慧榮科技 (SIMO) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the [first-quarter Silicon Motion Technology call, Q1 2013] (Company corrected after the conference call) earnings conference call.

My name is [Han] 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 Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended.

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

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

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

Potential risks and uncertainties include, but are not limited to, continued competitive pressure in the semiconductor industry and the effect of such pressure on prices, unpredictable changes in technology and consumer demand for multimedia consumer electronics, the state of and any change in our relationship with our major customers, and changes in political, economic, legal and social conditions in Taiwan.

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

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

I would now like to hand our presentation over to our host, Mr. Jason Tsai, Director of IR and Strategy.

Please proceed.

Thank you.

Good morning, everyone.

Welcome to the Silicon Motion first-quarter 2013 financial results conference call 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 a review of some of our recent business developments.

Riyadh will then discuss our first-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 financials, please refer to our press release which was filed on Form 6K after the close of 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.

The reconciliation of 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 now like to turn the call to Wallace.

Thank you, Jason.

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

In Q1, we continued to make substantial progress in growing our SSD plus embedded products, specifically our eMMC controller.

We are executing well on our SSD plus embedded growth plan and are increasingly confident that these products will more than double this year.

Our overall Q1 revenue were largely as communicated, and we expect our business to rebound in Q2 from continued strength of our SSD plus embedded products, as well as stronger card and UFD controller sales.

Riyadh will go into our financials later in the call.

Last quarter, when we spoke, I had discussed that we have set ourselves two important goals that we needed to grow and quickly scale up our new growth products, primarily our SSD plus embedded and LTE transceivers, and that we needed to continue to manage well our large but maturing core products.

We are doing well in growing our SSD plus embedded, especially our eMMC product.

Our SSD plus embedded products are now over a quarter of our sales and our eMMC controllers grew by almost 30% sequentially.

Our SSD plus embedded revenues are now larger than our USB flash drive revenue and should surpass our card controller revenue in Q2.

We remain very excited about our other major new growth product, our LTE transceiver, and this growth prospect with Samsung.

However, as we are transitioning with Samsung in our next generation LTE Advanced solution later this year, the timing and magnitude of revenue this year from this segment remains unclear.

Our LTE transceiver remains in customer testing, and I will talk more about this shortly.

In terms of our core products, our card and USB flash drive controller sales should rebound nicely in the second quarter, and sales of this controller should gradually decline over the rest of the year.

Now let me turn to our eMMC business.

We have had tremendous success with our eMMC controller.

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

eMMC account for roughly 10% of the overall revenue and we have become the eMMC merchant controller and market share and technology leader by a mile, by supplying to both Samsung and SK Hynix.

Our eMMC controller sales grew nearly 30% in Q1, and sales are well on track to more than double this year.

Samsung and SK Hynix are supplying embedded memory solutions using our eMMC controller to eight of the top 10 non-iOS smartphone OEMs.

We are being successful as our high-performance cost-competitive controllers enable our flash partners to grow the embedded market and capture market share at both tier-1 smartphone OEMs, as well as in the fast-growing China low-cost smartphone segment.

We believe our eMMC controllers are found in almost half of all the smartphones in China, whether low-cost or high-end.

We have significantly expanded our presence in the embedded memory market and our eMMC controller can already be found in well over 100 devices, mostly smartphones but now also tablets, smart TVs, set-top boxes and gaming consoles.

The majority of our eMMC controllers sold today have been our first generation eMMC 4.41 solution, manufactured using 110 nanometers.

Our second generation eMMC controller and eMMC 4.5 solution, manufactured at 35 nanometers, entered mass production in April.

eMMC 4.5 has doubled the random data read speed and tripled the random data write speed compared to eMMC 4.41, and this higher performing controller has allowed us to capture highly anticipated flagship smartphones and tablet wins already.

We have already begun shipping this controller for leading flagship Android smartphones and we'll begin shipping for flagship Android tablets in the second quarter.

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

Our product road map also includes eMMC 5.0, which will be available later this year, and UFS 2.0 next year.

The performance of UFS 2.0 is comparable to SATA3, and targets both high-end smartphones and tablets.

