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Silicon Motion Technology Corp. (NASDAQ:SIMO)

B. Riley & Co. 14th Annual Investor Conference Transcript

May 21, 2013 4:30 PM ET

Executives

Riyadh Lai - Chief Financial Officer

Jason Tsai - VP, Investor Relations

Analysts

Mike Crawford - B. Riley & Co.

Mike Crawford - B. Riley & Co.

We’ll go ahead and get started. It’s my pleasure to introduce Riyadh Lai, the CFO of Silicon Motion. We also have Jason Tsai, the VP of Investor Relations sitting up in front. And I think this is one of the cheapest stocks that you’ll find in this whole conference, especially if you want to look at to the lends of the free cash to our enterprise value and cash adjusted earnings, and Riyadh will tell us all about the company.

Riyadh Lai

Thank you, Mike. My name is Riyadh Lai. I’m the CFO of Silicon Motion. It’s a pleasure to be here today at B. Riley conference. Before I start, then has to just quickly mention that we will be making forward-looking statements in today's presentation. So to fully understand the risk with investing in our securities, please refer to our filings and annual reports filed with the U.S. SEC.

Silicon Motion, we are a fabless semiconductor company focused on two specific areas, NAND flash controllers and mobile RFICs. In mobile RF -- [Mobile Storage side] which is about 72% of our revenue last year. The primary products there are SSD and embedded memory controllers, as well as memory card controllers and USB flash drive controllers.

In Mobile Communications side of our business which is roughly 24% of our revenue last year. The primary product there is our LTE transceiver and to a lesser degree Mobile TV SoCs. We are a fabless kind of semiconductor company that has done very well over the last three years. We had revenues about $281 million represents a year-over-year growth of 25% last year. The prior year we grew our revenue 69% and the year before that 2010 we grew our revenue 52%.

In those three years, we've gone from operating margin of about 10% in 2010 to about 23% in 2012. During those three years, we’ve also grown our EPS about three times. So we done very well, but well, I’ll also highlight is we're a company that is in transition. In past years we've grown very strongly because of our card and USB flash drive, especially our card controller business for the pairing of memory cards with smartphones.

We’ve also recognized over the last few years that sooner or later our core products, our card and USB flash drive products will be increasing mature and would be facing secular headwinds. As such we’ve actively been investing in new growth products, primarily our LTE transceivers, as well as our SSD and embedded products.

We've done well, LTE in past last two years, but as I will mention in few minutes time, where our LTE transceiver is also in transition with Samsung as we prepare for LTE advanced solutions in the second half of this year for next year's production.

Our eMMC and SSD products however have been doing very well. Our SSD plus embedded products were about 15% of our total revenue last year. In the first quarter that grew to a quarter of our total combined revenue, consolidate revenue, a quarter of our total revenue now come from SSD plus embedded products.

This product segments will continue to grow throughout this year. We anticipate SSD embedded revenue to grow by 100% this year. Its act quickly growing to at a rate where it's beginning to overcome the secular headwinds that we have with our core products, cards and USB flash drive.

In the first quarter, I mentioned that our SSD plus embedded were about quarter of our total revenue. These products are now larger than our USB flash drive controllers in terms of revenue in the first quarter.

We’ll continue to grow rapidly into the second quarter where we anticipate our SSD plus embedded products to be even larger than our card controller business. And going into the second half the year based on our the trajectory of growth expected for our SSD plus embedded.

We believe our SSD plus embedded revenue in the second half of year will be larger than the combined revenue of our USB flash drive, as well as card controller revenue. So this is gearing up to be become our largest product line by the second half of the year and we are excited about where this is all going.

The primary product within our SSD plus embedded solution is our eMMC controller. This is roughly two-thirds of this product class, roughly two-thirds of our SSD plus embedded revenue coming from our eMMC solutions. We are now shipping our eMMC solutions to two primary customers, Samsung and Hynix.

We began production of our eMMC solution at the start of last year and in our first year of production, we have already secured about 5% to 10% global market share for controllers into this market.

Based on the growth that we're expecting from both Samsung and Hynix for our sale of eMMC controllers to them. We anticipate our eMMC revenue to grow at more than 100% where -- whereby end of this year, we’ll probably have market share well in excess of 15% to 20%.

This is a market where it's already roughly a 600 million unit market last year, largely smartphones but also increasingly tablets, as well as other smart devices such as smart TV, set-top boxes and game consoles.

This is a market that will probably grow about 30% and as we go from 600 million unit to one that's going 30%, we're also growing our topline for this product segment, where we're going from a market share of 5% to 10% to 15% to 24% the full year of this year.

This is through just two customers, Samsung and Hynix, and through them we’re going into right now -- selling into at least eight of the top 10 smartphone OEMs, going into over hundred devices, primary smartphones but also other devices.

