慧榮科技 (SIMO) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Silicon Motion Technology Corp. third-quarter 2014 earnings conference call. My name is Hui, and I will be your conference moderator for today. (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, 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 economy, legal and commercial conditions in Taiwan.

For additional discussions 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 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 and good morning, everyone. Welcome to Silicon Motion's third-quarter 2014 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 the 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. 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 results can be found on 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. Hello, everyone, and thank you for joining our earning call.

We are very pleased to report for the third quarter record revenue, net profit and earning per share. We're also on track to deliver, the full year, the highest revenue in our Company's history. We are confident that with the solid foundation of growth drivers that we have been building, you should expect Silicon Motion to reach even higher levels of sales and profitability next year.

In the third quarter, revenue increased 25% sequentially to $86.6m. This rapid growth was led by a 25% sequential revenue growth from our embedded storage products, which are comprised primarily of our eMMC, client SSD and industrial SSD controllers. Riyadh will discuss our financials in greater detail later on the call.

This quarter, sales of our embedded storage products, which account for nearly two-thirds of our NAND flash controller business, well over half of our total revenue, continued to strongly outperform. Embedded solid state memory based on NAND flash, such as those managed by our controllers, will continue to rapidly proliferate and is increasingly found in consumer electronics and commercial industrial applications.

You will find our controllers widely used in embedded memory for running code and storing data in devices and applications that are important part of our daily lives, from personal gear such as smartphone, tablet and PC to equipment and system communication in networking companies, major retailers, as well as in our cars and our workplace. We have the broadest portfolio of NAND flash controller solutions in the industry, and have become the leading merchant supplier of these controllers to NAND flash makers and other OEMs.

In the third quarter, our eMMC controller, the largest of our embedded storage products, continued to exceed market growth and gain share. Every quarter this year, including this quarter, our eMMC sales have grown well in excess of 50% year over year. We expect this strong trend to continue in the fourth quarter.

For full year 2014, our eMMC sales should grow over twice the 20% to 25% growth rate of the eMMC market, which is line with the market growth of smartphones plus tablets, the primary applications for eMMC. Our faster sales and market growth should take our market share from about 20% last year to 25% this year.

We remain by far the largest merchant eMMC controller supplier and the only significant and material merchant supplier. Our primary eMMC controller customer, SK Hynix, has become the second largest supplier of eMMC memory solutions in the world. We are pleased to have played a value-add role in helping SK Hynix quickly expand its market share.

Since late first quarter this year, we have also been supplying the TLC version of our eMMC controller to another NAND flash vendor, and sales to this TLC NAND flash partner should grow further next year.

Currently, eMMC solutions using our controllers have been adopted by all of top 10 non-iOS smartphone OEMs and across all the major application processor platforms, including those from Qualcomm and MediaTek. Smartphone OEMs have been building high-end smartphones with SK Hynix eMMC and low-cost smartphones with SK Hynix eMCP that leverages very competitive mobile DRAM parts.

A big source of the end demand this quarter for eMMC controllers has come from Chinese smartphone OEMs that are manufacturing low-cost smartphones for both China's own domestic consumption as well as the rapidly growing large emerging markets such as India and Latin America.

In China, our eMMC controllers are in the smartphone of established leaders such as Huawei, Lenovo, ZTE, Xiaomi and Coolpad and others, including OPPO and BBK. We have also won several design wins using the MediaTek platform that is powering the ultra-low cost Android One smartphone being rolling out in India and other emerging markets.

Let me now turn to our client SSD controllers. Sales of our SATA 3 client SSD controllers have been progressing as expected, as we expand our presence from the retail aftermarket to the PC OEM market. In the first quarter of this year, we began sale of our SSD controller to module makers such as Transcend, PNY and A-DATA.

Since then, our module maker customers have quickly established meaningful market share in the aftermarket for their SSD using our turnkey SSD controller solutions. We believe our controllers for the aftermarket will continue to grow next year.

In the third quarter, our storage OEM customers began sales of cache SSDs using our controller to three tier one global PC OEMs. Shipment of these cache SSDs are small, but with these sales we have established qualification and beachheads. We have displaced the storage OEM previous SSD controller supplier, and next year this OEM entire family of full size SATA 3 SSD for PC will be using our controllers. Initial sales of these full-size SSDs using our controller will begin in the first quarter of next year.

