慧榮科技 (SIMO) 2015 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the fourth-quarter Silicon Motion Technology Corporation Q4 2015 earnings conference call.

(Operator Instructions)

Before we begin today's conference I have been asked to read the following forward-looking statements.

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 all future results of operations, financial condition and business prospects.

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

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

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

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

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

I would not like to hand the presentations over to our host Mr. Jason Tsai, Senior Director of Investor Relations and Strategy.

Please proceed.

Thank you and good morning everyone.

Welcome to Silicon Motion's fourth-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 the recent business develop months.

Riyadh will then discuss our fourth-quarter financial results and provide our outlook.

We will then conclude with Q&A.

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

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

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

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

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

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

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

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 share with you the result of our strong quarterly and full-year performance.

Silicon Motion 2015 full-year revenue and EPS are the highest in our corporate history.

Also in the fourth quarter we (inaudible) weakness to deliver both growth and record quarterly revenue.

And just as important, we exited 2015 with the momentum of a strong pipeline of business activities and expect 2016 to be another strong year.

As the world leading NAND flash controller Company we are a key enabler and beneficiary of the increasingly widespread use of solid-state storage solutions, embedded in devices used in environments that range from mobile to computing, industrial and hyperscale.

We have steadily expanded into each one of these markets and build leadership positions.

We are the merchant market leader in eMMC for smart phone, device and tablets.

We are also the merchant market leader in SSD used in PC and other client devices.

Recently we have also started shipping high performance enterprise (inaudible) for data centers.

All of these products address the need for important long-term growth markets.

Already we supply more NAND flash controller IC than any other company in the world.

From 2010 to 2015 over this five-year period we have grown our revenue at a 22% compounded rate, annual growth rate.

During this same period of time our EPS has also grown at a 38% compounded annual growth rate.

For full-year 2015 our revenue grew 25%.

Our growth was largely driven by our embedded storage product which grew almost 30% in 2015 and addresses the growing demand of solid-state storage devices using the proliferation of applications.

Our (inaudible) embedded storage product include eMMC and client SSD controllers as well as (inaudible) SSD and Shannon Enterprise D solutions.

Our embedded storage products accounted for nearly 60% of our overall 2015 sales, up from about half of total sales in 2014.

We believe that the significance of our embedded storage business will likely increase to over 70% of our total sales in 2016.

Riyadh will discuss financial and guidance in greater detail later in the call.

Let me now talk about our key products starting with our client SSD controllers.

In 2015 our client SSD controllers sales increased by roughly 4 times to over $60 million and was our most important revenue growth driver in 2015.

Revenue growth of our client SSD controller has made this product line our second-largest after eMMC controllers.

In the fourth quarter, sales of our client SSD increased by nearly 20% sequentially and accounted for nearly a quarter of our total sales, up from about 20% in the previous quarter.

As a result of our rapid client SSD sales growth TrendForce, the memory industry market research company, believes that by the second half of 2015 Silicon Motion has become the world's largest merchant supplier of client SSD controllers.

We believe our client SSD market share will likely increase further in 2016 as we continue to rapidly grow sales from over $60 million to more than $90 million and client SSD will remain our most important growth driver.

Accommodating strong continued client SSD sales growth it is a result of multiple SSD platform wins as several [OEM] customers.

Further using our differentiated technologies and our configurable turnkey SSD controller strategy we have communicated in the past that we have been shipping client SSD controllers to Micron and SanDisk since the first quarter of 2015.

We started shipping client SSD controllers to our served flash partners in the fourth quarter.

And while sales in the fourth quarter were very small we expect sales to our served flash partners to become much more meaningful in the first quarter.

We have multiple programs wins in all three of our four flash partners and expect sales to each partner to scale further in 2016.

We remain on track to start initial sales of our client SSD controllers to our first flash partner around May 2016.

In 2015 we helped Micron successfully bring premium [performing] client SSD at affordable pricing to market and bringing their new 16 nanometer TLC flash into production specifically for client SSD.

In 2015 we also successfully helped SanDisk bring to market [performance] competitive client SSD that will not require expensive derisk.

Starting in the fourth quarter we started initial sales of our controller to our served flash partners for their client SSD that are using lower-cost TLC flash.

