慧榮科技 (SIMO) 2015 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Silicon Motion Technology Corporation Q3 2015 Earnings Conference Call.

This conference call 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 services, 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 industries and the effect of such pressures on prices, unpredictable changes in the technology, and the consumer demand for multimedia consumer electronics.

The state of any changes in our relationship with our major consumers and the changes in political, economic, legal, and social conditions in Taiwan.

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

We assume no obligation to update any forward-looking statements, which applies only as of date of this conference call.

I would now like to hand over the conference over to your speaker for today, Mr. Wallace Kou.

Thank you.

Please go ahead, sir.

Thank you, and good morning, everyone.

Welcome to Silicon Motion's third 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 highlights.

Riyadh will then discuss our third quarter financial results and provide our outlook, we will then conclude with Q&A.

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

For 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 is 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've 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 earnings call.

I'm pleased to be speaking with you again and report that our third quarter revenue increased by 9% sequentially to $95.4 million, a record high of Silicon Motion, and also specifically highlight that our revenue growth was led by robust sales of embedded storage products, which grew by about 25% sequentially, driven by the continuous building of our client SSD controller business, the rebound of our eMMC sales and addition of Shannon Systems.

Our client SSD controller sales alone grew over 40% sequentially.

We're well on our way to delivering the highest annual revenue in our corporate history with more strong growth to be expanding in the next few years as our SSD product scales further.

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

Let me first talk more of our client SSD controller business.

We are very pleased with the sales performance of this product.

By being rapidly developing market-leading technologies and winning business we saw highly customizable turnkey controller solution that are backed by (inaudible) customer support.

This year our sales of client SSD controller are tracking (inaudible) towards $60 million four times (inaudible) to be last year.

In the third quarter revenues on our client SSD controller grew by over 40% sequentially.

To give you a sense of how significant client SSD are becoming to our overall business.

Client SSD has scaled from roughly 10% of total sale in Q1 to 13% in Q2 to 20% in Q3, and very likely 25% of total sale in Q4.

Based on our pipeline of design win with our four NAND flash partners each of which we have multiple SSD projects.

We are confident our client SSD controller sales will scale a lot more next year.

We have been successful because we provide effective solution for our customers' need.

Our turnkey controller solution provides a module maker customer with a flexibility to utilize the latest generation NAND flash from any of their flash OEMs and quickly bring to market the most cost-effective client SSDs.

We're now the leading merchant supplier of client SSD controller to module makers, including most of the market leader in the US, Taiwan, and China, and we dominate this market.

We have also been providing in fact a client SSD controller solution to our NAND flash partners.

I will provide a few examples of our unique capabilities.

Earlier this year we provided Micron with our 2246EN controller, which power their highly successful and highly rated BX100 SSD, which was priced as an entry-level SSD, did deliver performance as good as most premium SSDs.

Also, early this year, we were the only merchant controller provider that enabled SanDisk to operate at high performance (inaudible) client SSD that does not require external DRAM cache, powered by our customized turnkey SM2246XT controllers.

Since early this year, we have been shipping in limited volume our SM2256 client SSD controller, the world's first turnkey solution for managing TLC NAND flash.

This controller supports Micron's new 15 nanometer TLC NAND and then we expect to sell those to OEM and module maker to beginning ramping in Q4 when Micron TLC flash become more widely available.

With SM2256, consumer and OEM will have more choices available to them.

Specifically, the choice to use low cost SSD and utilize lower cost TLC NAND without sacrificing performance.

We are able to lead a high-performance TLC-based SSD, because we can implement necessary LDPC Error-Correction Algorithm on both silicon hardware and controller firmware, a capability no other merchant controller vendor and very few flash makers have.

Today, we have been selling our client SSD controller to two NAND flash vendors.

We will begin initial sale of our client SSD controller to our third NAND flash partner in Q4.

The solution in that we will provide to our third NAND flash partner is also for managing TLC NAND.

We expect sale to our third NAND flash partner using the controller solution to scale materially beginning in Q1 2016.

Our first project with our (inaudible) partner will begin in the first half of next year coinciding with the timing and the availability of their own 3D TLC NAND flash.

Well, next year we remain on track to launch our new controller with multiple NAND flash partners for their PCIe NVMe client SSD using their new 3D NAND.

