慧榮科技 (SIMO) 2017 Q3 法說會逐字稿

Ladies and gentlemen, 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 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, in the state of and any change in our relationship with our major customers; and changes in political, economic, legal and social conditions in Taiwan.

For additional discussion on these risks and uncertainties and other factors, please see the documents we file from time-to-time with our 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 the conference over to your first speaker for today, Mr. Jason Tsai.

Please go ahead.

Thank you and good morning everyone.

Welcome to Silicon Motion's Third Quarter 2017 Financial Results Conference Call Webcast.

My name is Jason Tsai.

With me here is Wallace Kou, our President and CEO; and Riyadh Lai, our CFO.

The agenda for today is as follows: Wallace will start with a review of our key business developments.

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 was read at the start of this call.

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

For more details on our financial results, please refer to our press release, which was filed on Form 6-K before 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.

A reconciliation of the GAAP to non-GAAP financial data can be found on 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.

Let me start by talking about [economic] conditions affecting our business, followed by an update of our key products.

Riyadh will talk about our financials and guidance later in the call.

In the third quarter, NAND industry supply increased meaningfully, the flash maker continued to make good progress in improving manufacturing yields.

Our SSD solutions sales benefited significantly from the increase in NAND flash supply.

The price of the NAND flash, however, remained elevated, which continued to temporarily affect adoption of client SSD and demand for our controllers.

That said, we believe market conditions are gradually moving towards the direction of falling NAND flash prices.

NAND flash makers started initial productions of 64-layer 3D NAND late last year and early this year.

Production yields continued to improve rapidly and are approaching mature levels.

We are seeing good supply of the 3D NAND in the marketplace from most vendors, but available only if buyers are willing to pay the high asking prices demanded by flash vendors.

This better availability of flash is enabling us to sell more Ferri and Shannon SSD solutions than we had expected 3 months ago, and significantly more than we had expected at the start of the year.

This quarter, sale of our SSD solution grew 50% sequentially, following a [50%] increase last quarter.

NAND availability will continue to improve as supply continues to increase.

NAND [flash] prices remained elevated, but perhaps not for long.

Currently, SSD for [less prices] -- sensitive application, such as for enterprise, industrial, commercial and automotive markets are able to afford NAND at today's elevated prices.

This is why sales of our differentiated customer design SSD solution for industrial and hyperscale application have been able to grow rapidly, despite the high price of NAND.

While the price for NAND remained high, in fact, makers are already bringing down the price of their client SSD and pricing their SSD levels below the price of the NAND component to third-parties.

It goes without saying that many our clients, the module marker customers, are on the sidelines, waiting for the price of a NAND component to fall.

We have a broad portfolio of client SSD projects with NAND flash makers.

A few projects have just gone into production and most will enter in production during the next 2 quarters.

We believe client SSDs are one of the more price-sensitive implication for NAND, and one of the more price elastic.

Demand will pick up rapidly when price falls.

SSDs are superior to HDD in terms of battery performance, reliability and in power consumption.

The number of a thinner, lighter and faster PC being designed using SSD continued to increase and the faster NAND prices fall, the faster SSD displace HDD in PC, game console and other client devices.

Prices will fall, because more 3D NAND is significantly lower cost, is coming online and the industry is price competitive.

The cost of a 64-layer 3D NAND is significantly cheaper than the previous generations of NAND.

Costs will fall further as NAND makers start transitioning from 256-gigabit to 512-gigabit per single day, which is happening right now.

Cost will fall further when 4 bit per cell QLC components enter production in Q2 of next year.

Costs will fall further when 96-layer 3D NAND enter production, with commercial sample then expected to begin in the first half of next year.

We are confident that the market dynamics we are seeing today, driven by the record level of CapEx that the flash makers have been making will accelerate big growth in the coming quarters, which the new technology will certainly improve cost and drive down pricing quickly.

Our business is already starting to rebound and with improving flash pricing next year, we expect this rebound to accelerate.

Let me now go over key highlights from our different product segments.

Our second-generation turnkey hardware plus firmware PCIe and the NVMe SSD controllers with enhanced performance characteristics enter production in this quarter.

This series of controllers are designed specifically to meet the needs of our flash partners and module maker customer who need a best-in-class performance, cost leadership and want to rapidly bring to market SSD using many different variety of 64 and 72-layer 3D NAND from different flash makers.

