慧榮科技 (SIMO) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter Silicon Motion Technology Corporation 2018 Earnings Conference Call.

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

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

For additional discussion of these risks and uncertainties and other factors, please see 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 must advise that this conference is being recorded today, Wednesday, 30th of January, 2019.

I'd like to hand the conference over to your first speaker for today, Mr. Jason Tsai, Senior Director of Investor Relations and Strategy.

Thank you, please go ahead, sir.

Thank you, and good morning, everyone, and welcome to Silicon Motion's Fourth Quarter 2018 Financial Results Conference Call 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 our key business developments, Riyadh will then discuss our fourth quarter financial results and provide our outlook.

We'll then conclude with Q&A.

Before we get started, I'd like to remind you of our safe harbor policy, which was read at the start of this call.

For a comprehensible 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 after the close of market yesterday.

The 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 us today.

I will first update you on our business, and Riyadh will review our financials and provide our outlook later on this call.

For the fourth quarter, our sales of $123 million declined 11% sequentially, and we're near the midpoint of our guidance range.

Full year 2018 sales were $530 million, up 1% year-over-year.

Earnings per ADS for the quarter were $0.83, down 30% sequentially.

Full year 2018 earnings per ADS were $3.41, up 21% year-over-year.

Let me first talk about our client SSD business.

Revenue from client SSD sales increased about 30% for the full year, much stronger than what we expected in the start of this year, although a bit less than we -- our revised 35% target in Q3.

SSD controller sales to our NAND flash partners did increase by about 35% year-over-year.

We believe that demand for SSD grew as NAND flash prices declined meaningfully and as the affordability improved.

In Q4, we were expecting stable sequential SSD controller sales.

Q4 SSD controller sales, however, declined 20% sequentially as our China module maker customer became more risk adverse in procuring NAND component and building SSD as falling NAND prices accelerated dramatically, despite NAND flash maker holding back NAND shipment and building inventory.

Module maker became more cautious and did not want to try to catch a falling knife.

Looking to 2019, we believe our client SSD controller sales will continue to grow as NAND prices fall further.

NAND industry supply will grow robustly this year, as the yield improve on 96-layer 3D NAND and 64-layer QLC NAND ramps.

Demand for all major market segments, on the other hand, remains soft at today's prices.

And additionally, inventory levels, as a NAND vendor, are at the elevated levels.

It is very likely that NAND prices will continue falling rapidly in the first half of the year and increasingly and likely that the NAND prices will [fly] at more moderate rate in the second half.

This pricing trend will help improve affordability and create incremental demand for client SSD.

Despite positive industry trend, sale visibility this year is significantly more limited than in the past.

Some of our NAND flash partners would typically provide us with 12 months controller procurement forecast, have reduced their forecast period to just 6 months.

We believe they are struggling with their own limitation in operation and visibility due to demand uncertainty from weakening China economy conditions, U.S.-China trade negotiation and other issues.

Additionally, today's NAND market conditions are very volatile and NAND vendors are still revising plans for reducing their NAND inventory to minimize impact to their profitability.

Despite this near-term limitation to our sales visibility, we are pleased by our solid design pipeline and momentum going into 2019.

Exiting Q4, we have over 70% more client SSD controller program with our 3 NAND flash partners than we had the prior year.

These programs include SSD controller for managing 64-layer QLC 3D NAND and 96-layer TLC and the QLC NAND.

We recently began shipping our SSD controller to a NAND partner for one of the world's first 96-layer TLC-based SSD.

Recently, a [NAND] tech reported a very significant breakthrough for us, as one of the world's leading module maker, with whom we previously had 0 business engagement.

Let me also note that by falling NAND flash prices, we're driving increasing SSD adoption long term.

The effect is not immediate.

Sales of the SSD to PC OEM are generally based on long-term contracts that take time to renegotiate when NAND price falls and new designs qualification take time even as OEMs steadily increase the number of platforms using SSD.

Module makers are opportunistic, so react more rapidly to falling NAND prices.

But as previously discussed, they are more risk adverse when NAND prices are falling dramatically.

We remain optimistic that over the next few years, the almost $300 million client HDD, currently shipping annually, will be mostly replaced by client SSD.

And that we remain the leading merchant supplier or controller for this SSD, whether to NAND flash maker or to module maker for either the OEM market or the channel market.