We expect initial sale to begin in the first half of 2016 and expect these sales to scale meaningfully throughout the next year.

NAND flash makers have already mapped out their SSD product roadmap for next year.

And we have secured the majority of these projects including multiple projects with each of our OEM partners.

We expect this new project and new customer engagement, which I have discussed, to drive material revenue contribution and (inaudible) client SSD controller sale grows for at least 50% in 2016.

We expect continued strong growth of SSD for the next few years.

(inaudible) grows on the sale of our notebook PC to half existing next year, and the desktop PC market remains largely untapped.

Let me now turn to our eMMC controllers.

Our eMMC controller business rebounded as expected in the third quarter, but we started shipping our controller to SK Hynix as many of the new eMMC design wins we secured last quarter entered mass production with smartphone OEM in China and elsewhere.

We believe the issue of (inaudible) inventory was smartphone in China seeing the start of this year has largely been resolved, and the China market will return to growth though at lower growth rate consistently with the replacement demand of mature markets.

Based on (inaudible) order by SK Hynix in Q4, we expect our eMMC controller sales to transition stably from Q3 to Q4.

So remarkably eMMC continues to evolve and we remain in the forefront of technological development.

In the first half this the year the market began transitioning on eMMC 4.5 to a factor eMMC 5.0.

Most of the eMMC controllers that we are shipping in Q3 are ready with eMMC 5.0.

In Q4 we're going to begin initial sales of our eMMC 5.1 controllers, which did have even faster performance with the PC SSD feature, such as command queue.

These improvements in eMMC performance have been designed to meet the embedded memory requirement of increasingly sophisticated high-end smartphone and tablets that handle complex multi-tasking, browsing, file transfers, HD video recording, gaming, and general computing.

Beginning in the second half of 2016, we will start shipping our USS2.0 controller to our flash partners.

Initially USS2.0 will be used by a small number of our premium flagship smartphones and tablets for a broader adoption is now expected in year 2017.

For more mature markets, smartphone OEM are focused on developing increasing sophisticated smartphone for consumer replacement and upgraded.

We're cost sensitive emerging market, on the other hand where the consumers are buying their first smartphone.

Smartphone OEMs are focused on meeting consumer affordability requirement and this includes the use of lower cost eMMC that utilize lower cost TLC NAND flash.

In Q4, we are beginning initial sales of our eMMC controller to SK Hynix for managing their 16 nanometer TLC flash.

Turning into Shannon Systems.

We completed our acquisition of Shannon, China, leading enterprise-grade PCIe SSD developer on July 1, and consolidated first quarter of Shannon financials, which has a few million dollars to our topline in the third quarter.

Shannon has already developed the base of over 100 customers ranging from the leading internet and e-commerce companies to utilities, telcos, and other state-owned enterprise and government agencies.

Most of our sales are small in scale, those sales to serve our customer could scale meaningfully over the next few years, including sale to (inaudible) China, leading e-commerce company.

Globally, we believe the market size for enterprise-grade PCIe SSD is currently, approximately, $1.5 billion to $2 billion, with China accounting for 10% to 15% of the world and China growing roughly 50% annually.

While on technology -- is globally competitive and can compete successfully with global leaders, we have deliberately limited our (inaudible) market to China because we want to limit potential conflict with our NAND flash partners.

Our sales in supporting the structure, the designs specifically, the Chinese market and with limited resources, China sale is sufficiently attractive market to (inaudible) a long-term growth for us.

We believe given our competitive business pipeline and market opportunity in growth, we should be able to grow our channel sales to at least $75 million in three year's time.

While Shannon is relatively small, their shares are high-end China enterprise-grade PCIe SSD market, primarily with two NAND flash makers.

We have demonstrated that we have the technological wherewithal and dedicated local technical support, infrastructure to hold our own ground.

We were the world's first to introduce an enterprise-grade 6.4 terabyte PCIe SSD, and to this day we lead (inaudible) latency, power consumption, storage capacity, and (inaudible) feature due to our unique architecture and design.

Many customers recognize the value we provide and have chosen Shannon as a key supplier.