Adding to storage OEM, we now also have three NAND flash vendor customers for our SSD controller, one more flash OEM customer than last quarter. These three flash OEMs will be manufacturing full-size SSDs using our controller, and two of our projects will begin volume production in the first quarter of next year. And more will come online as the year progresses.

Our initial projects with these flash OEM customers are for entry-level client SSD. The follow-on projects are for both mainstream and high performance SSDs.

Based on the buildup of our business pipeline with module maker customers, the storage OEM and three NAND flash partners, we are confident that we're on track to scale our client SSD sales next year three to four times 2014 sales. We will be updating you further on the progress of our SSD business in the coming quarters.

In terms of client SSD controller technology roadmap, all our controllers shipping today are SATA 3 or MLC flash. We launched our TLC SATA 3 SSD controller last quarter and expect the product to enter production in early 2014 -- 2015. As you may recall, this is the industry's first complete merchant SATA 3 client SSD controller solution supporting TLC flash that offers integrated hardware and firmware. We expect to introduce our PCIe gen 2 and gen 3 controllers in the second half of next year.

Now, let me turn to our LTE transceiver business. I'm excited to announce that Samsung have begun shipping a number of field devices using our LTE transceiver, including new flagship models such as Galaxy Alpha, Galaxy Note 4 and Galaxy Note 4 Edge, all for the Korean market.

We saw our revenue with Samsung rebound sharply this quarter, and we are on track to see this grow further in the fourth quarter. We are working hard with Samsung to secure new projects for 2015, and look forward to updating you in the coming quarters about our progress.

Overall, this has been an outstanding quarter for Silicon Motion. We have been successfully executing on our growth strategy, expanding our product portfolio and adding new OEM customers. With our pipeline of embedded storage business wins, we are confident that our growth momentum will continue through 2015.

I will now turn the call over to Riyadh to give our financial performance and outlook.

Thank you, Wallace. First I will outline our financial results for the third quarter, and then I'll provide our fourth-quarter guidance.

In the third quarter, revenue increased 25% sequentially to $86.6m, a record quarterly revenue for Silicon Motion. Our controller sales increased 23% sequentially. And within our controller sales, our embedded storage products, our eMMC and SSD controllers, grew by 25% sequentially for reasons that Wallace has earlier talked about.

Sales of our removable storage products, our card and USB flash drive controllers, increased by 19% sequentially due to better flash availability to module makers. Our specialty RFIT sales increased 48% sequentially, as sales of our LTE advanced transceivers to Samsung rebounded.

Our corporate gross margin increased to 52.9% in the third quarter from 52.2% in the prior quarter, due to higher revenue contribution in the third quarter from our higher gross margin new growth products, specifically our eMMC and SSD controllers and LTE transceivers.

In the third quarter, our operating expenses increased to $21.1m (sic - see press release page 3 "$22.1m") as compared to $19.9m in the second quarter, due to higher compensation expenses. We ended the third quarter with 783 employees, 31 more than at the end of the previous quarter. Due to higher revenue and gross margins, our operating margin increased to 27.3% in the third quarter from 23.5% in the second quarter.

We achieved quarterly net income of $19.7m and earnings per ADS of $0.57, both also new corporate records.

Stock-based compensation in the third quarter was $4.3m, higher than the $0.4m in the second quarter due to the timing of share grants.

I will now move to our balance sheet and cash flow. Inventory days increased to 112 days in the third quarter from 105 days in the second quarter, due to inventory builds related to supporting our rapid sales growth. DSO decreased to 42 days in the third quarter, as compared to 52 days in the second quarter. Payable days decreased slightly to 57 days in the third quarter from 58 days in the second quarter.

Our cash, cash equivalents and short-term investments increased to $165.2m in the third quarter, as compared to $160.9m in the second quarter. Primary sources of cash in the third quarter were $19.7m from net earnings and a decrease in receivables contributed, $4.5m.