We are building PCIe and the NVMe SSD controller solution leadership with the broadest and the deepest portfolio of technologies in the emerging market, and a one that is likely broader and deeper than what is internally developed by most of the NAND flash makers themselves.

We offer hardware only and hardware plus firmware turnkey solution that range from today's PCIe Gen 3 to the upcoming PCIe Gen 4. We offer two NAND solution for mobile applications, 4-lane solutions for client applications and 8-lane solutions for enterprise applications.

With 8-lanes in [16] channels, we can address SSD density as high as 32 terabyte.

Our controllers are designed to -- for compact [BJE] chip scale storage devices, mainstream M.2 [acoustic] devices and high capacity, high performing U.2 devices.

The key pieces for our technology, silicon, firmware (inaudible) uniquely are all designed in-house.

We believe that the flash, or the ability improve next year and when more of our PCIe MVNE SSD controller projects enter production, our controller market share gain will continue and will quickly gain merchant market leadership in PCIe and the [NVMe] SSD controllers.

Let me update you on the progress of our new enterprise grade SSD controllers, specifically our open-channel SSD solutions.

We are on track to begin sampling our open-channel SSD controller with our first hyper-scale customer in the fourth quarter and our second will begin sampling in the first half of the next year.

We expect initial revenue for this product to begin in the first half of 2018.

These are initial beachhead projects with 2 hyper-scalers, and will take time to scale, but we are excited by the direction of our road maps.

Open-channel PCIe and the NVMe SSD are on its way to becoming widely adopted in most hyper-scale data center deployments.

Open-channel SSD overcome major bottlenecks in the carrier storage system by enabling better management of latency, so storage performance in highly scale-out environment can be delivered predictably and efficiently.

Open-channel SSD do this by enabling system host to bypass intermediary management layers found in traditional SSD, to directly manage the underlying NAND flash media.

We will provide more details when we bring out our open-channel SSD controller into production.

Let me talk about our controller for eMMc and UFS for embedding memory in mobile devices.

The vast majority of today's smartphones continue to use eMMc.

eMMc is a high-performance, low cost and widely supported by application processor vendors.

We are the leading merchant supplier of the eMC controllers and supply roughly 1/3 of the overall market.

We do not expect the adoption of the eMC by smartphone OEMs to decrease materially next year.

We also do not expect to see our market share to change materially next year, as our relationship with SK Hynix continue to be strong.

We continue to work closely with them on current and upcoming eMC projects and have been supporting their 3D NAND with our controller for several years.

We are confident that our relationship remains strong going forward.

Our UFS solution is already in production with our flash partners and our second-generation UFS controllers begin sampling in the fourth quarter.

However, we do not expect smartphone OEM to adopt UFS other than for very high-end products, given the high cost for UFS and limited application processor support.

Now let me turn to our SSD solutions.

This year, our industrial hyperscale SSD solution benefited from better-than-expected supply of NAND flash and we expect this to continue in Q4.

Our channel enterprise SSD sales increased significantly in Q3, because of the peak seasonal order patterns,

specifically for Alibaba and also because of the strong ability of NAND flash.

We believe we remain well positioned as a leading provider of customer build enterprise grade SSD to China hyperscalers and as a preferred local supplier of SSD to state-owned enterprise and government agencies that have domestic procurement requirements.

Our Ferri industrial SSD business grew strongly this quarter, as our diversified base of industrial commercial networking and automotive OEM customers continued to expand.

We provide very high quality, unique single-chip SSD solution, many requiring firmware customization for low density applications with compact footprint and for demanding environments.

Our differentiated focus with a matched customer support have helped us expand our traction with customers in Japan, the U.S., Europe and China.

Let me conclude by reiterating that our business, specifically relating to our SSD solution is already benefiting the improvement in NAND flash supply.

And as supply continues to improve, would sure lead to more competitive NAND flash prices, our client SSD controller sales will also benefit.

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

Thank you Wallace and hello everyone.

I will summarize our financial results and outlook.

Before I begin, I would like to reiterate that our comments today will focus primarily on our non-GAAP results unless otherwise specifically noted.

A reconciliation of our GAAP to non-GAAP data is included with the earnings release issued today.

Our third quarter revenue decreased 4% sequentially as our client SSD and eMMc businesses declined, partially offset by rebounding sales of SSD solutions.

