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Silicon Motion Technology Corporation (NASDAQ:SIMO)

UBS Global Technology Conference Call

November 14, 2012, 03:30 pm ET

Executives

Riyadh Lai - CFO

Analysts

Nick Gaudois - UBS

Nick Gaudois - UBS

My name is Nick Gaudois, The Asia and Japan Tech Research for UBS. It’s my pleasure to have Riyadh Lai here from Silicon Motion presenting for us. Riyadh, over to you.

Riyadh Lai

Thank you, Nick. My name is Riyadh Lai; I am CFO at Silicon Motion. It’s a pleasure to be here today at the UBS conference. For the benefit of everyone, a quick introduction to our company. We are fabless semiconductor company focused on two specific applications. Controllers for NAND Flash based storage devices and another area of focus especially the RF for mobile handsets, primarily LTE transceivers specifically for Samsung.

Our mobile storage business where our controller set is about 60% of our total revenue last year and in that product segment we have controllers for eMMC embedded memory, SSDs as well as cards and USB flash drives.

In our mobile communications, our other product line accounts for about 25% of the total revenue last year. Our primary product there is our LTE transceiver, though in addition, we also provide transceivers for CDMA EV-DO and we also have mobile TV SoC solutions for certain markets such as Korea, Japan and Brazil.

We are a company that has done very well over the last two years. We grew our revenue 69% last year to $224 million. We grew our revenue 52% in the prior year and this year despite the uncertain economic outlook, we are still going to grow our revenue about 25% to 27% and with our core products as well as our new growth products that are coming online very nicely, we are fairly confident that based on some basic scenarios of growing our business at least 15% next year.

We are an industry that is very exciting. We are in perhaps the most exciting part of semiconductor industry relating to NAND Flash. We are providing silicon for some of the fastest growing applications out there, primarily smartphones and also tablets. We are providing technology for the NAND Flash industry going into the smartphones that are unique and provide us with beneficial ASD opportunities as well as margin opportunities focusing on some of the leading OEMs in the marketplace that allows us to both drive our current products as well as go into new market segments to further our longer-term growth and these would be embedded memory as well as SSD and in other area that is a little bit different from controllers, especially the RF where we've done very well providing 4G LTE transceivers for many of Samsung’s products including their flagship Galaxy SIII phones and those phones are using our transceivers in select markets, primarily Korea.

NAND Flash is a very dynamic fast growing part of the semiconductor industry with fast bit growth and we will continue to have fast bit growth as industry continue to scale process geometries, add new equipment and new fab and this will continue. There is a lot of demand for Flash going into embedded applications, going into storage for the cloud and so forth. It’s creating a lot of opportunity for us and will continue to as all these storage devices, whether cards, embedded memory, SSDs and so forth all these products using NAND Flash storage (inaudible).

In the past years, we've been primarily a supplier of controllers for cards and USB flash drives, but we have very successfully moved into embedded memory as a provider of eMMC controllers for embedded applications, where we are now shipping to Samsung and Hynix and already in our first year business for eMMC have about 5% to 7% market share in the 600 million market unit business.

With all the Flash being produced and will continue to be produced, one of the important demands for all this Flash is going to smartphones. Smartphones have been growing rapidly, will continue to grow rapidly and there is strong demand for NAND Flash from these smartphones or the embedded memory fitting in these devices as well as external memory brought into these devices through cards. We are the leading supplier of controllers for memory cards with a market share of well in excess of 30%. We have been supplying a lot to the OEMs and other customers who are providing these memory cards to the handset OEMs.

In addition, we are now supplying other pieces of silicon to these smartphones, mainly eMMC controllers going into the embedded memory. So you can think of eMMC as deeper mobile devices for smartphones as well as tablets. We are also supplying LTE transceivers for many of the smartphones going into the market, specifically the market leading smartphones of Samsung, the Galaxy S III phones and to create marketplace.

NAND Flash is a very important component going into a lot of devices. Its importance is growing as costs come down, as you are able to store more and more device for the same dollar value of memory. And one of the things that’s happening with Flash, it’s rapidly moving down the geometry curve; it’s also moving up the architecture curve from SLC to MLC to TLC and each, with each successive generation of Flash the products are getting weaker and weaker from an endurance perspective as well as from a data integrity perspective and with each successive generation of shrinks NAND Flash require more and more sophisticated controllers.