Through these two customers, we've done well. We anticipate growing our business further next year. We are gearing up for a -- gearing up with a third eMMC team where we're looking to secure a third NAND flash partner for our eMMC solution for revenue next year.

Our eMMC solutions have done well. We are also progressing technologically from eMMC 4.41 that we're manufacturing at 110 nanometers to eMMC 4.5. eMMC 4.5 has IOPS rate roughly two to three times the previous generation and for this eMMC 4.5, we are -- we began commercial production in April of this year.

We have ready secured design wins with both a flagship smartphone, as well as a highly anticipated tablet. For the smartphone, it is already in production and we're very excited about where this represents in next evolution of our eMMC solution.

Further down the line, we’re going to be taking this and we’re going to be implementing TLC solutions at 4.5 -- eMMC 4.5 for commercial production in the second half of this year.

Going into next year, we’re going to be rolling out eMMC 5.0, as well as UFS 2.0. UFS 2.0 is advanced version of the current eMMC trends and when UFS 2 becomes available, we’re going to be able to see IOPS rates that are comparable to what you see with a SATA 3.0 SSD controller.

Let me now turn over to our LTE business. Our LTE business has done very well for us over the last two years. We still remain excited about the potential of our LTE opportunity with Samsung. As you know, our LTE transceivers are designed specifically for Samsung.

We've gone through several generations with Samsung from their first-generation. Their first LTE smartphone ever was built using their own transceiver as well as our baseband and then successive generation of their high-profile products, including the Galaxy Nexus and the GS III, both of these also use their own baseband as well as our transceiver.

This year will be a transition year as Samsung is focused on rolling out their new flagship product using with LTE-Advanced solution with carrier aggregation features. Our LTE solution with Samsung baseband will be rolling out with LTE-Advanced solutions in second half of this year. So we believe we’re going to be well-positioned for growth beginning next year again.

So this year will be a transition year, but this is a long-term partnership that with Samsung. So longer-term we're excited, remain excited about where this is all going given the large long-tail opportunity of LTE and Samsung's leading market share position in this market.

So that sort of concludes my presentation. And I’ll open up for Q&A.

Question-and-Answer Session

Unidentified Analyst

(Inaudible)

Riyadh Lai

No. We don't anticipate being in the GS4 for this year. One of the key requirements at Samsung is building into the LTE version of the GS4 is LTE-Advanced including carrier aggregation feature. We’re not in the GS4 because the baseband and transceivers LTE-Advanced ready. But we are going to be rolling out our -- with Samsung LTE-Advanced features and these solutions will be ready for testing, verification in the second half of this year. So we anticipate being well-positioned for next year.

Unidentified Analyst

(Inaudible)

Riyadh Lai

Sure. This year we're anticipating our overall full-year gross margin to be in the 46% to 48% range. Our new growth products are typically above corporate average. So our new growth products our LTE transceiver, our SSD plus embedded including eMMC controller. All these products are above corporate average in terms of gross margin. Our core products, the card, USB flash driver, now below corporate average in terms of gross margin.

Unidentified Analyst

Riyadh, what sort of progress are you making on building third team to work on (Inaudible)

Riyadh Lai

We've been building this third team for quite some time now and this third team should be ready to take on projects in the second half of this year. We also enacted dialogue with a number of potential flash partners and from the set of potential flash partners, we will choose one that we would like to partner up with for -- as our third partner. When this partnership is secured, we expect initial revenue in early next year.

So part of our decision-making is its focus on bringing on a partner that is accretive to our overall eMMC business, one that couldn’t help us grow overall TAM versus bringing in a third partner that is simply cutting into the existing pipe, if you will.

Unidentified Analyst

(Inaudible)

Riyadh Lai

Well. Currently, we are only at a very initial stages in exploring potential LTE transceiver partnerships with other OEMs. We're still very early stages in terms of those discussions. So it depends on how things progress. At the current stage, we only have one LTE transceiver team.

Unidentified Analyst

(Inaudible)

Riyadh Lai

In past years, most of our card, USB flash drive business came from the sale of controllers to module makers. Over the last few years, we've actively shifted gears while the module makers are important long-term friends of the company. We are friends of the company but at the same time we also recognize that flash sourcing is increasing a criteria for the production of cards and USB flash drive.

So we've actively moved towards engaging more actively with OEMs, mainly flash makers where most of our mobile storage business now relates to the sale of controllers to OEMs, flash makers as well as Q1 OEM such as Sony and other specialty SSD OEMs,

Over time, the card and USB flash drive business has done well for us. It's also a business that is in secular decline. Last year, our business had faced significant pressure as smartphones have debundled cards from their products at initial sale. But a lot of those risks have already played out. It was bundled rates for smart phones at low levels.

