Silicon Motion Technology's CEO Discusses Q1 2013 Results - Earnings Call Transcript

| About: Silicon Motion (SIMO)

Silicon Motion Technology Corporation. (NASDAQ:SIMO)

Q1 2013 Earnings Call

April 26, 2013 8.00 am ET

Executives

Jason Tsai – Director of Investor Relations and Strategy

Wallace C. Kou – President, Chief Executive Officer

Riyadh Lai – Chief Financial Officer

Analysts

Tony J. Stoss – Craig-Hallum Capital Group LLC

Raji S. Gill – Needham & Co. LLC

Mike Crawford – B. Riley & Co. LLC

Bob Gujavarty – Deutsche Bank Securities, Inc.

Monika Garg – Pacific Crest Securities

Tom Sepenzis – Northland Securities

Operator

Good day ladies and gentlemen and welcome to the Fourth Quarter Silicon Motion Technology Corp. Q4 2012 Earnings Conference Call. My name is Han and I will be your conference moderator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session (Operator Instructions).

Before we begin today’s conference, I have been asked to read the following forward-looking statements. This press release 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 conditions and business prospects.

Although such statements are based on our own information and information from other sources we believe to be reliable; you should not place undue reliance on them. These statements involve risks and uncertainties and actual market trends and our results may differ materially from those expressed or implied in these forward-looking statements for a variety of reasons.

Potential risks and uncertainties include, but are not limited to continued competitive pressure in the semiconductor industry and the effect of such pressure on prices, unpredictable changes in technology and consumer demand for multimedia consumer electronics, the state of, 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 press release.

I would now like to hand our presentation over to our host, Mr. Jason Tsai, Director of IR and Strategy. Please proceed, sir.

Jason Tsai

Thank you and good morning everyone. Welcome to the Silicon Motion First quarter 2013 financial results conference call and webcast. My name is Jason Tsai. With me here is Wallace Kou, our President and CEO and Riyadh Lai, our Chief Financial Officer.

The agenda for today is as follows: Wallace will start with a review of some of our recent business developments. Riyadh will then discuss our first quarter financial results and provide our outlook. We’ll then conclude with Q&A.

Before we get started, I would like to remind you of our Safe Harbor policy, which is 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 after the close of market yesterday. This webcast will be available for replay on our website, www.siliconmotion.com for a limited time.

To enhance investors’ understanding of our ongoing economic performance, we will discuss non-GAAP information during this call. We use non-GAAP financial measures internally to evaluate and manage our operations. We have therefore chosen to provide this information to enable you to perform comparisons of our operating results in a manner similar to how we analyze our own operating results. The reconciliation of GAAP to non-GAAP financial data can we found on our earnings, we’ve issued yesterday. We ask that you review it in conjunction with this call.

With that, I’ll now like to turn the call to Wallace.

Wallace C. Kou

Thank you Jason, hello everyone and thank you for joining our earnings call. In Q1, we continued to make substantial progress in growing our SSD plus embedded products specifically our eMMC controller. We are executing well on our SSD plus embedded growth plan, and are increasingly confident that these product will more than double this year. Our overall Q1 revenue were largely as communicated, and we expect our business to rebound in Q2 from continuous trends of our SSD plus embedded products as well as stronger current USB controller sales. Riyadh will go into our financial later in the call.

Last quarter, when we spoke I had discussed that we have set ourselves two important goals that we needed to grow and quickly scale up our New Growth Products, primarily our SSD plus embedded and LTE transceivers. And that we needed to continue to manage well our large but maturing core products. We are doing well in growing our SSD plus embedded especially our eMMC product. Our SSD plus embedded product are now over quarter of our sales. And our eMMC controller grew by almost 30% sequentially.

Our SSD plus embedded revenue are now largely in our USB flash drive revenue. And it will surpass our card controller revenue in Q2. We remained very exiting about our all the major new growth products, our LTE transceiver, and this growth prospect with Samsung.

However, as we are transitioning with Samsung in our next generation LTE advanced solution later this year. The timing and magnitude of revenue this year from this segment remain unclear. Our LTE transceiver remains in customer testing and I will talk more about this shortly. In term of our core products, our current USB and flash drive controlled sale should rebound nicely in the second quarter. And sale of this controller should gradually decline over the rest of the year.

Now, let me turn to our eMMC business. We have had tremendous success in our eMMC controller. Last year, was our first full-year of eMMC revenue and already for the full-year. eMMC account for roughly 10% of our overall revenue and we have become the eMMC merchant controller in market share and technology leader by a mile by supplying to both Samsung and SK Hynix.