The smartphone and tablet market for eMMC was over 600m 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 market share of 5% to 10% in 2012 and are confident, based on the projects that we are currently involved in with our two flash partners, that we can grow our market share to more than 15% to 20% this year.

While today growth from our SSD plus embedded products are primarily from our eMMC controllers, we are expecting to begin commercial sampling in Q2 of our new SATA3 controller for full-size client SSD and NAND cache drives.

While our SATA3 SSD controllers are early in the design cycle and we are not expecting significant revenue from this product this year, we are excited about the interest that we have received so far from potential customers and the positive early feedback from their testing and evaluations.

One of the more distinguishing characteristics of our SSD controllers is that we will be able to support TLC flash.

We are one of the very few controller makers that have the capability to design TLC, eMMC and SSD controllers.

This TLC feature will begin sampling in the second half this year and will allow for more affordable SSD solutions.

We will continue to update you on the progress of our SATA3 SSD controllers and believe we should have meaningful SSD revenue contribution in 2014.

Let me now turn to our card and UFD controller sales.

In the first quarter, our sales of card and UFD controllers to module maker customers was seasonally down, as expected.

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

More importantly, however, our large OEM customer has been rebalancing its card sales, and this rebalancing will negatively affect our controller sales for a few quarters.

This customer has been reducing the production of low-density cards and will be transitioning with us to higher performance cards in the second half of this year.

We expect our card and UFD controller sales to other customers should rebound 10% to 20% in Q2, due to both more flash availability and the competitiveness of our controller, but decline modestly for the rest of the year.

Sales of our card and USB flash drive controllers should be relatively stable for the rest of the year with minor variation, depending on greater or less flash availability, because most of the de-bundling cards with smartphones in more developed markets such as the US has already taken place.

While we do not see growth, we also do not see much downside from here.

In China, we believe there is significant demand for bundled low-density cards, but in the near term growth in the cost sensitive markets has been affected by NAND flash availability.

Now let me turn to our LTE transceiver business.

Our LTE transceiver paired with Samsung LTE baseband has been in testing for quite some time.

In the meantime, LTE wireless service providers have been rapidly progressing towards LTE Advanced and are seeking features such as carrier aggregation.

The current generation Samsung LTE baseband and our transceiver do not support carrier aggregation.

We are therefore not expecting any major Samsung flagship design wins this year.

The next generation baseband, along with our transceiver, does support carrier aggregation, will begin testing in the second half of this year.

We are, however, expecting some flagship derivative model wins from Samsung using the current generation baseband and our LTE transceiver in the second half of this year.

In general, individual flagship derivative model volumes are lower than for flagship models, but a number of models are usually more.

We believe Samsung remains firmly committed to using their internal application processor and LTE baseband for their smartphones.

We also believe Samsung's commitment to its LTE baseband is part of a long-term strategy.

We are actively working with Samsung to ensure that our next generation transceiver is ready for testing when their baseband becomes available in the second half this year.

We continue to feel good about meeting Samsung's technical and cost targets.

Overall, I'm very pleased by the progress that we have made in managing the slowdown of our core products and delivering rapid growth from our new growth products.

We are executing very successfully on our eMMC growth strategy and are confident that our LTE growth will resume later this year.

Also, later this year, we are planning to talk more about our high-performance, cost-competitive SATA3 SSD controllers for both NAND cache SSD and full-size client SSD, as well as our unique FerriSSD solutions.

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 first quarter, and then I'll provide our second quarter and update our full-year 2013 guidance.

For the first quarter of 2013, we delivered total revenue of $57.4m, a 19% decline compared to the prior quarter.

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

First, mobile storage.

Mobile storage revenues declined 18% sequentially.

Mobile storage controller shipments decreased 11% sequentially.

Mobile storage controller ASPs decreased by 7% sequentially, but increased 10% year over year, our thirteenth consecutive quarter of annual ASP increases.

Our card controller revenue decreased by 24% sequentially and our USB controller -- flash driver controller revenue decreased by 31% sequentially.