Most of our customers on Chinese Internet, our e-commerce Company, utmost are using our PCIe SSD for managing (inaudible) performance of big data.

Exchange performance, usage case include mission critical, latency-sensitive transactional application, such as flash sales where transactions are subject to extreme irregular spikes and online content need to be continuously distributed to the large number of customers.

Big data use cases includes scale-up e-commerce (inaudible) operation, inventory management, customer fulfillment, and shipment tracking.

We're managing large volume data rapidly and without interruption being critical.

We believe our Shannon business platform is also an excellent opportunity for us to develop (inaudible) enterprise the controller solution, data we can subsequently bring all to our NAND flash partners, then to address other market opportunity.

Our flash partner remained highly supportive of our Shannon business.

Overall, we are pleased by significant progress that we have made with our client SSD controllers.

With a stability of eMMC controller sales and with the smooth addition of our Shannon enterprise SSD business, we are on target for 2015 to be a record year for Silicon Motion in terms of the highest revenue and we are building a strong foundation for sustaining our rapid growth in 2016 and beyond.

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

Thank you, Wallace.

First, I will outline our financial results for the third quarter and then provide our fourth quarter outlook.

In the third quarter revenue grew 9% sequentially to $95.4 million.

Our storage product sales increased 14% sequentially and accounted for 85% of total revenue.

Within our overall storage products, our embedded storage, our eMMC, client SSD, and industrial SSD controllers, plus our Ferri and Shannon products increased by 25% sequentially and accounted for well over 60% of our total revenue.

Sales of our expandable storage products, our card and USB flash drive controllers decreased by about 5% sequentially.

Our Specialty RF IC sales decreased 13% sequentially due to changes in our smartphone OEMs product plans.

Our third quarter gross margin increased to 51.6% in the third quarter from 51% in the prior quarter due to the increase in sales of our embedded storage products.

In the third quarter, our operating expenses increased to $25.8 million as compared to $22.9 million in the second quarter due to higher headcount, including those related to Shannon systems and higher R&D tape-out expenses.

We ended the third quarter with 945 employees, 93 more than at the end of the previous quarter, more than half of these new headcount came from Shannon.

The benefits of higher revenue and higher gross margin were offset by higher operating expenses.

So operating margin decreased to 24.5% from 24.8% in the previous quarter.

Operating profit, however, increased 8% sequentially in line with revenue growth.

We achieved quarterly net income of $20.1 million and earnings per ADS of $0.57.

Stock-based compensation in the third quarter was $3.4 million higher than $0.3 million in the second quarter due to lumpiness and timing of RSU awards.

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

Inventory days decreased to 99 days in the third quarter from 103 days in the second quarter.

DSO increased to 54 days in the third quarter from 48 days in the second quarter.

Stable days decreased to 40 days in the third quarter from 51 days in the second quarter.

Our cash, cash equivalent, and short-term investments decreased to $183.7 million in the third quarter from $201.6 million in the second quarter.

Primary source of the cash in the third quarter came from $20.1 million in net earnings.

Primary usage of cash in the third quarter included increase in accounts receivable required $6.4 million, decrease in accounts payable required $12.3 million, $2.3 million for purchase of additional operating facilities, $2.3 million of routine purchases of software and design tools, $20.8 million paid to former Shannon shareholders as part of acquisition purchase price payments, $5.2 million of quarterly dividend payments.

I will now turn to our guidance.

For the fourth quarter, we are expecting our sequential revenue growth to range from flat to 3% sequential increase.

Our eMMC controller sales to trend stably from the third quarter to fourth quarter.

Our client SSD controller sales scale and grow strongly, sequentially in the fourth quarter to a revenue level, almost as big as our eMMC controllers.

Shannon systems which contributed a few million dollars in the third quarter was doubled in the fourth quarter.

Our expandable storage controllers to decline sequentially in the teens in the fourth quarter.

Our specialty RF ICs to decline sequentially in the teens in the fourth quarter.

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

Operating expenses in the fourth quarter is expected to be $25 million to $27 million.

Stock-based compensation in the fourth quarter is expected to be $5 million to $6 million.

Our model tax rate remains at 18%.

We will now open the call for your questions.

Operator, please start with the Q&A.

Thank you, sir.

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

(Operator Instructions).