An increase in inventories consumed $10.1m, a decrease in payables consumed $5.2m and our dividend payment consumed $5.1m. We invested $4.5m for the acquisition of new facilities to house our expanding SSD R&D team and $1.6m on the routine purchase of software and design tools.

I will now turn to our guidance. For the fourth quarter, we are expecting our revenue to decrease 5% to 10% sequentially. We expect our fourth quarter eMMC controller sales to decline seasonally, similar to last year. Even with the seasonal decline, our fourth-quarter eMMC sales should increase well over 50% year over year.

For full year 2014, our eMMC sales are on track to grow well in excess of 50% year over year. We currently expect our 2015 eMMC sales to grow at least in line with eMMC market growth.

We expect our fourth-quarter client SSD controller sales to increase strongly sequentially, due to expanded module maker SSD build-outs. For full year 2014, our SSD sales to our module maker customers are tracking towards the lower end of our $15m to $20m range. We continue to believe that our 2015 SSD sales should grow three to four times 2014 sales.

We expect our fourth-quarter removable sales to be flat to down sequentially. For full year 2014, removable storage sales should be modestly down year over year and we believe this trend should continue through 2015.

We expect fourth-quarter LTE transceiver sales to grow moderately sequentially, which should lead to $12m of 2014 full-year sales. Currently, we believe 2015 LTE sales should be similar to 2014.

For the fourth quarter, we expect our gross margin to be in the 50% to 52% range, lower than the third quarter because of product mix changes due to lower eMMC seasonal sales. We expect fourth-quarter operating expense of $21m to $23m. Stock-based compensation in the fourth quarter should be $4m to $5m. Our model tax rate remains at 18%.

We will now open the call to your questions.

(Operator Instructions). Suji De Silva, Topeka Capital Markets.

Morning, guys. Nice job on the quarter; congratulations. In terms of Hynix and the great growth you've seen in eMMC in China, what's the opportunity for further share gain in that market in the 2015 timeframe? Are they reaching a point of saturation, or is there more room to run for eMMC?

I think we believe we can continue to grow faster than the market and gain share. We are enabling our customers to offer more differentiated products and gain market share in the embedded memory market. We do transition from the very low end 4.41, 4.5, 5.0, and soon it will be 5.1. So ASP also will increase from 4.41 to 5.1, based on higher performance and much better error correction.

So we believe we should continue expand, to take from the small volume low end to expand to more volume to the mainstream high end, and that will grow our total revenue in eMMC in 2015 and 2016.

Okay. Great. That's helpful. And then, on the NAND SSD side, you've been playing in the entry SSD market, but it sounds like your products are coming out for mainstream and higher performance SSDs. How much more competitive is that area, or do you think you can come in with a similar sort of value proposition for the mainstream and high end for SSDs?

So, as of today, our SATA 3 SSDs are shipping with MLC NAND. I think from next year you're going to see from first quarter we're going to be shipping SATA 3 SSD with TLC. And I think moving forward, by late 2015 we're going to be shipping with even 3D NAND. So by second half of 2015, we are going to launch PCIe gen 2x2, followed by gen 3x2 and gen 3x4. So I think by the second half of 2015 you're going to see our high-end SSD product line we're moving to mass production.

Okay. Great. And last question maybe for Riyadh. The gross margin here is above, I think, your long-term target. You've guided it down a little bit. For 2015, is the mix that you expect going to allow it to stay above the high end or would it trend back toward that range?

Suji, it's a little premature for us to be talking about 2015, exact 2015 gross margin. Longer term, our gross margin is 50% and it still will remain 50% as our long-term target. And we expect to see some pricing decline as some of our products scale more meaningfully and as volume related pricing terms kick in. So we expect our -- plus, we expect our margins to fluctuate from quarter to quarter, due to mix and timing of new products. That's what we've seen in both Q2, Q3 and in Q4 this year. But I still believe the 50% is a healthy long-term target for us to achieve.

Great. Thanks, guys. Again, congratulations on the great growth here.

Jaeson Schmidt, Lake Street Capital Markets.

Thanks for taking my questions. I'm wondering if your eMMC assumptions for next year assume any significant return from Samsung.

