慧榮科技 (SIMO) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter of Silicon Motion Technology Corporation Q1 2015 earnings conference call.

My name is Sui and I'll 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.

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

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

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

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

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

Please proceed.

Thank you, everyone, and good morning.

Welcome to Silicon Motion's first quarter 2015 financial results conference call and webcast.

My name is Jason Tsai and 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 financial results, please refer to our press release, which was filed on Form 6-K 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 the GAAP to non-GAAP financial data can be found in our earnings release issued yesterday.

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

With that, I will turn the call over to Wallace.

Thank you, Jason.

Hello everyone and thank you for joining our earning call.

Silicon Motion delivered solid results for the first quarter 2015.

Revenue came in slightly above the high end of our guidance range.

Likewise, gross margin also came in at the upper end of guidance.

Our client SSD controller revenue doubled sequentially, better than expected, and our eMMC controller revenue was similarly stable sequentially.

Riyadh will discuss our financials in greater detail later in the call.

Last week we announced the acquisition of Shannon Systems, China's leading enterprise SSD company.

Before I talk about our acquisition, let me update everyone on our client SSD and eMMC controller business.

First, our Client SSD.

We already cited how this controller sale are scaling.

In this quarter as mentioned, our SSD controller sales doubled sequentially and are already 10% of our total revenue.

Sale to our NAND flash and storage OEM partner and our module maker customers are all progressing better than expected.

In March, our SSD controller sales have already increased to over 1 million units a month.

We believe it is very likely that we have already become the second largest merchant supplier of controller for SSD today.

This quarter we increased the number of PC OEM that are using SSD with our controller to five, up from three that we talked about last quarter.

Four of the Top 5 global PC OEM are now using SSD with our controllers.

SSD are increasingly affordable and will become even more affordable as NAND flash cost [continues] to fall further with the use of TLC NAND, 3D NAND, and TLC 3D NAND.

The absolute dollar cost of an SSD is already only a bit higher than HDD.

Last year, a quarter of our notebook PC including Macs were already shipping with SSD.

Next year a few of our flash partners are targeting half of all notebook PC to be shipping with SSDs.

To further improve affordability of client SSD, in August last year we released our controller solution for managing TLC NAND, the world's first firmware plus high resolution available.

TLC NAND, as you may know, is much harder to manage compared to MLC NAND; but importantly, TLC is around 20% to 25% cheaper per bit than MLC.

Beginning in the first quarter, we started shipping our TLC SSD controller in commercial volume to module makers for their channel business.

Our NAND flash partners will start using our TLC SSD controller in the second half of this year for supplying SSD to OEMs.

In the first half of next year, we will start initial sales of our NAND flash partners of our controller for managing the upcoming CD NAND.

We believe we are on track to deliver $45 million to $60 million of client SSD controller sales this year and are excited about next year.

Development of our controller for our flash partners enterprise-grade SATA 3 SSD are progressing smoothly and we expect to start shipping in second half of this year.

We also launched our PCIe client SSD controller towards the end of this year.

Now, let me turn to our eMMC.

This quarter our eMMC business grew well over [50%] year-over-year and sales was seasonally stable quarter-over-quarter as expected.

We are a value-add eMMC controller partner to SK Hynix and other NAND flash vendors and do not believe our solid relationship with Hynix and others will change either this year or the next.

We believe we are on track to deliver eMMC sales growth that is at least as fast as the 15% to 20% market growth expected for this year.

We are currently assembling our eMMC 5.1 at our NAND flash partners and in the first half of 2016 we will be introducing our controller supporting TLC and 3D NAND for both UFS 2 and single-chip PCIe SSD embedded storage solutions.

The majority of smartphones today are only just progressing on using eMMC 4.5 to eMMC 5.0.

This February JEDEC announced eMMC 5.1 as the newest high performance and cost effective standard for eMMC and eMCPs.

Our eMMC 5.1 IOPS strength is two to three times faster than our eMMC 5.0.

Our eMMC 5.1 is currently under verification at our flash partners and will start volume production in second half of 2015.

This year and next we believe eMMC 5.1 will account for a significantly larger part of the embedded market than UFS 2. UFS 2 was announced by JEDEC back in 2013 and over the last two years was actually promoted by leading application processor vendors.

Currently however, only Samsung Galaxy S6 flagship is using UFS 2. We believe UFS 2 rollout this year will be very limited as it is expensive, requires significant software engineering resources to implement, and JEDEC has not defined a cost effective integrated solution with mobile DRAM for UFS 2. In the first half of [2015] when premier smartphone will probably adopt next year embedded memory, OEMs will need to decide whether to use UFS 2 or the even faster single-chip PCIe SSD using the popular PCIe standard.