Our eMMC controller sales grew nearly 30% in Q1, and sales are well on track to more than double this year. Samsung and SK Hynix are supplying embedded memory solution using our eMMC controller to eight of the top ten non-iOS smartphone OEMs. We are being successful as our high performance cost completive controller enable our flash partner to grow embedded market and capture market share at both Tier 1 smartphone OEMs as well as in the fast growing China low cost smartphone segments.

We believe our eMMC controller are found in almost half of all the smartphones in China where the low cost are high-end. We have significantly expanded our presence in the embedded memory market. And our eMMC controller can already be found in well over 100 devices mostly smartphones, but now also tablet, Smart TV, set-top boxes and gaming consoles.

The majority of our eMMC controller sold today are being our first generation eMMC 4.1 solution manufacture using 110 nanometers. Our second generation eMMC controller and eMMC 4.5 solutions manufacture at 55 nanometer and to mass production in April. eMMC 4.5 has doubled the render data read speed and tripled the render data write speed compared to eMMC 4.1

And this higher performing controllers has allowed us to capture highly anticipate flagship Smartphone and tablet arena already. We had already begun shipping this controller to leading flagship Android smartphone and will begin chipping for flash Android tablet in the second quarters.

We also planning to bring to the market this year an eMMC controller that will support TLC Flash targeting low cost solution that’s employing emerging market like China. Our partner roadmap also include eMMC 5.0, which will be available late this year and USS 2.0 next year.

So performance of the USS 2.0 is comparable to SATA 3.0 and target both high end Smartphones and tablets. The Smartphone and tablet market for eMMC was over 600 million units in 2012. And we expect this two segment of the market to grow in excess of 30% this year. In this two eMMC market segment combined, we had an overall market share of 5% to 10% in 2012 and are confident based on the projects that we are currently involved in this our two flash partners, that we can grow our market share to more than 15% to 20% this year.

While today, growth on SSD plus embedded products are primarily for our eMMC controllers we are starting to begin commercial sampling in Q2 of our new SATA3 controller for full size client SSD and NAND-cache drives, while our SATA3 SSD controller are early in the design cycle and we are now expecting significant revenue from this SATA this year.

We’re slightly above the interest that we have received so far on potential customers in the positive earning feedback from the testing and evaluations. While though the more distinguishing characteristic of our SSD controller is that two of the able to support TLC flash, where one of the various three controller maker that have the capability to design TLC, eMMC and SSD controller.

This TLC feature will be picking sampling in second half of this year and will allow for more affordable SSD solutions. We’ll continue to update you on the progress about the SATA3 SSD controllers and so we should have meaningful SSD revenue contribution into 2014.

Let me now turn to our card and USB controller sales. In the first quarter, our sales of card and UFD controller to module maker customers were seasonally down as expected. Flash maker have also been limiting the sale of flash wafer to module maker to support prices. More importantly, however our large OEM customer has been rebalancing as card sales and this rebalancing will naturally affect our controller sales for a few quarters. This customer has been reducing the production of low density cards and will be transitioning with us to higher performing card in the second half of this year.

We sell our card and USB controller sales to other customers to rebound and to 20% in Q2, due to both more flash of their ability and the competitiveness of our controller, declined modestly for the rest of the year. Sales of our card and USB flash drive controller should be relatively stable for the rest of the year, with minor variation depending on greater or less flash availability. Because most of the debundling cards with smarphone in more developer market such as U.S. has already taken place. While we do not see growth, we also do not see much downside from here.

In China we believe there is significant demand for bundle low density cards, but in the near term growth in the cost sensitive market is being affected by NAND, flash availability.

Now let me turn into our LTE transceiver business. Our LTE transceiver paired with Samsung LTE baseband has been in testing for quite some time. In the mean time, LTE wireless service provider have been readily progressing towards LTE events. And our second feature such as carrier aggregation. The current generation Samsung LTE baseband and our transceiver do not support carrier aggregation. We are therefore not expecting any major Samsung flagship design win this year.

The next generation baseband along with our transceiver that support carrier aggregation will begin testing in the second half of this year. We are however expecting some flagship derivative model wins on Samsung using the current generation in baseband and our LTE transceiver in the second half of this year.

In general individual flagship derivative model volume are lower than for flagship model as the number of models are usually more. We believe Samsung remain firmly committed to using the internal application processor and LTE baseband for their Smartphones. We also believe Samsung commitment with LTE baseband as part of the long-terms strategy.

We are actually working with Samsung to ensure that our next generation transceiver is ready for testing, when their baseband became available in the second half this year. We continue to feel good about meeting Samsung technical and cost targets.