I think this will be a difficult to comment question. I think the -- because it depends the opportunity and depends on NAND and depends on market factor, if our customers prefer to enter. I think there's always opportunity to engage business with other NAND makers, not just particularly with Samsung, we believe, when we have spent more R&D resource and without this opportunity for us to engage business with Samsung for eMMC.

Okay. Thanks. And then, Riyadh, looking at the OpEx line in 2015, do you guys anticipate having to significantly ramp your headcount to go after all these opportunities?

We're seeing a lot of business opportunities. We're seeing more and more business opportunity. And based on our current headcount and available resources, we are still turning away business opportunities even from large OEMs. So we definitely need to continue scaling our investment in headcount and infrastructure to match the level of interest and business activities that we're seeing.

But from an operating margin perspective, our operating margin target remains 30% and we are going in that direction. That's what you've seen from our recent quarter. So we believe that as we scale our revenue, we can still scale it faster than operating expense growth, though, and that should be the case for 2015. We'll definitely provide you with more color as we progress into the following quarter.

Okay. And then just finally, wondering if you could comment on your thoughts on the current channel inventory in your core USB and card businesses.

Generally, the channel inventory for removable storage is fairly lean, and we don't believe that currently it's any different from what we?'e seen in the past, that there's not much inventory -- excess amount of inventory out in the channels.

All right. Thanks, guys.

Daniel Amir, Ladenburg.

Great. Thanks a lot. Congratulations on a good year thus far. Just a follow-up on the gross margin question from before. Can you give us a little more insight in what has the bigger impact in terms of the moving parts for your gross margin? Is it more the product mix, but then you're also coming out with TLC which should improve your cost as well? Or is it really the ASP impact, that it would be predominantly on your removable market, which is still something that is a mature market and definitely has some impact?

A lot of the benefit that we're getting from the gross margin uplift has been product mix related as we sell more of our new growth products, our eMMCs, our SSDs. And in the third quarter, we also got a rebound from our LTE transceivers. So, all these products have above corporate average gross margin. As we continue to sell more of these, it will continue to improve our gross margin profile.

But that said, quarter by quarter there are product mix shifts. In the fourth quarter, we're expecting a seasonal softness relating to the seasonality -- the annual seasonality of our eMMC sales. And then longer term, as we scale some of our business programs, there's certain volume related pricing actions that will kick in then. So, longer term, our gross margin profile should trend toward 50%.

So, Daniel, let me add a comment. Generally speaking, our embedded controllers have higher margin than the removable storage product.

Right. Okay.

So, based on product mix, quarter by quarter, so we will have certain margin shift.

Right. Meaning -- I guess the product mix has the biggest impact; I guess that's the way to look at it.

That's correct.

Okay. This is a follow-up question, just on your LTE business. So you're seeing -- you're expecting 2015 to be a similar level to 2014. Is that based on what you're currently seeing in terms of designs that you're currently modeled at Samsung, or do you already have some sort of visibility into Samsung's future designs that you're going to be in? I'm just trying to get a little more -- I know it's a lot smaller than it used to be and it doesn't impact your revenue top line as much as it used to, but just to get a bit more color on your level of comfort on this business.

So you are correct, Daniel. So I think the current forecasts for 2015 were based on the current design wins and within production from late Q4 or Q1 moving forward. So I think it's still too early to determine how many new design wins we may have for next year, but we are in testing in a number of new design wins. But whether those products will go into production remains to be seen, but we will try to update the coming quarters for our program for next year.

Okay. Just a final question on the SSD side. Given that you're getting into markets of SSD which require more software knowledge as well, do you feel that you have all what you need currently in terms of software capability, or are you still looking for assets or looking for people in the software space?

From this moment, regarding client SSD, especially SATA 3 client SSD, we believe we have all the know-how in the software algorithms and architecture and technology. We believe we can expand very broadly from floating gate MLC to TLC, including the 3D NAND MLC to TLC.

But regarding the resources, we're always short of resources because we turn down many big projects from NAND makers and OEM customers. We need to continually grow the team, because each OEM the demand's very heavy for our resource. Each OEM demand has multiple projects in the pipeline, not just single projects, and they don't even work with you if you only can support one single project.

So we have to -- very carefully to grow, to train in R&D with discipline, experience, and through from the project kick-off to mass production and including the customer service. So that's incurring tremendous demand on the resource. We need to recruit and build a more balanced team.

Okay. Great. Thanks a lot.

Rajvinda Gill, Needham and Co.

Yes. Thanks for taking my questions and congrats as well on excellent results. On the eMMC, you said you will continue to grow faster than the market, which would imply some market share gains. I was wondering if you could talk a little bit about the competitive landscape in eMMC with respect to where they are on the process note and TLC and where you are.

And if you could talk about the fact of trying to diversify away from SK Hynix, which is -- it seems like they're still the bulk of your eMMC revenue. If you can provide any metrics of some of the non-SK Hynix customers, if that's approaching a certain percentage of your overall eMMC revenue, that would be helpful as well.

As of today, I think we still do not see any meaningful merchant competition for eMMC controllers. We view ourselves as complementary to the flash OEM owing to no effort. I think where they focus on high end, more differentiated products, while we engage with them on mainstream and higher volume solutions. But you can see moving to 2015, 2016 will be more low-cost and low-end smartphone growth. That's why we count on the high growth from low end to grow the eMMC.

In the other hand, I think our product support for the other TLC base and NAND OEM customers, we believe this year their sale revenue is around less than 5% of total eMMC shipments. This was due to their internal NAND application. But we believe this program will bring that much faster next year. So we also try to increase R&D resources to engage the other NAND makers which are winning for almost a year. So that's why we have very high confidence to grow our eMMC through 2015 and beyond.

Raji, let me also add that barriers to entry are getting higher and higher for eMMC controllers. We're the only merchant supplier with a successful track record. We're shipping several hundred million units annually. And it's very difficult for newcomers to come into this market at this point in time without the type of track record to displace our leading position in the marketplace.

Okay. That's helpful. And on the SSD side, I guess a similar question as well in terms of the competitive landscape as you move upstream a bit. Can you talk about what are some of the challenges you're experiencing, what are some of the opportunities that you're benefitting from? If you could talk a bit about that, that would be helpful as well.

I think from our experience through supporting module makers to the channel aftermarket, now moving to PC OEM, and we engage with the three different NAND makers for multiple projects and we do gain experience and learning a lot from these programs.

The major challenging is really I think different OEMs, different NAND makers have different requirements, different perspectives and different qualification processes, and this requires dedicated team. And dedicated team is not just R&D team; including verification, also field supporting team. So the challenging really for us to grow further, growing quickly, is really to grow our R&D resources and the total headcount for SSD team.

I think that's the reason we are really recognized by NAND makers, major OEM customers, because we have a complete technology supporting both hardware (inaudible) as well as the firmware, a complete algorithm. And we also -- all the analogue IT, including the D5, ML5, are developed in-house. We have complete technology covered from SATA to PCIe, gen 2, gen 3, even the future gen 4 technology. And we have more business than we can take today; we just need to grow our R&D team.

That's very good. Thank you.

Mike Crawford, B. Riley and Company.

Thank you. In talking about your expected SSD growth next year, am I right in thinking that you're referring solely to the client and cache SSD business when you're talking about the three times, the four times growth comparison for next year?

That's correct.

And then, on top of that you also have your Ferri branded industrial SSDs, which I believe were nearly $19m, or $19m in revenue last year. That should be growing as well on top of that, is that correct?

That is correct.

Okay. And is that business -- that's a little slower growth, being an industrial business, or how should we think of that business, growing 20%?

I think that we will provide more clear update in probably next quarter's earnings call. Because we -- as you know, we are a controller company. We do provide some solutions for industrial grade if the margin meets our own company policy. So we are not trying to aggressively grow that product if the margin does not meet our company policy, but if it's a good program and it's sustainable in the long term industrial grade, [with that we'd deliver] our Ferri product line.

Okay. Thank you. And then, on the R&D front and the CapEx in the quarter, there was $4.5m spent on the purchase of facilities. So is that more of a one-time kind of extra CapEx, or do you see more expenditures like that in the next year? That's part one of the question.

And if you could give some sense of how many -- what rate of employee growth you would like next year, that would be helpful as well.