Now let me update you on the progress of our data center and enterprise standard and open-channel NVMe SSD controllers.

We are progressing well with our 2 hyperscale customers, so performance tuning of Shannon open-channel SSD for Alibaba and another BAT customer, using this these new controller, is progressing smoothly.

And we remain on track to being volume commercial production of our open-channel SSD around the middle of this year.

For Chinese hyperscalers, unlike the U.S. counterparts, we cannot just provide them with an SSD controller.

In order for us to sell an SSD controller to the Chinese hyperscalers, we must convert our controller into complete SSD solutions.

We're also engaging with other global hyperscalers relating to our data center SSD controller and initial feedback we have gotten has been very encouraging.

Turning to our eMMC+

UFS controllers.

Sales this quarter were down about 15% sequentially.

For full year 2018, sales of our eMMC+

UFS controller were down about 10%.

We were impacted by a declining global smartphone shipment and more meaningful decline in China domestic smartphone market, into which we were a big exposure.

In 2018, we made a strong progress growing the sales of our new USS controller to our U.S. flash partner and believe our customers' UFS mobile-embedded memory sales for the year very likely exceeded the UFS sale of our other mobile-embedded memory customer, who is using their own UFS controllers.

For the full year, our UFS controller sales accounted for more than 10% of our overall UFS+eMMC controller sales.

In 2019, we will continue to actually support our UFS partner in the UFS mobile-embedded memory sales growth -- growth objective focusing to leading global smartphone OEMs.

Additionally, in 2018, our primary eMMC controller customer started diversifying away from low-end, low-density mobile application and redirected their NAND supply to our SSD and other applications.

During the year, we sharply increased our support and sales of eMMC controller to the Chinese module makers, who have been stepping into this new market opportunity.

In 2019, we believe our primary eMMC customer will further diversify away from mobile application, and we will continue to actually support our China module makers, who are seeking to grow their sales of eMMC mobile-embedded memory.

Now let me discuss our SSD solutions business.

Sales for this sector grew modestly in Q4, as our Ferri industrial SSD sales were stronger-than-expected, which partially offset the expected continuing decline of our Shannon data center SSD sales.

In Q4, we provide more shipment of open-channel NVMe SSD to

Alibaba and another Chinese hyper-scalar for live testing in their data centers.

We continue to make a solid progress in delivering toward our milestones, which includes optimization and fine-tuning our SSD performance with low latency and remain on track to believe volume commercial sales in second half of this year.

2019 will be a challenging year for us, nevertheless, for the factors that we can't control, we feel good about solid progress that we have made.

We continue to win disproportionately large share of all the client SSD controller projects awarded by NAND flash vendor to merchant suppliers.

We are actually working to help our U.S. NAND flash partner grow their UFS embedded-memory sales and gain market share.

We are also actually supporting Chinese module makers grow their presence in the eMMC embedded-memory market, and our new open-channel SSD project continues to track towards the second half of 2019 ramp.

Now let me turn the call over to Riyadh, and -- to discuss our financial performance and more about our outlook.

Thank you, Wallace, and hello, everyone.

I will summarize our financial results and then provide our 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.

In Q4, revenue declined 11% sequentially.

For full year 2018, revenue grew 1% year-over-year.

Growth for our 3 key products are as follows: SSD controller sales declined about 20% sequentially, but for full year 2018, grew by about 30% and accounted for nearly 40% of sales.

EMMC+

UFS controller sales declined about 15% sequentially and for full year 2018, declined about 10% and accounted for about 25% to 30% of sales.

And SSD solutions sales grew about 5% sequentially and for full year 2018, declined about 5% and accounted for nearly 20% of sales.

Gross margins in Q4 declined to 50.5% from 51% in Q3 due to declining higher gross margin controller sales and increasing lower gross margin SSD solutions sales.

Gross margin for the full year increased to 49.3% from 48% in 2017, due to more favorable product mix.

In 2018, our higher gross margin controller sales grew while our lower gross margin SSD solutions sales declined.

Operating expenses in Q4 declined to $31.4 million from $33.1 million in Q3, due to lower year-end bonus accruals.

Operating expenses for the full year increased very modestly to $128.5 million from $127.8 million in 2017.

Operating margin in Q4 declined to 25.1% from 27.1% in Q3, as lower revenue and gross margins were partially offset by lower operating expenses.

Operating margin for the full year increased to 25% from 23.6% in 2017, primarily because of gross margin improvements.