Overall, I am very pleased by the progress that we have made in managing the slowdown of our core product and rapid growth for our gross products. We are executing very successfully on our eMMC growth strategy. And I am confident that our LTE growth resume later this year.

Also later this year, we are planning to talk more about our high performance cost competitive SATA3 SSD controllers for both NAND-cache SSD and full size client SSD as well as our unique FerriSSD solutions.

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

Riyadh Lai

Thank you, Wallace. First I will outline our financial results for the first quarter, and then I’ll provide our second quarter and update our full year 2013 guidance. For the first quarter of 2013, we delivered total revenue of $57.4 million, a 19% decline compared to the prior quarter.

Let me recap the performance of our two key product lines; first Mobile Storage. Mobile Storage revenue declined 18% sequentially. Mobile Storage controller shipments decreased 11% sequentially. Mobile Storage controller ASP decreased by 7% sequentially, but increased 10% year-over-year, our 13 consecutive quarter of annual ASP increase. Our card controller revenue decreased by 24% sequentially and our USB controller flash drive controller revenue decreased by 31% sequentially.

Over 85% of our SSD and USB controller sales are for supporting 19 to 21 nanometer NAND flash. This is a sharp increase compared to the fourth quarter when controller sale supporting 19 to 21 nanometer accounted for just over 50% of our SSD and USB controller sales. OEM revenue again accounted for about 65% of our controller sales in the first quarter, similar to the past two quarters.

Moving to mobile communications, this product segment revenue decreased 20% sequentially due to the cyclical transition of Samsung LTE smartphones. Our corporate gross margin decreased from 44.6% in the fourth quarter to 41% in the first quarter. Our gross margins were lower than our gross margin guidance range because of two one-time factors excluding these one-time factors our gross margin was 44%, the low end of our guidance. The two one-time factors are a) $1.4 million inventory charge for obsolete pars and $1.7 million vendor compensation.

Our operating margin in the first quarter was 13.7%, a decline from the 19.5% in the fourth quarter. In the first quarter our operating expense decreased to $15.6 million from $17.8 million in the fourth quarter due to delayed timing of new project expenses.

We ended the first quarter with 696 employees, eight more than at the end of the previous quarter. Earnings per ADS in the first quarter were $0.17, a decline from the $0.36 in fourth quarter as a result of lower revenue and gross margins. Stock-based compensation in the first quarter was $2.5 million, lower than the $3.4 million in the fourth quarter.

I will now move to our balance sheet and cash flow. Inventory days increased to 87 days in the first quarter from 78 days in the fourth quarter. DSO increased to 54 days in the first quarter compared to 48 days in the fourth quarter. Payable days increased to 65 days in the first quarter compared to 61 days in the fourth quarter.

In the first quarter our cash balance increased by $3.6 million to $166 million at period’s end. In terms of primary sources of cash, we generated $6 million in net earnings, a decrease in inventory levels generated $3.1 million and a decrease in receivables generated $3.7 million, a decrease in accrued expenses consumed $6.3 million, a decrease in payable consumed $7.3 million and our dividend payment consumed $5 million.

We invested $1.8 million for the prepayments made to purchase a building and purchase of testing equipment, software and design tools.

In the first quarter, we did not repurchase any shares. In the first quarter, we were focusing on establishing internal and external processes including appropriate Management Committee for the execution of our share buyback. Also, Council advised that we wait until material non-public information regarding our business has been disclosed before we execute our share buyback. We will be buying back our shares very soon.

In the first quarter, our Board authorized and initiated the payment of a quarterly dividend policy. We declared a US$0.15 dividend on January 22 and paid this on March 4. On April 23, our Board declared a second quarterly dividend of US$0.15, which will be paid on the May 14. We believe we have a business that can generate a fair amount of cash flow through its business cycle and US$0.15 a quarter is comfortably affordable amount even during a down cycle.

I will now move on to our guidance. Given uncertainties regarding the timing and magnitude of our LTE revenue this year and with objective of helping our investors better understand the prospects of the majority of our business, we are revising how we provide guidance by providing revenue guidance for our business excluding our LTE products. Our non-LTE revenue in 2012 were approximately 85% of our total revenue and almost 90% of our Q1 revenue.

We are executing eMMC business successfully. We expect our eMMC business to more than offset our mature and declining card and USB controller business. We expect our USB controller sales to be fairly stable for the rest of the year and our card controller sales to gradually decline for the rest of the year. As a result of eMCC growth more than offsetting declining card and USB sales, our overall business excluding LTE should grow at a moderate this year.

