Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Silicon Motion Technology Corporation (NASDAQ:SIMO)

Q2 2013 Earnings Conference Call

July 30, 2013 8:00 AM ET

Executives

Jason Tsai – Director of Investor Relations and Strategy

Wallace C. Kou – President, Chief Executive Officer and Director

Riyadh Lai – Chief Financial Officer

Analysts

Anthony Stoss – Craig-Hallum Capital

Mike Crawford – B. Riley & Company

Rajvindra Gill – Needham & Company, LLC

Bob Gujavarty – Deutsche Bank

Tom Sepenzis – Northland Capital

Operator

Good day ladies and gentlemen and welcome to the Second Quarter Silicon Motion Technology Corporation Q2 2013 Earnings Conference Call. My name is Edwin and I will be your conference moderator for today. At this time, all participants are in a 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 condition and business prospects.

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

Potential risks and uncertainties include, but are not limited to continued competitive pressure in the semiconductor industry and the effect of such pressure on prices, unpredictable changes in technology and consumer demand for multimedia consumer electronics, the states 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 second quarter 2013 financial results conference call and webcast. My name is Jason Tsai. Now 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 second quarter financial results and provide our outlook. We’ll 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 release 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 earning call. In the second quarter our SSD+embedded products, specifically our eMMC controllers, grew significantly again. This is ensuring strong growth of our new growth products, with revenue from this segment increasing by about 30% sequentially and now accounting for nearly 50% of our total corporate revenue. We are pleased by the progress we are making as we transition our business from core product to new growth products, and believe the investment we are making today, will significantly improve our long term prospectus.

Overall our total revenue increased 2% sequentially and profitability increased significantly, driving earnings per ADS of $0.27 in the second quarter, up from $0.17 in the first quarter. Go into our financials later in the call. Riyadh will go into our financial later in the call. And we have been communicating with you over the past few quarters; our long-term success is tied to our new growth products, specifically our SSD+embedded products.

I am pleased to report that this transition is progressing faster than expected. SSD+embedded sales in the same quarter grew by over 6% sequentially and that become our larger product group. Our SSD+embedded revenue is already larger than the combined revenue of our card and USB flash drive controllers, and it accounts for a little over 50% of our overall mobile storage sales.

Our rapid SSD+embedded growth has today been related to the success of our eMMC controllers, but over the next year we plan to add a meaningful sale of our SATA-III SSD controllers. FerriSSD embedded storage solutions and other embedded products to this product group. Our eMMC controllers have been very successful because we provide one of the best performing most power efficient and cost effective solution available to flash maker today.

We have also beginning successful because Samsung and SK Hynix, our two flash partners using our eMMC controllers, have been aggressive in using our controller to win eMMC market share in China and global markets. Promoting performance focus eMMC and cost oriented eMCP with global and local Chinese OEMs, for flagship and low cost smartphones and tablets. We currently provide our flash partners with two class of eMMC controllers.

Higher performance eMMC four or five controllers and more standard performance eMMC 4.1, we are being selling eMMC 4.1 controller since Q1 201 and begin sell of our new eMMC 4.5 this quarter. eMMC 4.1 talking main stream, high volume smartphone and tablet and eMMC 4.5 with two to three time the IOPS rate of eMMC 4.1, targeting premium global flagship devices. Our new performance eMMC 4.05 as already secure nine design wins, include some highly anticipated flagship android and window 8.1 tablets as well. As well flagship smartphones.

For example to recently release, next-generation Google, Nexus 7 tablets, are using the latest SK Hynix eMMC solution growing our new EMC 4 or 5 controllers. In addition to our current EMC 4 or 5 product you are shortly bring other value add eMMC solution to our first congress. In the fourth quarter of this year we ill begin sampling our even higher-performance 5.0 controller which we have four to six times to IOPS of eMMC 4.41.

Separately, for eMMC 4.5 there we recently began commercial sales in design to manage 2-bit MLC NAND cache. In the fourth quarter of the year we will begin sampling a new version of eMMC 4.5 controller and had being specifically redesign for managing TLC flash. As you know we have develop successful partnership with both Samsung and SK Hynix, while supporting their eMMC solution with our controller technologies.