Our effective tax rate in Q3 declined to 8% from 12% in Q3 due to the benefit of a one-time reversal of previously accrued tax liability.

Our effective tax rate for the full year declined to 11% from 21% in 2017, primarily due to more favorable tax arrangements from business process restructuring.

Earnings per ADS in Q4 declined to $0.83 from $0.95 in Q3.

Earnings per ADS for the full year increased to $3.41 from $2.81 in 2017.

We ended the year with 1,307 employees, an increase of 15 employees from Q3 and an increase of 57 employees from year-end -- increase of 57 employees from year-end 2017.

Stock-based compensation in our operating expense, which we exclude from our non-GAAP results, was $12.1 million in Q4, higher than the $4.5 million in Q3 due to the seasonal timing of RSU awards.

Stock-based compensation was $20.4 million for the full year, higher than the $15.2 million in 2017, due to higher RSU awards.

We had $289 million of cash, cash equivalents and short-term investments at the end of Q4, $20 million less than in the previously -- previous quarter and $78 million less than a year ago.

Cash flow from operations generated $35 million in cash in Q4.

In Q4, we had $5 million of CapEx, primarily for routine purchases of software and design tools.

In November, we paid $11 million of dividends to shareholders, the first $0.30 per ADS quarterly installment of our annual $1.20 per ADS dividend that was announced in October of last year.

In the fourth quarter, we spent $35 million to repurchase 1 million ADS at an average price of $34.52.

This is our first quarter of share repurchases as part of our $200 million 24-month share repurchase program that was announced in November of 2018.

Now let me turn to our Q1 and full year 2019 outlook.

First, I will reiterate that while we can provide full year directional trends and likely scenarios for our key products as well as outline related risks and opportunities, visibility of our sales is worse than usual as our customers are also operating with worse-than-usual business visibility.

Without a clear sales forecast, we believe that guiding directionally for the full year is more prudent than guiding with false precision to a specific sales range.

In Q1, we expect revenue to decline 16% to 21% sequentially with broad-based weakness in near-term demand.

For full year 2019, until we receive more concrete procurement forecast from our customers, there is a reasonable likelihood that our sales revenue this year could be approximately the same as the prior year.

Now let me provide color on our key products.

In Q1, we expect our client SSD controller sales to be roughly flat sequentially.

Based on discussions with our customers, we are expecting more positive SSD controller sales momentum to begin around the middle of this year when several major OEM SSD projects are scheduled to start.

While we currently do not have sales forecast beyond 6 months from our largest customers, we anticipate that with lower NAND prices, these programs should lead to stronger SSD adoption growth in PCs in the second half of this year and also solid growth for the full year.

We expect eMMC+

UFS controller sales to decline further in Q1 as both smartphone and demand and related smartphone build activity remain weak.

For the full year, we expect global smartphone shipments to continue falling and this could affect our eMMC+

UFS controller sales.

Additionally, the strength of our full year eMMC+

UFS controller sales will be dependent on our NAND partner maintaining or gaining UFS market share.

Strength of our sales will also be dependent on the ability of our Chinese module maker customers to scale their eMMC sales if our primary eMMC controller customers were to diversify further away from this market.

Based on our order books, we're expecting sales of both Ferri industrial SSDs and Shannon data center SSDs to decline in Q1.

Sales forecast from our customers suggest that our Ferri SSD sales should grow modestly this year.

Our Shannon SSD sales should start rebounding in the middle of this year when our open-channel SSD projects start volume commercial production.

Q1 gross margin is expected to be between 47% and 50%.

While we will benefit from favorable mix of higher gross margin SSD controller sales, our eMMC gross margin will fall as we sell more older parts.

Gross margin of our SSD solutions and legacy products, such as memory card controllers, should also decline.

For the full year, if our product mix remains the same as 2018, our gross margin should remain unchanged year-over-year.

Since our business is dynamic, it is likely that our product mix could change quarter-after-quarter.

Q1 operating margin is expected to be between 12% and 16%.

We expect Q1 operating expenses to be higher sequentially due to more R&D project tape-outs.

For the full year, we expect operating margin to be similar -- to remain the same as 2018 if gross margin were to remain unchanged year-over-year.

We expect to continue tightly managing operating expense this year.

Stock-based compensation in Q1 is expected to be in the range of $4.5 million to $4.6 million and for the full year to be roughly similar to 2018.