Our guidance for the second quarter is as follows. Total revenue, excluding LTE, is expected to increase 10% to 20% sequentially. Including LTE, our revenue should grow 5% to 10% sequentially. Gross margin is expected to be in the 45% to 47% range. Operating expenses are expected to be in the range of US$17 million to US$18 million. Stock-based compensation is expected to be in the range of US$2 million to US$2.5 million. Our mobile tax rate remains at 15%.

Our updated guidance for full year 2013 is as follows. Total revenue, excluding LTE, is expected to grow flat to 10% year-over-year. As a worst-case, we expect a minimum LTE revenue of US$15 million this year. Gross margins are expected to be in the range of 46% to 48% excluding one-time items. Operating expenses are expected to be in the range of US$72 million to US$76 million. Stock-based compensation is expected to be in the range of US$12 million to US$14 million. Our mobile tax rate remains at 15%.

We will now open the call for your questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, we’ll now begin the question-and-answer session. (Operator Instructions) Your first question comes from the line of Anthony Stoss from Craig-Hallum. Please ask your question.

Tony J. Stoss – Craig-Hallum Capital Group LLC

Hi guys, a couple of questions here. Riyadh, if you could help in terms of why the LTE, why you’re not finding your way into Samsung? Am I understanding you guys correctly that the lack of carrier aggregation is hurting you? And then I have a couple of follow-ups

Wallace C. Kou

Yeah, what we are seeing in the past few months is that carrier are pushing for LTE advanced features, such as carrier aggregation more aggressively than we have initially thought. Samsung’s current baseband our transceiver today do not support carrier aggregation, but our next generation solution along with their next generation baseband will support carrier aggregation and will begin testing in the second half of this year.

I think in the last couple of months most of the Samsung mobile platforms were run on parallel solutions and we really did not notice the information until really late Q1. As a result, major flagship models in 2013 will be using another solution that offers carrier aggregation this year until the next generation Samsung baseband and our transceiver are available in the second half for handsets coming to the market into 2014. However, we believe we still have opportunity in some flagship derivative models with our current solution, but the revenue scale per model compared with the flagship device is lower.

Tony J. Stoss – Craig-Hallum Capital Group LLC

Okay. Thanks Wallace. And then, if you look into 2014, can you give us a general sense of how you expect your mix is, your embedded business likely going to be your biggest? So if you could just give us a sense on mix. And then lastly, if you’ve got two embedded customers now, can you give us a sense of the likelihood of adding any more this year and what you would expect in 2014. Thanks.

Riyadh Lai

Already our SSD plus embedded is bigger than, and the first quarter is already bigger than our USB controller business and we expect going into the second quarter, our SSD plus embedded business will be even bigger than our card controller revenue. So based on our trend, and we have a lot of traction on our SSD plus embedded, especially on the eMMC side. Now we’re expecting our SSD plus embedded overall revenue to grow well in excess of 100% this year.

So based on our trajectory, we’re expecting going into next year that potentially our SSD plus embedded could be our largest segment of our business, certainly larger than our card and UFD businesses.

Wallace C. Kou

Let me add a comment. We already have other OEM coming to us for our eMMC solutions, but we are also resource constrained. eMMC requires a dedicated development team and also a dedicated supporting team and we are in the process of building this. And we believe we’ll be ready to support a third OEM in the second half of this year.

Operator

Thank you for your questions. Your next question comes from the line of Raji Gill from Needham & Company. Please ask your question.

Raji S. Gill – Needham & Co. LLC

Yes, thanks for taking my question. On the LTE number, at the beginning of the year you talked about LTE growing 50% to 75% year-over-year and I understand that the Samsung baseband doesn’t support carrier aggregation and therefore I think the mix of a lot of the Samsung platforms are going to move more to Qualcomm. But how much visibility do you have into Samsung’s development? I would have thought that you would have had some better visibility before you’d have provided that level of guidance and can you then provide what was the basis of that initial guidance in the first place?

Wallace C. Kou

I can only say (inaudible) that both Samsung and us work very, very closely and work very hard, try to win all the flagship models. I think that have been in test for really a couple of months from last year. Just unfortunately for we sold in North America market carrier aggregation, well then as a requirement it’s just optional in 2013, but unfortunately the final decision is really they do like to see the carrier aggregation. So we have to say, so we do work very closely, work very hard and we have a [confidence] and believe we are going to win, but unfortunately, in the late Q1, and we got a formal notification and they are going to ship to other solutions.