Over 85% of our SSD and UFD controller sales are for supporting 19 to 21 nanometer NAND flash.

This is a sharp increase compared to the fourth quarter, when controller sales supporting 19 to 21 nanometer accounted for just over 50% of our SSD and UFD controller sales.

OEM revenue again accounted for about 65% of our controller sales in the first quarter, similar to the past two quarters.

Moving to mobile communications, this product segment's revenue decreased 20% sequentially, due to the cyclical transition of Samsung's LTE smartphones.

Our corporate gross margin decreased from 44.6% in the fourth quarter to 41% in the first quarter.

Our gross margins were lower than our gross margin guidance range because of two one-time factors.

Excluding these one-time factors our gross margin was 44%, the low end of our guidance.

The two one-time factors are a $1.4m inventory charge for obsolete parts and a $1.7m vendor compensation.

Our operating margin in the first quarter was 13.7%, a decline from the 19.5% in the fourth quarter.

In the first quarter, our operating expense decreased to $15.6m from $17.8m in the fourth quarter, due to delayed timing of new project expenses.

We ended the first quarter with 696 employees, eight more than at the end of the previous quarter.

Earnings per ADS in the first quarter were $0.17, a decline from the $0.36 in the fourth quarter as a result of lower revenue and gross margins.

Stock-based compensation in the first quarter was $2.5m, lower than the $3.4m in the fourth quarter.

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

Inventory days increased to 87 days in the first quarter from 78 days in the fourth quarter.

DSO increased to 54 days in the first quarter, compared to 48 days in the fourth quarter.

Payable days increased to 65 days in the first quarter, compared to 61 days in the fourth quarter.

In the first quarter, our cash balance decreased by $3.6m to $166m at period end.

In terms of primary sources of cash, we generated $6m in net earnings, a decrease in inventory levels generated $3.1m and a decrease in receivables generated $3.7m.

A decrease in accrued expenses consumed $6.3m, a decrease in payables consumed $7.3m and our dividend payment consumed $5m.

We invested $1.8m for the prepayments made to purchase a building and purchase of testing equipment, software and design tools.

In the first quarter, we did not repurchase any shares.

In the first quarter we were focusing on establishing internal and external processes, including an appropriate management committee for the execution of our share buyback.

Also, counsel advised that we wait until material non-public information regarding our business has been disclosed before we execute our share buyback.

We will be buying back our shares very soon.

In the first quarter, our Board authorized and initiated the payment of a quarterly dividend policy.

We declared a $0.15 dividend on January 22 and paid this on March 4. On April 23, our Board declared a second quarterly dividend of $0.15 which will be paid on May 14.

We believe we have a business than can generate a fair amount of cash flow through its business cycle, and $0.15 a quarter is a comfortably affordable amount even during a down cycle.

I will now move on to our guidance.

Given uncertainties regarding the timing and magnitude of our LTE revenue this year, and with the objective of helping our investors better understand the prospects of the majority of our business, we are revising how we provide guidance by providing revenue guidance for our business excluding our LTE products.

Our non-LTE revenues in 2012 were approximately 85% of our total revenue and almost 90% of our Q1 revenue.

We are executing our eMMC business successfully.

We expect our eMMC business to more than offset our mature and declining card and UFD controller business.

We expect our UFD controller sales to be fairly stable for the rest of the year and our card controller sales to gradually decline for the rest of the year.

As a result of eMMC growth more than offsetting declining card and UFD sales, our overall business excluding LTE should grow at a moderate rate this year.

Our guidance for the second quarter is as follows.

Total revenue excluding LTE is expected to increase 10% to 20% sequentially.

Including LTE, our revenue should grow 5% to 10% sequentially.

Gross margin is expected to be in the 45% to 47% range.

Operating expenses are expected to be in the range of $17m to $18m.

Stock-based compensation is expected to be in the range of $2m to $2.5m.

Our model tax rate remains at 15%.

Our updated guidance for full year 2013 is as follows.

Total revenue excluding LTE is expected to grow flat to 10% year over year.

As a worst case, we expect a minimum LTE revenue of $15m this year.

Gross margins are expected to be in the range of 46% to 48% excluding one-time items.