Tax rate in Q1 is expected to be approximately 18% and for the full year to be approximately 15%.

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

(Operator Instructions) Our first question comes from the line of Mehdi Hosseini of SIG.

A couple of follow-ups.

The SSD shipment in Q4 was better than expected.

I just want to understand, was this primarily shipment to the channel distributors or was it directly to the end customer?

And as a follow-up to your expectation for a meaningful pickup in the second half, especially with the new projects, open-channel, can you provide us some anecdotal color or data point that would help with confidence that, that hockey stick ramp with these new projects are actually still on target.

NAND prices have been going down for more than a year and at the same time we've been waiting for these new projects to ramp.

I'm just wondering if you could add some more color here.

Yes, for the RSD shipment in Q4, we do have multiple distributors, however, all sales through to the end customers, right?

Due to the inventory, NAND price declined, our module customers become more cautious to take order.

But for OEM, I'm seeing this very strong and same as that we forecast.

Regarding the Shannon, the open-channel SSD project, I think, as we said, we are progressing very well with our 2 hyperscaler customers in China.

And we're in the final tuning, we already started live testing in 2 data centers from -- since December.

Now we're in the final tuning and they also need to modify the firmware software, and we're tuning the performance as well as reduce the latency to meet all the different applications.

As you all know, data centers have multiple applications, different business units have different demand, so the complexity is very large.

We have very high confidence so far, we will ramp our hybrid -- our open-channel SSD product by middle of this year.

If this committed -- these customers are less price sensitive and actually when this ramp happens to start in the middle of the year, it could actually be margin-accretive.

Am I thinking right about this Riyadh?

Mehdi, these are our SSD solutions.

And so these SSD solutions of ours generally have materially lower gross margins compared to our SSD controllers.

While these products are also -- these open-channel SSD controllers are going to be using our controllers, so we're going to be able to recognize the controller profitability.

The bulk of the bill of materials for these SSDs are NAND flash and since NAND flash accounts for a very large part of the bill or [bom] costs, our gross margins from these sales are much lower than our traditional controller products.

Our next question is from Karl Ackerman of Cowen.

I want to go back to Mehdi's question on the Shannon and Ferri guidance.

Within your implied revenue guidance for the Shannon Systems and -- sorry, SSD business units, how do you think about the implications that falling NAND prices will have on you ASPs.

I am under the assumption that those SSDs are priced having 90-day lag.

And I guess, are there certain take-or-pay contracts you have in place that underscore your more bullish outlook?

Or I guess is your expectation for the second half ramp driven primarily by improvements in demand elasticity?

And I have a follow-up please.

So, I think, for data center customers, it's not like channel or module customer, even like PC OEM.

I think the pricing, they will be discussed, settled even from last year December.

So there are all lines of volumes, all lines of delivery, everything.

So the price, they would definitely [screen to the scene] they can predict for 2019, but all the price, supplied volume needs to be settled.

I have seen this is very common for either China as well as in U.S.

Let me also clarify, we have our SSD client -- client SSDs where we're supplying controllers to both the NAND flash makers as well as to module makers.

These flash makers and module makers are using our controllers to build SSDs for PCs and other client devices.

For these sort of products, these are very sensitive to changes in the price of NAND and these are the products that are going into applications are currently mostly using hard disk drives.

And as such, they're very sensitive to changes in price relative to HDDs.

And so these are products where we're expecting price elasticity of demand to have a major -- a much larger impact to our overall sales.

Now this is -- these products are very different from the data center SSDs that Wallace had talked about.

These are the SSDs, are going to Alibaba, where we're using our new open-channel SSD controllers, but we're also building in entire modules.

These applications are much less price-sensitive to changing prices of NAND.

The price will be starting to decline quarterly, but price will be sell up, negotiate, settle down even by last year December.

That's clear.

I appreciate that.

For my follow-up, on your mobile business, we'd seen the transition from eMMC- to uMCP-based smartphones could be fairly lumpy.

Based on your implicit outlook for 2019, how are you thinking about reining in fixed costs as you also contemplate UFS acceleration and customer concentration risks?

Regarding the UFS, we work closely with one of our U.S. flash NAND maker, and we are in very good progress, because, today, the major smartphone player for Android is just about a [fine] maker is very, very straightforward.