Raji S. Gill – Needham & Co. LLC

Going into 2014 where do you think Samsung will be with the carrier aggregation? I mean, do you think, obviously Qualcomm is going to be another generation ahead come 2014 plus they’re integrating other elements of the overall handset in terms of our front end, for example. So it becomes even more competitive in terms of its cost. I just wanted to get your thoughts in terms of what the internal versus external dynamic that’s happening at Samsung. Obviously this year it’s going to be more weighted to Qualcomm, but in the future do you think that will also continue moving more to Qualcomm?

Wallace C. Kou

We will continue to invest in our LTE transceiver business and we believe that the issue we are facing this year are temporary and Samsung remain committed to using their own platform for LTE as a way to help differentiate their solution and have better supplier diversification. Samsung, being established the base renting for last 6 to 7 years and really aiming to bring differentiated solution and other supplier.

We believe the underlying reason for Samsung initial investment is developing really the best quality LTE baseband and application processor. We are the strategic partners of Samsung for the product for long time, and we expect to continue to invest alongside with Samsung as they further the developing for their own baseband. And we believe we do have a similar unique feature in the transceiver side like a (inaudible) and a lot of other key features, we believe that product feature performance compelling and we believe our LTE business were much better positioned in 2014, when Samsung baseband and our transceiver will support [carrier gauging].

Then in overall, there will be many, many new models for LTE content in 2014. I think that the more flagship model, well derivative model and it’s just a percent of what percentage we can share compared with other solutions.

Raji S. Gill – Needham & Co. LLC

And just last question on mobile stores part of the business. We are seeing some rebound in the second quarter. But what are your thoughts overall in terms of NAND supply going into 2014. Samsung are saying that they are not going to increase CapEx in terms memory, they want to keep the NAND supply as tight as long as possible, how does that affect your module business going-forward coupled with the fact that there is kind of a secular decline in the attach rates bundled cards as well? Just if you could provide any thoughts on that, kind of a big picture that will great and appreciated?

Wallace C. Kou

In my view we will all be growing, 2013 expected to be lower than 2012, were demand continued to increase for higher smartphone tablets and other consumer devices this year. The flash vendors I think continue to monitor the market closely, they do not want to release too much flash given that this May you’re really pricing too quickly. But they also want to make sure that the industry doesn’t suffer from severe shortage. We believe that still increasing utilization and profit geometry migration, flash volume should increase steadily this year and demand will close follow. But however the demand is interestingly stronger than supply, incremental flash capacity can be brought in line very quickly with introductory month. Since we do not believe most of our flash makers fab are currently fully loaded.

Regarding 2014, I believe Samsung just made announcement they will speed up the fab in Xi’an and they’re going to increase the capacity due to current forecast and demand. So we believe the NAND process can retain balance. In overall, we continue to expect moderate decline in the card marketing in 2013. Seen that the bundling of card in U.S. and other development market seem to have stabilized.

However, NAND flash tightness has also impacted our ability of low-density NAND. The stable China bundled card market has variably improved. We should see the bundle market in China also pick up. So we see this year the bundle card and the USB will be stable, next year as operating increased, but it’s a moderate decline.

Raji S. Gill – Needham & Co. LLC

Thank you for that color, Wallace. I appreciate it.

Operator

Thank you for your question. Your next question comes from the line of Mike Crawford from B. Riley & Co. Please ask your question.

Mike Crawford – B. Riley & Co. LLC

Okay. Thank you. Just to dig into the LTE transceiver business a little bit more deeply. So Samsung’s baseband does not support carrier aggregation and therefore the new guidance of $50 million of minimum LTE transceiver revenues you expect in 2013, it’s actually not only just a minimum number, but that’s also close to what you do expect. There’s no kind of an opportunity to get back to these numbers that you were looking at, say, only a couple of months ago in this year.

Wallace C. Kou

Mike, the $50 million in LTE revenue this year is a minimum, a worst-case scenario. This represents wins from last year that are still in production as well as some smaller program wins that we have won this year already. We’re not accounting for any new wins in this $50 million worst-case scenario. So there is a probability that the number could be higher than $50 million, but for the sake of having a worst-case scenario we’re just laying it out. US$50 million is a minimum for our business this year.

Mike Crawford – B. Riley & Co. LLC

And so, Riyadh, if you get designed into some I guess derivative products that are in markets where you don't have to worry about nonadjacent spectrum, then you don't need the carrier aggregation and then we could actually see some additional LTE transceiver revenue in the second half of this year, but likely not in the second quarter? Is that a fair statement?

Riyadh Lai

That’s correct. That’s correct. It is possible that our LTE revenue could be higher than $50 million. It’s interesting probability is if new programs kick in.