Mike, this is a one-time expenditure. Every few years, when we run out of office space to house our expanding R&D team, it's necessary for us to find new facilities to house them, to house their equipment, testing gear, etc. And then as well, as I talked about earlier, we're rapidly expanding our SSD engineering team and as a result we need to acquire additional facilities to house them in. So that's where that CapEx is related to.

And then you should expect our employee headcount to continue to increase as we seek to do more OEM business. Right now, it's difficult to give you an exact number how much -- how many headcount we anticipate to hire, but you should expect us to continue to aggressively hire in order to take on more OEM projects.

Okay. Thank you, Riyadh. And then last question, also on SSDs. So when you're moving to these full-size SSDs where you've been designed in for PC OEMs, I imagine that's where you might start to see some of these volume discounts which might bring the gross margin related to that particular revenue down closer towards the 50% target?

So our full-size SSD in production this year from first quarter should channel module customers. Our full-size SSD into production with top tier PC OEMs will be in the early first quarter of 2015.

From a margin perspective, our volumes for SSDs right now for our OEM partners are just beginning to come on stream and will be coming on stream in the first quarter of next year. So, once they're a certain size, once they reach a certain size, the volume related discounts that we will provide. So, all in all, we are targeting our gross margin profile to be into the 50% level, so long term you should expect that.

I think our underlying average gross margin is higher than our corporate gross margin. So we believe when SSD product line revenue grows, we should see the better margin mix.

Okay. Thank you very much.

Tom Sepenzis, Northland Capital Markets.

Yes. Hello. I'm just wondering, you mentioned in your prepared comments that Samsung was going to be up sequentially in December. Is that eMMC only, or does that include the LTE business?

This is related to LTE. This is -- as you know, in the third quarter our LTE revenue rebounded sharply because of new LTE programs that went into production. These will continue to grow into the fourth quarter. So that's where our Samsung related revenue growth is coming from.

Great. And just to clarify, next year, any other design wins would be incremental to the $12m estimate?

Some of our programs -- some of our LTE programs will continue production well from this year into next year. So we are working to secure additional design wins. And currently, based on what we can see, next year's LTE revenue should be similar to this year's LTE revenue. But if we can gain additional design wins, additional to what we currently expect, there could potentially be upside. But as we see it right now, $12m this year, $12m next year.

And then, just from a housekeeping perspective, traditionally in December your stock-based comp goes up. Is that something we should be expecting this year as well?

Well, our stock-based compensation amount, it all depends on the granting of our stock-based compensation, when our compensation committee passes these. So for the fourth quarter what we're expecting is $4m to $5m.

Great. Thank you, Riyadh.

Monika Garg, Pacific Crest Securities.

Hi. Thanks for taking my questions. First is just a housekeeping. Inventory in dollar terms has grown significantly last two quarters. So is it the kind of new level to think about, or do you think it comes down going forwards?

If you're asking about inventory, our inventory levels are a little on the elevated side compared to what it is historically, and it's all related to the builds necessary to support the rapid ramp of our sales that you've witnessed in the last few quarters. The inventory levels will come down as we consume what we've built, so that should go down over the next few quarters into a more normalized level.

Okay. Thanks. Then if you look on the eMMC side, more than 90% of your revenue is really coming from Hynix, and Hynix has indicated that they're looking to develop internal eMMC controller. So the question is do you think they're looking to develop something, or can they develop a controller? And if they do, how can that impact your business?

So, I really cannot comment in detail, but I can give example. To develop internal solution including our controller with their firmware or their controller with their firmware, so this could all be part of their solution. So if it's our controller with their own firmware, then we count the same revenue.

Okay. Thanks a lot.

Thank you very much. There are no further questions on the line at this time. I would now like to hand the call back to Mr. Jason Tsai. Please continue.

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

We will be at the following conferences in this quarter. In November, we'll be presenting at RBC Technology, Internet, Media and Telecommunication Conference in New York; Wells Fargo Tech, Media and Telecom Conference in New York; JPMorgan Global TMT Conference in Hong Kong; UBS Global Technology Conference in San Francisco. In December, we'll be presenting at the Credit Suisse 18th Annual Technology Conference in Scottsdale. 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 your participation. You may all disconnect.