I am happy to announce that we have already began eMMC product development with the third corresponding and expect our eMMC controller will this new partner to enter mass production in the first half of 2014. This new Flash partner’s emphasis is on leveraging our TLC expertise to deliver cost-effective TLC-based eMMC solutions. Our expanding of eMMC controller products, as well as addition of a new eMMC Flash partner, are part of our long-term goal of diversifying our SSD+embedded business, for our product as well as our customer basis.

Turning now to our SSD products, we began commercial sampling of our new SATA-III SSD controller this quarter and are pleased with initial progress and feedback that we have received so far from potential OEMs and module maker customers. Initial customer test reports of our SATA III SSD controller, which target full-size SSD, NAND flash drive and solid-state hybrid drive, suggest that our SSD controller is among the top-performing products in the market today, in terms of performance, reliability, latency and power consumption.

We believe we will begin to see initial revenue from our SATA III SSD controller in the second half of the year. But the material revenue contribution should begin next year. We look forward to talking more about this in the coming months, as our design wins move into mass production.

Our other SSD product is our FerriSSD embedded storage solution, which is targeted for its unique high-end reliability, industrial grade applications. In the first quarter, we announced that our FerriSSD had secured design win for two Tier-1 Japanese OEMs. I’m now pleased to announce that in this quarter, our FerriSSD has secured design win from two other Tier-1 Japanese OEM.

Applications for our FerriSSD embedded memory solution include point-of-sale terminal for a major convenience store chain, as well as commercial class multifunction printers manufactured by a leading industry OEMs. Overall, I am pleased with the progress that we have been making in expanding the prospect of our SSD+embedded business. We have been laying the strategic foundation for an upcoming growth by broadening our portfolio of next-generation controllers, increasing our base of OEM customers.

Let me now turn to our card and USB controller sales. Our card and USB controller sales declined in the second quarter, as tight flash availability continue to negatively affect our module maker customers. While our business for our OEM customer for card and flash drive was expected.

Module makers were generally unable to procure the plan quantity of flash and this affected their card and USB sales and their procurement of our controllers. We expect to see a slight improvement in our card USB sales in the second half of the year, as seasonally stronger demand helps our higher controller sales. But this trend will be much more muted, compared to previous years.

On the demand side, the de-bundling of memory cards with smartphones that we have seen over the past year has limited the overall demand for cards. We believe China is only major market where there is strong demand for bundled cards for use with low cost smartphones, containing very little embedded memory capacity.

But unfortunately at this time, flash makers remain uninterested in supplying low priced, low density flash for this market. The part of the card market that is doing well in the high-end, including UHS SD cards. These ultra high-speed memory cards are up to 20 times faster than the standard SD cards, and are used in recording high definition video, previously only available in video camcorders, but now increasingly a standard feature in high-end smartphones, such as Samsung Galaxy S4.

For us, controller for UHS card are higher-value value add, higher ASP and higher-margin products. We introduced our UHS-1 controller last year and currently these controllers account for about 40% of total SD card sales. We expect to begin sampling our even higher performance UHS-2 controller in the fourth quarter of this year, will have other emerging controller suppliers.

Now, let me update you on the progress that we are making with our LTE transition. As we have discussed, Samsung is in transition to next-generation LTE-Advanced baseband and we are developing our corresponding transceiver to support this new baseband.

We remain on track with our transceiver product development and expect to begin testing with Samsung new LTE-Advanced baseband in this coming quarter. We believe Samsung remains committed to using their own LTE silicon solution, as part of their long-term strategy to differentiate their product and our transceiver remains the preferred pair to their baseband. We look forward to updating you on our progress later this year. Overall, I’m pleased by the progress that we have made in managing the slowdown of our core product, and delivering rapid growth of our new growth products.