Mike Crawford – B. Riley & Co. LLC

Okay. And then, I see a scenario where even next year, if you thing that Samsung’s baseband is now up to speed and good enough to be in its products. And so, your paradigm and your business goes up again, but still the market is very unlikely, in my opinion, to give you any credit for that revenue and profitability because everyone is going to say that this is going to disappear right away. So given that this business is one that the street is unlikely to recognize the same amount of value that you probably think it has and maybe your partner Samsung thinks it has. What discussion has the Board had regarding possibly selling this business be it to Samsung or to someone else that wants to supply Samsung given particularly that the nexus of this business is in Korea, right the FCI business seems like it wouldn’t be too hard to separate from the rest of the company.

Wallace C. Kou

Mike, the LTE business is a integral part of our new growth product line. It’s a important part of our future growth drivers. In terms of options, in terms of how we can manage our overall shareholder value, this is the topic that we obviously would have to have further discussions with our Board.

Mike Crawford – B. Riley & Co. LLC

Okay, thank you and then just turning to another part of our business you’re talking about any more than 15% to 20% of the eMMC market in 2013 with just a few OEM partners. When might we see Silicon Motion shipping to a third partner and what will be your share targets for next year if you had three OEMs you’re shipping to?

Wallace C. Kou

Currency we can only say, we might talk to ship to (inaudible) probably early 2014 because of development, the qualification take time and they also try to building the collaboration and supporting structure with us. So, I think the product sale is ready but is I cannot disclose regarding what type technology and NAND we’re focused on. But, we will try to differentiate and not to overlap with our current business with the two major OEM customers today.

Mike Crawford – B. Riley & Co. LLC

Okay, thank you

Operator

Thank you for your question. Your next question comes from the line of Bob Gujavarty from Deutsche Bank. Please ask your question.

Bob Gujavarty – Deutsche Bank Securities, Inc.

Yes, thanks for taking my question. I guess my question will be, I understand the LTE business in the short term, but if I look at 2014, I would expect there would be more merchant vendors with carrier aggregation competing with Qualcomm. So even if Samsung's internal solution is available, you'll have solutions from Broadcom and Intel, among others, so there's no guarantee you'd even get any business then, either, so I guess the question is, why do we have confidence that a year out, knowing, today, you actually have a benefit in that Qualcomm's the only solution that's available. No other merchant LTE solution is shipping, so that would actually be a good thing for Samsung to use their internal solution. Next year, there'll be many, many merchant vendors available. So I guess I just have a question, why would it get better in 12 months?

Wallace C. Kou

So Bob, you asked a very good question. Let me answer with my opinion. The LTE solution qualification process is taking much longer that the 3G. It probably will be three times complicated than the 3G solution in the past. And we have being working with Samsung since 2008. So many operators, carrier tests, and field task in many, many countries. So that’s being allowed regarding qualification process. And we also being value and recognized by many carrier too.

I think Samsung is a long-term strategy; it builds their own Internet solution. It doesn’t mean all their model eventually using Internet solution. However it’s very important for them to keep Internet solution to balancing the sourcing and diversification strategy and pricing strategy. So when really currently in smartphone, inside Samsung, the percent is still very small. So when you imagine if the launching LTE based smartphone, it go to as 300 million, 400 million per year in the Samsung, there could be a lot of them today.

I have no meaning to, I respect Intel and Broadcom and many other players, but seeing today even for any major mobile phone maker, they probably don’t have enough resource to parallel qualify many new suppliers simultaneously and this is very difficult and not just because they don’t want to, but they don’t have resource to go through it again.

So I think that’s a true value for us to become a very solid base in the Samsung in the past five years and we will continue growing modular relating ship and carry the comparability from 2008 and move into 2014. That’s why we have confidence and the Samsung team also have confidence for total solutions we have should be very competitive with other solutions available or coming to the market in 2014.

Bob Gujavarty – Deutsche Bank Securities, Inc.

Fair enough. I guess the other question I have is, I understand that their technical features are important criteria, but I don't understand the incremental news in that. We always knew Samsung's internal baseband did not support carrier aggregation. This is not a new piece of information, so I guess the question is, why is it important now and it wasn't three months ago when you suggested the LTE business would grow 50%? The technical specs of the product did not change in that time.

Wallace C. Kou

Bob, we also saw we have a good shot and I think at that time from the feedback we had regarding contact in the Samsung, we feel that we have a pretty good shot in the flash model, but just unfortunately, it could be other reason behind it, but one of the reason they told to us is carrier aggregation, so that is their decision and there is nothing we can do.