I think that our partner and customer focus on the 5 leading smartphone maker, and we are already in initial shipment for some programs, and certainly, we are in the process of qualification.

So I think we have a pretty good confidence and visibility about the ramping about the program.

In addition, for the China module maker, due to low-end smartphone, still pretty healthy growing in the India market.

So for the NAND maker, they have less interest to do low-density eMMC or eMCP.

So we believe our China module maker customer, they can grow very rapidly for the low-end, low-density eMMC and eMCP product for the low-end smartphone market.

Let me also add to your question relating to managing our operating costs, operating expense, given the dynamic nature of our business.

This year, visibility is weaker than what we typically have, but we will continue to tightly manage our operating expenses as necessary.

We're also working on rightsizing operations on our core products that are currently less profitable.

And separately, we are also taking actions on non-core products.

Nevertheless, for important products, like our SSD controllers and our UFS controllers, you should expect us to continue actively invest in resources even when near-term business visibility is less clear.

Continued technology and product development, both hardware and firmware, are critical for our future success.

We have a question from Gokul Hariharan of JP Morgan.

So first of all on SSD adoption as well as SSD controller -- client SSD controllers growth.

Riyadh, could you repeat your expectations for the full year?

Did I hear right if you said that the full year you're expecting to pretty much flat line?

Secondly, could you talk a little bit about what has been the incubator in terms of growth given the pretty sharp decline in NAND flash prices?

And is there a very different behavior you're seeing in terms of growth between your PC OEM customers and some of the module makers, particularly the China module makers.

That was my first question.

Yes, regarding our SSD controller growth, we believe, from [uniwide], we definitely will grow roughly around about 20% or higher.

However, due to the NAND price declined sharply, our ASP might be impacted.

So also we will work very hard for the gross margin.

In addition, we believe -- because the falling NAND prices will drive increasing adoption for long term, but its effect is not immediate, right?

Sale of SSD, PC OEMs are generally based on long-term contracts that take time to renegotiate when NAND prices fall and new [divide corvine] take time.

And so we -- our OEM project seems very stable and -- but just the visibility is only about 6 months.

And as previously discussed, there are more risk adverse for module maker to take the -- our controller due to the sharp NAND price drop.

But we still own very large percent of the module maker for the -- and we are confident when the price becomes stable and the demand, our visibility will be much stronger this year.

And Gokul, let me also add to what Wallace just talked about.

While we're expecting our SSD revenue to be flat in Q1, we're expecting very strong growth for the full year.

And just our visibility is quite limited given that our largest customers, our NAND flash partners, have not been able to provide us with full year forecast this year.

So instead of the 12 months sales procurement forecast to us this year, they're now providing us with 6-month procurement forecast.

So this is limiting concrete visibility that we have.

We have theoretical visibility in terms of the dynamics of our industry and the projects.

We're expecting a lot of our PC OEM projects to start ramping midyear point, but the exact sales volume we still do not have visibility for that.

And so instead of giving you a false precision by providing a dollar sales range, growth range, we decided that it's more prudent just to provide directional trends for our key products.

Okay.

So with the decline in Kingston, how does it look from a market share perspective given that they have been pretty much exclusively using one of your competitor's controller solutions?

Does that mean that there is a meaningful potential increase in market share given their position in the channel market?

We have been working with this particular leading module maker in the world since early 2018.

It's quite interesting they come to us and looking for a long-term partnership.

So we have multiple programs working with this customer from channel as well to PC OEM and a future enterprise product.

Just step-by-step, but we still try to be quiet at this moment.

Hopefully, we're going to see very bright results in the future.

Okay.

The last question I had was on eMMC and UFS.

Actually, customer mix changes in pretty tough market environment as well towards more Chinese module maker as well as your U.S. NAND flash customer for UFS.

Do you see any margin changes happening given that you alluded to some margin pressures in Q1 in the eMMC business?

Are there any meaningful margin pressures emerging in the eMMC business?

We have a few trends, Gokul.

We have the trend of eMMC converting to UFS and in the initial stage where UFS volumes are small, the gross profitability in UFS's products are better than the sort of segment average for eMMC+

UFS.

But over time, when UFS becomes the primary type of embedded memory for mobile devices, the gross profitability will converge.

So this is one of the trends.

The other trend that we're seeing, especially in Q1 is, in Q1, we're going to be shipping a lot more -- temporarily we're going to be shipping a lot of legacy eMMC parts within the eMMC segment.