Many years ago, say 2007, most of the Flash in the marketplace were 65 nano or older Flash. For these Flash you generally need about two bits per one kbyte of data for error correction. Now with the more, most advanced flash in the marketplace, say a 20 nanometer flash need about 48 bytes of data for a kbyte, 48k of error correction for one kbyte of data, so this is a geometric increase in amount of error correction required in order to have the same quality product.

And so this is driving strong demand for cutting-edge controller technology, technology that we supply for these most advanced node Flash products coming into market and this is giving us a business profile where on apples-to-apples basis our ASPs have been increasing, we’ve had ASPs increasing for our controllers for the last 11 consecutive quarters on a year-over-year basis and we have been able to provide these products, these cutting edge products with fairly robust gross margins in the 48% to 50% range over last many years.

Part of our strategy also includes emphasizing OEMs, specifically flash makers and Tier-1 device makers. We are supplying a lot of flash controllers to OEMs our largest customer is Samsung but we also supply controllers to Hynix and Micron. We are also working closely with all of the other flash makers in providing controllers that supports their flash going into the marketplace.

Our OEMs now account for about 65% of our total controller sales, the benefit of this emphasize on OEM is many, one since they own the flash especially the flash makers, we have much better business visibility. And because they know how they want to sell their flash and how they want to allocate their capacity, it also reduces the visibility of our business and to them focusing on selling products to OEMs, device makers, there is also increasing emphasizes on quality controllers, higher quality controllers that buy the best performance products of this device OEM.

And furthermore through the flash vendors, we are able to enter new categories or controllers beyond these cards and USB flash drives going into SSD embedded solutions. And when I talk about SSD embedded the biggest part of this segment, this class of products for us now our controllers for eMMC. We started going into production of eMMC for a flash maker in the first quarter.

We went into production with the second flash vendor in the second quarter. So all-in-all, we now have two full quarters of revenue sales of eMMC controllers to our two flash partners Samsung and Hynix and by the end of the year through the business that we have so far, we will probably have eMMC controller market share of about 5% to 10% market share.

This has been a market with a [count] of at least 600 million units. Of the 600 million units, we have 5% to 10% market share. We expect the count to increase about 20% from the 600 plus million units and based on the projects that we are already involved in with Samsung and Hynix we believe we can grow our market share from the 5% to 10% to about 15% to 20% next year.

Other important area of new growth for us in addition to eMMC is our LTE transceivers, our 4G LTE transceivers. We have been working closely with Samsung for a number of years on providing them with our LTE transceivers products and we've done very well with this.

Last year 2010, LTE transceivers accounted for roughly 10% of our corporate revenue. This year, we will grow our LTE revenue about roughly 65%. This is through a more than, roughly a doubling of our design wins compared to last year. We had about six design wins with Samsung for LTE phones. This year we have about 15 models, including their Galaxy SIII IV select markets, principally the Korea market for KT SKT and LGU Plus. So we are providing a lot of different variations of our LTE transceivers to support Samsung both for the Korean market as well as the US markets.

We have capabilities to support them for the CDMA, EVDO plus LTE networks as well as the WCDMA plus LTE networks for both the US as well as Korea and we expect that we will continue to grow this going into next year. Based on our expectations of the overall growth of LTE as well as Samsung maintaining their market share in the LTE market as well as continue usage of their own baseband and our transceivers we believe we can grow our LTE revenue 50% to 75% next year. This is beyond the 65% that we will deliver this year.

Our business profile has also been changing through the many changes in our business, the many growth drivers of our business. Historically, the key growth driver for our business has been controllers for cards, basically cards bundled with Smartphone, it drove most of our growth in last two years but that growth rate is now beginning to slow down and as it slows down we've been investing in and ramping new growth drivers to continue to sustain our longer term growth of our company.

In the past, growth came from cards, USB flash drives; in the future growth will be coming from our LTE, eMMC and further some our SSD programs. Already, our new growth drivers account for a meaningful part of our business. Our few growth drivers are LTE and eMMC and SSD products accounted for 15% of 2011 revenue.