Operating expenses are expected to be in the range of $72m to $76m.

Stock-based compensation is expected to be in the range of $12m to $14m.

Our model tax rate remains at 15%.

We will now open the call for your questions.

(Operator Instructions).

Your first question comes from the line of Anthony Stoss from Craig-Hallum.

Please ask your question.

Hi, guys.

A couple of questions here.

Riyadh, if you could help in terms of why the LTE, why you're not finding your way into Samsung?

Am I understanding you guys correctly that the lack of carrier aggregation is hurting you?

And then I have a couple of follow-ups.

Yes.

What we have seen in the past few months is that carriers are pushing for LTE Advanced features, such as carrier aggregation, more aggressively than we had initially thought.

Samsung's current baseband and our transceiver today do not support carrier aggregation, but our next generation solution along with their next generation baseband will support carrier aggregation and will begin testing in the second half of this year.

I think in the last couple of months most of the Samsung mobile platforms were run on parallel solutions, and we really did not notice the information until really late Q1.

As a result, major flagship models in 2013 will be using another solution that offers carrier aggregation this year until the next generation Samsung baseband and our transceiver are available in the second half for handsets coming to the market in 2014.

However, we believe we still have opportunity in some flagship derivative models with our current solution, but the revenue scale per model compared with the flagship device is lower.

Okay.

Thanks, Wallace.

Then, if you look into 2014, can you give us a general sense of how you expect your mix?

Is your embedded business likely going to be your biggest?

So if you could just give us a sense on mix.

Then, lastly, if you've got two embedded customers now, can you give us a sense of the likelihood of adding any more this year and what you would expect in 2014?

Thanks.

Already our SSD plus embedded is bigger than -- in the first quarter is already bigger than our UFD controller business and we expect, going into the second quarter, our SSD plus embedded business will be even bigger than our card controller revenue.

So, based on that trend, and we have a lot of traction on our SSD plus embedded, especially on the eMMC side, we're expecting our SSD plus embedded overall revenue to grow well in excess of 100% this year.

So, based on that trajectory, we're expecting going into next year that potentially our SSD plus embedded could be our largest segment of our business, certainly larger than our card and UFD businesses.

Let me add a comment.

We already have other OEMs coming to us for our eMMC solution, but we are also resource constrained.

eMMC requires a dedicated development team but also a dedicated supporting team, and we are in the process of building this.

And we believe we'll be ready to support a third OEM in the second half this year.

Thank you for your question.

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

Please ask your question.

Yes.

Thanks for taking my question.

On the LTE number, at the beginning of the year you talked about LTE growing 50% to 75% year over year, and I understand that the Samsung baseband doesn't support carrier aggregation and therefore I think the mix of a lot of the Samsung platforms are going to move more to Qualcomm.

But how much visibility do you have into Samsung's development?

I would have thought that you would have had some better visibility before you'd have provided that level of guidance, and can you maybe provide what was the basis of that initial guidance in the first place?

I can only say the (inaudible) both Samsung and us work very, very closely and work very hard trying to win all the flagship models, I think, as they've been in test for really a couple of months from last year.

Just unfortunately for, we started in North America and carrier aggregation wasn't a requirement.

It's just optional in 2013.

But unfortunately the final decision is really they do like to see the carrier aggregation.

So we have to say that we do work very closely, work very hard, and we however confidently believe we are going to win.

But unfortunately, in the late Q1, and we got a formal notification and they're going to ship to other solutions.

Going into 2014, where do you think Samsung will be with the carrier aggregation?

Do you think -- obviously Qualcomm is going to be another generation ahead, come 2014, plus they're integrating other elements of the overall handset in terms of the front end, for example, so it becomes even more competitive in terms of its cost.

I just wanted to get your thoughts in terms of what's the internal versus external dynamic that's happening at Samsung.

Obviously this year it's going to be more weighted to Qualcomm, but in the future do you think that will also continue moving more to Qualcomm?

We will continue to invest in our LTE transceiver business, and we believe that the issues we are facing this year are temporary.