Both our UFS 2 and single-chip PCIe SSD solution will be ready in the first half 2016.

Smartphone OEMs are currently divided on which embedded memory solution will be more popular and we are prepared for either option.

Furthermore to address OEM affordability issue and to target higher density equipment, our upcoming UFS 2 controllers have been designed specifically to managing both cheaper TLC NAND flash and higher density 3D NAND.

We will be ready to support Hynix and our other NAND flash partners on their USF 2 and single-chip PCIe SSD solution when the market is ready to scale.

Last Friday we announced the acquisition of Shannon Systems, China's leading enterprise grade PCIe SSD and storage array vendor.

We are excited about this acquisition.

Let me explain what this acquisition means for us.

Over the last few years we have been actually exploring ways to enter the storage device side of market by selectively crossing over from being a pure controller vendor.

There are certain niche markets that are underserved by the flash makers and module makers.

By leveraging our controller expertise and our engineering supporting structure, we can support OEM unique application with customized SSD solution and by doing so, we are expanding the total addressable market for us and our flash partners.

Let me be clear, our strategy is not to compete against our flash partners.

Our strategy is in fact to supplement our NAND flash partners' activities.

In the flash market, the flash makers typically focus on larger markets such as smartphone and PC and large OEM customers to effectively sell through their large expanded capacity of NAND flash.

They tend to take a more wholesale approach with their business.

We pick the niche opportunity not covered by their wholesaler approach.

Niche opportunity that we are talking include submarkets that are sub-scale to our flash partners or markets with difficult barrier to entry.

For example, our FerriSSD targets (inaudible) that require industrial quality, customization, and dedicated support; application underserved by the flash vendor and module makers.

Our FerriSSD are widely used in point-of-sale systems used by major retailers and convenience store chains, office automation equipment, and automotive infotainment systems.

Our Shannon acquisition on the other hand is focused on China and increasingly for attacking markets that require significant local touch and tailored support.

China's state-owned and state control enterprise are increasingly seeking to only buy locally developed technology as part of the government's cyber subservience policy and the government's increasingly restricted about procuring US and other non-Chinese IT product.

Even China's private sector is increasingly towing the party line and giving preference to local vendor.

Since Shannon R&D, manufacturing, and supporting team are currently in China, Shannon is less handicapped compared to foreign vendor.

We intend to maintain the local company profile advantage after we complete our acquisition.

Shannon also has the support of flash makers that are using Shannon to indirectly participate in China's fast growing enterprise SSD market.

Shannon is an innovative Chinese company co-founded by the former Chief Architect of Marvell SSD controllers.

The co-founders together have over 150 patents to their names and as Shannon, they have developed a unique architecture for implementing enterprise grade PCIe SSD, which enabled Shannon to launch in 2014 the industry's first 6.4 terabyte PCIe SSD with ultra low access latency and very low power of less than 25 watts.

Because of Shannon unique architecture, its PCIe SSD are having scalable and example is already shipping 30 terabyte PCIe SSD today.

More recently and also based on the unique architecture, Shannon introduced PCIe-RAID technology, an innovative flash array solution that offer enterprise customers uncompromised performance and high availability.

Shannon has already successfully expanded its customer base to more than 80 companies in China and count China's leading Internet company in e-commerce, online travel, and mobile security as key customers.

Shannon also has been shipping SSD to government agencies, financial institutions, telcos, and leading enterprise in traditional industries.

In 2015 Shannon expects to rapidly scale sales to approximately $14 million to $18 million and should be mildly profitable.

We expect to complete this acquisition by July.

As I mentioned at the start of the call, we are off to a great start this year led by our client SSD and eMMC controllers.

We will soon add Shannon's fast growing enterprise SSD solution to our business.

I'm pleased that our team has been executing very well and delivering.

I would now turn the call over to Riyadh to discuss our financial performance and outlook.

Thank you, Wallace.

First, I will outline our financial results for the first quarter and discuss the financial details from the Shannon acquisition.

I will then provide our second quarter and full-year 2015 guidance.

In the first quarter revenue grew slightly sequentially to $80.6 million and grew 53% on a year-over-year basis.

Our storage product sales decreased 3% sequentially and accounted for 79% of total revenue.

Within our overall storage products; our embedded storage, our eMCC client SSD, and industrial SSD controllers, plus our Ferri products grew 9% sequentially primarily due to the strength that we are seeing in client SSDs, which Wallace had talked about earlier.