This is also affecting how the flash makers look at this business. It is no longer as attractive as they used to be. Given the smaller requirements of flash with these products but that’s also where we're going to increasing focus on embedded as well as SSDs versus declining card, USB flash drive part of our business.

On embedded side of business, it is a business that is very OEM centric, the eMMC part of business we’re supplying to just Hynix and Samsung. Two companies that own the source of flash, two companies that are insulated from the risk go for flash storage.

Unidentified Analyst

In you SSD business, (inaudible) has been primarily industrial. (Inaudible)

Riyadh Lai

In the past, most of our SSD products have been the industrial grade, low-density industrial grade solutions for a lot of high-end applications, routers, point of sales and other devices. We have recently ticked out our SATA 3.0 SSDs for the PC market both as a full size primary storage SSD as well as NAND flash -- used as NAND flash for the PC market.

Our SATA 3.0 SSD controllers are currently in commercial sampling stage. We anticipate having some initial design wins and shortly where we can start securing revenue in the second half of the year. But that said, we do not anticipate having meaningful SSD revenue in the second half of the year but do if all -- if the design wins that we’re anticipating pan out, we expecting material SSD revenue, beginning next year early next year.

Unidentified Analyst

(Inaudible) smartphone market being more saturated, do you see that being more than offset or less than (inaudible).

Riyadh Lai

For, our business relating to this smartphones, Mike, your question is whether the increasing saturation of the high-end smartphone will be offset by low-cost smartphones in order to drive further overall smartphone growth. From our perspective as eMMC controller supplier to the smartphone OEMs, we are supplying to Samsung and Hynix to both global flagship products as well as more mainstream smartphone and also low-cost smartphones.

For us, we've done really well in the low-cost smartphones as well as other ends of the market. But a lot of the growth, we believe will be coming from the low-cost smartphone side of the market. And so that’s where a lot of that emphasis of our customers have been in the Chinese marketplace servicing Chinese OEMs both tier 1 guys as well as the lesser OEMs.

In that market, they are building smartphones both for the local Chinese marketplace as well as other developing markets and also beginning to make its way into the developed portal carriers whether U.S. or Europe with their low-cost, high-performance solutions. In the Chinese marketplace, our eMMC controllers through our flash partners we’ve done well. We believe we’ll have a market share closely to 50% of the Chinese marketplace. For smartphones that are a local Q1 smart phones as well as the low cost smartphones made in China.

Unidentified Analyst

(Inaudible)

Riyadh Lai

You’ve got two questions there. I’ll answer them. The first is whether the tight NAND flash situation will affect our business. We got two parts to our NAND flash controller business. The first relates to cards and USB flash drive that we sell to module makers and we also have controllers that we sell to the flash makers themselves whether cards or eMMC controllers.

The module maker side of business, clearly our business has been affected. There is strong pent-up demand for low density, memory cards, specifically for the Chinese marketplace for use with the low-cost smartphones. The bundle rates for those low-cost smartphones are a lot lower than we had anticipated and key reason is because NAND flash availability.

Their NAND flash supply is tight and so there is not as much flash available for module makers for making cards for the Chinese marketplace. So that is affecting the growth of our sales to the module maker part of our business.

But that said, that is part of what we’ve been talking about in term of guiding for our card and USB flash driver business to be rebounding in second quarter and from there on to face gradually decline. And this is part of the gradual decline is base on the prospect that our module maker customers will be facing continued short supply of flash for…

Unidentified Analyst

(Inaudible)

Riyadh Lai

Yeah. Q3, Q4 we're expecting our card USB business to be in gradual decline. But the other part of our business relating to the OEMs, the flash makers whether for cards or eMMC, we do not expect any effect whatsoever since flash makers own this source of flash and they decide where they are going to allocate their flash and for the case of the eMMC it's a important growth area for the flash makers whether Samsung or Hynix and it's a priority area for them to allocate their flash source. So that's why we're expecting very strong growth of our eMMC controllers this year both well in excess of 100%.

To your second question about 3D NAND. 3D NAND will make its way out and we already in active dialogue in tutorial lessons if you will with flash makers in terms of how they're planning to design their flash, the characteristics of their flash, how we should be addressing the issues that they may be facing with their 3D NAND and their technological requirements that they need from a controller perspective.

This will be a continuation of the relationship that we've established with flash makers in helping them bring controller solutions for their products whether for the sale of -- eventual sale of 3D NAND to -- into the merchant supply base or as a supplier of 3D NAND controllers for their own internal use, whether for consumer-related external applications or embedded flash.

But as things and we're still very early stages in terms of 3D NAND and so there is quite a lot of time to before we reach commercial production, but we are in active dialogue with flash makers in coming up with suitable solution that meets their needs in terms of performance and time-to-market. Thank you

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Source: Silicon Motion's Management Presents at B. Riley & Co. 14th Annual Investor Conference (Transcript)

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