Mehdi Hosseini, SIG.

Yes.

Thanks for taking my question.

It's great to see the traction with client SSD, but looking to next year what is the confidence that the large number is not going to impact you.

How should we think about the sustainability of that particular line item.

And my second follow-up question has to do with increased consolidation and one of your key customers SanDisk has been acquired and how do you see the customer landscape changing especially looking into the second half of next year?

Thank you.

Regarding your first question, we believe the traction we're gaining this year will continue throughout the next year.

We'll grow our TLC base and doing the client SSD controller next year, as well as see that introduction was 3D NAND based SSD, using NAND controller begin scaling next year.

We'll be introducing our PCIe SSD controller early next year.

(inaudible) next generation controllers to also contribute meaningfully to the next year growth.

We expect to ramp results (inaudible) later this year and now force in the first half of next year with both contributing materially to the 2016 growth and beyond.

You can see we have ample new products and growth driver that will further add to our revenue growth and toward the end of next year.

We believe we can continue to grow at least 50% next year, but (inaudible) market growth rising in 2016.

Regarding your second question Western Digital acquisition of SanDisk.

We do not foresee any impact for our business as a result of Western Digital acquisition of SanDisk.

The demand for third-party merging controller remains strong and Western Digital does not possess any controller technology for client SSD or expandable storage.

So we still see a significant opportunity for us with the combined company.

Many believe that WD (inaudible) to grow its client SSD, mobile storage, and expandable storage business.

ARCUS engagement (inaudible) with SanDisk should remain unchanged.

Great.

If I may just -- quick clarification back to your SSD or client SSD commentary.

Is it fair to say that you are going to be -- you're going to focus on diversifying beyond the SATA and with PCIe starting to become material second half of next year, that diversification will help you to sustain the growth rate.

Is that fair?

Yes.

We believe currently we have sufficient SATA-based controller and (inaudible) pipeline to grow next year.

Although we might add one or two more SATA SSD controller with end-to-end protection.

The primary focus for next year will be PCIe.

Jaeson Schmidt, Lake Street Capital.

Hi, guys.

Thanks for taking my questions.

Wallace, just want to talk about your commentary regarding the Shannon Systems business and your expectation for that to grow to $75 million within a three-year time frame.

I think on the last call you suggested that Shannon would do about $16 million this year with a go forward growth rate of over 30%.

Would it be fair to say that your expectations, now that you've seen (inaudible) of Shannon a bit more, have increased since your last call?

Yes.

I think globally the size of enterprise-grade PCIe SSD market is approximately $1.5 million to $2 million.

In China, which has market and there we focus only as roughly 10% of the global market and growing about 50% a year.

And in Shannon, really have delivered a few million dollars with sales in Q3 which is almost double in Q4.

And quarterly sales this year have been quite lumpy.

But we believe we can realistically scale Shannon sale to at least $75 million in three year's time because from currencies and pipeline although the scale is still small, but -- we use the Tier 1 China e-commerce and internet and design wing, we believe the momentum in technology can carry us from today to really very large scale, three years from now.

Okay.

Great.

And then, wondering if you could comment a bit on what you're seeing in the pricing environment surrounding the eMMC business?

Can you clarify again, you're referring to the pricing of our eMMC controllers.

Is that what you're asking, just like to clarify?

Yes.

Correct.

Our ASPs for our eMMC over the last three, four years have been fairly stable and continues to be quite stable.

They've been trending around $0.50 for controller and continue to be at that level.

Daniel Amir, Ladenburg.

Thanks a lot.

I have a couple of questions.

First of all, follow-up on Shannon and your design win with a leading Chinese e-commerce company.

I mean, is this a trend basically to adopt Chinese SSD solutions and therefore Shannon is winning it, given that -- it's obviously a major customer, which would have interest from other SSD vendors outside the US in order to win that business, so is that really the background there and if so, is that, a continuing trend for a lot of Chinese cloud and e-commerce companies to use local SSD suppliers?

I think Daniel, in my personal opinion I think the -- for China leading e-commerce internet company, they are really and select the best-in-class product to feed their need.

So, I mean, they understand how to tailor their software and utilize the best solution.

Shannon winning e-commerce internet company by their leading technology, such as great technology around system level and low latency, low power and very unique structure for higher density.

