half of the year, we will be ready to expand more opportunity with other underserved flash makers.

Daniel, let me also add to your question.

Most of our eMMC controllers are going into memory modules targeting the smartphone industry.

So the bulk of our volume will be driven by the smartphone industry, but it is a fantastic opportunity for us to have other applications like tablets, smart TVs, smart set-top boxes and other applications that also require eMMC controllers and we have been designed into many of these.

So we are delighted that the addressable market is growing and enabling us to go into more and more different directions.

Okay, great.

The final question just on the tax rate, Riyadh.

I mean 15%, has anything changed this year?

You have really never had 15% tax rate; it has always been a lot lower.

So anything to clarify there?

Well, the tax regime in Taiwan is (technical difficulty), so there is a lower amount of R&D tax credits being available over the next few years.

So we are holding to our 15% mobile tax rate and 15% continues to be what we use for modeling our business internally.

Okay, great.

Thanks.

Anthony Stoss, Craig-Hallum.

Hi, guys.

I have a two-part question.

Wallace or Riyadh, you were talking about potential new eMMC customers coming online.

If you wouldn't mind sharing a little bit more color if you think that is kind of the December quarter.

And to that same point, heading into 2014, can you give us a sense of growth expectations from both your LTE and the embedded side of the business?

Thank you.

I think we could say that we already have other OEMs coming to us for our eMMC solution.

But we will also have a (inaudible) trend.

eMMC requires dedicated development and a supporting team, as I mentioned earlier and we are in the process of building this new team and we should be ready to support OEMs in the second half this year.

That is what I can say.

Regarding 2014, we absolutely see our marketshare can grow in the eMMC space area as we guide about 10% to 20% for 2013.

For 2014, we can grow to a higher percentage with the eMMC marketshare growth, as well as the new additional OEMs.

Okay.

Then, Riyadh, if you wouldn't mind, you talked about gross margins jumping throughout the year.

Can you reiterate what those numbers were and then also what gives you the confidence I guess specifically to that September quarter gross margin that you can get there?

Thanks.

Our gross margins were 46.4% in the third quarter and they came down to 44.6% in the fourth quarter.

So well within close to the midpoint of what we had guided previously.

Our roadmap for returning to our 48% to 50% gross margin level is based on a push to lower cost 55 nanometer manufacturing processes, as well as increasing the proportion of our new growth product sales.

New growth product sales, these products generally have higher gross margins.

So in terms of the first item, moving to 55 nanometer manufacturing processes, we are making very good progress in transitioning to these more cost-effective parts.

Currently, the vast majority of our cards and USB controllers that I previously mentioned are manufactured at 110 nanometers or older processes.

All of these parts, including new -- all of our parts, I'm sorry, including new card controllers, new eMMC controllers that we have recently taped out or will be taping out, will be taped out at 55 nanometers.

So we are targeting a third of all our products to be at 55 nanometers by the fourth quarter.

So this is going to help our gross margins significantly.

Furthermore, we are also going to be blending up our gross margin as we sell more and more New Growth Products.

Our gross margin will improve as these New Growth Products are above corporate average gross margins.

Our eMMC sales will grow quickly throughout the year, as well as I just talked about and we believe our LTE sales should start ramping aggressively in the third quarter.

Thank you.

Mike Crawford, B. Riley & Co.

Thank you.

Regarding your SSD business, so do you expect that to become more significant once you have your SATA 3 cache in the market or is that fairly new?

Let me just comment.

We are already starting sampling our SATA 3 SSD controller.

While we are a late mover into the SSD controller market, but being a late mover also has its advantage.

We have (inaudible) standing above the overall landscape and competition, which allow us to have a more focused strategy in coming to design and marketing our SSD controller, as well as our supporting for the next-generation NAND of 2y nanometer and 1x nanometer as we have more compelling support in the new NAND solutions.

We are targeting for both NAND cache and full-size client SSD market to use the SATA 3 controller.

We believe we have a very compelling performance and power consumption and very competitive cost.

We have started to see initial revenue contribution in the second half of this year.

Since our SSD controllers are currently only sampling, it's still too early to talk about revenue contribution.

We will update you as the year progresses.

Okay, thank you.

And then combined with all of your SSD products, including the industrial ferrite brand SSDs, what percent of revenue was SSD in 2012?

Our New Growth Products, the total for 2012, was about 31% of total revenue.

Our card -- our -- LTE was about 15%.

Our eMMC was about 10%.