Samsung remains committed to using their own platform for LTE as a way to help differentiate their solution and have better supplier diversification, Samsung being established the baseband team for the last six to seven years and really aiming at bringing differentiated solutions than other suppliers.

We believe the underlying reason for Samsung's initial investment is developing really the best quality LTE baseband and the application processor.

We are the strategic partner to Samsung for the product for a long time, and we expect to continue to invest alongside with Samsung as they further the development for their own baseband, and we believe we do have several unique features in the transceiver side, like a smart filter and a lot of other key features.

We believe the product feature performance is compelling, and we believe our LTE business will be much better positioned in 2014 when Samsung's baseband and our transceiver will support carrier aggregation.

And in the long run, there will be many, many new models for LTE from Samsung in 2014.

I think there will be more flagship models, as well as derivative models.

It's just what percentage we can share compared with other solutions.

And just the last question on the mobile storage part of the business.

We've seen some rebound in the second quarter, but what are your thoughts overall in terms of NAND supply going into 2014?

Samsung are saying they're not going to increase CapEx in terms of memory.

They want to keep the NAND supply environment as tight as long as possible.

How does that affect your module business going forward, coupled with the fact that there's kind of a secular decline in the attach rates for the bundled card, as well?

Just if you could provide any thoughts on that kind of big picture, that would be greatly appreciated.

Thank you.

In my view, overall [bit] growth in 2013 is expected to be lower than in 2012, whereas demand continued to increase from higher smartphone, tablets SSD and other consumer devices this year.

The flash vendors I think continue to monitor the market closely.

They do not want to release too much flash, given that this may erode pricing too quickly, but they also want to make sure that the industry doesn't suffer from severe shortage.

We believe that through increasing utilization and process geometry migration, flash volume should increase steadily this year, and demand will closely follow.

However, if the demand is significantly stronger than supply, incremental flash capacity can be brought online fairly quickly, within two to three months, since we do not believe most of the flash maker's fabs are currently fully loaded.

Regarding 2014, I believe Samsung just made an announcement they will speed up the fab in Xi'an, and they're going to increase the capacity due to current forecast in demand.

So we believe the NAND process can reach certain balance.

Overall, we continue to expect modest decline in the card market in 2013, seeing the de-bundling of cards in US and other developed markets seems to have stabilized.

However, NAND flash tightness has also impacted the ability for low-density NAND, the staple of the China bundled card market.

As the visibility improves, we should see the bundled market in China also pick up.

So we see that this year the bundled card and the UFD will be stable; next year [if availability] increase.

But it's just a modest decline.

Thank you for that color, Wallace.

I appreciate it.

Thank you for your question.

Your next question comes from the line of Mike Crawford from B. Riley & Co.

Please ask your question.

Okay.

Thank you.

Just to dig into the LTE transceiver business a little bit more deeply, so Samsung's baseband does not support carrier aggregation, and therefore the new guidance of $15m of minimum LTE transceiver revenues you expect in 2013, it's actually not only just a minimum number, but that's also close to what you do expect?

There's no opportunity to get back to these numbers that you were looking at, say, only a couple of months ago in this year?

Mike, the $15m in LTE revenue this year is a minimum, a worst-case scenario.

This represents wins from last year that are still in production, as well as some smaller program wins that we have won this year already.

We're not accounting for any new wins in this $15m worst-case scenario.

So there is a probability that the number could be higher than $15m, but for the sake of having a worst-case scenario, we're just laying it out; $15m is a minimum for our business this year.

And so, Riyadh, if you get designed into some, I guess, derivative products that are in markets where you don't have to worry about non-adjacent spectrum, then you don't need the carrier aggregation and then we could actually see some additional LTE transceiver revenue in the second half of this year, but likely not in the second quarter?

Is that a fair statement?

That's correct.

That's correct.

It is possible that our LTE revenue could be higher than $15m.

It's a distinct probability if new programs kick in.

Okay.

And then I see a scenario where even next year, if you think that Samsung's baseband is now up to speed and good enough to be in its products, so you're paired and your business goes up again, but still the market is very unlikely -- it might be in the end -- to give you any credit for that revenue and profitability, because everyone's going to say that this is going to disappear right away.