However, I think there are some Chinese government-related business, which have (inaudible) to choose local supplier that has government and state-related business.

Chinese private company including Internet company also prepared buying from one of their own, for some private company provide locally developed and made product just as good as imported product.

They preferred the benefits of (inaudible) local technical support.

So that's why we've taken advantage for that as we believe Shannon can grow the business continually.

Okay.

And I guess the follow-up question on the eMMC side, as you transition from 4.5 to 5, now in terms of ramp and then UFS 2.0 next year.

I mean, does this change in terms of competitive positioning, I mean is it stronger or how would you define that transition in terms of potential growth rates for this category going forward?

We still do not see any meaningful emerging competition in the eMMC controller market.

We man the only meaningful supplier today.

I think we have a long and solid relation with the current customers and have helped them become very successful in the eMMC market and a solid number to suppliers.

We've been providing and will continue providing with high-performance, low-cost eMMC solution as well as low cost UFS controller solution.

That said Hynix does have their own internal development for UFS2.0 controller and have being marketing this for quite some time.

So, they also recognize we are emerging controller supply in the business, still remaining (inaudible).

I think the market of the UFS currently is very small and the number of the smartphone and tablet using can come down in one hand.

So immediate and large-scale business that we focus relate to the continued rollout of eMMC 5.0 transition to eMMC 5.1, and introduction of eMMC using TLC flash.

Long-term UFS will happen, we have already secured our UFS2.0 design win with our flash partners and anticipate launching this in second half 2016.

So leading position unchanged (inaudible) eMMC alternating UFS could believe we are only one meaningful merchant controller player in the market today.

Okay.

And final question is just on our RF IC, I mean, that business looks like it's down in Q4 again.

Is this an area that you're basically focusing into next year.

I mean, is this going to be anything meaningful in terms of revenues or is this just remaining to be I guess opportunistic in terms of your large customer if you get designed in or not?

Overall, mobile communication product line is actually doing a lot better this year than last year.

Unfortunately, our LTE is not a source of growth.

We've been seeing and benefiting instead from our mobile TV SoCs.

We become the market share leader in both Korea and Japan, but that said both Korea, Japan are mature markets, so you should not expect this sort of growth that we've been experiencing this year with our mobile communications product line to continue for the foreseeable future.

Our LTE sales, while not experiencing any growth over the last three years has been relatively stable.

Samsung sources their LTE transceivers from us and also internally for carrying with their internally developed LTE baseband.

Our transceivers are very competitive for certain criteria and are positioned for certain Samsung smartphone segments.

I think we will continue to look for additional channel for LTE product, if our LTE business does not meet our long-term growth and possibly the objective, we could be open to consider strategic options.

Suji De Silva, Topeka.

Hi, guys.

Congratulations on solid results here.

A couple of questions, first of all, I believe you said for 2016, the client SSD business would be about a 50% grower.

If you do the math on the fourth quarter, I think it's about $25 million of revs, the run rates $100 million versus $60 million this year.

So, am I missing something on the math there that's conservative or any thoughts there?

Thanks.

Numbers for this year, based on where we are tracking, as well as what we're expecting for the fourth quarter should add up to roughly $60 million what we've been saying and committed to its delivering.

And based on pipeline of businesses that we have already secured and planning to rollout -- continue rollout as well as I'd talked about quite in detail.

We're expecting to grow our client SSD revenue by 50%.

So we do $60 million this year, we'll do $90 million next year.

Okay.

And now the question is on eMMC into 2016 and ramping into UFS.

How would that play out at Hynix versus their in-house Link-A-Media Solution -- is that something that would be split with you guys or UFS be a non-Hynix opportunity, just curious, any color there?

Thank you.

We cannot comment the detail regarding how to partition the business, but as you know every NAND maker has limited internal resource, and UFS for Samsung mobile spec with other Tier 1 android-based smartphone spec-- they're different.

So, I think we're based on normally NAND maker 10 to develop high-end, high performance Tier 3 till then and we will focus on TLC NAND, so this is roughly the way we serve for each market sector to grow the business together.

Mike Burton, Brean Capital.

Hi, guys.

Thanks for taking my questions.