Bob Gujavarty – Deutsche Bank Securities, Inc.

Okay. And then this may, final question, I look at the business and the good news is, I guess on a quarterly basis, the LTE business, it's relatively small today, so it's less of a headwind on a Q-on-Q basis, and maybe that's why. But I look at the OpEx, and do you feel comfortable at these levels, given that there are revenue challenges and or is it just that's what you need to support some of these growth drivers? I'm just curious if you have any ability to modulate on that line?

Riyadh Lai

Well, could you clarify your question again, sir. We can answer it more appropriately?

Bob Gujavarty – Deutsche Bank Securities, Inc.

Yeah, sure. I mean revenues are certainly taking ahead. But it seems like spending is continuing at a relatively steady pace. I’m just curious what the rationale behind the disconnective?

Riyadh Lai

We still have a lot of growth opportunities this year, excluding the LTE part of our business, the rest of our business should grow in the range of flat to 10%. So our business is the underlying part of our business is still relatively healthy. And plus as well as I’d mentioned we still have a lot of growth ahead of us on LTE with our partnership with them. So overall, the operating expense investments that we are putting in place are still of the skill and resource commitment that we need in order to deliver on our longer-term growth.

Bob Gujavarty – Deutsche Bank Securities, Inc.

Okay.

Wallace C. Kou

So I think that Bob, in addition our communication business and not just LTE transceiver. We also do have mobile TV SoC. And we don’t really want to mention too much above the advanced TDM, being ion Korea and also activity TMN in Japan market. And when we really start to see more meaningful revenue, we will report it to our view.

Bob Gujavarty – Deutsche Bank Securities, Inc.

All right, fair enough. Thank you.

Operator

Thank you for your question. Your next question comes from the line of Monika Garg from Pacific Crest Securities. Please ask your question.

Monika Garg – Pacific Crest Securities

Hi, thanks for taking my question. The question is regarding the China fab you mentioned. It seems that that fab is for 3D NAND technology, which is, of course, a different weight than the plain-old NAND technology, what we have currently. So the question is, are you working with Samsung for controllers? I mean, your 2014 growth is kind of based on the fact that the new supply comes from Samsung. But given that that’s a different architecture and that still seems like it’s in the R&D phase, so it could be some time before that starts ramping, so what gives the confidence that supply will be sufficient enough for you to grow enough supply for your cards and UFD business?

Wallace C. Kou

I cannot comment whether the Xi'an plant Samsung the only fabricates 3D or vertical NAND. I think you have to ask Samsung directly, I cannot comment that. Regarding we do what with our NAND makers, when they bring to vertical NAND, 3D NAND, into the market. But just really I think eventually it’s the ballgame depends on the manufactured cost, the final cost. Any capital investment for vertical NAND is tremendous.

I think all NAND makers, they all have to think through how to gradually transition and balance between floating-gate technology and Vertical NAND technology. I think all the NAND makers, they have their strategy and they tried not to overextend it, but also don’t want to see severe shortage. But that’s a NAND maker, their own plan. Definitely, this year, we won’t to see any capital investment for the next year, I think gradually we will see a more investment for the NAND changing demand.

Monika Garg – Pacific Crest Securities

Just a follow-up on this; how do you see about your control of the card? Do you need to change something in your technology to be able to work with vertical NAND?

Wallace C. Kou

I cannot comment for that either, because each of companies, have a quite deepened vertical NAND technology. And we do want to work closely with them as they needed. I think in the future, controller technology although they see it's not high, but it play a very critical role to enable the future NAND technology.

Monika Garg – Pacific Crest Securities

Okay, thanks. Just a question on your margins; could you maybe update us where they are on the recovery path, your transition to lower-geometry nodes?

Riyadh Lai

Sure. The vast majority of all our products being introduced this year already manufactured at sub 110-nanometer process geometry, including our new high volume UHS-1 and eMMC 4.5 controllers. As these new controllers ramp up, they will have a positive uplift to our gross margins. We are also expected to see the growth of our SSD plus embedded products this year drive higher gross margin for our overall revenue as these higher margin products ramp further as the year progresses.

Additionally, gross margin improvement relative to depend on incremental LTE revenue that we gain later this year. So in terms of our full-year gross margin guidance, it still remains at 46% to 48% excluding one-time items, and we expect our gross margin to improve gradually throughout this year.

Monika Garg – Pacific Crest Securities

And then on the SSD business, could you maybe talk about how do you see the growth in that segment next year or maybe 2015? Where do you see that segment growing?