Sales of our removal storage products, our card and USB flash drive controllers, declined 21% sequentially due to seasonality, flash availability, and market maturity.

Removable storage declined 4% year-over-year.

Our specialty RF IC sales increased 14% sequentially led by new mobile TV wins.

Our corporate gross margin decreased slightly to 52% in the first quarter from 52.5% in the prior quarter due to more aggressive sales of legacy non-embedded storage products.

In the first quarter our operating expenses increased to $22.5 million as compared to $21.4 million in the fourth quarter due to higher headcount and compensation expenses.

We ended the first quarter with 838 employees, 14 more than at the end of the previous quarter.

Due to lower gross margins and higher operating expenses, operating margin decreased to 24.1% in the first quarter from 26% in the fourth quarter.

We achieved quarterly net income of $16.6 million and earnings per ADS of $0.48.

This quarter we have updated our non-GAAP definition to improve the quality of our data and improve transparency.

We have removed the impact of foreign exchange gain or loss from our tax line, which should make our taxes more predictable and consistent with our model tax rate.

We have also removed tax benefits in our tax line related to stock-based compensation and other expenses excluded from our non-GAAP measures.

Stock-based compensation in the first quarter was $1.5 million, lower than the $4 million in the fourth quarter.

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

Inventory days decreased to 106 days in the first quarter from 118 days in the fourth quarter.

DSO increased slightly to 40 days in the first quarter as compared to 37 days in the fourth quarter.

Payable days decreased to 42 days in the first quarter from 44 days in the fourth quarter.

Our cash, cash equivalents, and short-term investments increased to $200.5 million in the first quarter as compared to $194.9 million in the fourth quarter.

Primary sources of cash in the first quarter came from $16.6 million in net earnings.

Primary uses of cash in the first quarter that were not related to working capital included $1.8 million of routine purchases of software design tools, $5 million of quarterly dividend payments.

Now let me discuss some of the financial metrics related to our Shannon acquisition and the financial impact to our P&L.

Last Friday we announced reaching agreement to acquire Shannon Systems for a total purchase price of $57.5 million.

This $57.5 million includes $40.4 million in cash, $13.1 million in Silicon Motion ADS which are issued only to the management team and employees and subject to a three to five year lockup with annual release, and $4 million of cash earnouts payable if Shannon were to achieve certain 2015 revenue targets.

For full-year 2015, we believe Shannon should achieve $14 million to $18 million in sales and we expect to complete our acquisition by July.

The amount of revenue that we will consolidate will depend on the timing of when our acquisition closes and timing of revenue bookings.

Shannon will not affect our gross margin profile and will be slightly EPS accretive this year and more accretive next year.

I will now turn to our guidance.

For the second quarter, we are expecting our revenue to increase 5% to 10% sequentially in the following.

Our eMMC controller sales to grow sequentially and as seasonally expected, our SSD controllers sales to scale and grow strongly sequentially, and our removable storage controllers to rebound.

Gross margin in the second quarter is expected to be 50% to 52%.

Operating expenses in the second quarter is expected to be $23 million to $24 million.

Stock-based compensation in the second quarter is expected to be less than $0.5 million.

For the full-year 2015, we are expecting revenue to increase 17% to 25% as compared to 2014.

This forecast does not include the benefit of our Shannon acquisition.

As previously provided, full-year gross margin range of 49.5% to 51.5% and full-year operating expenses ranging from $91 million to $97 million, both remain unchanged.

Our stock-based compensation range of $11 million to $13 million and 18% model tax rate also remained unchanged.

We will now open the call for your questions.

Thank you.

Ladies and gentlemen, we will now begin the question-and-answer session.

(Operator Instructions) Daniel Amir, Ladenburg.

Congratulations on a great SSD quarter.

First question is here with regards to Hynix.

There's discussion whether Hynix will develop an internal controller or not.

You seem to be pretty confident that you can maintain that business going forward, what gives you that confidence?

And what are the risks associated whether one of your larger customers decides to diversify its controller supply?

And then I have a follow-up.

Thanks.

We have been a dedicated controller technology partner of SK Hynix for their eMMC business for several years now.

Through our joint development effort, we have seen Hynix share scale significantly over the past three years to over 25% of the overall market.

We help them become very successful and have done well ourself.

They obviously have their own controller technology and have always had a few wholly internally development solutions in parallel to ours, more recently their own UFS 2 which is currently in testing.

In the past and now when they come to actual commercial production, they have always used our controller because of better performance and cost and track record and supporting structure.

Let me explain more specifically about UFS 2. JEDEC announced its standard way back in 2013, but the adoption by smartphone OEM has been slow.