Many of our 2015 business programs will continue into 2016 including refresh programs.

In the first half of 2016 we will have several new client SSD programs that will enter production and most of these involved 3D NAND, flash and PCIe (inaudible) solutions.

We believe the market for client SSD will continue to grow rapidly with increasing adoption of SSD by PC OEMs.

And we have been benefiting from this trend.

We have also been benefiting from our NAND flash partners client SSD market share gain and are delighted to have played a helpful role.

The majority of our customers' client SSD sales in 2015 were for the channel market which has been growing robustly on retail sales to individual consumers and from commercial sales to system integrators, corporate and data center operators.

In 2015 our customers also started selling their client SSD with our controller to PC OEMs.

As of today four out of the top five PC OEMs are already shipping PCs with SSD using our controllers.

In 2016 we believe the majority of our incremental client SSD controller sales will be for PC OEM market.

We believe the adoption of SSD by PC OEMs will accelerate even when the price of 256 gigabytes SSD coverage more closely with HDD.

And this will likely happen in the second half of 2016 with SSD using 48 stack TLC 3D NAND flash become a variable.

We are well-positioned as the market-leading merchant client SSD controller supplier and we look forward to growing sales even more in 2016.

Our highly configurable hardware plus firmware turnkey controller solution is unique in the marketplace.

We're the only merchant controller vendor with the necessary hardware plus firmware technologies qualified to supply to the NAND flash vendors and able to meet their very demanding high performance and high quality requirements.

With each generation of our controller our solution and technology are getting better and better, the track record more extensive and our leadership should likely extend even further.

Let me now turn to our eMMC controllers.

As expected demand for eMMC controller in the fourth quarter remained stable compared with the third quarter.

This led to modest full-year eMMC growth largely in line with the muted industry smartphone build rate growth.

As many of you know, China smartphone OEMs builds excessive number of smartphones at the end of 2014.

These OEMs and their channel partners spend the first half of 2015 working off the excess smartphone inventory in China.

And as a result smartphone building rate and the demand for eMMC were low and lower than what we had originally expected.

We believe this excess inventory issue was largely resolved by the third quarter of 2015 and demand for eMMC in the second half of 2015 returned to more normalized levels.

In 2016 based on our flash partners business plans we should be able to grow our eMMC controller sales at least in line with global smartphone growth rate of 5% to 10%.

In the second half of 2015 we started transitioning most of our eMMC controller sales to eMMC 5.0 and 5.1.

And some of these controllers are supporting low-cost TLC flash.

We expect this trend to continue in 2016.

Globally, the majority of the new demand and replacement demand for smartphones will continue to be for mainstream and low-cost devices.

These devices primarily use cost-effective eMCP solutions.

Embedded memory solutions that are packaged together mobile DRAM with NAND flash.

We believe the sales of eMCP is an important priority focus of SK Hynix.

This play to their [leadership] both DRAM and NAND.

Our eMMC controllers are designed specifically of supporting SK Hynix for meeting this priority.

For our USS 2.0 controllers we have design wins with at least one NAND flash partner and are tracking to begin commercial sales in the second half of 2016.

We believe sales of smartphones using USS 2.0 will remain small throughout 2016.

So do not anticipate large sales of our USS 2.0 controllers this year.

However, our USS 2.0 controllers are designed to be high performance and very cost effective, two important criteria necessary for driving broad adoption of USS 2.0 by smartphone OEMs.

More widespread adoption of USS 2.0 in 2017 by smartphone OEMs should lead to much larger sales of our USS 2.0 controllers.

Let me now move on to update everyone on the progress of our Shannon Systems enterprise grade PCIe SSD business.

Sales of our PCIe SSD solution nearly doubled in the fourth quarter as we grew sales with customers, mostly China leading e-commerce companies.

Our meaningful e-commerce customers include online marketplace operators, flash sales specialists, travel agencies, restaurant review, group buying and (inaudible) ticketing, mobile security and the travel database.

China is already the largest Internet market in the world today and is one of the world's largest enterprise [SSD] markets.

Our enterprise SSD are highly specialized and focused on most differentiated end of the market, customizing the price of these solutions and government-related protected markets.

Our highly differentiated product include features that combine larger capacity, highest IOPS, lower latency, lower power and unparalleled performance ability.