Our SSD+embedded solutions continue to outperform our expectations, and gathering our customer and product segments into our long-term prospects. We are excited about the new market that we are now addressing with our SATA III SSD controller and FerriSSD embedded storage solution, and look forward to updating you on the progress we are making in the coming months. We continue to invest in our business and in our products, especially with our business transitioning to a new product in order to further extend our industry leadership in areas where we are strong are strong.

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

Riyadh Lai

Thank you, Wallace. First I will outline our finance results for the second quarter and then I’ll provide our third quarter and update our full year 2013 guidance. For the second quarter of 2013, we delivered total revenue of $58.3 million, a 2% increase compared to the prior quarter.

Let me recap the performance of our two key product lines, first, mobile storage. Mobile storage revenue increased 8% sequentially. Mobile storage controller shipment decreased 3% sequentially. Mobile storage controller ASP increased by 11% sequentially and 2% year-over-year. Our fourth consecutive quarter annual ASP increases, our 14 consecutive quarter ASP increases.

Our card controller revenue decreased by 21% sequentially and our USB controller revenue decreased by 17% sequentially. OEM revenue again accounted for nearly 70% of our controller sales in the second quarter, a slight increase from the first quarter.

Moving to mobile communication, this product segments revenue decreased 27% sequentially due to the continuing transition of Samsung LTE smartphones. Our corporate gross margin increased from 41% in the first quarter to 48.4% in the second quarter. Our gross margins were better than originally forecasted due to better than expected SSD+embedded sales.

Our operating margin in the second quarter was 19.7% an increase from the 13.7% in the first quarter. In the second quarter, our operating expenses increased from $15.6 million in the first quarter to $16.8 million in the second quarter, due to a higher compensation expenses. We ended the second quarter with 694 employees, two less than at the end of the previous quarter.

Earnings per ADS in the second quarter were $0.27 and increase from the $0.17 in the first quarter as a result of higher revenue in gross margins. Stock-based compensation in the second quarter was $1.4 million, lower than the $2.5 million in the first quarter.

I will now move to our balance sheet and cash flow. Inventory days increased slightly to 88 days in the second quarter from 87 days in the first quarter. DSO decreased to 50 days in the second quarter, compared to 54 days in the first quarter. Payable days decreased to 54 days in the second quarter, compared to 65 days in the first quarter.

In the second quarter, our cash balance decreased by $9.6 million to $156.4 million at periods end. The primary source of the cash in the second quarter was $9.2 million in net earnings, a decrease in payables consume $3.1 million, our dividend payments consume $5 million and our share buyback consume $10 million. We invested $6.6 million with the purchase of additional office space and to a lesser degree, the purchase of testing equipment software design tools.

In the second quarter, we repurchased $0.9 million ADSs for total cost of $10 million at weighted average price of $11.24. While we remain optimistic about our future and we strongly believe that our stock is undervalued, our Board has asked us to temporarily hold our share buyback in Q3 because of reduced Q2 revenue and full-year projections, including cash flow. This hold in our share buyback is temporary and our buyback could be started at the discretion of our Board. Unlike our share buyback, which is opportunistic in nature, our dividend payout is not. We aim to pay a dividend throughout the ups and downs of our business cycle. Let me emphasize that we are maintaining our $0.15 per quarter dividend payout.

I will now move on to our guidance. We expect to see continuing tightness in flash availability in the third quarter and second half of 2013, and this will limit our historical seasonal pattern of strong sequential growth in the third and fourth quarters. We expect our SSD+embedded strength, specifically our eMMC products, to offset softness in our core products and so revenue growth will likely stay flat for the next two quarters.

Our guidance for the third quarter is as follows. Total revenue, excluding LTE, is expected to be up 2% to 7% sequentially. Including LTE, our revenue should be down 2.5% to up 2.5% sequentially. Gross margin is expected to be in the 47% to 49% range. Operating expenses are expected to be in the range of the range of $17.5 million to $19.5 million. Stock-based compensation is expected to be in the range of $2.5 million to $3.5 million. Our effective tax rate will increase to 25%.