This year our new growth drivers will grow to account for about 32% of our revenue and next year assuming a 15% revenue growth trajectory, we believe our new growth drivers can account for roughly 40% to 45% of our business. So we believe we've been very successful in executing on what’ve promised, what we have been investing in, creating a new pattern of growth to support the longer term growth of our business as previous growth drivers of business closed down.

As these growth drivers core products slow down, we have new classes of products for us to hand turn over for further growth. But that said, we're still expecting continued growth from our card controller business, though at a much more modest growth rate this year as well as next year, modest growth rate for our card controller business next year.

We recently announced our third quarter results. We’ve done very well in our humble opinion. We delivered $77 million of revenue in Q3. This is a corporate high, the highest revenue level or quarterly revenue level in our corporate history. We also delivered EPS of $0.54. This again is a record high in our company. We believe with the growth drivers that we have as well as modest growth from our core products, next year it should be another exciting year for our business.

So with that, I will turn the presentation over to you guys for the Q&A.

Question-and-Answer Session

Nick Gaudois - UBS

Great, thank you very much Riyadh. Just transceiver LTE, as far as the first design win is concerned for large US carrier for Samsung you just mentioned as well as bullet points in presentation, could you confirm SSD is, LTE with reverse path tools HSDPA plus or GSM or is it from the video side.

Riyadh Lai

We are providing both, we are providing if you look at the products that we have been shipping to Samsung for the US market as well as the Korean market, we have been providing both. We have been providing transceivers for Samsung for the CDMA EV-DO plus LTE programs as well as WCDMA, HSPA plus LTE program. For example, if you look at Korea, we are supplying the transceivers to Samsung for their Galaxy S III phones going to three market or their three carriers there KT, SKT and LGU Plus. LGU Plus is a EV-DO plus LTE network, so we are supplying our transceivers to support Samsung for that carrier, other two major carriers KT and SKT are WCDMA plus LTE carriers and so for them we are supplying our transceivers that supports Samsung for those two type of air interface.

Nick Gaudois - UBS

When you provide LTE transceivers for solution including EV-DO, you provide this in addition to any video solution, right. So it’s too cheap solution transceiver [2G] baseband, one of them being the commercial.

Riyadh Lai

For the EV-DO plus LTE solution, we are providing two Silicon, we are providing a LTE transceiver and a separate discreet EV-DO transceiver.

Nick Gaudois - UBS

So when we talk about but on however first Samsung LTE design wins for H1 2013 in the US for large carrier would about be a one cheap solution but going back to GSM type note with CDMA type.

Riyadh Lai

Well, I mean last year we were for the US market we were supplying to Samsung for the Galaxy Nexus. I believe we are also buying earlier this year too, Galaxy Nexus going to Verizon, Verizon is the CDMA network, so for that phone we are providing the LTE for the Samsung baseband as well as a EV-DO transceiver for a VIA baseband that Samsung is using in their Smartphone.

Nick Gaudois - UBS

Okay, any questions, (inaudible)

Unidentified Analyst

Do you mind going back to the EMC to tell about how (inaudible) is getting weaker for the complexity increased on the controller side and this might be an ignorant question on my behalf but why is that the actual event price (inaudible) on to the controller side, thanks?

Riyadh Lai

NAND flash in general, with each successive generation shrink is leading to worse and worse endurance and worse and worse data integrity. It’s a bit of a bargain with a devil; you want more capacity, more memory for cheaper price. You shrink, you have closer line width with the finer processed nodes and as the line width gets packed closer and closer, you have more interference, less reliability of data, lower endurance of the product. So this requires more and more sophisticated controller technology to process, to ensure that the data is still there, that the data is being transmitted accurately, that its zero, if it’s a zero that you are transmitting that zero is actually what is stored in the cell.

So we provide the technology to handle this principally through air correction and we are leveling, but we also bring to the table a host of digital signal processing including data shaping to make sure that the wave while the storage of the data, the data itself is digital, the data that's being passed through is analyzed through a wave, and for us its part of what we have to do with the digital signal processing is to ensure that this wave is capturing, if the data is one, it’s the one in that wave.

This gets increasingly complex when Flash is going into finer and finer geometry and that's why the amount of air correction we are using, the way leveling that we are using and foreseeable when we go into the next generation of Flash in the mid-teens say 15 nanometer Flash existing air correction algorithm using BCH will no longer work and we are going into LDBC which we already have.