Wallace C. Kou

I think we are already to sample our SATAIII SSD controller and expect to enter commercial sampling and testing this quarter. But while we’re late mover into the SSD controller market, being a late mover also has its advantage. We have a more focused strategy, when it come to designing and marketing our SSD controller, as well as offering support with the latest generation to why and one example to the NAND flash.

We’re also one of the very few controller maker that can support TLC NAND flash to reduce the cost. Our solution is not only performance competitive to the existing solution as tested by our customers, but also much more cost effectiveness than one is currently available in the market. We expect to see initial revenue contribution in the second half of this year seems our SSD controller they’re currently only sampling as here too early to talk about revenue contribution, but we will definitely update you as the year progresses.

Monika Garg – Pacific Crest Securities

Yeah, thanks a lot. That’s all from me.

Operator

Thank you for your question. (Operator Instructions) Your next question comes from the line of Tom Sepenzis from Northland. Please ask your question.

Tom Sepenzis – Northland Securities

Hi, using the 15 million LTE revenue estimate for the current year, what kind of cash do you think you can generate for the whole company?

Wallace C. Kou

Well, in the last quarter, we, if you were to exclude, we consumed about almost $1 million but that was largely due to our $5 million dividend payment right? So if you were to exclude that, it was relatively flattished by revenue coming down sharply. We have a business model that does not burn cash, well much cash in even during the hard years that we had in the past. So our expectation is the year progresses, we will be able to generate cash over the next few quarter as revenues pick up. So the dividend payment that we have is set at a level that we could certainly affordably pay out.

Unidentified Company Representative

I think we would say we are confident to generate more cash even we pay dividend at the same time, even in the worst case scenario our LTE only $15 million.

Tom Sepenzis – Northland Securities

Okay great and just from a very broad general prospective looking out the following year if the LTE business doesn’t return would you still expect growth in the rest of the businesses or would things start to flatten out?

Wallace C. Kou

Actually we have quite a lot of new growth products, but it’s just, they haven’t really reached meaningful revenue and really we don’t want to all talk about it same time. I think we have a very exciting about the SSD product line. We have very exciting embedded SD solution product line, right, and we now we have two major new OEM designs from Japan and they’re ramping up from Q4 this year. And we also have a new mobile TV SoC design, especially Japan transition to [ ICBT TNN] and we are one of the leading supplier right now to being a major design, but I think until all this become a meaningful revenue and a major design and close with a revenue, we’re going to talk about more. I think we are overall very balanced company and we are not just a company with one product. But in the same time, we are also feel very excited about our LTE solution and currently we definitely focus on Samsung because we work very closely, but we can expand to much more other baseband player, especially for China market too.

Riyadh Lai

Bear in mind, our eMMC revenue will continue to grow. Now this year, our growth will grow our eMMC revenue will grow by well in excess of a 100%. We this is based on just two NAND flash partners. As well as I had mentioned, we are building up resources where we can take on a third OEM customer and when that happens, the earliest that this revenue will kick in, will likely be in the first half of next year. And so, we have a lot of momentum. Our market share this year with eMMC just with these two partners should only go up to in excess of 15%, 20%. So there is a still lot of growth opportunity just in the eMMC and plus the eMMC market itself is still and expected to continue to grow rapidly

Tom Sepenzis – Northland Securities

Great. Thank you. So you're very confident, then, in this gross margin expansion that you talk about?

Wallace C. Kou

Yes, that’s correct. We are expecting our gross margin to get back to a much higher level and it should gradually increase over next few quarters.

Tom Sepenzis – Northland Securities

Okay, thanks very much.

Operator

Thank you for your question. There are no further questions at this time. I would now like to hand the conference back to Mr. Jason Tsai. Mr. Tsai please continue.

Jason Tsai

I would like to thank all of you for joining us today and your continuing interest in Silicon Motion. We will at be the following conference this quarter. In May, we’ll be presenting at Jefferies 2013 Global Tech Conference in New York, Deutsche Bank’s Semiconductor 101 Day in San Francisco, B. Riley’s 14th Annual Investor Conference in Santa Monica. Craig Hallum’s 10th Annual Institutional Investor Conference in Minneapolis. In June, we will be presenting at the RBC Communication, Technology, and Semiconductor Investor Day in Boston, Lazard Solid State Drive Conference in New York, [CYSA] Corporate Asset Day in Singapore and Hong Kong. UBS Investor Conference in Taiwan. Details of these events are available on our website. Thank you and goodbye for now.

Operator

Ladies and gentlemen that does conclude our conference for today. Thank you for participating. You may all disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!