So given that this business is one that the Street is unlikely to recognize the same amount of value that you probably think it has and maybe your partner Samsung thinks it has, what discussion has the Board had regarding possibly selling this business, be it to Samsung or to someone else that wants to supply Samsung?

Just given particularly that the nexus of this business is in Korea, right, the FCI business, it seems like it wouldn't be too hard to separate from the rest of the Company.

Mike, the LTE business is an integral part of our new growth product line.

It's an important part of our future growth drivers.

Now, in terms of options, in terms of how we can manage our overall shareholder value, this is a topic that we obviously would have to have further discussions with our Board.

Okay.

Thank you.

And then, just turning to another part of your business, you're talking about getting more than 15% to 20% of the eMMC market in 2013 with just your two OEM partners.

When might we see Silicon Motion shipping to a third partner, and what would be your share targets for next year, if you had three OEMs you were shipping to?

Currently, we can only say we might start to ship to a third OEM probably early 2014, because the development qualifications take time and they also try to -- are building the collaboration and supporting structure with us.

So I think the product itself is ready, but it's just that I cannot disclose regarding what type of technology and NAND we're focused on.

But we try to differentiate and not to overlap with the current business with the two major OEM customers today.

Okay.

Thank you.

Thank you for your question.

Your next question comes from the line of Bob Gujavarty from Deutsche Bank.

Please ask your question.

Yes.

Thanks for taking my question.

I guess my question will be, I understand the LTE business in the short term, but if I look at 2014 I would expect there would be more merchant vendors with carrier aggregation competing with Qualcomm.

So, even if Samsung's internal solution is available, you'll have solutions from Broadcom and Intel, among others, so there's no guarantee you'd even get any business then either.

So I guess the question is why do we have confidence that a year out, and knowing -- today, you actually have a benefit in that Qualcomm's the only solution that's available.

No other merchant LTE solution is shipping.

So that would actually be a good thing for Samsung to use their internal solution.

Next year, there'll be many, many merchant vendors available.

So I guess I just have a question why would it get better in 12 months?

So, Bob, you ask a very good question.

Let me answer with my opinion.

The LTE solution qualification process takes much longer than the 3G.

It probably will be three times complicated than the 3G solution in the past.

And we have been working with Samsung since 2008, through many operator carrier tests and field tests in many, many countries.

So there's been a lot regarding qualification process.

And we also bring value and are recognized by many carriers, too.

I think Samsung has a long-term strategy of building their own internal solution.

It doesn't mean all their models eventually use an internal solution.

However, it's very important for them to keep internal solutions to balancing their sourcing and diversification strategy and pricing strategy.

So, really, currently in smartphones inside Samsung the percent is still very small.

But can you imagine if they're launching an LTE-based smartphone, they go to 300m, 400m per year inside Samsung, there could be a lot of modeling today.

I have no meaning to -- I respect Intel, respect Broadcom, respect many other players, but I think today, even for any major mobile phone maker, they probably don't have enough resources to parallel qualify many new suppliers simultaneously, and it's very difficult.

Not just because they don't want to, but just don't have resources to go through it again.

So I think that's a true value for us, because we're a solid base inside Samsung in the past five years, and we'll continue growing merchant relationship and carry the compatibility from 2008 and moving to 2014.

That's why we have confidence and the Samsung team also has confidence the total solution we have should be very competitive with other solutions or variables coming to the market in 2014.

Fair enough.

I guess the other question I have is, I understand that their technical features are important criteria, but I don't understand the incremental news in that we always knew Samsung's internal baseband did not support carrier aggregation.

This is not a new piece of information.

So I guess the question is why is it important now and wasn't three months ago, when you suggested the LTE business would grow 50%?

The technical specs of the product did not change in that time.

Bob, we also thought we had a good shot, and I think at that time, from the feedback we had regarding contact inside Samsung, we felt like we had a pretty good shot in the flash model.

But just unfortunately, and there could be other reasons behind it, but the one reason they told to us is carrier aggregation, so that is their decision and there is nothing we can do.