We also provide customers that require customized solutions with extensive local R&D and rapid response, on the ground fuel engineering support.

Additionally, we benefit from China increasingly protectionist technology sourcing requirement that apply to government agencies and state-owned or controlled enterprises such as the telcos, utilities and financial institutions.

By focusing on these niche areas we limit potential conflict with our many flash partners who are both large customers of our controllers and who we rely on for supply of NAND flash components for our enterprise SSD.

Our enterprise SSD solution are being developed by our e-commerce customers to manage their hyperscale operations for online content distribution to business transactions, big data analysis, inventory management and tracking and shipping logistics.

We expect the market of high-end enterprise SSD in China to grow annually by at least 50% for the next few years and we are confident that we can match or exceed the market growth.

Based on rapid market growth and our current business development activity our enterprise SSD should be able to deliver $20 million to $30 million sales in 2016 and scale to $75 million by 2018.

Overall, we are pleased with the continued progress that we had been making across all our embedded storage products.

While the broader semiconductor market has been affected by challenging macroeconomic conditions we are fortunately to be focused on industry segment that have faced less headwinds.

In this industry growth segment we are building on our leadership position.

We will continue to expand our portfolio of growth products and Tier 1 OEM customers.

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

Thank you, Wallace.

First I will outline our financial results and then provide our guidance.

Our solid results for the fourth quarter provided us with a strong finish for the full year.

For the quarter we delivered $98 million of sales, up 3% sequentially at the high-end of our guidance and a record high.

For the full-year 2015 we delivered $361 million of sales, up 25% at the high-end of our initial guidance for the year and also a record high.

For the quarter our storage products grew 8% sequentially which is more than offsetting a 30% sequential decline at our specialty RF ICs.

Our RF IC sales which are now 9% of total sales decline due to mobile TV SoC customer project cancellations and consolidations.

While Korean domestic smartphone sales remain stable sales to Brazil and other markets have it retrenched.

Our RF IC sales were also affected by a winddown of an LTE transceiver program.

For the full year, our storage products grew 25% and our RF ICs grew 27% both contributing positively to our full-year 25% growth.

Our quarterly storage product sales growth was led by our embedded products which are comprised of our eMMC and SSD controllers plus our Shannon and Ferri storage solutions.

Sales of our embedded products grew almost 15% sequentially to account for about two-thirds of total revenue.

Sales of our expandable products, our card and USB flash drive controllers, were stable sequentially.

Our client SSD controllers grew 20% sequentially.

Our eMMC controllers were stable and enterprise SSDs nearly doubled.

For the full-year 2015, our storage product sales group 25%.

Embedded products grew almost 50% to account for about 60% of total revenue.

Expandable products declined 5% to 10%.

Our client SSDs grew from roughly $50 million in 2014 to over $60 million in 2016, slightly exceeding our original expectations.

Our eMMC controller sales grew modestly.

We benefited from six months of enterprise SSD consolidation with sales under $10 million.

Our corporate gross margin decreased to 50.1% in the fourth quarter from 51.6% in the prior quarter in line with our guidance.

This quarter our embedded storage gross margin continued to remain above corporate average.

Our expandable storage gross margin on the other hand remained below corporate average and dipped a bit as a result of segment product mix shifts.

Within our expandable products we were more successful defending our USB flash drive market position than SSD cards and grew our USB flash drive sales but these are our lowest gross margin products.

Compared to our eMMC and client SSD controllers we face many more competitors in the card and USB flash drive controller markets.

In the fourth quarter our operating expenses decreased to $25.3 million as compared to $25.8 million in the third quarter due to lower R&D expenses.

We ended the fourth quarter with 973 employees, 28 more than the end of the previous quarter.

Most of our new hires are R&D engineers.

Operating margin was 24.4% in the fourth quarter, a little lower than 24.5% in the third quarter.

We achieved quarterly net income of $19.7 million and earnings per ADS of $0.55.

For full-year 2015 we generated earnings per ADS of $2.11, 24% more than the prior year.

Stock-based compensation in the fourth quarter was $5.2 million, higher than the $3.4 million in the third quarter due to seasonal timing of RSU awards.

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

Inventory days decreased to 91 days in the fourth quarter from 99 days in the third quarter.