So it is a balance, the balance that adds up to 31% coming from our SSD products.

Okay.

Thank you, Riyadh.

And then just getting back, can you please just give a little bit more color what you mean by your large customer rebalancing the card business that is affecting you in Q1, exactly what is happening there?

So the flash OEM use the card market and the module maker market as a buffer to their supply output.

If supply is outpacing demand, NAND is sold easier as a card, the wafer to module maker are held as inventory.

This market is very dynamic and so can change quickly and dynamically depending on the relative profitability of the card versus the wafer and other strategies acceleration pushing marketing timing.

As the largest supplier of controllers for flash maker and the module maker, we benefit whether flash maker make a card or module maker make a card.

In the first quarter, we are seeing a shortened shift away from the internal card business.

This can change course again very quickly.

We are starting to see increasing quantity of wafers being released to module makers.

These sales are still relatively small.

We expect wafer sales to become more meaningful in the second quarter.

I think that we -- every NAND maker, they have their own strategy and looking to maximize their profit.

We cannot comment whether it is consistent, but it is very dynamic.

But either way, I think we can grow our card business and controllers.

Okay, thank you.

Raji Gill, Needham & Company.

Yes, thank you.

The 2013 annual growth of 10% to 20% implies a very steep ramp in the second half, something on the order of maybe 40% to 50% from the second half versus first half depending on what 2Q is.

Just want to give a sense of what are they kind of the drivers for that very significant ramp in the second half, what are some of the risks that that second-half ramp might not materialize?

There are three pieces to our growth for this year -- our eMMC, our LTE and our card [EFD] business.

Our card and EFD business, we are expecting modest declines for 2013.

Our eMMC business, we are expecting that revenue to essentially double and grow sequentially for the full year with the total full-year revenue being roughly double what it was the prior year.

Our LTE revenue should grow about 50% to 75% for the full year compared to the prior year, but this part of the business will be lumpy.

As we previously talked about, we generate a very large part of our LTE revenue in just one quarter.

If past two year's sales pattern are a precedent, we generate almost half of our LTE revenue in just the third quarter with a smaller revenue, LTE-related revenue in other quarters.

So that is going to be one of the biggest moving parts in our revenue to get to the 10% to 20% revenue guidance for the full year.

So let me add some color here.

I think, for eMMC growth, we have very high confidence we may have a potential upside with our guidance regarding the eMMC growth revenue.

In the LTE side, the risk -- it just depends on the production of Samsung new models and their selection about the solution.

And we are only the LTE transceiver provider.

And we also depend on the baseband and application processor altogether regarding the new production model.

Sometime it could be delayed, sometime maybe moving earlier.

So we cannot comment for that.

But, however, I think we know, in today, our fifth-generation LTE transceiver is very appreciated.

All this fact, quality, they meet the expectation and we believe we can win as long as they are planning a certain percentage using general solution.

So I think there is moving parts.

It is a risk whether we will be moving up or delayed, but I think the socket we have confidence.

That is helpful.

And Wallace, you touched upon this before, but the NAND supply environment is expected to remain pretty tight.

If you look at what SanDisk is saying and what Samsung is saying, they are looking at kind of 30% to 40% bid growth, which is kind of historical low levels of NAND supply.

They might increase NAND supply in the second half, but it is not certain.

Wondering, in terms of how the tightness of supply impacts the module makers and how do you offset that at the OEM level?

I think that variability was the big tide in the fourth quarter and currently remains high as the flash vendors haven't released too much flash into the market, the module maker and to protect their NAND price.

However, we are already seeing additional signs of additional wafer coming to the market with our China and Taiwan module maker customers.

So the overall variability should improve in the late first quarter and we also believe there will be more supply of NAND flash maker to both OEM and module makers in the second half.

And so I think the -- overall, I believe flash maker, it does mean for more conservative guidance and because the supply demand balancing.

However, if the (inaudible) significantly stronger than supply, incremental flash capacity can be brought online fairly quickly, within two to three months since most of the flash makers, their fabs are currently not fully loaded.

This is -- actually Toshiba, they cut back 3% of capacity and I think they can resume quickly by early second half.

Thanks.

And just last question, just that I understand it correctly, you said the core products should be flat at best in 2013?

And the card business would decline modestly?

That's correct.

Our core business is primarily our card and USB flash drive products.

So, at best, they are going to be flat, but we believe our card and USB flash drive business revenue-related should decline modestly for full year.

And is this mainly the result of a significant decline in the bundle -- the attach rates for bundled cards?