Even right now because of high cost and technologically issue such as significant investment in software development to incorporate UFS 2 into their handset, something not many OEM have the resources or capability to support.

Global smartphone growth are now being driven by low cost in mainstream devices and the industry-leading eMMC 4.5 of course have been replaced by the much faster eMMC 5.0.

And later this year the rollout of even faster eMMC 5.1, very fast but very expensive UFS 2 targeting niche premium smartphone like the Galaxy 6.

And there are no UFS 2 eMCP for single chip with adding mobile DRAM and really that's not played well for Hynix trends.

For the premier phone, OEMs are still divided between supporting UFS 2 and even faster single-chip PCIe SSD.

We believe both our USF 2 and single-chip PCIe SSD controller will be ready in the first half of [2016].

And let me add, our controller also supports TLC and TLC 3D NAND, which Hynix is gradually ramping.

Our Hynix relationship continues to be very solid and we don't believe will be any change this year or the next or future.

Okay.

Thanks for the detailed answer.

The other question is around Shannon.

Can you give us some idea what Shannon did last year in terms of revenues and what type of growth rates we should think of this business given that it's doing $14 million to $18 million this year?

Thanks.

Daniel, for the calendar year Shannon is targeting $14 million to $18 million in sales representing a 4x increase from last year.

Since we'll be completing this acquisition by the end of July, we anticipate consolidating roughly half of the full-year target revenue; the full-year $14 million to $18 million, roughly half of that.

Based on projections, we believe this acquisition will be mildly accretive to us in 2015 and significantly more accretive in 2016.

More broadly, the overall Chinese Internet market is still growing quite robustly.

And at this point in time we hesitate to provide you with a more long-term revenue growth number for Shannon, but obviously the market is growing rapidly and we are very well positioned.

Okay, great.

I'll get back into the queue.

Thanks.

Jaeson Schmidt, Lake Street Capital.

Just a follow-up on Shannon, wondering if you could provide any detail surrounding their ASP profile?

So regarding Shannon ASP profile, it's regarding the density they provide.

They are shipping some 2 terabytes, 3.2 terabytes, and up to 6.4 terabytes.

Basically they also have provided solutions up to 13 terabyte and really they price a big range about the product based on customer need.

We are talking about many thousands of dollars per unit.

Okay.

And then, Wallace, could you describe the current supply and demand environment you're seeing in the overall NAND flash market?

I think for the second quarter we could see flash availability to be a little tight due to the shipping and manufacturing process [geometry] to 1z, which is equivalent to 16 nanometer and 15 nanometer and related lower initial yield.

Flash supply in the second half of the year will also depend on the availability and adoption of 3D NAND.

So, I think that we have to see the result and see whether it's balanced supply/demand.

Okay, great.

And then the last one from me.

Do you guys still expect to do about $12 million in the transceiver businesses this year?

Absolutely, we are on track with $12 million LTR product business.

Alright.

Thanks a lot, guys.

Suji De Silva, Topeka Capital Markets.

In terms of the Shannon acquisition, can you talk about the SSD controller team that you're acquiring and the benefit for your controller roadmap and how those two teams will work together?

It's a very good question.

I think as you can see, Shannon has very deep understanding of enterprise SSD system and Chinese storage market.

(inaudible) NAND technology and we have very cost effective AC solution for SSD and we have complete firmware technology among the SSD area.

So combined together, I think we create the value to accelerate Shannon enterprise SSD business and raise our solution to grow in the China market.

So, that's a synergy.

It will also help us to enter into China market by providing the solution and cost from a client SSD controller to enterprise SSD solution and the storage array solution.

Okay, great.

And then you just talked in the last question about the NAND supply/demand.

Can you talk about the SSD supply/demand situation?

I know that people were being more cautious three months ago, it's not like they're building again for the channel.

Can you just talk about how that's flowing there?

I think in the first quarter we experienced very exciting SSD demand.

I think what we said in March our unit shipments over 1 million units.

But I think in the second quarter, we'll also continue to see the strong demand from both our OEM customers as well as the module maker for the channel business.

So I think this year due to the price structure hit the right point that the SSD is growing probably more than 80% or double than last year.

Okay, great.

Thank you.

Monika Garg, Pacific Crest.

Couple of questions on the Shannon side.

Could you maybe talk about the supply agreements you have signed for the NAND vendors so you don't run into any supply problems for this product?

I think Shannon already have supply agreement with their current NAND supplier and I think after the acquisition we might consider adding one more NAND supply vendor to balance and more price competitive and because when their business scales up, we believe that two suppliers maybe will add more value to the company in the market.