We are we believe the leader in providing LDBC solutions for the industry and we do this for a living. This is our bread and butter and we do this very well. We help the Flash makers be successful in selling their Flash. So we think of ourselves as the outsourced partner to the Flash makers, to help them alleviate their own constraints and we can, through our resources provide cutting edge technology, but in addition technology that is very cost competitive that enable them to rapidly scale their business and sell more Flash into the marketplace.

Nick Gaudois - UBS

I guess I will just add to that, how much smaller can Flash get before the transition goes on to something else. I have been reading about resistive gram and just addition to that question.

Riyadh Lai

That's a very good question, an interesting question. Flash has always been surprising us in it’s ability to go through more shrinks. Many years ago a lot of analysts including yourself were thinking well, is 45 nanometer it, and then you go to 35 nanometer, is 35 nanometer it, but there are a lot of very clever engineers working on the NAND Flash industry. It’s a very large industry. There are a lot of resources being applied and a lot of innovations in how you can continue the process shrink and then from our perspective how we support the Flash makers from a controller perspective to ensure that whatever Flash they can bring to the market there are strong controllers available to ensure that from a consumers perspective, the quality remains consistent, that there is no degradation of user experience.

How far will it continue to shrink? Perhaps in to the teens we are at 20 nano, we will go in to 15 nano and beyond that, potentially it maybe shrink further. But there are also alternative strategy that the flash makers are pursuing including 3D NAND flash. Right now, NAND flash is 2D and one of the ways to continue the progress of NAND flash is to build it up 3D. Through 3D NAND flash, you also need controllers. So there is going to be extension of the NAND flash, existing NAND flash technology by going up the 3D path, and beyond that, there are host of other alternative post-NAND technology that could come to play, but those are still many years from really going mass production.

Unidentified Analyst

Hi, I was just wondering what your strategy with respect to SoC controllers. Specifically why it has taken you a while to launch an SoC controller and why you need (inaudible) space given relatively crowded space and do you have any design wins? Can you talk about?

Riyadh Lai

We're not that big a company. You know, we have 600 plus employees. Roughly, two-thirds or so engineers. So we need to prioritize where we think we can capture the proper market opportunities. So the way we prioritize was to go after eMMC (inaudible). eMMC the market is large, it’s smart phone centric, smart phones growing faster than PCs, smart phones larger than PCs and through eMMC we can also go into adjacent market that are taking market share away from PCs mainly tablets and also into devices are becoming smart like TVs, smart TVs where we are already shipping controllers very small volume so far taking our characteristics of smart phones and tablets.

Again the smart TVs require embedded memory eMMC is a popular way to go through it, to go about it if it’s ARM base and using Android as operating system. So it’s prioritization for us, how we allocate our resources. The way we think about eMMC is essentially also SSD, but SSD for mobile devices. We think about smart phone, it’s providing a PC like experience for a lot of consumers, tablets again taking much away from notebooks.

So as these processors become more and more powerful potentially the ARMs are also going to be going into notebooks and when that happens eMMC could also go into notebooks. eMMC is a type of SSD but using the eMMC interface performance is a little slower, but it’s also very sophisticated controller, a very sophisticated storage device.

On the SATA SSD going to PCs, we have been putting in lot of resources for that too, but in terms of priority it follows our eMMC. We have products that have come to market; we will have more products that come to market. So far its fairly limited, we have a product as selling in the market place right now it’s an all in one PC with one terabyte hard disk drive plus the 40 gigabyte NAND flash, where we are providing and controllers for that.

So for us it’s a replication of our existing strategy from cards to eMMC to SSD where we become work as the outsourced business partner R&D ARM of the NAND flash partners by offering technology that is cutting edge, that's one of the best in the market place on performance perspective as well as solutions that are very cost competitive, where we believe we can continue to add value to our customers.

SSDs for PCs we are not might there yet, but its going to be endpoint part of our market and we have a lot of OEMs asking us to quickly progress our development of SATA SSD solutions.

Nick Gaudois - UBS

Okay, great. Thank you very much Riyadh for (inaudible) continuous conversation and we see there is a breakout session for (inaudible) right now, thank you.

Riyadh Lai

Thank you.

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