Riyadh, just, early to talk about Q1, but given the changing mix of business as you ramped in client and enterprise SSDs, hoping you can share your thoughts on how we should be thinking about seasonality for Q1 in next year?

For seasonality, your question is seasonality, unfortunately there is no consistent quarterly seasonality pattern for our consolidated sales.

Our quarterly sales now embed many different trends -- that's our rapidly scaling client SSD controllers, our stable eMMC controller sales, the new addition of our Shannon business, which is quite lumpy quarter-to-quarter and our mature and declining expandable storage sales.

These trends could change when our client SSD sales become more scaled out in a few years' time and when Shannon also reaches a larger-scale operation or diversified set of customers.

So, unfortunately I cannot give you more color about our seasonality because we no longer have a consistent quarterly seasonality pattern.

Fair enough.

Can you talk a little bit about the competitive environment.

We saw Micron by title and then some reports that MediaTek and Huawei are planning on entering the market.

Any thoughts about potential competitive threats for eMMC client or enterprise SSDs?

We believe that Micron acquisition is to strengthen the enterprise SSD product roadmap.

We are primarily engaged with Micron for their client SSD business.

So there is no impact and no change to our client SSD controller engagement with Micron.

I think our relation remains tight, we see more and more project on (inaudible).

Let me also add, we do not see any meaningful competitors outside of Marvell in the client SSD controller market, that is the one company that we see in many situations.

There are potentially others who may want to come in, but we have not seen any meaningful entrants coming into our space.

Okay.

So to confirm, we haven't seen anything from MediaTek and Huawei.

And then also on Marvell, there's been some talk about them rolling out 28 nanometer controllers in Q4.

Have you heard the same from your customers and if so, is that affecting pricing at all this quarter?

Thanks, again.

Rajvindra Gill, Needham & Company.

I was just wondering if you could help maybe characterize how the two current client SSD partners, where they are, what innings in their ramp and how we should expect a similar magnitude in timing with the one coming on in Q3 -- Q4, and then early next year?

Thank you.

So as we said, we have engaged with four NAND flash partners, two are in production today, one is Micron, the other is SanDisk, there are multiple projects.

The third NAND flash partner will enter production in Q4 this year and materialize in Q1 2016.

The fourth NAND partner with a focus in 3D NAND will move to production in the first half of 2016 and ramping in second half 2016.

Okay.

Thank you.

And then I was hoping could you maybe characterize how eMMC sales is tracked around the quarter, because we've kind of seen some conflicting data points and the China handset market from other semiconductor peers, so it'd be helpful to see what you're seeing.

Thank you, and congratulations on the progress.

Let me start with our own eMMC controller sales quarter-by-quarter.

Our eMMC controller sales in the first quarter and second quarter growth was fairly flat in Q1 and Q2, and an increase modestly in Q3 up in the 10% to 15% type of sequential growth range -- growth level.

And going into -- going from Q3 to Q4, we should -- our sale should trend stably over the Q4.

Charlie Chan - Morgan Stanley

Thanks for taking my question.

So, first of all you are introducing a new SSD controller IC product like our TLC controller and also PCIe SSD controller.

So how are these new products going to affect your ASP trends, is it going to trend higher next year?

I think for PCIe controller, our high-end ASP is going to be higher.

However, most of our customers including NAND maker, they expect (inaudible) for the mainstream PCIe, should be the same, probably as SATA controller.

So I think the average, speaking, we think our controller SSD will be a little higher, all flat compared with 2015 -- at around $5 range.

Okay.

Thank you.

And will you do any (inaudible) migration for your controller IC, where -- now you see the 55 nanometer or 40 nanometer and when they're going to move to next generation and what does that mean to your gross margin trend?

So, we expect to begin manufacturing our 28 nanometer controller next year, about three major new controllers but currently -- our current 40 nanometer and 55 nanometer controllers already very competitive in terms of cost, power consumption, and performance.

And also to your question Charlie about gross margins, you should expect our client SSD gross margin to continue to be quite stable and continue to be above our corporate gross margin levels.

Okay.

Thank you.

Yes.

And if I may, there seems to be some delay for your fourth flash OEM customer in SSD sales.

Any reason behind that and what is the visibility there?