I mean you've been traditionally in the controller business so that has helped you never to take kind of a NAND pricing risk on your end.

But given the acquisition now, you could be carrying some NAND pricing risk.

How do you kind of look to alleviate that risk?

I think first of all from our perspective of Shannon today, they have a pretty good NAND supply agreement with the current NAND partners and we also have a very strong [mention] with all the NAND makers.

I believe TLC 3D NAND will become very important in 2016 and we are in the process to negotiate better contracts and more stable contracts with NAND suppliers who is not playing in enterprise SSD in China market, then we add that value to the NAND maker as well as to our business.

Monika, let me also add a bit more about your question about NAND flash price risk by taking on NAND flash components as inventory.

We don't take too much of these components.

We take pretty much what we need to ship our products for the upcoming quarter and we regularly negotiate and purchase NAND flash component on a fairly regular basis in order to not hold so much inventory.

We appreciate the risk, but it's also important to manage down this risk by not holding on to these components for more than what we need for our operations.

Just a last one from me.

You talked about next year you expect to ramp 3D NAND based solutions for your OEM partners.

Could you maybe talk about in the beginning the solutions you expect, is it more on the client SSD side or more on the retail end of the market?

We believe 3D NAND will be available to both OEM and the channel module customer in first half of 2016 and our SSD controller both SATA and PCIe will be ready by first half of 2016 to support the variety of 3D, especially TLC 3D NAND from multiple NAND supplier.

Got it.

Thank you so much.

Mike Crawford, B. Riley & Co.

Riyadh, you mentioned that you didn't expect Shannon to change your gross margin profile but then you said in 2015.

As that business scales in 2016, wouldn't it be fair to think that enterprise SSD gross margins get down maybe closer to the 40% range than the corporate average?

The gross margin of the business is similar to our gross margin and so therefore we are not expecting it to impact our business, in line with what I've been talking about.

So, let me add a little bit.

For certain more commoditized enterprise SSD, the margin may go little lower; but for each area the margin will be higher.

For [product mix], we believe that gross margin will be similar as our corporate gross margin.

Okay.

And then just to reiterate, it sounds like your intention with Shannon is to stay within this niche of enterprise SSDs for Internet companies in China thereby avoiding certain channel conflicts with other partners and customers.

Is that right now kind of your long-term vision for this business or do you think this is a business that might scale into some other niches as well?

I think Shannon is focused in China.

The focus on China coupled with China protection policy in favor of a local IT vendor, I think strong competition with our OEM partners was an important consideration for our acquisition.

So, we do not want to compete with our NAND flash partners.

But China, as you know, the world's largest Internet market is also one of the largest and fast growing market for enterprise SSD in the world and we see the ample opportunity for continued growth in this market.

So at this moment, we have no intention to go to other regions.

I think we have plenty of opportunity to focus to grow in China alone.

And as this business gets bigger, are you worried that as a fabless semi company that you're going to run into the same problems that have plagued virtually every other controller supplier in the space that's come before you?

Fusion-io and OCZ and sTec; that landscape is littered with companies that ran into problems because they didn't own their own flash.

I think we all learn from all the previous acquisitions and see how they fail.

We think we have a better strategy to have a better strategy to negotiate with NAND partners and some NAND partners are in discussion with us to negotiate whether we're [partly] by sale region, by product, to grow the business together.

As we said, we have no intention to compete with a NAND partner, naturally it's enabling the NAND sell for the partner.

Also they can sell solutions in some region we have no interest to sell to.

Mike, let me also add.

This acquisition of Shannon, pure criteria and reason why we went into this acquisition is because of China and its protectionistic policies.

This is a protector market where the other flash vendors, which are all non-Chinese, will have increasingly a difficult time providing their enterprise-grade SSD solution into that market.

China wants to buy its own SSDs, wants to buy SSDs that are developed internally within China, made in China.

And so by acquiring a company that is developing and doing all this internally in China, we are far from being a competitor to the NAND flash partners.

In fact we are acting as a partner to help them sell their NAND into China through Shannon.

And then last question comes back to UFS.

I think, Wallace, on the last call we talked about whether it was UFS 2.0 or UFS 2.1 that you're working on; maybe you could clarify that.

And then also I do know that you have been working on UFS so you just think that maybe there will be a small window where UFS solutions are competitive in the market quickly overcome as you see it now by PCIe controlled embedded memory solutions, is that accurate?

Let me answer your first question first.

We are developing a UFS 2.0.

We focus on TLC NAND and TLC 3D NAND support.

We believe next year for the TLC will become more important because embedded will move into the higher density.

