慧榮科技 (SIMO) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2016 Silicon Motion Technology Corp Earnings Conference Call.

My name is Amber and I will be your conference moderator for today.

(Operator Instructions)

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

This 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 conditions and business prospects.

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

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

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

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

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

I would now like to hand our presentation 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 first-quarter 2016 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 will 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 and 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.

I'm pleased to share with you the strong result of our first quarter.

Revenue increased 15% sequentially to $113 million, the highest quarterly revenue in our Company history, and now sales [accounts] every quarter of revenue growth.

Our embedded storage products, our eEMMC and SSD controllers and our enterprise and industrial SSD solutions grew 35% sequentially and account for 80% of total sales.

Our strong sales result in an EPS of $0.68 this quarter, also a record high for Silicon Motion.

Riyadh will discuss our financial in greater details later on the call.

Our first quarter revenue came in better than expected as a result of larger orders from our customers for client SSD controllers, eMMC controllers and our enterprise and industrial SSD solutions.

Our client SSD controller sale grew 35% sequentially.

Our eMMC controller sale grew 30% sequentially.

And our enterprise and industrial SSD sale grew 50% sequentially.

Orders for client SSD controllers this quarter was exceptionally strong, especially from our NAND flash partners.

Sale from our NAND flash partners more than doubled this quarter, driven by our DRAM solutions and our solution for managing TLC flash, all for client SSD that are primarily for PC OEM.

Our client SSD controllers are now used by our top five PC OEMs excluding Apple.

In addition to PC OEM our customers are now using our controller for client SSD that target non-mission critical datacenter storage and other channel makers including embedded applications.

This quarter we further extended our client SSD controller market share.

We have grown our market share as we scale our sales to our served flash partners.

And as our three flash partners gain market share at expense of incumbent client SSD market leaders, we have helped our flash partners gain market competitiveness through our unique solutions.

We have helped our flash partners significantly reduce their new product development cycle with a highly customizable hardware plus software turnkey controller solutions where our flash partners can commercially launch new SSD product almost at the same time as their introduction of new flash components.

This reduction in new product development cycle is important because flash makers are constantly introducing new generation of NAND components every nine months to 12 months.

And we help our flash partners capture the better economics available during the early part of the component lifecycles.

Silicon Motion is the only emerging controller vendor supplying our NAND flash partners customizable hardware plus software turnkey controller solution that can manage current MLC and TLC flash and upcoming 3D flash.

Our unique solution also includes controllers for DRAM-less client SSD and for client SSD using low cost TLC flash.

One of our flash partners has been rapidly growing their sales of DRAM-less SSD.

Silicon Motion is the only emerging controller supplier that can supply controller for SSD that do not require embedded DRAM and that can deliver performance competitive to SSD with DRAM.

SSD manufacturers have traditionally used DRAM for buffering within their products because DRAM data ray are faster than NAND.

Our solutions enable competitors' performance without the need for expensive DRAM components.

This year, NAND flash makers were aggressively introducing client SSD using TLC flash.

The dollar per gigabyte cost of TLC flash is much lower than MLC flash and the use of TLC flash bridges the current generation of SSD using MLC flash and the upcoming generation of SSD using even lower cost 3D flash.

PC OEM had in the past been unwilling to use SSD with TLC flash.

After the completion of extensive evaluation and verification testing PC OEMs are now willing to accept TLC flash.

The availability of cheaper SSD using TLC flash will further drive the adoption of SSD in the PC and the replacement of mechanical HDDs.

This year most of our client SSD controllers will be used for managing TLC flash.

Silicon Motion is the only emerging controller company supplying turnkey SSD solution managing TLC NAND to flash makers for PC OEMs.

We are on track for replacing our PCIe for -- releasing our PCIe NVMe client SSD controller midyear.

Our PCIe, NVMe SSD controllers which have previously secured design wins at several NAND flash partners recently began later-stage testing at two of our flash partners.

Our PCIe and NVMe controllers similar to our SATA III controller are also highly customizable hardware plus firmware SSD controller solutions.

You should expect us to bring to the market an expanding portfolio of cost competitors, high performing PCIe NVMe controller solution to our customer, initially targeting high-end and gaming PC, workstation and non-mission critical datacenter applications.

As we had highlighted in the past, most of our client SSD controller supply last year were managing MLC flash.

This year most of our client SSD controller supply will be for managing TLC flash.

Most of our new product introduction this year however will be for managing 3D flash.

We are seeing more and more commercial sampling of 3D flash by NAND Samsung flash makers.

We expect all six NAND flash makers to be supplying 3D flash by the end of this year and their 3D output will scale next year as their manufacturing processes become more mature and the yield improve.

Based on our pipeline of design wins and our flash partners' 3D flash roadmap, it is likely that a majority of our client SSD controllers next year will be for managing 3D flash.

We have been collaborating with all the flash vendors for nearly two years now developing custom-tailored proprietary controller technology to overcome the weakness of 3D NAND.

3D flash is very hard to manage and will get increasingly more difficult.

While current 3D flash endurance is better and has a faster data rise speed than planar flash.

3D data retention and error rate are much worse.

3D endurance is better than planar flash because the transistor gate for storing data have been designed at older, more robust 30-nanometer processors.

However, in 3D flash, the charge trapping layer are now isolated, but are sharing a string of cells, which introduce a path of current leakage which cause data retention loss.

The bigger issue with 3D flash is its higher noise interference issue resulting in more bit errors.

Planar flash regularly experience single cell bit data flip because of charge disturbance and noise interference issue.

Because our client use 3D flash instead of single cell bit-flip issues we have the bigger issue of having entire string of multiple string of cells that bit-flipped.

To manage the 3D error rate issue caused by multiple cell bit flip our controller run our very efficient proprietary hard decode and soft decode LDPC algorithm and also rate.

Our controller rate block data within a flash dye and cancel (inaudible) multiple flash dye within an SSD.

These are now issue that we need to manage for planar flash.

The 3D flash issues will get progressively worse as NAND flash maker increase their 3D layer count and shrink the size of their transistor gates.

Today through our advanced error correction algorithm and the proprietary controller technologies our flash partners are able to commercialize their 3D NAND sooner.

We use a cross-border range of product and bring to market more cost effective 3D SSD and embedded memory solutions faster.

Now let me turn to our eMMC controller business.

Sales of our eMMC controller grew strongly in the first quarter and will likely remain steady and stable for the rest of the year.

We expect that for the full year our eMMC controller sales growth will exceed global smartphone sales growth of 5% to 10%.

Sale of our eMMC controller grew rapidly as smartphone OEMs build activity pickup and our NAND flash partner aggressively pursue eMCP sales.

This quarter we benefited from Chinese smartphone OEM building low-cost 4G smartphones to supply local demand created by the government subsidizing consumer to trade up to 4G phones.

Also our flash partner has been targeting smartphone OEM, building ulta-low-cost smartphone for faster-growing global emerging market like India.

These ultra-low-cost smartphone previously primary used raw NAND for embedded storage.

More broadly our flash partner has been very aggressive in the eMCP market as likely gaining market share.

Because of the market segment that our flash partner is targeting, we are seeing strong sale of EMC 5.0 and 5.1 controller for mainstream phone and renewed strength of legacy EMC for the five controller sales for ultra-low-cost phones.

We currently have multiple UFS 2 program wing as our flash partner including UFS 2 supporting 3D flash, and they remain on track to begin mass production in some time in the second half of this year.

We should be ready to scale our UFS 2 sales in 2017 when UFS 2 is more widely adopted by smartphone OEM, both for high-end phones and mainstream phones.

Currently, UFS 2 only found in very high-end flagship smartphone and we expect this emphasis of flagship devices to continue through 2016 and to 2017.

Broader UFS 2 adoption by smartphone OEMs will be dependent on the availability of application processor supporting the standard and on UFS 2 cost competitiveness.

Currently UFS 2 is not only more expensive than EMC, but is now widely supported by the big AP vendors.

Qualcomm high-end chipsets support UFS 2, but their mainstream chipset are agnostic.

Mediatek and Spectrum do not support UFS 2 and will not until sometime next year.

Even Mediatek's new high-end 10-core Helio AP does not support UFS 2. Our UFS 2 controller is designed to be both high performance and also cost-effective, an important criteria to help encourage chipset supplier to transition support UFS 2.

Let me now move on to our enterprise and industrial SSD solutions which are our Shannon and Ferri products.

This quarter sale of this product grew 50% sequentially, as we started shipping in large volume over customized enterprise grade PCIe SSD solution to a leading Chinese ecommerce company.

Our Shannon SSD focus on providing customized solutions demand primarily by Chinese Internet companies and other enterprise for datacenter operating both private and public (inaudible 0:22:46.3).

Our Ferri SSD focuses on customized solution for many industrial applications with most of our business with big Japanese OEMs.

Demand for our specially tuned enterprise industrial SSD is very strong, and this year we expect the sale of this SSD solution to grow to be nearly as big as our expandable storage products, our legacy SD card and USB flash drive controllers.

Overall, we had an outstanding start for 2016.

You should expect our client SSD controller, our eMMC controller and our enterprise and industrial SSD solutions to drive our growth for the remainder of the year into next year.

You should also expect the value of our controller to continue to grow important with the 3D flash.

With the proliferation of devices using EMC and SSD and rapid build out of card-based storage using SSD, we are very excited about where our industrial is head to and our increasing value-added role.

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 strong 40% year-over-year growth in Q1 provided us with a head start to 2016.

For the quarter we delivered sales of $130 million, up 15% sequentially, much higher than guidance because of stronger-than-expected orders for our client SSD and eMMC controllers and enterprise and industrial SSD solutions.

For the quarter our mobile storage segment revenue grew 19% sequentially.

This market segment sales growth was led by our embedded storage products, which are composed of our eMMC and SSD controllers plus our Shannon and Ferri storage solutions.

Sales of our embedded storage products grew 35% sequentially to account for almost 80% of total revenue.

Within our embedded storage products our client SSD controllers grew 35% sequentially, our eMMC controllers grew 30% sequentially and our SSD solutions comprising enterprise and industrial SSDs grew 50% sequentially.

On the negative side our mobile communication segment sales declined 20% sequentially, primarily due to timing of orders for mobile TV SOCs.

Mobile communication sales now account for 6% of total sales.

Sales of our expandable storage products, our memory card and flash drive controllers, fell 30% due to typical Q1 seasonal weakness, but compounded by aggressive sales action of Taiwanese competitors.

Expandable storage sales now account for 10% to 15% of total sales.

Our corporate gross margin increased to 50.6% in Q1 from 50.1%, as the mix of our higher gross margin embedded storage products increased.

In Q1 our operating expenses increased to $26.8 million from $25.3 million in the previous quarter, primarily due to higher compensation expense related to higher headcount.

Our Q1 operating expense however was understated by $1 million to $2 million due to IC tape-outs previously planned for Q1 that have now been postponed to Q2.

As a result, our Q2 operating expense will be incrementally higher with addition of this $1 million to $2 million of delayed spending.

We ended Q1 with 1,025 employees, 52 more than at the end of the previous quarter.

Most of our new hires are R&D engineers.

Operating margin was 26.8% in Q1, significantly better than the 24.4% in the previous quarter, as a result of strong revenue growth, higher gross margins and smaller increase in operating expense.

In Q1 we achieved record quarterly net income of $24.3 million and earnings per ADS of $0.68.

Stock-based compensation in Q1 was $2 million, lower than the $5.2 million in the previous quarter due to seasonal timing of RSU awards.

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

Inventory days increased to 98 days in Q1 from 91 days in Q4.

DSO increased slightly to 55 days in Q1 from 54 days in Q4.

Payable days increased to 57 days in Q1 from 34 days in Q4.

Our cash, cash equivalent and short-term investments increased to $191 million in Q1 from $185.2 million in Q4.

Primary sources of cash in Q1 came from $24.3 million in net earnings, an increase in AP of $24.3 million.

Primary use of cash in the first quarter included an increase of $25.7 million in inventory, an increase in $18.3 million in accounts receivable, $2 million for the routine purchase of software and design tools, and $5.3 million for quarterly dividend payments.

I will now turn to our guidance.

For Q2 we are expecting sequential revenue growth of 5% to 10%, equivalent to year-over-year growth of 36% to 42%.

We expect client SSD controllers to grow strongly in Q2 as sales to our three flash partners scale further.

Given our strong continued growth momentum, we are increasing our client SSD controller sales guidance from our previous guidance of at least 50% growth for the full year and we are now expecting our client SSD controller sales to double for the full year.

We expect our eMMC controller sales to remain stable going into Q2 after the very large 30% sequential jump in Q1.

For the full year we believe our eMMC controller sales will very likely grow much faster in overall smartphone market growth as our flash partner aggressively expands its market presence.

We expect sales of SSD solutions, our enterprise and industrial SSDs, to grow strongly in Q2.

For the full year we expect sales of our SSD solutions to double to $50 million to $60 million as we scale our Shannon enterprise grade PCIe SSDs with Chinese Internet companies and our Ferri SSDs with Japanese OEMs.

We expect sales of our expandable storage controllers to remain stable going into Q2 and RFICs to rebound sequentially with new mobile TV SOC orders from OEMs.

For the full year our expandable storage controller sales should decline at least 10% and our RFIC sales should be stable.

Based on business activities planned for the second half of this year we believe sales should grow modestly in Q3 and decline seasonally in Q4.

Our sales later this year could potentially grow faster if we can resolve capacity constraints at our foundry partners.

And as of today we have no assurance capacity constraints can be resolved.

We expect Q2 gross margin to decline to 47% to 49%.

Our gross margin target for full year 2016 remains unchanged at 49% to 51%.

In Q2 our gross margin will temporarily dip due to a large multimillion dollar one-time customized SSD solution project where we are facing unfavorable accounting treatment.

For this project our customer will be supplying us with flash components.

But due to how this transaction is structured we will be recognizing these component costs as both part of revenue and cost of sales.

We are not making a profit on the components.

Excluding this one-time project, our second quarter gross margins would have been within our full-year gross margin range.

With negligible impact from this project in Q3 we expect our gross margins to recover in Q3 and remain stable in Q4.

And for the full year our gross margins should be in the 49% to 51% range.

Operating margin in Q2 is expected to decline to the 22% to 24% range from 26.8% in Q1 due to lower gross margin and higher operating expenses.

As previously mentioned, our Q2 operating expense will be higher than planned because of $1 million to $2 million IC tape-outs previously planned for Q1 now taking place in Q2.

For full-year 2016 we expect operating margin to be approximately 24% to 26%.

As comparison, our full year operating margin last year was 24%.

Stock-based compensation in Q2 is expected to be $0.5 million, lower than the $2 million in Q1 and the lower amount in Q2 is related to seasonal timing of RSU awards.

For full year 2016 our stock-based compensation should be approximately $14 million to $16 million.

Our modeled tax rate remains at 18%.

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) Mike Crawford, B. Riley & Company.

Are you working with Apple directly or through your flash partners?

No, unfortunately, we are not working with Apple.

I thought you said that you were (technical difficulty).

Non-Apple.

Excluding Apple, right, I see.

Our client SSD controllers to the five PC OEMs, non-Apple.

Non-Apple, got it, misheard you.

What about the -- what growth rate do you expect for client SSDs for the whole year?

Client SSDs, we are now expecting for the full year to double.

Previously, we were guiding for 50%, but based on the stronger momentum that we are seeing right now, we are now expecting our client SSD sales to double this year.

Okay.

And then your inventory jumped up almost $30 million in Q2, was that planned or what should we expect with inventory going forward?

We have slightly higher inventory levels and this is as a result of much faster sales that we are planning.

And so as related to the higher sales we also need to maintain slightly higher inventory levels that correlate with that.

Then last question is when do you think we'll see a drive hit the market with your SM2260 controller?

We're probably going to see commercialized in early Q3.

Mike Burton, Brean Capital, LLC.

And congrats on the very strong results.

So first let's -- you went in a little bit on the UFS side, but if you could help describe the competitive environment both within eMMC in UFS going forward and then from other merchant suppliers in the client SSD markets right now?

I think we continue to now see any meaningful emerging competition in the EMC controller market.

We meant only meaningful supplier today.

We do have a very long and solid relationship with Hynix and had helped them to become very successful in the eMMC market and the solid number two supplier.

And I'm seeing we are on track to bring our UFS 2 solution to market in the second half of the year, and our solution is expected to be better performing and more cost effective than any other solutions captured otherwise.

We believe our UFS 2 solution will move into mass production in the second half this year.

Great.

And then just following up on the competition in client SSD, what are you seeing from some of the other merchant suppliers there?

And then also you walked through -- thank you for walking through some of the dynamics for the 3D NAND controllers.

But what are you seeing from pricing, from a pricing standpoint relative to what you were seeing in 2D?

We are seeing new generation of flash coming to the market every nine months to 12 months.

Flash makers are increasing reliance for high-performance, cost-effective solutions that meet their time to market requirements.

For mainstream high volume client SSD we provide turnkey controller solutions at lower cost with better performance and much faster time to market than what a flash maker can do with internal resources.

So our nearest competitor has limited firmware expertise and has not been able to provide acceptable turnkey solution to the flash makers.

Flash makers will use their hardware only controller, need to tie up their own experienced engineers to develop firmware and cannot match our short development cycle time.

By providing a turnkey solution we are working more closely with flash makers and their PC OEM customers.

So we have better market intelligence, enabling us to develop solutions that are found around industrial trend.

And by understanding this trend and requirement by enabling customer to get a product to the market much faster and get qualified much more quickly at PC OEM.

So our flash partners focus on their internal resources or enterprise SSD solution where the product cycle is much longer, and see much higher and we become their extended R&D arm to provide the client SSD turnkey solution.

Let me also get to you on your question price difference between 2D and 3D SSD controllers.

Generally for our newer generations of controller solutions we get a price premium.

But for competitive reasons we are not going to go into the details of what that might be.

Anthony Stoss, Craig-Hallum Capital Group.

My congrats as well on the great execution.

Can you talk a little bit about, you mentioned you hired 52 employees since the last quarter.

Are any of those hired on to potentially go after new verticals?

I'd love to hear also your thoughts on going after new verticals this year.

And then secondly, if you won't mind commenting about what you expect the growth to be on Shannon Systems itself this year over last.

Then I'll follow-up after that.

Majority of our hiring focused on engineering R&D development.

I think the 60% will be in SSD and about 30% in eMMC and UFS.

And I think we really need more R&D resources to support the strong demands on OEM customers worldwide.

And we are also planning increasing the headcount for Shannon Systems to meet the strong demand in China market because several major projects really need dedicated resources to support them.

So I think we will continue to increase the headcount in R&D side, both in Shannon and our own SSD product line.

Tony, for your question about our expected growth for our Shannon business, more broadly, globally the size of the enterprise grade PCIe SSD market is approximately $1.5 billion to $2 billion.

And in China the market focus -- that we focus on, it's roughly at least 10% of global market and growing at least 50% a year.

China, as you know, has some of the largest Internet companies in the world and these companies are already established users of enterprise-grade PCIe SSDs on par with US Internet companies.

Chinese non-Internet corporates however are several years behind western companies in the use of SSDs.

More to your question, we expect sales of our enterprise and industrial SSDs to double this year to $50 million to $60 million.

Okay.

And then Riyadh, as a follow-up, you mentioned you had a one-time project that's going to impact gross margins for Q2.

Can you share with us or give us a general sense of the size of that?

And then secondly, you are launching with two flash partners in the middle of the year for your PCIe NVMe product also expected range just from that or those two customers in the second half of 2016?

Yes, for that project, it's for SSDs, it's a couple of million dollars of sales.

Okay.

And then the rev expected on the PCIe NVMe product for the second half of the year with the two flash makers?

We are on track for the two projects.

This year PCIe unit shipment is really low.

We don't think that will be the high volume this year.

Probably in 2017 we will continue to grow with PCIe.

Okay.

Great job.

Mehdi Hosseini, Susquehanna Financial Group/SIG.

A couple of follow-ups.

Can you help me understand how your customers would be required to redo their controller as they go from MLC to TLC?

And I asked the question because as the new third generation 3D NAND capacities come online next year there tends to be more of a TLC mix compared to MLC and I want to understand how that would impact your business?

And I have a follow-up.

Now, we mentioned in 2016 the main demand is floating gate TLC-based SSD because the costs are more attractive compared with MLC-based and so we see the entire year those channel as well as PC OEM will accept TLC-based value line of client SSD.

Although we also see the upcoming 3D NAND because the beginning of the 3D NAND will stay with 48 -- 32 stack or 48 stack TLC, and the cost structure is not comparable to floating gate 15 nanometer or 40 nanometer TLC.

So I think it takes about maybe some time to fine tune the process of yield, improve the cost structure when 3D NAND move to 64 stack as it will be more cost competitive.

And then I think the product transition will move to 3D NAND become mainstream.

Mehdi, let me also add, TLC Flash is a lot more difficult to manage than MLC Flash.

TLC endurance is lot weaker, number of times that you can write to the sales are a lot of more limited to MLC Flash, it's also a bit slower in program time and the air rates are also lot higher.

These are all issues that we need to address to our controllers.

And my second question has to do more with the longer term looking beyond 2016, how should we think about a scaling of a Shannon and scaling in terms of the required investment and how it would enable you to scale revenue?

Is there any way you can explain how much you have to invest and how we should think about the revenue growth opportunities beyond 2016?

I think today Shannon is in a very unique position, target for very high-end PCIe proprietary SSD product.

So that means their average density is 3.2 terabyte and 6.4 terabyte or even higher.

So it's a very premium line.

And in order to scale up Shannon, the total revenue, we not only need to expand broader customer base, we'll also need to expand the product line.

So I think we are also planning to move into the standard PCIe NVMe solution next year and to grow broader product offering to our customer in China.

Let me also add, previously we had mentioned that Shannon, we should easily scale that to a $75 million revenue in 2018 and that is still on track for us.

But we're -- for competitive reasons we're now bundling our Shannon business with our Ferri business, and as such, this year we should, the two combined, we should be able to do at least $50 million to $60 million of sales.

And this is a business that's expected to grow at least 50%, it has been growing 50% in the first quarter and should continue to grow solidly this year.

In terms of the overall operating expense required to grow our Shannon business, we're managing this as part of our overall operating expense infrastructure.

So this will fold into how we manage to maintain our operating margin and how we eventually over a longer period of time go towards our 30% operating margin target.

Tom Sepenzis, Northland Capital Markets.

Congratulation.

I think you mentioned that you were looking -- a couple of your suppliers are having capacity constraints, is that across all your products or just the client SSDs or how should we be thinking about that and when do you expect that to no longer be an issue?

I think, as you know, there were the earthquakes the foundries are seeing in February time period and so they are in the recovering, but it's not across all the product line.

It's specific in around the 40 nanometer geometry product.

We believe the tight capacity supply issue could be resolved in late Q3 timeframe.

But let me just add, this while we are expecting the capacity constraint to be resolved we would like the capacity constraint to be resolved.

Currently, we have no assurance that these capacity constraints can be resolved and so we still need to monitor the situation closely.

And then in terms of the huge eMMC growth during the quarter, you mentioned that part of that was your main customer seeing market share gains and the other was just a transition from ROM-based memory.

Can you give us some indication as to which was the greater source of that strength?

I think as a lot of people know, this year China government really pushing the carrier to subside the user consumer to upgrade from 3G smartphone to 4G smartphone.

So that really increase tremendous demand for eMMC solution.

In the other hand for ultra-low-cost smartphone in the past what's used is raw NAND for Spectrum and MTK platform solution.

Now they are transitioning to eMMC or eMCP solution thus increased demand.

So although the smartphone itself only grow about 5% to 10% we believe our eMMC, our eMCP controller will grow beyond that.

Suji DeSilva, Topeka Capital Markets.

I believe you mentioned an Internet customer, a large one you're engaged with, I'm wondering how many large China Internet customers you're working with at this point?

We are working couple of them.

This is one of the largest in China.

So I think that we thus need more resource and more product to serve all of this demand from the large-scale Internet, ecommerce company.

And you talked about being able to target on top of the PC OEMs, the datacenter non-critical hard drive conversion to solid state drive.

I'm wondering how big the chance for that is relative to the PC OEMs and where your shares are today and how that will grow.

For this year, as we said, it will be very small because the adoption rate for PCIe NMVe is still slow.

But we believe for 2017, the momentum will be stronger.

But you know Intel pushing very hard and to transitioning from SATA PCIe in the high-end, and we believe maybe later in 2017 or early 2018, PCIe might transition into the mainstream for client SSD.

And Wallace, last question.

I'd love to hear your thoughts on 3D cross point and the implications for your roadmap and the competitive landscape for 3D cross point, if that's meaningful, if that's something that's not as relevant to your growth opportunity.

We cannot comment for 3D cross point.

I think we could be part of it, but we cannot comment.

It's still very early days, Suji, for 3D cross point at this stage.

Congratulations again.

Rajvindra Gill, Needham & Company.

Wallace, a question on 3D NAND from a technological perspective, how the controller is different versus a 2D NAND in terms of complexity, in terms of error correction code, any thoughts around that realm will be helpful.

So from programming point of view 3D NAND is easier for controller.

However, I think the 3D NAND have better endurance more than 2D NAND, but the data retention and noise interference is much worse than 2D NAND.

So controller cell need to cover three dimensional noise interference.

And so, we not only need to have a soft decode, hard decode LDPC engine and very smart DSP to handle that, we also need to have a special ray technology to cover all their requirement because this is another single block (inaudible).

It could be multiple dye within the SSD.

This is quite different than traditional 2D NAND as you don't need the really special rate for protection.

So we have been working with NAND makers since 2014 with 3D NAND development, and we're also working for the second, third or fourth generation 3D NAND to define together, that's why we have a very strong technology probably for all our product line for the upcoming 3D NAND support.

And in terms of the 3D NAND flash customers or just in general, where are they in terms of migrating to a lower process node, (inaudible 0:48:57.5) we could mind you are saying is that some of these 3D NAND flash vendors were still, their initial developments will be on a lagging edge process node.

So I just wanted to get your thoughts on when are they transitioning would you say or what the pace is from 3D NAND on a lower process node and 3D NAND from MLC to TLC, et cetera, which will align more to your --

Every NAND maker have a different strategy in their transition because some NAND makers have fully engaged more cost inside it, so they are transitioning slowly.

Some NAND maker they are fully engaged not that competitive, they will be transitioning faster.

Although we might know the answer we cannot comment for the answer.

Congratulations.

Daniel Amir, Ladenburg Thalmann & Company Inc.

Congratulations on a great quarter.

Couple of things here.

First of all, I guess first of all on the eMMC just to clarify, you mentioned that the smartphone market growing 5% to 10%, you'll grow more than that.

Previously I think you mentioned that you expect the eMMC growth to be 10% to 15% this year.

I mean is that still your guidance or you're kind of changing that here?

Daniel, for the overall smartphone market, we're expecting the market to grow about 5% to 10% this year.

Markets are now a lot more mature than it was in past and so there is a lot more growth coming from replacement cycle versus first-time buyers and so the blended growth rate is now a lot lower.

But, more broadly for the market, our guidance for the market growth is unchanged from before, which is market's growing 5% to 10%.

All right.

But now what's your outlook on your business on the eMMC business?

For our eMMC growth we're expecting to grow significantly faster than the market growth, with the market growing 5% to 10%.

Okay.

And the second on the client SSD side, you've been basically in one quarter here you changed kind of your guidance for the year from 50% to double basically.

So what's happened here in this quarter that's given you such a high change in terms of your outlook here in a very short period of time?

I think main reason is because we start to see PC OEMs accept TLC-based client SSD.

In the past most PC OEMs they only accept MLC-based client SSD.

So that really increase our confidence and so see the sale forecast from our major NAND partner.

Okay.

And then last question, you mentioned that with one of your partners you're working with an SSD without DRAM.

Is that -- I mean, is that a trend that you think will accelerate given that you have a unique solution here to this market?

And if so, that -- I mean, is that something that is very positive for your business compared that there is no other solution out there?

I mean, it would be great to get a little more clarification on that.

I think, Daniel, as you know, the client SSD product is very cost competitive and cost sensitive.

So for some NAND makers, they don't have DRAM.

So DRAM is a very expensive component to them.

So I think the -- for some NAND makers DRAM-less solution is the ideal product for them to penetrate competing the value line.

And I won't say that becomes a trend.

However, in PCIe NVMe solution one of the trend in future will be BGA.

If the PCIe BGA SSD become standard popular, DRAM-less will become very, very important because the host memory buffer will become one of the key items for future trend to reduce total system cost.

So we believe are current today with the DRAM-less for SATA, we are also moving to PCIe NVMe in the next year and that will broaden our product line offering to meet all different customer need to meet at the market segment.

Thank you.

There are no further questions now.

I would now like to hand the conference back to our CEO, Mr. 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 May we will be presenting at the Citi Corporate Day 2016 in Hong Kong, Morgan Stanley GEMs Conference in London, Jefferies Technical Conference in Miami, Goldman Sachs TechNet Conference in Hong Kong, B. Riley 17th Annual -- B. Riley Investor Conference in LA.

In June we'll be presenting at the Craig-Hallum 17th Annual Investor Conference in Minneapolis, Bank of America-Merrill Lynch Global Tech Conference in San Francisco, Macquarie Global Emerging Leaders Conference in New York, London and Singapore.

Credit Suisse 8th Annual Semiconductor Supply Chain Conference in Boston and Toronto.

Details of these events will be available on our website.

Thank you and goodbye for now.