Our fourth NAND flash partner, the timing was that -- it's more related to the timing of their new NAND rollout.

So, the timing of when we're going to be rolling out our product is going to tie quite closely with when they are able to bring their positive market.

I see.

Yes.

And lastly, if I may so I guess Shannon Systems is going to be a big part of your revenue in the coming three years.

So overall, what you would think this business is going to impact your gross margin and operating margin.

Is that going to be (inaudible)?

The way we're looking at Shannon, is this is the acquisition that we are doing because it will not impact our gross margin profile.

We are business that has a 50% gross margin target.

This is our gross margin profile, and we do not expect Shannon to affect our -- this sort of profile.

Okay.

Got it.

Thank you very much.

Thank you.

Tom Sepenzis, Northland.

Hi.

Thank you.

I'm just wondering, as you introduced the UFS two products in the second half of next year, how should we be thinking about ASPs and margins relative to your eMMC product?

ASPs for our UFS will be similar to all of our other eMMC related embedded memory controllers.

So you should expect our average selling price for our eMMC, UFS the broader grouping to be constant to -- similar to what we've been experiencing.

So roughly $0.50, we've been at $0.50 level for the last 3, 4 years and you should expect that to continue through foreseeable future.

And in terms of gross margin, our gross margin for our eMMC, UFS should continue to be quite stable and continue to remain above our corporate average gross margin.

Thank you.

And did you mention that you had one or multiple partners there?

Multiple partners.

Great.

Thank you very much.

Mike Crawford - B. Riley.

Thank you.

Regarding Shannon Systems, you paid $21 million of cash during the quarter for that acquisition, believe it was a $57.5 million acquisition depending on some contingency payments.

Could you just walk through what remains to -- what the obligation remains there?

Okay.

It's kind of complicated.

So I'll try to explain, take you through the numbers.

Our final purchase price of Shannon was $55.6 million, a little lower than our original announced $57.5 million.

The difference is how some of the numbers are accounted for difference being -- that different amount is now accounted as compensation expense, which is going to be amortized over three years.

So the final purchase price is $55.6 million of which we paid $51.6 million at the close, at the closing on July 1. $40.4 million was in cash and $11.2 million was in stock.

Our net cash payment was $20.8 million since we netted off $5.4 million bridge loans, which we had provided to the Shannon shareholders in Q2.

We've also withheld part of the cash or anticipated tax payment.

And there are other NAV and other transaction related adjustments.

We will be releasing the withheld cash for the shareholders to pay their transaction related taxes shortly, any excess will be returned to the selling shareholders.

Also note that the two co-founders who had owned 42% of Shannon received half of their payment in cash and half in stock.

The co-founders are now part of our executive team and the stock component of their payment is subject to a 5-year lockup.

Okay.

Thank you.

And then also a separate question related to your Ferri branded industrial storage product, so those -- you account for those as part of your embedded memory solutions, but not totally separate from your client SSD controllers, is that correct?

That's correct.

Our Ferri storage solutions are part of our embedded storage product line.

They are not part of our client SSD controllers, that's correct.

Right.

And the Ferri business is growing maybe single-digit from around $15 million level or what's the level of that business today?

It's growing roughly 10% to 20% annually.

And is around how much?

It is -- our Ferri and industrial SSDs account for the balance between our eMMC plus our client SSDs and the difference between that and our total embedded storage product is our Ferri and industrial SSD revenue.

(Operator Instructions) Monika Garg, Pacific Crest.

Hi.

Thanks for taking my question.

First on the Shannon, you've talked about ramping to $75 million over the three-year period.

Could you maybe talk about the linearity, how you see reaching that level from current levels?

It's hard to say or predict exactly how it's going to scale.

We have a lot of businesses, we have a lot of customers, as well as I previously mentioned, we have over a 100 customers that we are already servicing right now.

Most of our sales to the customers, however, are quite small, but we are anticipating that a few of our customers are going to be scaling quite big.

I cannot give you a better clarity in terms of how linear it's going to be or how not linear it's going to be, but we -- what we had is a sales pattern on a quarterly basis that has been quite lumpy.

So, potentially it could be quite lumpy as part of our roads getting to a $75 million annual revenue in three years' time.