Okay.

And then just maybe a final question.

I look at the business and the good news is, I guess, on a quarterly basis the LTE business is relatively small today, so it's less of a headwind on a Q-on-Q basis, and maybe that's why.

But I look at the OpEx, and do you feel comfortable at these levels, given that there are revenue challenges?

Or is it just that's what you need to support some of these growth drivers?

I'm just curious if you have any ability to modulate on that line.

Bob, could you clarify your question again so that we can answer it more appropriately?

Yes, sure.

Revenues are certainly taking a hit, but it seems like spending is continuing at a relatively steady pace.

I'm just curious what the rationale behind the disconnect is.

We still have a lot of growth opportunities.

This year, excluding the LTE part of our business, the rest of our business should grow in the range of flat to 10%, so our business is -- the underlying part of our business is still relatively healthy.

And plus, as well, as I've mentioned, we still have a lot of growth ahead of us on LTE with our partnership with Samsung.

So, overall, the operating expense investments that we're putting in place are still of the scale and resource commitment that we need in order to deliver on our longer-term growth.

So, Bob, in addition, our communication business is not just LTE transceivers.

We also do have mobile TV SoC.

And we don't really want to mention too much about advanced TDM, being Korea, and also ISDB-Tmm in Japan's market.

And when we really start to see more meaningful revenue, we will report it to all of you.

Fair enough.

Thank you.

Thank you for your question.

Your next question comes from the line of Monika Garg from Pacific Crest Securities.

Please ask your question.

Hi.

Thanks for taking my question.

The question is regarding the China fab you mentioned.

It seems that that fab is for 3D NAND technology, which is of course a different weight than the plain-old NAND technology, what we have currently.

So the question is are you working with Samsung for controllers?

Your 2014 growth is kind of based on the fact that the new supply comes from Samsung, but given that that's a different architecture and that still seems like it's in the R&D phase, so it could be some time before that starts ramping, so what gives the confidence that the supply will be sufficient enough for you to grow that, enough supply for your cards and UFD business?

I cannot comment whether the Xi'an plant from Samsung only fabricates 3D or vertical NAND.

I think you have to ask Samsung directly.

I cannot comment that.

Regarding we do work with our NAND makers, when they bring through vertical NAND, 3D NAND, into the market, but just really, I think eventually the ballgame depends on the manufactured cost, the final cost.

Any capital investment for vertical NAND is tremendous.

I think all NAND makers, they all have to think through how to gradually transition and balance between floating-gate technology and vertical NAND technology.

I think all the NAND makers, they have a clear strategy and they try not to overextend it, but also don't want to see severe shortage.

But that's a NAND maker, their own plan.

Definitely, this year we won't see any capital investment for the next year, I think.

Gradually, we will see more investment for the [Xi'an NAND].

Just to follow up on this, how do you see about your control of technology?

Do you need to change some things in your technology to be able to work with vertical NAND?

I cannot comment for that either, because each of companies -- NAND companies have a quite deepened vertical NAND technology, and we do want to work closely with them, as they need it.

I think, in the future, controller technology, although the ASP is not high, but it plays a very critical role to enable the future NAND technology.

Okay.

Thanks.

Just a question on your margins.

Could you maybe update us where they are on the recovery path, your transition to lower-geometry nodes?

Sure.

The vast majority of all our products being introduced this year are already manufactured at sub-110-nanometer process geometry, including our new high-volume UHS-I and eMMC 4.5 controllers.

As these new controllers ramp up, they will have a positive uplift to our gross margins.

We're also expecting to see the growth of our SSD plus embedded products this year drive higher gross margin for our overall revenue, as these higher-margin products ramp further as the year progresses.

Additionally, gross margin improvement will also depend on incremental LTE revenue that we gain later this year.

So, in terms of our full-year gross margin guidance, it still remains at 46% to 48%, excluding one-time items, and we expect our gross margin to improve gradually throughout this year.

And then, on the SSD business, could you maybe talk about how do you see the growth in that segment next year or maybe 2015?

Where do you see that segment growing?