We expect our Q4 revenue to increase sequentially 2% to 7%, to $130 million to $136 million, led by rebounding client SSD controller sales and stable SSD solutions, offset by softness of other products.

We expect our 2018 revenue to grow, led by a rebound in our client SSD controller sales, continued growth of our SSD solutions sales and stable eMMc controller sales.

Let me provide additional color on our key products.

Our client SSD controller sales declined as expected.

Client SSD controllers declined approximately 10% sequentially, as continued high NAND flash prices and corresponding high client SSD prices affected demand for our controllers.

For Q4, we expect our client SSD controller sales to rebound strongly sequentially, as sales of our new PCIe MVNE SSD projects begin, with Q4 likely a peak quarter this year.

We expect client SSD controller sales in 2018 to increase strongly, with growth dependent on the rate of NAND prices falling.

Our eMMC controller sales declined approximately 20% sequentially, as SK Hynix rebalanced their limited supply of NAND away from smartphones, towards other applications.

For Q4, we expect our eMMC controller sales to decline further sequentially.

For full year 2017, our eMMc controller sales will only fall slightly, because our flash partner had pre-built inventory in the first half of the year.

We expect our eMMC controller sales in 2018 to be similar to 2017 sales, given mature end markets.

Our SSD solutions sales increased 50% sequentially, driven by strong growth from both our Shannon hyperscale SSD and Ferri industrial SSDs.

As Wallace had discussed earlier, increasing availability of NAND flash is enabling us to procure more flash and fulfill strong demand for our custom built SSD solutions.

For Q4, we expect SSD solutions sales to be flat sequentially as OEM customers take advantage of adequate flash availability to fulfill their demand.

We expect our SSD solutions sales in 2018 to continue growing, with growth from both our Ferri industrial SSDs and Shannon hyperscale SSDs.

Our third quarter gross margin decreased to 46% from 48.7% in the previous quarter, largely due to growing sales of lower gross margin SSD solutions and declining sales of higher margin client SSD controllers.

For Q4, we expect gross margins to be in the range of 45.5% to 47.5%, with the midpoint slightly higher than our third quarter gross margin, as a result of growing high gross margin client SSD controller sales, offset by flat and lower gross margin SSD solutions sales and declining higher gross margin eMMC controller sales.

Beyond this year, we continue to maintain a 50% gross margin target.

We believe that rebounding growth of our higher gross margin client SSD controller sales will be sufficient to offset growing lower gross margin SSD solutions, for Silicon Motion to deliver a 50% target gross margin.

Our third quarter operating margin decreased to 20% from 23.9% in the previous quarter, primarily due to roughly similar operating expenses, a lower revenue and lower gross margins.

In the fourth quarter, operating margins will improve slightly as revenue increases, gross margin increases, but offset by slightly higher R&D expenses.

Our total headcount this quarter increased to 1,214, which was 61 more than the second quarter.

Our effective tax rate in the third quarter was 23%, slightly higher than the 22% in the second quarter, but still higher than our long-term model tax rate of 20%.

We anticipate our effective tax rate to remain elevated in Q4 and expect our effective tax rate to start trending towards our model tax rate of 20% next year.

Our third quarter EPS was $0.57, lower than last quarter's $0.71.

Total stock-based compensation in this quarter was $3.3 million, higher than the $1 million in the previous quarter due to the seasonal timing of RSU awards and consistent with timing of past years.

For the fourth quarter, we expect stock-based compensation in the range of $8.2 million to $8.3 million.

Let me now talk about a few key items from our balance sheet.

We had $333 million of cash, cash equivalent and short-term investments, $27 million more than in the previous quarter and $64 million more than a year ago.

We also paid off our $25 million short-term borrowing this quarter.

In August 2017, we paid $7 million of dividends to shareholders, the final $0.20 per ADS quarterly installment of our annual $0.80 per ADS dividend.

Earlier this week, our board announced an annual dividend of $1.20 per ADS, also payable quarterly.

Our board increased our dividend by 50% based on their confidence in our ability to continue generating strong free cash flow and confidence in our strong business outlook.

Last quarter, our board provided authorization for a $200 million, 12-month share repurchase program.

Consistent with what we have said in the past, we intend to opportunistically repurchase our shares when we believe they are significantly undervalued.