DSO is increased to 54 days in the fourth quarter from 51 days in the third quarter.

Payable days decreased to 34 days in the fourth quarter from 40 days in the third quarter.

Cash, cash equivalents and short-term investments increased to $185.2 million in the fourth quarter from $183.7 million in the third quarter.

Primary sources of cash in the fourth quarter came from $19.7 million in net earnings.

Primary sources of cash in the fourth quarter, uses of cash in the fourth quarter included increase in AR consumed $2.5 million, increase in AP consumed $8.7 million, $12 million for the purchase of additional operating facilities, $2.2 million for the routine purchases of software and design tools, $4.6 million paid on previously deferred Shannon acquisition payments, $5.2 million for quarterly dividend payments.

I will now turn to our guidance.

For the first quarter, we are expecting our sequential revenue growth of down 2.5% to up 2.5%.

We expect continued embedded storage sales growth to largely offset anticipated expandable storage seasonal weakness.

We expect sales of our eMMC and client SSD controllers to both grow in the first quarter.

Shannon Systems is expected to trend stably from the fourth quarter to the first quarter.

Sales of our expandable storage controllers and RF ICs are both expected to decline.

Gross margin in the first quarter is expected to be 49% to 51%.

Operating margin in the first quarter is expected to be in the (technical difficulty) to grow to $20 million to $30 million.

We expect our expandable storage controllers to decline about 10%.

This year while we will likely continue to have LTE sales given the poor visibility of our LTE transceiver sales we are not including projected LTE sales into a revenue guidance.

Without LTE sales our RF IC projections will decline this year.

Gross margin for 2016 is expected to be 49% to 51%.

Operating margin four 2016 is expected to be in the range of 23% to 25%.

Stock-based compensation for 2016 is expected to be $13 million to $15 million.

Our modeled tax rate remains at 18%.

We will now open the call for your questions.

(Operator Instructions) Monika Garg, Pacific Crest Securities.

Thanks for taking my question.

When do you expect to ramp revenue from 3D NAND controllers?

We expect to ramp 3D controllers from late second quarter of 2016 this year.

Okay.

Thanks.

Then you were expecting eMMC to show 5% to 10% growth, now kind of we are hearing China slowing down and emerging market slowing down.

Do you see any risk to that growth?

We are seeing the Chinese domestic smartphone market become saturated which is leading to decelerating growth in demand.

However, we are also seeing strong demand from other emerging markets including India, Southeast Asia and Latin America and these regions together represent a market opportunity even larger than what we've seen in China over the last few years.

These markets are primarily being supplied by Chinese OEMs so the demand for our eMMC solutions particularly for the low end to mainstream smartphones continue to remain quite robust.

We are also seeing increased adoption of eMCP embedded memory solutions for low-end smartphones displacing the raw NAND currently being used, adding additional opportunities for our embedded business.

Nearly half of the world's mobilephone users today are still using feature phones and have not yet converted over to smartphones, so the market opportunity to supply this market will represent several more years of modest unit growth for the market.

As our business model is based upon unit volume growth and not on increasing dollar content or adoption of high-end smartphones we expect to continue to grow consistently and stably despite the challenging smartphone market dynamics and volatility.

Thanks.

Just a last one.

On the client SSD side, could you maybe remind us like how much was the mix of two bit per sale and three bit last year and how do you see that changing this year?

We believe the majority of our client SSD controller shipping seen last year first three quarters MLC-based.

The start from late Q3 we're moving (inaudible) with TLC.

For Q4 the TLC base will be around 25%.

But with growing demand from a major OEMs and NAND procurement and business demand lower cost SSD with a stronger demand for TLC SSD in 2016 we believe in the entire 2016 the TLC based SSD will be more than 50%.

Thank you so much.

Mike Burton, Brean Capital.

Hey guys, congrats on another great quarter and guidance.

Really good progress across all fronts.

But in client SSD what do you believe your market share is now and your goal for market share and what do you expect the market growth to be this year versus the growth that you expected?

I think we have already won most of the client SSD controller program released by the NAND flash makers to merchant controller vendors.

We are already shipping to Micron and SanDisk as well as our third flash customer in the fourth quarter.

Our fourth flash partner remains on track to begin production in a year.

With all the flash customers already secure multiple client SSD program.

So we have confidence with the ongoing SSD shipments.

We believe in 2015 our market share for client SSD will be around 20% to 25%.

Our target long term will be toward 35% to 40%.

Thanks.

And then you're guiding for a better than seasonal March quarter, it looks like primarily related to the SSD ramp you have and some eMMC strength.

But given the rapidly changing mix for you guys, how should we be thinking of your seasonality going forward past the March quarter?

There are no consistent quality seasonal patterns for our consolidated sales.

Our quarterly sales embed many trends.

Our rapidly scaling client SSD controllers are more stable, eMMC controller sales growth, new addition of Shannon which has a rather lumpy quarterly seasonal pattern and the mature and declining expandable storage sales.

These trends could change when our client SSD controllers become more scaled out in a few years time and when Shannon reaches the larger scale with a more diversified set of customers.

Okay, and then last one for me, if you could talk a little bit on client SSD talk a little bit about the inventory situation you're seeing in that market and some other semiconductor companies actually describe some weakness in notebooks and SSDs in general.

You guys are obviously growing right through that but do you see any sort of inventory within the client SSD market right now?

Thanks.

We see the current inventory situation is low today in the channel on the OEM side.

We do not believe there are any inventory issues related to client SSD solutions or client SSD controllers.

Charlie Chan, Morgan Stanley.

Hi Wallace, Riyadh and Jaeson.

Congratulations for the solid results.

So my first question is the margin trend and the ASP trend for your SSD controller because you're adding several high-end products in your portfolio.

So how should we think about a blended ASP trend for the SSD controller and combined with your potential cost reduction by migrating to more advanced (inaudible) foundry, can we expect a margin extension for the SSD controller this year?

Product by product, part by part our gross margins are have been fairly stable and we believe will continue to be fairly stable.

By having higher gross margin products this is giving us an opportunity to blend it down by being more aggressive with products with lower gross margin such as our expandable products.

In our most recent quarter our gross margin decreased from the prior quarter's 51.6% to this quarter and this is Q4's 50.1%.

And this is the result of embedded storage gross margin continuing to be above corporate average and our expandable gross margin products also continuing to be below corporate average.

But these expandables have dipped a bit as a result of expandable product mix shifts.

Within our expandable storage products we have USB flash drives and card controllers.

Our USB flash drive sales increased in the most recent quarter whereas our card controllers decreased.

Our USB flash drive controllers are our lowest gross margin products and so by selling more of those products our gross margin for expandables have come down which has affected our gross margin for this quarter.

So my follow-up question is really on the removable card controller business.

Is it fair to say now it's a purely commodity and it is very hard to differentiate anymore?

Well I won't say the path to differentiating more is, I think we remain focused on high-end, more differentiated and more dependable solutions for expandable storage.

For example SDA now we are leading the position to launch higher random [iOS] performance of the card is the first time for the cardmaker tried to match embedded solution.

So this could create a potential growth in the future if you have a better technology because Google Android 6.0 and 7.0 require higher revenue performance.

So I think currently we see the market saturated and the price very competitive but as there will be opportunity for us to focus on high-end and (inaudible) solution to sustain our market share and potentially also stabilize our sales revenue.

Thanks, Wallace.

So my last question is on the RF IC business outlook.

So it seems like you're (inaudible) on the LTE transceiver is very low this year but I think this business is sort of captive business with your key customer.

So will your customer compensate your fixed cost, for example the fixed R&D cost, given your revenue likely to be very small for this year?

Yes, I think that we're not developing new LTE products in 2016.

However, we'll continue selling and engage business opportunity with Samsung and others LTE modem player.

So I think that we're not going to tape out new LTE products in 2016 but R&D because they can be used for other our product lines and XLT.

Charlie, let me just also add, as Wallace mentioned we've been working on a few other opportunities outside of Samsung and potentially also within Samsung.

But a lot of these projects are still early-stage and if they do become something more material we will be talking about them.

Okay, understood.

Thank you very much.

Anthony Stoss, Craig-Hallum.

Hi guys, nice execution in a week macro.

Two-part question.

Can you talk about maybe beyond just 2016 what you expect growth rate wise for Shannon Systems and how the gross margin might change over time on Shannon?

And I don't know if I missed this but if you would mind talking about your PCIe controller for 2016, the expected timeline of when you think the ramp will begin?

Thanks.

For Shannon Systems, we completed our acquisition middle of 2015.

So for 2015 we consolidate half-year sales.

Half-year sales equated to under $10 million of revenue.

For this year 2016 we expect Shannon to do about $20 million to $30 million.

And based on the business development activities that are taking place at Shannon we feel fairly comfortable that Shannon should be able to grow their revenue to about $75 million by 2018.

Regarding our PCIe product, we're engaged with two flash makers for PCIe [3 x 4 MA] solution.

We believe on current pipeline development process we believe the product will be ramped up in late Q2 or Q3 timeframe this year.

Let me also get back to you on your other question about gross margin.

We're not going to talk specifically about each one of our embedded products gross margin profile.

But what I can say is our overall embedded storage gross margin is above corporate average, part by part our gross margins have been fairly stable and we expect this trend to continue this way.

Tom Sepenzis, Northland Capital.

Yes, sorry, can you just talk about the emerging markets?

You mentioned a couple that I think it was Latin America, Southeast Asia and somewhere else that you were seeing growth and you expect that could actually be bigger than what you've seen in China over the last couple of years.

Did I hear that correctly?

I believe this relates to overall smartphone unit growth.

For this year 2016 we're expecting smartphone unit growth to grow somewhere in the 5% to 10% growth rate.

This I believe is fairly consistent with the forecast from other parties within the industry including QUALCOMM and others.

Market research firms, brokerages I think our forecasts are well within this range.

And this is based on the forecast of growing 5% to 10% includes both replacement demand from more developed markets as well as consumers buying their first smartphone from emerging markets.

Some of these emerging markets like India, Latin America and other markets are fairly large and we believe represents plenty of opportunity for modest rates of growth for the foreseeable future.

Great, thank you.

And a couple of other companies have mentioned on their quarterly calls here in the last week or two that they are starting to finally see some uptake of 4G in India.

I'm just curious as to whether you're seeing that as well?

We don't make smartphone so I think we're not best place to talk about that.

We make controllers for eMMC and India is a great opportunity for Hynix to be selling their phones, their controllers, their eMMC into that market.

A lot of the very low end smartphones in India and some other markets are using raw NAND and so by converting the usage for new models from raw NAND to eMCPs this represents upside opportunities for our business.

Great, thank you and congratulations on the quarter and the outlook.

Jaeson Schmidt, Lake Street Capital.

Hi guys, thanks particular questions.

Wondering if you could talk about how we should look at the industrial SSD business both this year and going forward?

The global industrial SSD business is growing and they cover from merchant promotion, multifunction printers, industrial PCs to automotive.

So we see the trend is growing.

However, currently the total volumes here relatively small compared with commercial consumer client SSD.

But industrial is the gross margin is better than the consumer commercial SSD.

So we think that in the next few years maybe they can grow scale to a certain level and that will have a more visible contribution to our sales revenue and net profit.

Okay.

And then looking at the client SSD market are you guys seeing any changes from a competitive landscape point?

So far I think we are the only merchant controller player with both hardware (inaudible) solution and qualified by NAND makers and PC OEMs.

And I think most of the NAND flash makers focus on their internal controller [controller resource and device] (inaudible) for high-end while mainstream high-volume and I think we can provide the total solution with a cost-effective solution and with high quality and good performance.

That's why I think we have a better economy of scale and we have very deep and broad flash management technology.

And our focus business is streamlined to focus specifically on providing [controller] solution well.

That's why I think currently we did not see any competitor threaten our market position.

All right.

Thanks a lot.

Suji Desilva, Topeka.

Hi guys, congratulations on a strong year of results here.

For the PC market, the OEM market, the SSD attach rate can you talk about where you think it is right now what you think it might grow to exiting 2016 whether that will ramp up or stay level?

Regarding the client SSD PC market we think in commercial product line we believe the adoption rate for SSD is about 50% in 2015.

The consumer line is just about 10% or less.

So I think going forward I think the adoption rate, the majority will come from commercial line and commercial notebook.

So I think we believe by the end of 2016 and I think it will be probably more than 60%, 70% will adopt SSD based on the price trend.

However, we also hear the feedback from NAND makers if (inaudible) [gigabyte SSD] the price will hit the $40 range there will be majority PC makers will [link through] to adopt SSD even for some desktop all consumer PC.

Great.

And then your relationship with SanDisk, I'm wondering if you see any impact in the pending SanDisk-Western Digital merger and not any thoughts on what that may do for that relationship either, positive opportunities or risks to that?

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

The demand for third-party merchant controller remains strong and Western Digital does not possess any controller technology or semiconductor technology for client SSD or expandable storage, so we still see it's an opportunity for us with the new combined Company.

Many believe that WD will rely on SanDisk to grow the client SSD and expandable storage business.

Our engagement and relationship with SanDisk should remain unchanged.

Great, and then my last question it's been a couple of quarters now since you acquired Shannon Systems.

I'm wondering your thoughts on further acquisitions, are there any product holes or whether you're still in the process of digesting Shannon before you do more activity?

Thoughts there would be helpful, thank you.

Shannon was a very exciting acquisition for us.

With Shannon we are now a leading vendor of enterprise SSDs to the Internet companies in China that service some of the world's largest Internet markets.

We continue to look at M&A opportunities but now that we've closed the acquisition our immediate priorities include integrating Shannon and helping them scale their revenue.

Great, thanks guys.

Mike Crawford, B. Riley & Company.

Thank you.

Riyadh, you talked about Shannon sales trending stably in Q1 which by that I think you mean flat, near $6 million for Q1.

But then if you just kept that rate flat through the year that's already the midpoint of the $20 million to $30 million guidance you gave for the year which doesn't -- is that you being conservative or is there something else potentially going on there?

The revenue for Shannon in Q1 should be fairly stable compared to Q4.

Shannon's revenue because of its more concentrated customer mix of large customers can be quite lumpy quarter after quarter.

For the full year we're expecting revenue in the $20 million to $30 million range.

Okay, thank you.

And then further regarding Shannon, you did pay another $4.6 million toward that acquisition in Q4.

I believe it might be $32 million still remaining to be paid and can you remind us well A, if that's accurate and then B, what the timeline might be for those payments?

Our final purchase price of Shannon was $55.6 million.

We paid $51.6 million at closing, at midyear $40.4 million was in cash and the remaining was in stock.

We then made -- but that payment of the $40 million was not paid completely at that point in time.

$4.6 million was deferred and for that amount we paid that at the end in the fourth quarter.

Great.

So that's done.

Then you also had this one-time facilities purchase in Q4 which you invested $12 million of cash.

And is that -- do you expect -- when's the next time you might have to do it more of an outsized CapEx investment beyond the lower maintenance levels we've seen?

The purchase of our facilities relates to the integrating our Shannon business with our operations, our other operations in Shanghai.

In order to drive synergies and work more efficiently and more cooperatively we've pulled our teams into one new location and so they purchase relates to operating facilities for our combined team.

Okay great, thanks.

And final question is on the client SSD trend.

How do you see your ASPs there today versus what it might be a year or two from now?

Our ASPs for all our products are fairly stable.

They've been very stable over the last many years and we believe will continue to be very stable over the coming period of time.

The products that we have long track records including expandable products they have been consistently around $0.25 for eMMC that we've been shipping since 2011, 2012.

They've consistently been about $0.50.

We have a shorter track record for our client SSDs and we believe that we've been shipping the ASPs have been around $5 and should remain at this level.

So let me add a comment is we moved to PCIe product they have been naturally will be higher than SATA controller.

So because PCIe in the much bigger die site so relative PCIe will be higher than SATA controller.

Great, thank you very much.

Rajvindra Gill, Needham & Company.

Hi, this is Josh in for Raji.

Thank you for taking my questions and congratulations on the continued results.

I just want to -- most of my questions have been asked already but I just want to clarify, did you say that the LTE business is not included in the fiscal year guidance or was there no growth included?

That's correct.

We have not baked in LTE, projected LTE revenue into our full-year guidance this year.

While we're expecting some amount of LTE revenue this year because of the poor visibility of this LTE revenue stream for purposes of providing guidance we have not baked in any LTE revenue assumptions into our full-year guidance.

Okay thank you.

And then regarding the 256 gigabit when do you expect that to cross that $40 threshold?

We believe when 3D TLC NAND hit the 48 or 64 stack and the 256 gigabyte SSD probably will hit the $40 range.

And this could happen as early as sometime late this year.

Okay, great.

And then just my last question I know in the past you've talked about maybe working with some customers on eMMC beyond SK Hynix.

Can you maybe talk about any progress you've made there?

Thank you.

Yes, we do have some others eMMC customers.

I think the -- we are emerging controller suppliers so we always explore business opportunity with many price flash partners.

So currently I think because highly (inaudible) they are almost 80% of eMMC controller business.

However, we do work with several other larger makers including one smartphone maker for eMMC solutions collaboration.

Okay, thank you and congratulations again.

Daniel Amir, Ladenburg.

Great, thanks a lot, thanks for squeezing me in.

So on the expandable storage part historically in the past few years this business has declined around low single digits.

You're now guiding this business to decline about 10% in 2016.

So what's changing there?

Is it you're walking away from business?

Has pricing gotten a lot worse?

What's the thought process around that business now?

Daniel, the market for expandable products, memory cards and USB flash drives, these are very mature markets.

And these are also markets that are in secular decline, have been in secular decline for a number of years.

We believe these trends will continue.

Last year, this is 2015, our expandable sales declined about 5% to 10%.

We believe this year probably will decline by a similar range, so for purposes of providing guidance we believe declined 10%.

Okay, 10% is a little different than 5%.

So it's more like 5% to 10% similar like it was in 2015?

Yes, that's right, that's right.

So final question just on the RF IC business, you're doing obviously extremely well in your SSD business growing markets.

What's really the rationale to continue to invest in this business?

It doesn't seem like there's many synergies with the other parts of the business.

You're now not really investing anymore in LTE.

Is the skillset of some of the engineers on the RF is different than the skillset that you need on the storage side?

And it seems like this business has become somewhat volatile at least on the mobile TV segment from quarter to quarter.

So it would be great to just get a little more clarity a bit on the strategy of this business segment given that it's still 7%, 8% of your revenues.

So Daniel as you know LTE RF alone you cannot sell it.

You need a LTE baseband modem partner together.

When we worked with Samsung five years ago they don't have our LTE RF.

Now they have their own internal solution.

So they buy natural they will try to prefer using internal solutions.

However, LTE is not just only used for smartphones.

They can use a very wide range of application including the car, tablets, and also M2M applications.

So I think we are working with Samsung and try to support, supply the area they don't have internal resources to do and we can still selling LTE to RF with the products.

By the same token China also has growing LTE baseband developers.

So we are also looking for opportunities how we can fit and collaborate to grow their LTE solution together.

So we are not using the R&D to develop a new LTE RF.

However, we are looking to expand potential solutions to continue to maintain LTE sales revenue.

You're correct, LTE RF engineers cannot do SSD firmware and hardware development.

But RF is really a very wide range and we do have some other new products which are not LTE but are related to the wireless area.

When this becomes mature and becomes more visible we will introduce it to all the analysts and shareholders.

Daniel, let me also add our FCI business did very, very well last year.

They grew well over 25% revenue growth.

We're, as Wallace mentioned we continue to look for additional channels for LTE products.

But the timing and visibility of these potential projects are uncertain.

And so as we've always said if our LTE business does not meet our long-term growth and profitability objectives we could be open to strategic options.

Okay, great.

Thanks a lot.

Thanks for clarification.

With that, Ladies and gentlemen, I would now like to turn the call back to Wallace Kou for closing remarks.

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

We will be at the following conference this quarter: in March we will be presenting at the Morgan Stanley 2016 TNT Conference in San Francisco, Northland Capital Market 2016 Growth Conference in New York, [Sukihana] Fifth Annual Semi-Storage and Tech Company in New York, UBS technology 101 Conference in 2016 in London, Merrill Lynch Conference in Taipei, Morgan Stanley Hong Kong Investor Summit in Hong Kong.

Details of these events will be available on our website.

Thank you and goodbye for now.

Thank you, ladies and gentlemen.

That concludes our conference for today.

You may now disconnect the line.