Now regarding UFS and single-chip PCIe solution, I think today in the market the high-end JEDEC have started defining UFS from 2013.

However, the promotion effort comes from the chipset; AP became positive vendor, but it wasn't very successful.

The reason is they take a lot of the software effort to enable the command queue and multi-strap operation.

As you know under Android, there's now [tens of software] enabled go to the right level so you need to add many middle layer firmware or driver to enable the performance to reach the highest performance.

So company like Samsung Mobile, they have many, many software R&D effort to do the development.

So, that's a challenging part for UFS to be adopted widely by many smartphone makers especially in China.

Now there is other (inaudible) as you know by Intel and promoted PCIe-based solutions as a single-chip PGA package with a NAND.

And I think because in PCIe today, they have a complete infrastructure of the software being developed in the past 10 years that's well suitable for the mobile devices not just a PC.

So, I think we don't know which company is going to win so we develop both solution.

Both solution will be ready in the first half of 2016 and we will watch out whether customer needs UFS 2 or single-chip PCIe SSD, either way we'll have solution.

But being an organization, eMMC and eMCP still will occupy majority of market share in the next two years.

Great.

Thank you very much.

Rajvindra Gill, Needham & Company.

Congratulations as well on fantastic results.

Two questions, one on the eMMC and the China handset market.

You talked about growing at least in line with the market 15% to 20%.

Wanted to talk about what are some of the differences this year versus last year in what you're seeing in the China handset market in terms of market share dynamics?

Samsung with the S6 appears to be a bit of a better product line than last year so could you be seeing more increased competition in the China handset market from Samsung and that could affect your business vis-a-vis SK Hynix?

So I wanted to talk a little bit about the China handset market and what's going on there?

And maybe we could just start with that question first.

So, definitely this year's market trend is different than last year.

We believe there will be a lot of consolidation and some company going to continue to grow, some probably going to decline.

Well, there are many reports.

Some suggest certain chipsets supplier sales has slowed down in China domestic market smartphone and some data suggests local market increasingly saturated, but also some reports say there is strong demand because a region like India growing rapidly.

But overall we think smartphone market should grow at least 15% to 20% this year, seeing this growth led by low cost smartphone primarily in China.

Now, we provide eMMC controller for both premier smartphone and low cost smartphone and supply to all the non-Apple industry leaders including Chinese OEMs focusing on emerging market growth.

In Q1 our eMMC sales was as expected seasonally weak, but nevertheless grew 55% year-over-year.

This growth rate will moderate as the year progress due to large number.

For the full year, our EMC should grow at least as fast as market growth.

Regarding Hynix UFS 2, I think you all know Hynix established their own R&D center three years ago and focused in UFS development.

I think every NAND company needs to have its own R&D development to provide a solution to meet their long-term goal.

And there is nothing wrong or nothing different than how we work with other NAND maker, sometime we have very clear partition; they work on the high end, they may work in the mainstream because they focus on the technology, we focus on the unit and the volume.

But as Hynix in the past they don't have any R&D, now they have R&D that being developed for three years, they want to deliver UFS solution.

I think that's great, but that's partly for the premium line and that is a very niche market.

I think we'll also provide alternative UFS solution for both Hynix and other NAND vendor particularly which support TLC and TLC 3D NAND.

We believe they will become mainstream.

But today probably only Samsung have TLC capability for embedded solution and we are the strongest supplier to enable TLC into the embedded business and we think we will have a much better opportunity in 2016 and beyond to enable embedded business not just for Hynix, for all of the NAND makers.

And last question on the Shannon acquisition.

You talked about one of the ways that you can avoid channel conflict from the flash vendors is that you're buying a local Chinese supplier and the Chinese only want to deal with local Chinese vendors.

But I mean what happens if a larger flash vendor buys a local Chinese company as well and can see it from that perspective?

So I'm just wondering maybe you could describe the Chinese SSD landscape in terms of the existing suppliers that are currently there and if the Chinese Internet market is growing at a fast rate that's a big growth opportunity, why wouldn't other vendors particularly some of the US vendors get into this market vis-a-vis an acquisition in the China market?

In terms of the high-end enterprise grade SSD market, PCIe SSD market, essentially if you're looking for world-class solutions, it would be Shannon and two of the global NAND flash vendors.

Essentially it's a fairly small and tight market.

You have smaller players that are targeting the lower end, but if you're going after the high end as what Shannon has been doing, it's a very small group of suppliers.

And in addition to the acquisition (inaudible) not so because of protectionism from the China, but also Shannon have a very unique technology architecture for PCIe SSD.