That is correct.

Two-thirds of your card controller business?

Is that why you are kind of saying cards could decline modestly?

That is correct.

Thank you.

Bob Gujavarty, Deutsche Bank.

Great, thanks.

I know it is a little difficult given a lot of one-time type of things and design cycles and all that, but what do you think is the seasonality of your business?

Is it primarily a 2Q/3Q phenomenon and then kind of 1Q and 4Q are relatively weak or how do you think about your business now given where you are trying to grow?

I think for NAND controller business, 1Q always our weakest quarter.

Second quarter and third quarter continue to growth.

Fourth quarter could be slightly decline or flat.

So for LTE, the fourth quarter always goes down for the (inaudible).

For our productline, the business, the fourth quarter all go down.

Q1 also is weak.

It depends whether there will be more new models designed pipeline.

I think currently we see the product transitioning in Q1 as LTE sale revenue declined bigger than in normal productline.

But I think when LTE business growing bigger and for the mobile space, we probably won't see such a big decline in fourth quarter.

Got it.

And also some of the margin pressure, because of strategic pricing moves you made, if you could expand a little bit on how that creates a revenue opportunity, is it across your productline, is it certain key parts of your productline?

Can you talk about when we see some of that revenue?

Because you took the margin and ASP hit, but up till now, you haven't really seen the revenue come through.

So just can you talk about that a little bit?

I think it is difficult for us to talk about specific customers.

I think based on the business engagement, based on our commitment, sometime when our major customers, they really suffered the price decline and we had to share a certain pain.

So whether there will be a really upside for the business, but at least we will maintain the customer relationship and continue to engage long-term business.

Got it.

Thanks.

Thomas Sepenzis, Northland Capital.

Hi, thank you for taking my question.

I am just trying to get a better sense of the quarter-to-quarter decline in the card business in Q1.

Given the rebalancing, it seems like most of the change in guidance is coming from that.

And so I am wondering if you can provide a little bit more color there and then what gives you the confidence that that card business will rebound starting in Q2?

I think for our OEM business, the card controller is stable.

If you are looking for our Q3 to Q4, the revenue maintains unchanged and we think even Q1 it may be some (inaudible) probably maintain it is also flat.

However, due to the supply to module maker is limited, so we see the module maker portion for the card business decline sequentially quarter-to-quarter.

For the second quarter, we believe the variability of a NAND supply in the second quarter will be increased.

That is why we can predict we should see the better rebound for our card controller business in the second quarter.

Okay, great.

Thank you.

And what is the current yield on the 55 nanometer?

Are you having any issues there or is that coming off the line working pretty well for you?

55 nanometer is a very mature process technology.

We use the TSMC low lead process technology 55 nanometer, which supposed to see around 90% yield around that range.

Great, thank you.

And you announced four new LTE handsets in South Korea in the press release.

I am just wondering if you could give us some color there as to when that starts to hit the model and if we can see any kind of help from that in Q1 or if that is more a Q2/Q3 type event?

I think we announced there are four new LTE models designing and shipping in the first quarter.

However, I think the volume (inaudible) model relatively small.

So that is why you won't see the (inaudible) revenue increase.

However, after we win the major flash (inaudible) model for LTE and you are going to see the major revenue rebound.

We expect to see increase from late Q2 and ramp up very quickly in third quarter this year.

Great, thank you very much.

Ladies and gentlemen, that is all the time we have for questions and I would now like to hand the conference back to Mr. Jason Tsai, Director of IR and Strategy for closing.

Before I hand the call to Jason, this is Riyadh, I am just going to make a statement about our dividend.

As you know, we have declared a dividend, so just want to talk a little bit more about our dividend policy.

Essentially barring any very exceptional events, we are expecting that our $0.15 per quarter dividend to be an ongoing event.

As our business improves and scales, we could look to increase the dividend amount.

We believe we can generate a fair amount of cash flow throughout our business cycle and $0.15 a quarter is a comfortably affordable amount for us.

So for modeling purposes, we would guide that $0.15 per quarter should be an ongoing amount.

So let me turn the call over to Wallace 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 at the following conferences this quarter.

In March, we will be presenting at the (inaudible) Semiconductor Summit in New York; Northland Technology Conference in New York, Merrill Lynch conference in Taipei.

Details of these events are available on our website.

Thank you and goodbye for now.

Thank you.

Ladies and gentlemen, that does conclude our conference for today.

Thank you for participating.

You may all disconnect.