Our updated guidance for full year 2013 is as follows. Total revenue, excluding LTE, is expected to decline 5% to 10% year over year. We now expect LTE revenue of $11 million due to weaker-than-expected sales of legacy Galaxy S3 LTE smartphones in Korea. 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 $70 million to $73 million. Stock-based compensation is expected to be in the range of in the range of $10 million to $12 million. Our long-term model tax rate is now 20%.

We will now open the call for your questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will 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 questions.

Anthony Stoss – Craig-Hallum Capital

Hi, guys, a three-part question. I’d love to hear your view on your current embedded customer base, if you think there’s any risk to any of those customers taking technology in-house and developing themselves. Also we are on the gross margin front, any help you could give us where you see things heading into next year, full year. And then lastly, also on 2014, where you see a range on LTE? Thanks.

Wallace C. Kou

Thank you. We remain, by far, the leading merchant eMMC controller provider in the market today. And we do not see any meaningful emerging competition at this moment. While we may be perceived to be perceived to be competing with our NAND flash partner in general controller scene, we are more partners than we’re competitors. We help our flash partners to extend their R&D capability product portfolio and market competitiveness.

Some of our strengths in TLC flash management and the (inaudible) ECC engine algorithm are unique, and are complementary to our flash partners. Also, since all our flash partners have limited R&D resources, we help them optimize their internal capability, for example, enabling them to focus their limited resources on SSDs relating to enterprise and data-center storage solutions, or the premium line EMC markets. They will continue to outsource to us more mainstream products, [prioritizing] for market segments and for special capabilities.

Riyadh Lai

Let me now go to your second question relating to gross margin. Our migration in smaller process geometries for our product is -- has been progressing smoothly and we expect it to continue progressing smoothly. As you may remember, our latest generation UHS-1 in our eMMC 4.5 controllers are being manufactured on 55-nanometer process geometries and these should provide better profitability.

In general our gross margins, while the may fluctuate quarter-to-quarter, depending on the mix of some of our lower gross margin products like our card and USB controllers, versus newer higher margin eMMC and SSD controllers. So longer term we believe our – as our new growth product revenue increases, we should see our overall gross margin improve. We still remain committed to our long-term gross margin target of 50%.

Wallace C. Kou

And in addition we do not believe that Samsung’s commitment to their own platform has changed. They are actually working on their next generation LTE-Advance-capable baseband, and we are on track to pair our transceiver with that part later this year.

Anthony Stoss – Craig-Hallum Capital

Okay thanks guys.

Operator

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

Mike Crawford – B. Riley & Company

Thank you. Could you go into more detail on the SATA-III SSD controllers and what – how bad the ASP for that product will compare to say an eMMC controller, and what the addressable market is for your controllers and the products they are designed into so far?

Wallace C. Kou

As I said we begin sampling our new SATA-III SSD controller this quarter and the initial feedback we have gotten has been very positive. Our controller performance whether IOPS, power consumption, latency and for long-term reliability, stay in the top 10% of what is really available in the market today. We believe we will see some wins initial revenue in the second half of this year, but we do not believe material revenue contribution will happen until next year. We are targeting (inaudible) SSD, embedded SSD and NAND cache SSD as well as solid-state hybrid drive controller. So, that’s the market we focus on.

Mike Crawford – B. Riley & Company

And the ASP for that product compared to, say, a eMMC 4.5 controller, is this something that would be (multiple speakers)?

Wallace C. Kou

eMMC 4.5 controller SSD is around $0.50, for our SSD controller range is about $5 to $10 depending on applications.

Mike Crawford – B. Riley & Company

Okay, thank you. And then this question is for Riyadh. You said your long-term tax rate is now expected to be 20%. Is that corresponding with what you expect to actually pay in cash taxes?

Wallace C. Kou

These are accrued tax rates, so let me explain, first we’re increasing our effective tax rate for the upcoming quarter; we are also increasing our long-term model tax rate. For the upcoming quarter we are facing higher effective tax rates because of pre-tax losses made by certain of our operating entities which, when combined with pre-tax income and tax expenses of a profitable entities is resulting in an higher overall effective tax rates, so this will be for the third quarter.