And for these older legacy parts, the gross margins are lower and so this is affecting our segment as well as contributing to overall lower gross profitability.

We now have Rajvindra from Needham & Company.

And I joined a little bit late, you might've mentioned this before, but I just wanted some more clarification about the comment that the flash vendors are unable to provide a full year forecast, usually it's 12 months and now you're saying that they can provide 6 months.

And you'd mentioned that the NAND pricing has fallen significantly, but it doesn't necessarily -- it takes time to see that those effects in the marketplace.

I'm just trying to understand that because, in the past, it's -- client SSDs have been a very price-elastic market, you would see adoption pretty quickly.

So why is it that this particular time is different from -- is it different from other periods where we have seen NAND pricing drop and there's a lag that's having -- that's taking effect?

I think there's a couple of factors here: first of all is NAND, the inventory is in very, very high level.

And it will take time for NAND makers to sell-through the inventory and if they have the output come out in Q1, Q2.

So each of the NAND maker, our design, they're receiving the forecast on PC OEM, also only have 6 months.

They don't have a full year visibility.

So they would like to be more cautious and give a 6-month forecast instead of 1 year full year forecast.

So that's the current situation.

But the runway production is very solid and actually we have a more design pipeline in our hand.

And you're seeing, because 96-layer TLC, 96-layer QLC design for both SATA and PCIe, we have 70% more than last year.

Now for China module maker, due to the NAND price declined sharply, so they try to be more cautious, they do not want to buy a large volume of NAND.

So they, step-by-step, monthly, buying the NAND and ship the product based on their customer demand.

So our visibility for our module maker is even worse.

That's why, we -- very hard for us to give a very concrete guidance.

We understand client's demand is very strong and continually from Q2 all the way to the end of the year, but we cannot give a concrete number regarding how much sale revenue grow for client SSD at the moment.

That's very helpful, Wallace.

Is this a -- based on your experience, is this a unique situation that we're in right now where even the NAND makers are not getting forecast -- full year forecasts from their customers or is this kind of par for course, that would be -- when we're in this situation?

I will say this is a very unique situation right now.

Many, many people in the food chain underestimate the NAND oversupply situation.

Now the oversupply situation, is -- are you seeing this being driven also because of weakening demand?

Obviously, smartphones and other markets, is it just purely supply -- oversupply, because of the transition to 3D NAND?

Any kind of comments on the demand part of the equation?

There are many factors, many data points here.

This relate to global economic slowdown, relate to U.S.-China trade war, relate to many, many uncertainties, also smartphones slowing down and replenishment cycle extended.

And PC market, it just stays flat or just declines gradually.

So I think the situation, because the yield of the 3D NAND is much better than the past, so the NAND output, the big growth, just compare with current economic situation, it doesn't match and the gap becomes very big.

So NAND maker all try to find the effective way to move the inventory.

We definitely benefit some with the movement -- to move inventory, because clients would be probably the best vehicle to move the NAND.

However, the current situation is very unique, it's very special and it never happened before in the past.

And last question in terms of your view of NAND, its supply and NAND ASP falling.

Any sense there in terms of how much more over -- what is the supply from your vantage point?

How much greater that's going to be than, say, previous thinking?

And any view on the NAND pricing, how much is it going to fall this year based on your expectations?

I think it's very hard for me to comment for that, because that's a NAND maker-related question.

I think you can see the other financial reports, everybody really have a very, very high inventory, excess inventory, they need to figure out how to move.

But, however, Q1 also is a weak season for the full year and we're definitely going to see gradual rebound from second quarter and all the way to the higher season in Q3, Q4.

And we're going to see more applications to come through the NAND.

We're going to see data centers start to repurchasing the NAND from late Q2 to early Q3.

So I think, eventually, the difficult situation will be resolved, but the Q1 is the worst season for the full year.

(Operator Instructions) Our next question is from Mike Crawford of B. Riley FBR.

Do you think in 2019, you're going to end up having a new #1 customer displacing your current top customer?

Mike, can you come again, your question is -- are we going to have another large customer replace our current large customer?

Yes, do you think we'll have a change in who is your largest customer from what -- for -- in the prior number of years has been Hynix?

Well, we cannot -- we really don't know, the -- I think we definitely have a growing customer from NAND makers.

We also have a growing strong customer from module makers.

Okay.

And just switching gears a little bit to regarding open channel.