I think we are already starting to sample our SATA III SSD controller and expect to enter commercial sampling and testing this quarter.

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

We have a more focused strategy when it comes to designing and marketing our SSD controllers, as well as offering support with the latest generation 2y and the (inaudible) nanometer NAND flash.

We are also one of the very few controller makers that can support TLC NAND flash, to reduce the cost.

Our solution is not only performance competitive to the existing solutions, as tested by our customers, but it's also much more cost effective than what is currently available in the market.

We expect to see initial revenue contribution in the second half this year.

Since our SSD controllers are currently only sampling, it's still too early to talk about revenue contribution, but we will definitely update you as the year progresses.

Thanks a lot.

That's all for me.

Thank you for your question.

(Operator Instructions).

Your next question comes from the line of Tom Sepenzis from Northland.

Please ask your question.

Hi.

Using the $15m LTE revenue estimate for the current year, what kind of cash do you think you can generate for the whole Company?

Well, in the last quarter, if you were to exclude -- we consumed about almost $4m, but that was largely due to our $5m dividend payment.

So if you were to exclude that, it was relatively flat despite revenue coming down sharply.

We have a business model that does not burn cash -- well, much cash -- even during the hard years that we had in the past.

So our expectation is, as the year progresses, we will be able to generate cash over the next few quarters as revenues pick up.

So the dividend payment that we have is set at a level that we can certainly affordably pay out.

I think we would say we are confident to generate more cash, even we pay dividend at the same time, even in the worst-case scenario, our LTE only $15m.

Okay.

Good.

And just from a very broad, general perspective, looking out the following year, if the LTE business doesn't return, would you still expect growth in the rest of the businesses, or would things start to flatten out?

Actually, we have quite a lot of new growth products, but it's just they haven't really reached meaningful revenue, and really we don't want to all talk about it at the same time.

I think we have very exciting about the SSD product line.

We have very exciting embedded SSD solution product line, Ferri, and we have a NAND -- we have two major new OEM designs from Japan and they are ramping up from Q4 this year.

And we also have a new mobile TV SoC design, especially Japan transition to ISDB-Tmm, and we are one of the leading suppliers right now to win majority of designs.

But I think until all this becomes meaningful revenue and major design and flows to the revenue, we're going to talk about it more.

I think we are overall a very balanced company, and we're not just a company with one product.

But in the same time, we also feel very excited about our LTE solution, and currently we definitely focus on Samsung, because we work very closely, but we can expand to much more other baseband players, especially for China market, too.

Bear in mind, our eMMC revenue will continue to grow.

This year, our eMMC revenue will grow by well in excess of 100%.

This is based on just two NAND flash partners, as well as I mentioned we are building up resources where we can take on a third OEM customer.

And when that happens, the earliest that this revenue will kick in will likely be in the first half of next year.

So we have a lot of momentum.

Our market share this year, with eMMC just with these two partners, should only go up to in excess of 15%, 20%, so there's still a lot of growth opportunity, just in eMMC.

And, plus, the eMMC market itself is still and expected to continue to grow rapidly.

Great.

Thank you.

So you're very confident, then, in this gross margin expansion that you're talking about?

Yes.

That's correct.

We are expecting our gross margin to get back to a much higher level, and it should gradually increase over the next few quarters.

Okay.

Thanks very much.

Thank you for your question.

There are no further questions at this time.

I would now like to hand the conference back to Mr. Jason Tsai.

Mr. Tsai, please continue.

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 May, we'll be presenting at Jefferies 2013 Global Tech Conference, New York, Deutsche Bank's Semiconductor 101 Day in San Francisco, B. Riley's 14th Annual Investor Conference in Santa Monica, Craig Hallum's 10th Annual Institutional Investor Conference in Minneapolis.

In June, we will be presenting at the RBC Communication, Technology and Semiconductor Investor Day in Boston, Lazard Solid State Drive Conference in New York, CLSA [Corporate Asia] Day in Singapore and Hong Kong, UBS Investor Conference in Taiwan.

Details of these events are available on our website.

Thank you, and goodbye for now.

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

Thank you for participating.

You may all disconnect.