Now moving to the longer-term model tax rate, following a very detailed review of our – the taxes of our various entities and how they are calculates, we determine we should be increasing our long-term model tax rate from 15% to 20% and the key reason behind this is because certain of our R&D tax credits are no longer available to us resulting in overall higher model rate.

Mike Crawford – B. Riley & Company

Okay, thank you. And the last question relates to the buyback. The Company does have some $4.66 at depository share in cash of $156 million. And I assume that the office space purchase that you put into CapEx was a one-time event in Q2, so that the CapEx going forward goes down more to a historic level of $1 million, $1.5 million a quarter, which would imply continued strong free cash flow. So I’m a little at a loss to see why the Board would temporarily suspend a buyback and what would it take to have them move forward again with what should be a successful program?

Wallace C. Kou

Office space is a one-time purchase, and it and its primarily relating to the continued investment of engineering teams, specifically building out a new team for eMMC programs, as we grow the future of that product segment. To your question about our buyback, we remain optimistic of our own future of our company and we strongly believe that our stock is under valued, but the Board is looking for improved fundamentals and our return to growth and some of the metrics were continuing to previously authorize share buyback program, but let me also emphasize that we are aiming to pay the dividend that we’ve been committed to throughout the ups and downs of our business cycle and so we’re maintaining our $0.15 per quarter dividend pay off.

Mike Crawford – B. Riley & Company

Okay, thank you.

Operator

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

Rajvindra Gill – Needham & Company, LLC

Yes, thank you. A question on the Samsung transition to the LTE-Advanced baseband, how do you characterize the cadence of their development; what kind of push that Samsung is making in developing more LTE-Advanced basebands in their portfolio next year. So how do you see that from your vantage point, and how do you think Samsung’s LTE-Advanced baseband compares to Qualcomm’s LTE-Advanced carrier aggregation baseband?

Wallace C. Kou

Like when you say that we believe there is a (inaudible) Samsung’s long-term strategy to utilize more internal second logic content and to differentiate their product. So Samsung did put a lot of resource to develop their LTE-Advanced baseband. We are paired to tracking on the joint development and tapping the coming months. We believe I have seen a year ago LTE-Advanced we are behind, but we cannot comment regarding who is better. But we believe now we have more compelling product to combine the market for LTE-Advanced in the coming year.

Rajvindra Gill – Needham & Company, LLC

And so, if you look at – your LTE business has dropped significantly in 2013 versus 2012 due to this transition. So logically we would expect that business to be up pretty significantly next year, if there are no, as you say, changes in Samsung’s strategy in terms of allocation of baseband development, internally versus externally. Though if this was just simply an LTE carrier aggregation transition question, then one would expect that the LTE business should be up pretty significantly next year, perhaps closer to what you did in 2012, around $40m to $50m. Is that a fair assumption, or is that too premature at this point?

Wallace C. Kou

Well we are expecting great things from our LTE program, at this moment we rather not provide that extent of view in terms of where our business could be heading in terms of LTE, we are very optimistic, we think there are great things that can come from it, but let me just caution that our new LTE-Advanced transceiver as well as Samsung’s new LTE-Advanced baseband, we’re only be coming out in following months and we only beginning testing and qualification. So it’s a little premature right now to take a stab at what is our revenue, we are going to be expecting next year.

Rajvindra Gill – Needham & Company, LLC

And this last portion from me was on NAND supply environment. As you know, listening to the commentary out of all the major flash vendors, the NAND supply environment is continuing to remain tight for the remaining of 2013 and also the expectation for NAND supply growth going into 2014 remains fairly tight, if you look at what their expectations are for bid growth. So it would assume that you could be facing perhaps prolonged issues in your module maker business, at least until first half of next year, where you don’t have a lot of – where the module makers don’t have a lot of availability for NAND supply.

So I was just wondering, what’s your viewpoint on that, clearly you are trying to offset it with the eMMC and SSD and you’ve done an excellent job doing that. But just what’s your view of the NAND supply environment yourself, this year and going into perhaps next year? Thank you.