So I know visibility, one, if I just directionally, how do you see potential pathways for open-channel controllers and SSD comprising a percent of your total business, say, is it more of a design-win thing in 2019 and then you see a real ramp up in 2020, or what -- directionally, where do you see that heading?

I think as we said, for China enterprise SSD business, we have to sell enough enterprise controller as enterprise SSD solutions.

So that is really SSD solutions selling to the 2 China major hyperscaler open channel.

We believe, this year, the percentage from their overall demand probably still very small, but gradually that will increase into the very important role for their data center storage.

And for the U.S. development, I think we are still working and cooking with each of the hyperscaler, maybe they don't call it open channel, but they have a similar concept and requirement, they want to have tailored enterprise controller with tailored firmware together to meet a specific demand application.

And we are in parallel process for both enterprise open-channel solutions in China and enterprise controller engagement for U.S. market.

Okay.

And then just 1 last question.

In the U.S. market or both markets, I mean, the initial opportunity is to get into data center applications.

But how far are we talking when we consider open-channel SSDs helping to handle data being generated in increasingly autonomous automobiles and other applications?

For automotive, we really don't know, but we know that's really working well for certain data center applications and specifically the business structure.

Because we do see the test results and that's why we get a good collaboration and work together with the 2 hyperscaler customer in China.

Our next question is from the line of Anthony Stoss of Craig-Hallum.

Riyadh, can you indicate if you have any open-channel revenue in your essentially flat 2019 revenue guide?

And if you do, maybe a little bit of a range.

Second question, on the, again, on open channel, can you also provide more color on the tuning that still needs to be done, if it's done on Silicon Motion side and it still needs to be done on Alibaba's side?

And then lastly, I would also love to hear a little more color on -- you talked about design activity on SSDs being strong, maybe kind of share with us what you think in terms of number of designs that will go-live in the second half of '19 versus second half of '18?

Tony, I'll start with first of your 3 questions and Wallace will probably take the remaining 2. We've started -- we provided our very low volume, our open-channel SSDs to our 2 Chinese hyperscaler, Alibaba and all the BAT customers.

These initial test boards were provided to them in Q4 of last year.

So they're already testing right now.

We have -- they have our SSDs in live situations and are testing, and we're tuning and optimizing our software to get the performance to where it needs to be.

With the expectation that by mid of this year, we're going to be able to start volume production and ramp for the remainder of the year in the second half of this year.

So we are expecting meaningful revenue contribution from these open channel SSDs.

And this is how we're intending to drive our growth and maintain similar SSD revenue for the full year compared to last year.

Regarding the tuning process, I think, the hyperscaler and us both need to put the effort into doing the tuning process.

But you know the -- each of the data center they probably -- a provider, they have 20 sort of different business units and applications are quite different.

And so the test condition and requirement are also different.

That's why they complicate the whole process.

That's why, maybe you wonder why is the tuning taking so long, because when it started a couple of hundred board testing and there's a couple of hundred servers, it just take time to see the result, different workload and other different conditions.

So it just -- it's in the final stage of tuning process.

That's why we have pretty good confidence and the production will happen in the middle of the year and as a schedule from last year and -- we should see the meaningful revenue from open-channel SSD solutions through the 2 China hyperscalers customer.

And then, Riyadh, getting back to the designer activities kind of what you expect in terms of number of units launched in the second half of '19 versus second half of '18.

I guess, what I'm driving at is we take second half of '19 and the first half of 2020 kind of more accurate picture on your business.

So any color would be helpful.

As we talked about earlier in our call, we have a lot of programs with client SSD programs.

We have 70% more programs exiting last year compared to where -- what we had a year ago.

So we're very well positioned.

We -- going into this year for -- with our NAND flash partners to go into a lot of OEM programs, PC OEM programs.

So from a programs perspective, the factors that we -- the key factor that we can manage, we're very well set up.

Now what we're waiting for is better procurement forecast from our customers, so that we can have better revenue visibility, but as things stand, we feel very good about where we are today.

And ladies and gentlemen, that does conclude our Q&A session.

And I would like to hand the conference back to Mr. Wallace Kou, President and CEO.

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

We'll be attending several investor conferences in Asia and the U.S. in this quarter.

Detail of this event will be available on our website.

Thank you, and goodbye for now.

Thank you.

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

Thank you for participating.

You may now all disconnect.