In line with this principle, we have put in place a trading program to repurchase a large percentage of our daily trading volume, if our share price were to fall to a level around our Q2 52 week lows.

Depending on how our share price performs over the life of our 12 months' repurchase program, we could be utilizing a significant portion of our $200 million authorization, buy nothing or some amount in between.

We did not repurchase any shares in the third quarter.

This concludes our prepared remarks, we will now open the call to your questions.

(Operator Instructions) We have the first question from the line of Mehdi Hosseini.

Yes, 2 follow- ups.

Your revenue per employee has consistently declined over the past 4 to 6 quarters and the decline is very significant and obviously you are investing in R&D and for future.

And in that context, when should we expect to see the leverage, when should we expect to see this scaling of revenue?

I understand the NAND tightness, but most of the your investment has been in the higher ASP products, which could offset some of the tightness.

And in that context again, I'm just trying to better understand when the scale is going to happen, especially with the higher ASP products?

I have a follow-up too.

Mehdi, that's a very good question.

We do actively as management look at that metric, headcount, revenue per headcount and we actively use that as a means to measure our performance on a long-term basis.

But that said, we have limited the numbers of new hires and scaled back the portions of our operating expenses as much as we can, but we need to continue to make sure that we are, in fact, investing in our future.

We need to make sure that new products such as our enterprise SSD controllers remain on track to drive our long-term growth.

Where it makes sense, we will delay spending, but we need to be forward looking to make sure that our portfolio of growth products remain well-positioned for upcoming technology migrations and other market opportunities.

Let me rephrase the question.

What if the NAND tightness were to be more structural, the migration to higher layer count 3D NAND is lower than previously expected?

Is that going to change product portfolio for you?

Is that going to change priorities within the company, which is also tied into the revenue per employee that I was referring to in my first question?

Well, currently Mehdi, we have a lot of very important projects that are critical for our long-term future and these projects will require a lot of engineers and these are commitments that we have in place for our customers, our current customers, as well as future opportunities and so these projects need to continue to move ahead.

Yes, let me add a comment.

We expect to see supply continue to grow meaningfully as the flash market -- flash makers are aggressively ramping up production of 3D NAND, and with that improving the yield, better manufacturability and the introduction of next-generation NAND, such as QLC and 96-layer will help accelerate the growth through 2018.

We believe QLC will move into production by next year Q2, and we should see 96-layer 3D NAND into production by second half of next year.

So that really shows the confidence about the NAND maker progress and we can grow with the NAND improvement and our current product road map and direction should be in the right direction.

We have the next question from the line of Mike Burton.

So a 2-parter on mobile.

Your top customer announced the other night that they achieved a technological breakthrough and will be using in-house controllers starting at 72-layer NAND.

So first, do you still expect to sell eMMC or eMCP to them at 72-layer and going forward?

And then second, how is the progress on your UFS or UMCP controllers relative to the 2 flash OEMs that you talked about before?

Should we expect that to start to ramp in 2018?

I know the market is going be muted, but just any progress there.

Thanks.

I think our relationship with Hynix remains strong as ever.

We are still working on new projects with them, supporting their next generation 3D NAND for embedding memory.

As we have said, we are complementary to outside partners.

Our R&D resource will help extend their internal capability.

As Hynix recently said, with the growth in the number of products, their capacity is limited.

So for controller they should continue to cooperate with outside partners.

We believe they try to use a higher layer -- the 72-layer for eMMC, a target for new potential projects or a new customer to expand their market position.

And regarding UFS, our first UFS customer has begun shipment already and will begin sampling our second-generation UFS solution this quarter.

So we are happy with the progress we are making here.

The challenging for UFS is that broader adoption of UFS remain limited and UFS embedded memory is very expensive and performance improvement are marginal.

And so we are not in a hurry to widely use UFS and thus AP makers are being slow in rolling out UFS support to a larger range of AP, beyond the very high end.

[eMC remains] cost effective for OEM requirements, so we believe our eMC sale revenue remain flat in 2018.

And then secondly on gross margins, you mentioned mix is a driving factor, Riyadh.

I was hoping if you could help quantify, how much of that is mix versus SSD solutions versus your controller businesses, or is it still related to older generation of controllers within client still shipping due to the tightness in NAND?

What I can say is that near term our gross margins are slightly below our 50% target, largely because of unfavorable product mix.

Our controller gross margins remain very stable above our corporate average.

This year our client SSD controller sales have been soft because of high NAND prices, which has been affecting our end market demand.

And eMMC controller sales have also been soft, because of our flash partners rebalancing of their limited NAND capacity towards other applications.

Our SSD solutions, as we talked about, on the other hand, have grown strongly for 2 consecutive quarters.

And looking ahead our corporate margin should improve when our client SSD controller sales rebound, which will begin in the fourth quarter.

We have the next question from the line of Sujee Desilva .

Can you remind me the typical seasonality of the SSD solutions business, whether the hyperscale customers tend to order more in certain quarters in a year and whether that would play out in 2018 given the flash tightness (inaudible)?

Typically in last -- at least based on last year's patterns, our hyperscale SSD, specifically relating to Alibaba program started kicking in, in the first quarter.

They scale significantly in Q2 and reach peak seasonal sales in Q3 before scaling down in fourth quarter as programs end.

That was what we were originally expecting for this year.

But due to strong demand for our products, coupled with pretty good availability of NAND flash prices, the programs have extended into Q4.

So our overall SSD solutions in Q4 will be at a similar level to Q3.

Okay, that helps, thanks.

And for the newer open channel products you have, are those the same hyperscale customers you have for the SSD solutions today, Shannon or those are new customers you are getting directionally?

We can't comment specifically about our customers at this stage.

Our products are not even in production.

But we do have 2 hyperscaler customers for our open-channel SSDs.

The first will begin commercial sampling this fourth quarter and the second in the first half of next year.

And then my last quick question.

(inaudible) differential for the enterprise PCIe SSD or in the client PCIe SSD products versus the traditional SATA/SAS SSD controllers?

We are not getting to the specific of products that are not in production, but they are going to be -- our enterprise grade SSD controllers will be multiples -- ASPs will be multiples of the benchmark $5 that we have for our client SSDs.

We have the next question from the line of Jaeson Schmidt.

How should we think about your embedded card and USB business going forward?

We believe our embedded microSD card business will decline continually, but slightly, because now market is stable.

We do see some demand from India smartphone, however, because NAND makers have less interest to produce the low density NAND, so we see that the card business will remain stable or slightly decline.

Okay, that's helpful.

And how should we think about OpEx ramping in 2018?

Do you guys anticipate needing to add significant lead to headcount to go after these opportunities?

We will continue to add headcount next year, but generally the way we plan our operating expense is somewhere in line with revenue growth.

We typically plan our operating expense growth in line with revenue growth at the start of the year.

And if we are able to grow much faster, then operating leverage kicks in.

And currently, we are looking at next year that way, but we'll keep you posted as we firm up our plans going into next year.

We have the next question from the line of Mike Crawford.

Can you tell us a little bit about the facts of your Bigtera acquisition, this software defined storage platform that you spent just $2.9 million of cash on in the quarter, will there be further payments as well?

Let me answer your second part about the payments.

There is a tail payment, roughly about -- a little over $1 million that we'll be paying in about a year's time.

So the Bigtera acquisition we made was a further expand and they extended our product capability long-term.

Software defined storage is a very important part for hyperscale data center storage.

(inaudible) enable hyperscaler to develop storage platforms.

That can be scaled out more efficiently and effectively.

I think the -- for the data center and enterprise market, Bigtera's software defined storage complements our Shannon SSD design capability and our core controller expertise.

We are expanding our technology footprint to address longer-term opportunity.

They help us to understand more about today's, the challenging in the gap for enterprise or call center, so they will help us to make a better enterprise controller for the future use.

Okay.

And whilst the company has a number of these appliances, do you expect -- is there much revenue associated with the existing Bigtera clients business, or this is more of a technology buy?

(inaudible) is aiming for growing sale revenue for software defined storage solution and bundled with a system integrator, selling in China initially, we may go back to U.S. long-term.

Just to add further, the business is very small.

It's essentially a startup with negligible revenues at this stage.

And then last question is on your forthcoming SM2264, third-gen PCI product.

So when -- is that still scheduled for release in the second half of 2018?

Yes, I think we're going to have multiple (inaudible) PCIe NVMe product line.

The Gen 3 -- it's a Gen 4 solution for 2264 is positioned.

Sampling in early 2019 and production in late '19 or early 2020, which will be aligned with the Intel platform chipset.

We have the next question from the line of Rajvi Gill.

Hi, this is (inaudible) on behalf of Rajvi.

In fact, I have a question around the Shannon systems or SSD solution systems as a whole.

Obviously, you guys saw some pretty good strength this quarter, and are guiding for continued strength in the fourth quarter.

I just wanted to kind of get a framework of how we should expect that business to continue throughout 2018 in terms of an overall mix of your total business.

Are you still guiding that up throughout the whole year?

Coming off of a pretty strong 2017, should we expect that to taper off a bit?

And then also I just wanted to get a better profile of what the gross margins in that business should be going forward.

I know you guys had talked about new businesses should have gross margins closer to the corporate average.

Then I've one follow-up.

Let me first just sort of outline our SSD solutions in a very general term, sort of explain what we're trying to achieve.

We are not trying to transform ourselves into a module maker.

Our strategy for doing SSD solutions is to lever -- to leverage our unique controller technologies, to expand into markets under-serviced by the NAND flash makers and module makers.

These are both our traditional customers.

NAND flash makers prefer high volume wholesale markets, not small, niche, high-touch markets.

And module makers have limited technological capabilities and through their limitations of both parties, it creates opportunities for us to service.

And looking into our business, we've been very disciplined in approaching the SSD solutions market.

We regularly walk away from market segments and customers that do not add value, do not value our technology, and we do not expect this to change going forward.

We will continue balancing the growth opportunities of our controllers with the opportunities of our SSD solutions to maintain gross margin around 50%.

50% remains our long-term model gross margin target.

We have the next question from the line of Betsy Van Hees.

I had a couple for you.

In regards to the client SSD business, the challenges you had the first of the year was the fact that we were seeing a reallocation of NAND supply to the higher ASP hyperscale products -- data center, and now it seems that the challenges the client SSD business is having is elevated NAND prices.

When you gave your guidance in Q3 and you talked about this meaningful inflection that we were going to see in Q4, were you anticipating that we were going to see reductions in NAND pricing, was that part of your thought process when you were talking about the meaningful improvement and [why it is a key] business in Q4?

We were already originally expecting some price reduction in Q4, but this has not materialized.

Prices for NAND continue to be elevated, elevated for a bit longer than we had expected and so this is causing some delay with some of our program launches.

But we are however expecting fairly strong rebound of our client SSDs in the fourth quarter of this year.

And so with pricing of NAND, where does pricing need to go, where does it need to fall for us to start seeing a really big re-acceleration in the client SSD business?

And conversely, if NAND doesn't fall next year, what does that mean for the client SSD business, can we expect it to be exceptionally challenged, or will you still be able to see some growth in that business?

We believe we'll start to see NAND price start to decline gradually.

There is some indication that pricing will come down soon.

So flash makers are trying to maintain a high price for NAND, but they are only [ready to sell] on price below the cost of a raw NAND, they're selling to a module maker.

We believe when we move into second quarter for 2018, the QLC SSD solution into production and 96-layer coming second half of next year, NAND price should go down quickly and we see that as a NAND price trend for 2018.

Betsy, let me also add.

We have a number of programs that have just entered initial production.

These are our second-generation PCIe NVMe client SSD controllers.

These have just entered production.

We have a very large portfolio of programs that are going to go into production over the next 2 quarters.

These are -- we have a fairly high confidence with our flash partners that these programs will be entering production over the next 2 quarters and we believe these are going to be timed pretty closely with the continued supply increase of NAND, especially relating to the 64-layer 3D.

Alright.

Thanks, Wallace and Riyadh for the additional color on NAND.

I appreciate that.

In light of the tax rate trending down, how should we be looking at the tax rate for next year?

Is it going to -- should Q1 be flat and then it trends down from there, or can we start to see a trend down starting in Q1 of next year?

Our tax rate recently has been a little bit elevated, because of R&D tax credits in Taiwan expiring at the end of 2016.

But our statutory tax rate in Taiwan is essentially 17% plus a 10% retained earning surtax.

And so our overall Taiwan tax is closer to the 29% -- 28%, 29%.

But we also operate in Korea, China, the U.S. and elsewhere.

So our blended tax rate is actually closer to 20% from a modeling perspective.

In 2017, our effective tax rate, however, has been higher than this, but as our businesses continue to evolve and progress, we expect our taxes to gradually trend towards 20% next year.

In the first quarter it will start inching down, but it will take some time for it to reach our model 20%.

Thank you Riyadh for the additional color.

And last question from me is also on the seasonality.

So, Sujee asked a question about seasonality for the hyperscale, and how about client SSD, given the fact that we normally see seasonality down, I would say, sharply in Q1, could we expect it to be even more challenged in Q1, given the fact that we've had the higher NAND prices for the client SSDs, or how should we be thinking about that for seasonality?

We're not quite sure about the actual seasonality of client SSD.

So we would imagine that it will probably be similar to client HDDs, though for own business in particular, the seasonal patterns have -- we have not seen the seasonal patterns as it relates to our own business, given the sharp ramp that we had last year and this year because of the tight NAND flash conditions affecting the end demand.

Traditional seasonal patterns probably also do not apply.

Looking into the first quarter, it's still too early to say, but we are pretty excited about how our business is progressing.

So Betsy, let me add a comment.

We believe from this current design pipeline and production ramp-up, for Q1, we should see also slightly growth for the client SSD.

We have the next question from the line of Tom Sepenzis.

So I'm just wondering in terms of the gross margins, is the rebound contingent on a bounce in mobile and would that be -- would it be prudent to think of that as more likely a Q2 event than a Q1 event?

Our gross margin increase is not contingent on the rebound of our eMMC controller sales.

We are expecting our eMMC controller sales to rebound in the first quarter, but we are not expecting that to be the key mover of our overall corporate gross margin moving up.

It's largely this simple, we have lower gross margin, higher gross margin products.

Our lower gross margin products are our SSD solutions.

Our higher gross margin products are essentially all our other controllers.

So as our client SSDs start ramping, rebounding with better NAND flash prices, this should be the key driver to bring our gross margins up.

In addition, when the NAND price is going down, our procurement for the NAND price is going down, which have better margin for the enterprise SSD solution.

Great, thank you.

And then on their call last night Western Digital sort of stated that the NAND flash pricing has leveled off, but they don't think that it will decrease until after Q2, at least next year.

So does that make it more difficult -- if that would have come true, would that make it more difficult for you to show revenue growth in 2018, or do you think you can still get there even if it is back-half weighted?

There are about 6 NAND makers today.

We cannot comment for a particular NAND maker, as a different NAND maker has a different strategy regarding their NAND sale.

From what we are seeing, the indication, we believe there will be more NAND coming to the market and we believe the NAND price will go down into -- that is the direction we are seeing today.

We have the next question from the line of Donnie Teng.

My first question is regarding to the full year client SSD and SSD solution guidance, because previously, last quarter, we mentioned about the full year SSD, this year will be flat, last year.

But now given the stronger SSD solution sales in [first] quarter, could you remind us what is the latest view on this year for client SSD and SSD solution?

Sure.

For the full year, our client SSD sales should be down a little bit compared to last year, while our SSD solutions will be similar, but likely also down a little bit compared to last year, which is very different from what we were originally expecting at the start of the year.

At the start of the year, as you may recall, we were expecting our SSD solutions to be down quite significantly, and now we're expecting that to be fairly level, it's a little bit down compared to last year.

I have a follow-up question, is that we know that the enterprise data demand is still quite strong.

And NAND supply is still very tight.

But how you have a stronger fourth quarter for the SSD solution, plus the strategy for fourth quarter?

This relates to what you were talking about, demand for enterprise is very strong.

And given the better availability of NAND, our Alibaba program has extended at -- third quarter levels over to the fourth quarter.

My second question related to our client SSD outlook for next year.

So are we expecting our client SSD controller shipment growth to be similar to the overall client SSD shipment growth next year?

I believe our 2018 client SSD controller shipment will grow very, very strong and much stronger than 2017, and because we have multiple projects in NAND OEMs, as well as we will have multiple product coming and with the design pipeline.

So we do see they are going ramping from late Q1 and Q2 and moving forward to Q3, Q4.

So this -- we have very high confidence for client SSD.

We shall become the new leader in PCIe NVMe for merchant company.

Alright.

So our target is to gain market share next year, right?

Absolutely.

As there are no further questions at this time, I would now like to hand the conference back to 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 attending several conferences in Asia and U.S. in the fourth quarter.

Details of these events will be available on our website.

Thank you and goodbye for now.

Thank you, sir.

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

Thank you for participating.

You may all disconnect.