Riyadh Lai

So in our view in the first half of this year, the issue of the module maker space was an overall lack of availability of flash because the supply is tight. But in the second half of this year the initial availability the pricing still remain high and because the NAND price and did not meet the module makers are really raising their demand.

I think the NAND availability start to change from second half of this year. I think if the overall NAND market dynamic improve, I think, especially to our module maker customers and pricing coming down gradually we could see some card and USB sales in the second half of this year, yes I think most of our OEM customers they can procure their NAND very sufficiently the module maker the lack of a bargain power with the NAND maker but currently we see the availability for NAND in the second half is improving slightly and our business were going to focus on more OEMs instead of the module makers. I think that’s why our continued growth on eMMC, as well as for SSD and embedded SSD.

Rajvindra Gill – Needham & Company, LLC

Very good, thank you.

Operator

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

Bob Gujavarty – Deutsche Bank

Great. Thanks for taking my question. I think, if we look back over the last three months, I think there’s been two significant developments. And I’m curious how they impact your business. I think one is the move to kind of lower-priced smartphones and tablets, and also – and then the second one, would potentially impact the LTE business, in that Broadcom has kind of admitted their ability to meet Samsung’s requirements has pushed out quite a bit into the second half of 2014. So I’m just curious if you can just talk about those two big developments and how potentially they impact your business?

Wallace C Kou

Yes. First of all, I think for the smartphone, as we all know, because the embedded NAND we have the increase the card bundling is decreased. So we do see our business being impact of bundling of micro SD card. But however we think that de-bundling rate almost it’s already happened and we see we will be kind of stabilized and but we also see there is a strong demand on China side, they demand bundling card due to they have little embedded memory for the low cost smartphone.

However, at this moment NAND maker they show less interest to supply the low card low density NAND wafer for the micro SD card. That’s why they impact our business. But in the same time, we’re growing our eMMC controller business.

So the smart – low cost smartphone and all the smartphone tablets, white-label tablet in China are helping their transition from (inaudible) to eMMC. So we do see the other part is helping for our business. Regarding LTE, I think in the beginning of the year as I said because the third generation of LTE transceiver, we do not have a carrier aggregation function do not meet the LTE-Advance requirement. It wasn’t required a year ago when we when we discussed with Samsung Mobile and I cannot comment the detail. That’s why we did not win any new projects for last quarter for Samsung Mobile LTE latest smartphone.

However, I think we do put a good effort together with Samsung (inaudible). And I believe the next generation product our LTE-Advanced transceiver should have much more compelling features and we have two versions to deliver. And with four receiver, single transmitter, in single die and with very, very low power and also support annual tracking all the feature. We believe I think we have a pretty good position to compete in 2014 for LTE-Advance markets.

Bob Gujavarty – Deutsche Bank

Got it. Maybe and this is maybe a question for Riyadh but you’re operating at the high end of your gross margin, kind of, medium term targets, kind of 47% to 49%. I mean when I look at the back half of the year, what – how should I think about gross margin? What could potentially surprise you? Is it really just product mix is what to be looking for?

Riyadh Lai

For the second half of the year, we are planning to increase the sale of our new growth products and in general the new growth products have higher above corporate average gross margins. So our overall gross margin is going to be the result of the blending of our new growth products, as well as our core business and so the more we sell of our new growth products the better are our overall gross margins going to be.

At the same time, quarter by quarter there is really some fluctuation in terms of the actual mix of core products versus new growth products and so that may affect temporarily some of our overall gross margin. But overall the direction that we are – our business is taking is more and more into the new growth products and so we are – remain very focus on our target gross margin of 50% but near term it will be a bit lower than that.

Bob Gujavarty – Deutsche Bank

Okay. Thank you.

Operator

Thank you. Your next question comes from the line of Tom Sepenzis from Northland Capital. Please ask your question.

Tom Sepenzis – Northland Capital

Hi. Thank you for taking my question. I just was hoping you could tell us a little bit about what you’re seeing competitively. I’m wondering reported record profits and revenue up above 17% on the quarter. So I’m just curious if you think there’s some market shift – market share shift going on there? Or if that’s just something that might be customer based? How are you viewing it? I mean last year you were a good year ahead of at least on the embedded side, so any clarification you could provide there would be helpful. Thank you.