That's why they are very scalable, they can grow very fast in the next few years.

Together with our know-how in the NAND and the [AC] controller and we can provide many different solution to serve different China customers.

I'll just squeeze one more question and I'll get back in the queue.

A big flash vendor earlier this month talked about problems with PCIe and basically indicating that there has been a shift away from PCIe to SaaS and SATA SSDs given the cost performance dynamics that are occurring in that market.

So, therefore the PCIe market is starting to shrink a little bit or is not as big as what people originally anticipated.

Just wondering what your thoughts are on that market as you kind of move into enterprise and if you could talk a little bit about your PCIe enterprise strategy relative to some of the bigger competition in the US and how should we think about that?

I think in different region, maybe the standard different, but demand also different.

We cannot comment other customers or partners, their intention or their market focus.

But in China, PCIe is a way to go for enterprise SSD.

Thank you.

Mike Burton, Brean Capital.

Congratulations on the strong reporting guidance, especially considering some of the end market trends.

Most of my questions have been asked.

But on the strong guidance you gave, clearly a testament to your design wins and ramps, but are you seeing any impact from currency fluctuations on end demand?

I know you already spoke about mobile devices, but on any of your other segments and how are you planning to deal with that going forward?

In terms of foreign exchange, there is a negligible impact to our business with regards to our OEM customers or module makers and how that also flows through to end consumers.

At least, this as it relates to our products.

Okay.

And then just on the Hynix side, we've heard Hynix make noise about its own internally developed silicon and firmware in the past.

Given your comments earlier to Dan's question, is it fair to say you don't really view their comments last week as an indication that they're any further along to implementing their own solutions than they are in the past?

And then further from your conversations with your customers, how many OEMs do you believe will implement UFS in 2015 and then 2016?

So, I think let me try to [answer].

We cannot comment what Hynix tried to do.

But by the way, I want to redefine Hynix own solution either we provide turnkey both firmware and hardware for our controller or we provide the design; they will modify somewhere and use a hardware, they will claim it's their own solution.

So, we support customer whatever they like to defend their solution and we are related with Hynix very close, very strong and will continue to grow in the next few years.

And regarding the OEM for this year, we believe only one smartphone maker uses UFS 2 and majority supply from Samsung their own solution.

Great.

Thanks again and congrats.

Tom Sepenzis, Northland Capital Markets.

I was just wondering with the Shannon acquisition, obviously you're moving into the enterprise space with your own internally developed products.

Are you planning on supporting two different architectures moving out a couple of years or do you plan to integrate the two different platforms on maybe the same software architecture over time?

So regarding Shannon, they have their own architecture and they will continue to grow for their own solution with their own firmware and our value is we will follow the standard PCIe [SSD] and that's the standard that we focus on client side sometime because we can use for the low-end standard enterprise SSD.

So Shannon can use that as their foundation, develop software, put together to scale it to be storage array or low-end enterprise solution.

But their main focus is higher density beyond 6.4 terabytes of 30 terabyte SSD solution.

Riyadh, I think you said that the $14 million to $18 million in revenue expectation this year is just a half year of revenue.

Did I get that right?

The $14 million to $18 million of revenue expected from Shannon is for the calendar year 2015.

So, we are targeting to close our transaction by July.

So depending on how much revenue they are going to be booking as the year progresses and if we were to close by our expected July timeframe, we should be consolidating roughly half of that.

And what was the growth rate expectation for the Internet in China next year?

There are many reports about how fast it's expected to grow.

I think the third-party research numbers will probably be a better indication to you for your purposes.

But China is certainly one of the fastest growing Internet markets and it's already the largest Internet market in the world out there with plenty of world-class Internet companies.

Great.

Thank you so much.

Charlie Chan, Morgan Stanley.

Congratulation for a good result and good acquisition M&A.

So may we get of how Shannon's market share in China data center market, do you have that kind of data?

No, we don't.

Shannon's market share in China is still very small, but their customer base is very broad, it's over 80 customers right now.

We believe they have a great potential, together we can help them to accelerate growth in the next few years.

Okay.

So when we look at their growth potential, is it mainly from the market share again or the organic growth of China data center demand?

I won't say it's because of the China data center demand.

I think we have four specific category to growth and some relate to Internet e-commerce, some relate to the China banking, some relate to the certain industry we cannot comment this moment.

But I think we have specific market to grow and demand what will be China government-related company, how they develop new development like China grid-related business.

Charlie, let be add.

The growth of this company is going to be coming primarily from the growth of the overall enterprise-class SSD market.

The market is very small because the adoption of SSDs in China is roughly two or maybe three years behind the western markets, but you're seeing the same sort of adoption curve that we've seen in US and European markets from several years ago.

The rapid adoption, very strong interest by corporates whether private sector or public sector, whether small companies or large Internet companies including government agencies; very strong interest across the board to use SSDs for various different types of applications, many that Wallace had just talked about.

And because we are at the ground floor of the growth curve, we believe there's tremendous growth available in this market.

And so the growth of this company and just to wrap up is with the industry rather than to kind of take market share from existing players because the larger growth is going to be coming from the industry.

So, just one housekeeping question.

So, you seem to be revising up your full-year guidance range, right?

The low-end growth is now a 17% year-on-year growth.

So any segment obviously that you see upside for full year, for example SSD or mobile TV?

Charlie, we've taken up the bottom end of our range because mathematically that's how it works out because for the first quarter we've delivered at the high end of guidance and going into the second quarter, we believe we are providing very robust sequential growth going into the second quarter.

So by definition mathematically, our overall number for the full year needed to go up.

In addition we have not started rolling in expected revenue, revenue that we were going to be benefiting from as we consolidate Shannon in the second half of the year.

So there could be potentially some upside, but we'll provide more color in terms of how much to expect and revise our guidance as the year progresses.

But in the meantime, we're going to hold to what we've just stated.

Okay.

Because I thought you may see some upside for your SSD revenue forecast.

Are you going to change the range of $45 million to $60 million for this year?

We are going to hold to the guidance that we've previously given and the guidance that we have reiterated as part of this webcast.

Okay.

Lastly, lots of investors are asking UFS 2.0.

Is there any possibility that Hynix instead of going into very difficult technology, they come back for the more mature eMMC controller IC because by doing that, they may save more cost than doing a niche market.

What's your thought on that?

You mean from development or from selling?

From development.

Naturally they always have R&D team development on eMMC because they also need to train their R&D and continue.

But as you know when solution is down, your selling is down.

It's really a waste of time and money to redo it again.

So I think with eMMC, we continue 100% of Hynix market share.

For UFS 2, we will also sincerely wish Hynix can be successful.

But we also have very good UFS 2 solution ready in the first half of 2016 and support TLC and TLC 3D NAND.

So, I think we have pretty good opportunity to grow if UFS scale up to the market.

Charlie, let me add before we move on.

The bulk of the market still relates to eMMC.

The bulk of the market, the bulk of where Hynix is going to be targeting their embedded memory; it's still going to be related to eMMC progressing from eMMC 5.0 to 5.1 and so forth.

UFS is just targeting at the very high premium end of the market and for the next year or two, it's still going to be a very, very small part of the overall market.

Okay.

Thank you very much.

Anthony Stoss, Craig-Hallum.

First on the PCIe side, can you give us a sense of where you stand integration wise with your NAND flash partners, if you think you can hit the ground running pretty quickly to ramp in 2016 quickly?

And then secondly, Riyadh, the 128-gig on the SSD side at $60, when do you see that heading kind of sub $40 based on TLC?

And lastly, do any of your major competitors have any effective TLC support right now?

Thanks.

Regarding PCIe development, our first PCIe (inaudible).

We are receiving first silicon just a couple of weeks ago.

We are on track as we believe we will be moving to mass production by end of the 2015.

We have lined up with our major NAND partners to launch with their program progressively.

And we believe from 2016 we will have at least three major NAND makers lined up with our PCIe solution.

To your other question about pricing of SSD coming down and approaching parity with HAD.

We are still a little bit higher, but we are approaching that direction and part of it is coming from the greater use of TLC on a blended basis, but NAND flash prices have continued to come down and so there's a lot of interest from OEMs to use SSDs and that's why we are hearing a lot of interests also from the flash vendors to move in that direction.

And so a lot of them believe that by next year, half of all noble PCIe could very well be using SSDs.

Thank you.

Thank you.

There are no further questions on the line at this time.

I'll now like to hand the call back to Mr. Wallace Kou for management's closing remarks.

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 will be presenting at the Citi Corporate Day in Singapore and Hong Kong, Jefferies TMT Conference in Miami, B. Riley's Annual Investor Conference in LA, Morgan Stanley's GEM Conference in London, Ladenburg Investor Day in New York, Craig-Hallum Annual Investor Conference in Minneapolis.

In June we'll be presenting at Bank of America-Merrill Lynch Global Technology Conference in San Francisco, Citi Corporate Day in London.

In July we'll be presenting a Morgan Stanley GEM Conference in San Francisco.

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.

Have a pleasant evening.