And let me add some comment.

We mentioned our Shannon Systems has won China's number one Internet company design win by seeing the design pipeline, and we can see in the next few years, it could be our major customer in the future.

So I think we still have the confidence, we found design pipeline in some customer base and product transition, we have the confidence to reach the financial goal in three years.

Thanks.

Then given the way client SSD revenues ramping and the Shannon System is ramping, do you think your margins could be higher than 51 points, gross margin?

Our gross margin profile has been quite stable since we've been a public company around 50% gross margin level, certain year's a little bit below, certain year's a little bit higher.

We are currently a little higher, and we've been benefiting from -- or higher mix of higher gross margin products, especially from our embedded storage product lines, but at the same time, this is giving us the opportunity to blend it down by being more aggressive with our expandable storage products, which have lower gross margin.

The expandables being the card and some dry part of our business.

Got it.

Then you talked about ramping one 3D NAND solution, first half next year with one of the flash OEM partners.

When do you think other OEM flash partners -- other from last OEM partners will ramp 3D NAND solutions with you?

Our new projects in 2016 will be all based on 3D NAND.

Some would be 3D MLC NAND, some will be 3D TLC NAND.

But 2016 new project will be all use 3D NAND -- with much more projects.

Got it.

With all the four flash OEMs?

Yes.

Okay.

Thanks.

Then just one more on the client controller side, maybe can you talk about most of the solutions this year on client controller.

How much of them are on MLCs, and how much of that is on TLC.

And how do you see the mix shift next year?

So regarding our client SSD controller, in the first half of 2015, almost majority of module maker all use MLC.

In the second half of 2015, because of supply tightness and the price competition, I've seen portion of our module maker transition to three TLC base.

And for our NAND OEM partner and some who adopt -- MLC, some of you will adopt with TLC, as we said.

The third OEM will start to ship with the TLC.

However, our second OEM is Micron, they also start to run with 16 nanometer TLC in Q3.

So for next year majority NAND, major OEM for new project will transition into 3D NAND.

Got it.

Thank you.

Then -- what is the NAND supply situation you see as all the NAND vendors move towards 3D NAND.

Do you think you could see tightness in the market or you think NAND is quite available in the market over the next three to nine months?

We see all NAND makers, they're very aggressively trying to ramp up the 3D NAND.

However, the manufacturer is challenging and all the capital increment stopping, they need a learning curve.

So we see second half of 2016, 3D NAND will contribute a meaningful percentage for the NAND industry.

Got it.

And then just last one for me.

Would you ever think about entering the enterprise controller SSD market?

So currently, we focus on basically Silicon Motion -- we focus on client SSD controller development.

However, our customers especially NAND OEM customer, they might use our client controller-based solution with modification of firmware using an enterprise low-end SSD searching the work station, PC servers and data center.

So in their side they call it enterprise SSD, but to us, it's client SSD controller.

In the long-run, we will provide a broader base of controller also used for Shannon to grow, expand their product portfolio.

We are exploring this (inaudible) SSD controller and for solution.

So, I think our main focus with client SSD, because of unit growth, as they also use the same solution for low-end enterprise storage solution.

Got it.

Thank you so much.

Let me also add, our Shannon business is providing us with an ability to develop controllers and field test them in real life working competitive environment and these controllers that we're developing for Shannon potentially we could also provide to our NAND flash vendors.

We can provide them with battle-tested enterprise grade controllers for the very high-end.

Got it.

Thank you so much.

There are no further questions at this time, I would like to hand over the call back to Mr. Wallace Kou.

Thank you.

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

We will be at the following conference this quarter.

In November, we'll be presenting at the Bernstein Technology Innovation Summit in San Francisco.

Wells Fargo, TMT Conference in New York, RBC Capital Market Technology Conference in New York, JPMorgan Conference in Hong Kong.

UBS Global Technology Conference in San Francisco, Morgan Stanley Conference in Singapore.

In December, we will be presenting at the (inaudible) US Tech Conference in Phoenix.

Jefferies and Bank of New York ADR Conference in New York, Wedbush Technology and Consumer Conference in LA, details of these events are there available in our website.

Thank you and goodbye for now.

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

Thank you all for participating, and you may all disconnect.