Wallace C. Kou

I think as I said, we remain, by far, the leading merchant eMMC controller provider in your market today. We do not see any meaningful merchant competition at this moment.

Riyadh Lai

We can’t comment specifically about how their performance, how they are delivering their performance but from the eMMC perspective as well that – that just made it – we do not see any meaningful competitor in the eMMC front from the merchant side.

Tom Sepenzis – Northland Capital

Okay. So you expect that to continue to be strong as we go through the rest of this year but not really bumping anybody?

Riyadh Lai

I think if you’re looking for the past few years, eMMC performance prospects has been doubling every year since 2011, our eMMC 4.1 to 4.5 to 5.0. It will be very difficult for any new merchant control supplier to compete in this market – as they are allowing the eMMC market already to-date. So I think we have learned quite a lot on experience supporting customer of system knowledge and take quite a long time into development. We believe the success of future eMMC business we are on the joint partnership between NAND maker, controller maker and device OEMs beginning from early stage product development.

Tom Sepenzis – Northland Capital

Great, thank you and then Riyadh, for the December quarter I know that you’re not giving direct guidance for that, but you did give guidance for the year. And the current guidance suggests a further drop in the December quarter from a revenue perspective. The last couple of years that’s been driven by LTE, whereas the controller business typically does see a little bit of growth in the December quarter. So I’m just curious as to what you’re seeing that makes you so cautious for December? I mean it looks like revenues got to be close to $50 million in order to get to your guidance for the year.

Riyadh Lai

In our prepared remarks, I mentioned that we’re seeing the balancing of our new growth products growing very strongly with softness in our core products. So overall through the combination of these two factors, we’re seeing a flattish growth for the rest of the year. So this upcoming quarter we’re seeing, we’re expecting flattish revenue and in fourth quarter, we’re also expecting at this point in time expecting flattish revenue for Q4.

Tom Sepenzis – Northland Capital

Okay, great. I just misread that. Thank you so much. I appreciate it.

Operator

Thank you. (Operator Instructions) Your next question comes from the line of Rajvindra Gill from Needham & Company. Please ask your question.

Rajvindra Gill – Needham & Company, LLC

Yes. Just a follow-up, Riyadh. In your full-year guidance you said revenue excluding LTE was to decrease 5% to 10%. What is the revenue including LTE guidance for the year? What would that be?

Riyadh Lai

Just a second; our total revenue excluding LTE is you were expecting that to decline 5% to 10% year-over-year. So the LTE element is roughly $11 million, which is lower than what were originally expected. Originally last quarter we were saying that LTE was $50 million right and this quarter we’re now expecting to be a bit lower $11 million due to weakness from expected sales of legacy Galaxy S3 LTE smartphones in Korea. It will be including the LTE revenue, the revenue for the year would be coming down closer to 53%.

Wallace C. Kou

We’ve laid out what our total revenue is going to be excluding LTE and that is expected to decline 5% to 10% year-over-year and the amount that we’re excluding, which relates to LTE is $11 million.

Operator

Thank you. (Operator Instructions) All right, I guess there are no further questions. At this time, I would now like to hand the conference back to Mr. Wallace Kou for his closing remarks. Thank you.

Wallace C. Kou

I would like to thank all of you for joining here today and your continued interest in Silicon Motion. We will be at the following conferences this quarter. In August we’ll be presenting at Pacific Crest Global Technology Leadership Forum in Vail, Jefferies Semiconductor & Hardware Summit in Chicago. In September, we will be presenting at Citi 2013 Global Technology in New York, Brean Capital Global Technology in New York, Deutsche Bank dbAccess Technology Conference in Las Vegas and the 14 Annual Credit Suisse Asian Technology Conference in Taiwan. Detail of these events are available on our website. Thank you and good bye for now.

Operator

Thank you. 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!

Source: Silicon Motion Technology's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts