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

Silicon Motion Technology Corporation (NASDAQ:SIMO)

Q3 2013 Earnings Conference Call

October 25, 2013 08:00 ET

Executives

Jason Tsai - Director, Investor Relations and Strategy

Wallace Kou - President and Chief Executive Officer

Riyadh Lai - Chief Financial Officer

Analysts

Suji De Silva - Topeka

Rajvindra Gill - Needham & Co.

Mike Crawford - B. Riley & Company

Bob Gujavarty - Deutsche Bank

Tom Sepenzis - Northland

Operator

Good day ladies and gentlemen and welcome to the Third Quarter Silicon Motion Technology Corporation’s Q3, 2013 Earnings Conference Call. My name is Desmond and I’ll 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 limitations, statements regarding trends in the semiconductor industry and our future results of operations, financial condition and business prospects.

Although such statements are based on our own information and informations 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 relations with our major customers and changes in political, economic, legal and social conditions in Taiwan.

For additional discussions 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 obligations 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.

Jason Tsai - Director, Investor Relations and Strategy

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

The agenda for today is as follows. Wallace will start with a review of some of our recent business developments. Riyadh will then discuss our third 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 release issued yesterday. We ask that you review it in conjunction with this call.

With that, I would now turn the call to Wallace.

Wallace Kou - President and Chief Executive Officer

Thank you, Jason. Hello everyone and thank you for joining our earnings call. In the third quarter, I’m pleased to report that our mobile storage revenue grew sequentially with our SSD+embedded scale further and now card controller sales rebounded. Over the last several years, we have been investing aggressively in our SSD+embedded solutions and I’m delighted that our eMMC controller sales have continued to successfully scale. And then in the second quarter of this year this product line had already become our largest.

I’m also delighted that our SATA III client SSD controllers which we recently launched and have received very favorable third-party benchmarking reviews has already entered initial sales for a few of our customer sales to both retail channel and Chinese for PC OEMs. Overall, I am pleased that we continue to make good progress in transitioning our Mobile Storage products from mature external storage solution to longer term growth opportunity in the embedded storage space.

Additionally, we believe our card controller sales has stabilized a risk relating to card debundling has largely play out. Overall, our revenue declined slightly due to revenue LTE product finishing went down. Excluding LTE sales, our revenue will have increase modestly this quarter. Our growth in our operation and profitability on the other hand increased in the third quarter. Earnings per ADS in the third quarter grew to $0.32 up from $0.27 in the second quarter. Riyadh will go into our financial later in the call.

Our SSD+embedded product are the future of our Mobile Storage business with consumer and electronic devices are increasingly smart devices that require embedded memory. SSD are rapidly replacing HDD in PCs. And more and more category of devices whether for industrial, automotive or commercial application are now seeking specialized embedded memory solutions. We are being developing a variety of SSD+embedded solution to target these markets.

Our eMMC controller has successfully scaled and it’s already our largest product line. We are now in initial stage for scaling our SATA III client SSD controller business. This quarter our SSD+embedded revenue grew by nearly 10% sequentially and now account for about 55% of our total Mobile Storage revenue that’s from above 50% the previous quarter. Our eMMC controller sales grew well in excess 10% this quarter as OEM device makers increased their procurement for end of the year helped their sales. Year-to-date, our eMMC sales are already up over 150% compared to the same period a year ago.

We supply high performance in cost competitive eMMC controller to Samsung and SK Hynix. And through our partners we have been able to significantly expand our market share this year. In 2012, our first year on eMMC revenue we achieved around 5% to 10% market share and we are on track this year more than doubled our share and that 15% to 20% global eMMC market share. eMMC memory modules with our controller are widely used in 8 out of top 10 non-iOS smartphone OEMs. We have exceptionally strong presence in China where we have almost 50% of this eMMC market with also controller for eMMC 4.01 and 4.5 product that are built into global flagship devices as well as low cost smartphones whether on a Android, Windows or Blackberry OS. Our eMMC 4.5 controller accounted for nearly 25% of our shipment in the third quarter and we are on track to become sampling our next generation eMMC 5.0 controller this quarter and for this to enter (indiscernible) in the first quarter of 2014.

In the third quarter our flash partner use our eMMC controller to secure 15 new design-ins and design wins. So, majority of each are eMMC 4.5 controllers. This win include numerous Android smartphone and tablets including the previous mentioned even Google and Nexus 7 as well as Window 8 tablet from global top three PC OEMs. Last quarter we extend our eMMC NAND flash partnership with addition of our third flash partner and I’m pleased to confirm that our busy engagement with this flash maker for TLC-based eMMC controller has being progressing as expected.

Managing no cost for the weaker TLC flash without compromising data storage reliability and the high performance requirements of the eMMC 4.5 classification is challenging. But we believe our customer is on track to begin commercial sampling of their eMMC solution using our controller in November and we expect to see initial commercial revenue in the first quarter of next year. This third-party complements our existing partnership with Samsung and SK Hynix by enabling the competitive TLC-based eMMC solution that target low cost devices. Overall we are pleased with the successful execution of our eMMC product this year. This year we would grow our eMMC sales well around 150% significantly faster than eMMC market growth. Next year we believe the market of eMMC should grow about 25% and we believe our sales to Samsung and SK Hynix should grow at least as fast. Sales to our new served flash partner will contribute incremental growth. For the fourth quarter however we expect our eMMC revenue to decline sequentially due to seasonally strong views in the third quarter ahead of the fourth quarter holiday buying season, but expect strong growth to resume in the first quarter as new OEM program begin.

Let me now turn to our SSD controller business. As we have discussed our new SATA III client SSD controllers began sampling in the third quarter and based on customer feedback as well as independent third-party testing and benchmarking. Our controllers offer very competitive performance, but with power consumption that is substantially lower than any other SSD controller available in the market today. Lower power consumption is one of the key factors (indiscernible) in their decision making process for choosing SSD controller. I’m pleased to announce that we have started initial sale of our SATA III client SSD controllers to several module maker customers with design wins for both retail channels and local Chinese notebook PC OEMs.

Additionally we are also working with OEMs targeting longer Tier 1 global PC OEM application and design cycles and are targeting sale to these customers beginning in the second quarter of next year. Until the second quarter of next year we do not expect our SATA III client SSD controller sales to contribute meaningfully. Overall I’m pleased with our expanding portfolio of SSD+embedded products and this activity and expect sales from this segment to continue to scale. Already our SSD+embedded sales are above 55% for our mobile storage sales. Our next milestone for SSD+embedded to account for the majority of our overall corporate revenue.

Now let me turn to our card and USB flash drive controller business. As we are talking about for sometime the market for these controllers are mature and has been in secular decline. The debundling of memory card for smartphone and continuing weak PC sale have limited marketing opportunity for our card and USB controller this year. Let me talk about the card and USB trends separately.

First cards. We believe further downside risk to our card controller business is limited. We believe the smartphone cards debundling risk has largely played out. A very few smartphone are now sold with the bundled card. Four years ago as you may recall both smartphone were sold with bundled memory card. This is no longer the case. In addition to the bundled card market the other majority markets, major markets for memory card is the retail channel. We are seeing stability in the retail market specifically for high-performance cards such as UHS SD cards for digital and video camera as well as smartphone that can record high-frame rate for HD video. Our card controller sales rebounded modestly this quarter and over one sort of our SD card controller sales now for high-performance UHS SD cards.

In this quarter we began controller production for Samsung for its new multi-quarter UHS SD card program during its 90-nanometer TLC NAND Flash. Our USB flash drive controller sales have dropped sharply since last year. USBs are popularly used of external storage with PC. We believe the market for USB has been negatively affected by declining PC sales, growing sales of tablet which do not use USB, an increasing adoption of card storage. We do not believe we have yet seen the bottom of the declining trend. Our USB sales however are relatively small compared with our memory card sales. We sell roughly two to three card controllers for each USB.

For the fourth quarter which is typically our strongest quarter in the year with card and USB controllers. This year we are only expecting flat revenue growth. By our overall flash availability have improved slightly comparing this year, availability to module maker is just tight and end consumer demand remain weak. I would now discuss our LTE transceiver progress. We have completed our LTE-Advanced transceiver development at roughly the same time as Samsung with the new LTE-Advanced baseband and Samsung Mobile recently started testing our new transceiver with a new baseband. We remain committed to our LTE transceiver business and we believe Samsung remains committed to further development of their own baseband platform as part of our long-term strategy of offering differentiated products. Our transceiver remains integral to this strategy and its preferred payer to their baseband. We believe that we will have better stand over the scale of design wins for 2014 in January and look forward to updating you then.

To conclude I’m pleased by the progress that we have been making in transitioning our controller by external storage solution to invalid storage solution. I’m proud the successes our team have had in bringing eMMC controllers to market and making it our larger product line. Next year I’m confident about delivering further eMMC growth. I’m optimistic that we are well-positioned to scale up our SATA III client SSD controller business and I feel good about our new LTE-Advanced transceiver.

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

Riyadh Lai - Chief Financial Officer

Thank you, Wallace. First I will outline our financial results for the third quarter and then I will provide our fourth quarter guidance. For the third quarter of 2013 we delivered total revenue of $51.1 million, a 2% decrease compared to the prior quarter. Let me recap the performance of our two key product lines. First mobile storage. Mobile storage revenue increased 4% sequentially, mobile storage controller shipments increased 7% sequentially, mobile storage controller ASPs decreased by 3% sequentially have increased 8% year-over-year, our 15th consecutive quarter of annual ASP increases. Our card controller revenue increased by 8% sequentially and our USB controller revenue decreased by 23% sequentially. OEM revenue again accounted for nearly 70% of our controller sales in the third quarter similar to the second quarter.

Moving to Mobile Communications, mobile communications revenue decreased 27% sequentially due to the continuing (indiscernible) transition of Samsung LTE smartphones. Our corporate gross margin increased from 48.4% in the second quarter to 48.8% in the third quarter. Our corporate operating margin increased from 19.7% in the second quarter to 22.7% in the third quarter. In the third quarter our operating expenses decreased to $14.9 million as compared to $16.8 million in the second quarter due to lower accruals of compensation expenses. We ended the third quarter with 711 employees, 17% more than at the end of the previous quarter. Earnings per ADS in the third quarter were $0.32, an increase from the $0.27 in the second quarter, as a result of higher gross margins and lower operating expenses.

Stock-based compensation in the third quarter was $1.5 million up slightly compared to the $1.4 million in the second quarter. I will now move to our balance sheet and cash flow. Inventory days increased slightly to 91 days in the third quarter from 88 days in the second quarter. DSO remains unchanged at 50 days in the third quarter as compared to the second quarter. Payable days decreased to 46 days in the third quarter, compared to 54 days in the second quarter.

Our cash, cash equivalents and short-term investments increased to $163.4 million in the third quarter from $156.4 million in the second quarter. Primary sources of cash in the third quarter were $10.8 million from net earnings and a decrease in receivables generated $1.7 million. A decrease in payables consumed $2.7 million and our dividend payments consumed $4.9 million. We invested $1.2 million for the purchase of testing equipment, software and design tools. We do not repurchase any shares in the third quarter. Our board has still not given a green light to continue with our previously authorized a suspended share repurchase program.

I will now move on to our guidance. We expected our fourth quarter revenue to decline, because of LTE product transition. eMMC seasonality and falling mobile TV sales. I’ll briefly talk about each of these three factors. LTE product transition, we completed our last residual sale of our end-of-life LTE program in the third quarter and so we will not have any material LTE sales in the fourth quarter. For the full year we will deliver almost $12 million in LTE revenue.

eMMC seasonality. Smartphone and tablet OEMs have been building devices for the fourth quarter holiday sales and the sales of our eMMC controllers are several steps removed from OEM sales of devices to end consumers the seasonal tapering off of our eMMC sales happened earlier. As you know we sold our eMMC controller to the flash makers will in turn sold eMMC. Memory solutions, the device OEMs will in turn build the devices for retailers to start for holiday sales. We expect our eMMC sales to rebound strongly in the first quarter of next year as new OEM programs kick in and we expect our first quarter eMMC sales to recover levels close to the fourth quarter. Following mobile TV sales, our mobile TV sales were declined due to following Korea T-DMB and Japan ISDB-T SoC sales.

Our card and USB controller sale growth is expected to be flat in the fourth quarter due to weak and consumer demand. Our guidance for the fourth quarter is as follows. Total revenue excluding LTE is expected to be down or to down 10% sequentially. Including LTE, our revenue should be down 6% to down 12% sequentially. Gross margin is expected to be in the 47% to 49% range. Operating expenses are expected to be in the range of $16 million to $18 million. Stock-based compensation is expected to be approximately $5 million, we are adjusting our long-term tax model rate to 18%. Effective tax this year will be a few percentage points higher than the 18% due to changes in some of our tax positions.

Looking into next year and I will summarize what Wallace had previously discussed for the benefit of our audience. We believe our card controller sales has stabilized but our USB controller sales may continue to fall quarterly at a modest rate. eMMC market should grow about 25% and our eMMC business with Samsung and Hynix should grow at least as that. Revenue from our third flash partner will contribute growth incremental to this. Our third flash partner sales should begin in the first quarter. Our SATA III client SSD controller sales should contribute more meaningfully to revenue beginning in the second quarter. We will update everyone on the progress of our LTE business in January. It is still too early to talk about timing or magnitude of this LTE revenue. We are confident next year will be a growth year for us. We will now open the call for your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question comes from the line of Suji De Silva from Topeka. Please ask your question.

Suji De Silva - Topeka

Yeah, good morning guys. Can you talk about the impact you saw from the Hynix expire on availability of NAND for your customers?

Wallace Kou

I think the Hynix (indiscernible) produce DRAM to file therefore directly of that DRAM supply and the price. However memory OEMs have converts from NAND flash capacity to DRAM in light of the higher DRAM prices in the market impact of the shortened supply of NAND. We are monitoring the situation closely and continue to have conservative expectation in term of near-term NAND supply growth. I would like to point out that any of their ability Hynix will impact our module markers and now our OEM business which in the third quarter was nearly 70% of our controller business.

Suji De Silva - Topeka

Okay, thank you. And then the inventory collection you’re seeing in the fourth quarter in handsets is that evenly split between the Tier 1s in the China low cost handset manufacturers or is it more meaning towards one or the other?

Riyadh Lai

Suji, could you please repeat your question so we can answer more appropriately.

Suji De Silva - Topeka

Sure, the handset inventory collection for the fourth quarter is that more of the Tier 1 OEM or the low cost China handset OEM?

Wallace Kou

Well we cannot comment the endmarket for the smartphone but we believe the inventory correction has started since May Q3, but we believe currently just because procurement of our customer that’s why the eMMC our revenue was declined shortly from Q3, but we do not see any really smartphone volume decline, we believe that we still see the strong rebound from first quarter next year.

Riyadh Lai

Suji let me also add our expectations about overall eMMC growth for this year is substantially higher than what we had originally expected. As you may recall originally we’re expecting eMMC growth this year to be roughly around 30%, our latest view is now that eMMC growth will be about 55% for this year because of substantially higher low cost smartphone volume ramping from China and so these are obviously opportunity for our eMMC business.

Suji De Silva - Topeka

Well a quick question what’s the typical 4Q seasonality declines for eMMC typical I guess it’s still growing but what was expected to go?

Riyadh Lai

Suji, we – we’re still very lean to the eMMC business. We’ve this is we’re going to our second just completing our second year of eMMC business and so the seasonal patents we’re seeing are still early days since we’re ramping our business and so the patents that we are seeing probably not going to be reflective of the longer-term patents, the longer-term patents would probably be closer to what you normally expect towards was the handset.

Suji De Silva - Topeka

Okay. Thanks guys.

Operator

Thank you for your question. Next question comes from the line of Rajvindra Gill from Needham & Co. please ask your question.

Rajvindra Gill - Needham & Co.

Yes, thank you. A question on the eMMC, from a technology perspective as well as from a sales strategy, what is the difference in developing this type of controller versus a controller that would go into a bundled card, is it, does it take longer to develop, is there more complexity and then how do you factor that in when you’re looking at the growth rate next year?

Wallace Kou

The eMMC controller design for invalid solution and frankly speaking we believe eMMC controller technology to lease about three times complicated than the card controller technology, because you need to have much more robust power management to prevent in sudden power down and you have a much better algorithm for performance driven spend especially the focus at both rend and rely and sequential rewriting. And also you have to recover any (indiscernible) condition and doing the event user and status operation. So I think in many areas for eMMC technology as much more complicated than removable storage controller technology.

Rajvindra Gill - Needham & Co.

So, does that help you in terms of providing a value proposition to the flash vendors who don’t necessarily want to develop the eMMC controller themselves?

Wallace Kou

I think we mentioned in the past eMMC technology, the success of eMMC technology remains rely on several factors if it’s not just controller technology for the hardware SLC in the algorithm and (indiscernible). It’s also in addition is a verification process and also the pre-cap resistant integrator and including the debundling technology in kind of supporting the field how strong your team can depart the product and their official kind of OEM customers because they’re relying all dynamics rely on your team, overall not to control the technology but the overall scale and technology and provide a robust solution to them.

Rajvindra Gill - Needham & Co.

Thank you and this last question on the LTE business, I mean I don’t understand some of this testing their baseband and, but do you have any additional visibility into what the roadmap would be into 2014 because I mean clearly this year 90 odd percent of Samsung LTE phones are using Qualcomm I'm just wondering – what makes you more confident that mix shift could, that split could go more to Samsung internally, if you could elaborate a little bit further?

Wallace Kou

First of all from a technology point of view last year our LTE transceiver and Samsung baseband do not have career application and below tracking features. I think this year all product needs the LTE-Advanced requirement including carrier. And we really do not believe Samsung commitment to their own platform has changed and they are actually working on their next generation LTE-Advanced cable baseband and we are on the track to pay our transceiver with their part maintenance here. I cannot reveal the detail to you but we have the confidence, good confidence I think by year end we could have a full update to you.

Rajvindra Gill - Needham & Co.

Thank you very much.

Operator

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

Mike Crawford - B. Riley & Company

Thank you. Can you please talk about the margin, expected margin impact on the shift eMMC 5.0 solutions?

Riyadh Lai

Well all of our new solutions have gross margins that are above corporate average and so for this product as well as other products you should expect the same trend of higher gross margin blended into our overall growth margin profile.

Mike Crawford - B. Riley & Company

Okay, Riyadh is this eMMC 5.0 becomes more prevalent say I don’t know Q2 would you expect margins to ever get above that 49% level on the gross margin side?

Riyadh Lai

All of our products when they initially come to market they have much higher gross margin but over time we are committed to delivering a cost down program to our customer. So, our overall gross margin profile for our products are the combination of the individual product as well as the product mix of all the various parts that we have and so the more of an easy product that we bring to market and the larger the significance the better our gross margin is going to be. Let me just add that our long term target still remains 50% for our gross margin.

Mike Crawford - B. Riley & Company

Okay, thank you. Regarding the LTE-Advanced I think the statement was that Samsung remains committed well to development of baseband I think we can understand that. And Silicon Motion is the preferred partner to the baseband. Would you expect to have a majority of a tax rate with Samsung next year or still close to 100% share of, if they’ve used their own LTE-Advanced baseband?

Wallace Kou

I think we have been very successfully meeting their requirement and so long as, as long as we continue to meet this requirement we do not believe we will see any competitive threat entering the market whether internal or external. Well we believe our solution outperform their internal other solution. And we think Samsung is committed to use internal solution as possible as they can. They have internal solution have similar of better performance they will have a more model using internal solution to differentiate their product.

Mike Crawford – B. Riley & Company

Okay, thank you. And then last question on stock based comp. I think it’s been about $5.4 million through nine months you didn’t say $5 million for Q4 did you, or did I miss you there?

Riyadh Lai

I'm sorry.

Mike Crawford – B. Riley & Company

Stock based…

Riyadh Lai

You heard right it is 5 million.

Mike Crawford – B. Riley & Company

And is that….

Riyadh Lai

It’s compared to higher than the previous quarter. We have, we’ve just are in process of bringing out a new stock based competition program and so the impact is going to be higher in the next quarter compared to the previous few quarters.

Mike Crawford – B. Riley & Company

So a final question then is what would you – what get the stock based comp for next year?

Riyadh Lai

You should look at that on a more annualized level right, quarter-by-quarter there are always some variance, variations in terms of one program that brought to our employee so the right way to look at it is to look at on a full year basis.

Mike Crawford – B. Riley & Company

No, Riyadh but so you’re talking about $10 million in stock based comp this year, is that a good number for next year as well?

Riyadh Lai

Roughly, if you add up the number for this year then that would give you a sense of magnitude that you should expect next year plus some scaling.

Mike Crawford – B. Riley & Company

Okay, thank you.

Operator

Thank you for your questions. (Operator Instructions) The next question comes from the line of Bob Gujavarty from Deutsche Bank. Please ask your question.

Bob Gujavarty - Deutsche Bank

Yeah I have a kind of a question I mean if I look at maybe a competitor to you indirectly like SanDisk they’ve been able to grow their USB and their flash card revenues some of the ASP but they lost a grown unit. Is that a function do you think in this environment where NAND is very tight is it that they are able to gain share in a tougher market or is it just I'm just curious how you just you kind of explain the discrepancy between their performance and your performance?

Wallace Kou

Hi Bob. It seems you are right. In today’s market NAND supply is very tight. So, NAND maker have a privilege to come show the product they want to sell. I believe SanDisk definitely gained their position in card and USB. I don’t believe they gain a much more volume in USB but definitely their card business is doing very well. And so it depend on the NAND maker clear strategy some NAND maker they don’t want to surprise the NAND to the card and USB business. But overall for NAND supplies the module maker is limited that’s why we are impacted by the module maker business.

Bob Gujavarty - Deutsche Bank

Got it. And then if I think about kind of I mean you talked a little bit about the puts and takes for Q1. I mean obviously their eMMC customer coming back there is presumably some replenishment of inventory existing eMMC customers after they draw it down in Q4. What are some of the headwinds should we think about I mean – can USB take another leg down, flash cards are seasonably soft in 1Q. So, can you talk a little bit about maybe the offsets of some head winds in Q1 otherwise I can only think of good things and I don’t want to get the impression that its going to be an up, a big up quarter if that’s not the proper way to think about it?

Wallace Kou

We cannot predict about USB product line but we believe because PC market continues to decline the demand on USB flash drive also is very weak. So, the potentially we already mentioned the USB product line will moderately decline. But ASP card we believe is stable right now. We did see a very small rebound in third quarter and we see what the flat rate for Q4 and moving next year. However I think we can gain more high performance market share the total unit will may not increase but the ASP becomes higher but we can grow for the top line as well as profit. Well we also mentioned we start to ship the SATA III client SSD from this quarter with small volume but we believe entering to late Q1 or second quarter we start to be the sales contribution will be more meaningful to our business. So as you know in 2013 we don’t have any SATA III client SSD business this year.

Bob Gujavarty - Deutsche Bank

Right. So net-net, a lot of good things potentially in 1Q and most of the bad stuff is largely gone. Okay, great. Thank you.

Operator

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

Tom Sepenzis - Northland

HI guys, I think you mentioned earlier that you expect the embedded market to grow 25% next year, that’s just what the two existing customers not including the third, correct?

Riyadh Lai

That’s correct, that’s the industry number, that’s the industry number. We believe the industry as a whole will grow about 25%, the industry, the market for our eMMC, so our business with Samsung and SK Hynix at a minimum it should grow as fast as the industry. And when we are – if a third customer comes online that will be incremental to what we expect to deliver with Samsung and Hynix.

Tom Sepenzis - Northland

Okay, good. And then as far as operating expenses, do you have anything in the plan for next year that take some backup obviously they were lower this quarter than expected. So do we just use the current (indiscernible) going forward?

Riyadh Lai

Our OpEx for the third quarter was a bit lower as a result of lower accruals of compensation expenses, our fourth quarter OpEx on our hand should be about $2 million higher than the third quarter because of higher tape-out expenses. In general looking up a bit further out OpEx for upcoming quarters should be a bit higher than this quarter, the third quarter, we will continue to build out our R&D and other operating infrastructure this quarter our growing SSD+embedded sales as these investments are critical to our long-term growth. From a operating margin perspective if that’s what you are heading you should expect our operating margin target still to remain at 30%, a profitability level that is within reach and that what, that we had achieved in the past.

Tom Sepenzis - Northland

Great. And just in terms of tax rate for next year?

Riyadh Lai

Our mobile tax rate is now 18%.

Tom Sepenzis - Northland

Great. Thanks so much.

Operator

Thank you for your questions. I would now like to hand the call back to Mr. Wallace Kou, President and CEO for closing remarks.

Wallace Kou - President and Chief Executive Officer

I would like to thank all of you for joining us today and your continuing interest in Silicon Motion. We will be performing conference this quarter in November 2013 we’ll be presenting at Wells Fargo Securities Tech, Media & Telecom conference in New York, RBC Capital Markets’ Technology, Internet, Media and Telecommunications Conference in New York, Deutsche Bank Conference in Taiwan, UBS Global Technology Conference in San Francisco. In January 2014 we will be presenting at the 14th Annual Nomura @CES Conference in Las Vegas, Needham Growth Conference in New York, details 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 your participation. You may now disconnect your lines.

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 Q3 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts