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Silicon Motion Technology Corporation (NASDAQ:SIMO)

UBS Global Technology Conference

November 20, 2013, 12:15 PM ET

Executives

Riyadh Lai - Chief Financial Officer

Analysts

Unidentified Analyst

It's my pleasure to have Riyadh Lai here with us from Silicon Motion. We'll start with a short presentation and then move to Q&A.

Riyadh Lai

[ph] Nick, thank you very much. Thank you for the introduction and it's a pleasure to be here today at the UBS Conference, here in San Francisco. Before I begin, I'll just remind everyone of Safe Harbor statements that we file with the U.S. SEC. Please refer to them for risk relating to the investments in our securities.

We are a fabless semiconductor company with two primary product lines. We're primarily a NAND flash controller company, but we're also involved in the LTE transceiver space. We're a company that has grown quite rapidly over the last three years. We grew our revenue at over 50% CAGR to over the last three years, to about $281 million last year.

This year however is a big transition year for us. Transition relating to our controller business as well as transition related to our LTE business. The transitions are as a result of major changes in the end-markets in which our controller business operate in as well as technology shifts happening on the LTE side.

On our controller business. We've been very successful over the last three years, as a result of external storage business, primarily cards and USB flash drive, with rapidly growing market for smartphones with high attach rates of memory cards with smartphones. We grew rapidly over the last three years. We also grew rapidly with increasing sales of LTE transceivers to Samsung, as will I will talk today. We are going through transitions that are allowing us to position for the longer-term growth for our business.

But first on the controller side of our business. We are moving from a business, where we are primarily a external storage controller company to where we are already primarily an SSD plus embedded controller company. In past years, we were primarily supplying cards and USB flash drives. As of the most recent quarter, third quarter, majority of our sales relating controllers are already not cards and USB flash drive, but in fact our SSD plus embedded.

SSD plus embedded is already 55% of our total mobile storage revenue. So this is a major transition for us. And I believe an indication of our success that we've achieved in transitioning our business from external to an embedded controller business.

On the card side, we've done well in the past, as a supplier of cards for smartphones. But with falling bundle rates from what used to be 80%, 90% of all smartphones sold, bundle with a memory card to what is now 10%, 20%, we've gone through a significant debundling of risk relating to our business.

But with the bundled rates down to 10%, 20%, most of that risk relating to the debundling issue, we believe has largely played out. So with that risk at the lower level, most our growth is now shifting or has shifted away from cards to the embedded side of the business.

On embedded side of business, we've grown from next to nothing, to what is already 55% of our storage business, primarily led by our eMMC controllers going into smartphones and tablets. You think of eMMC as the SSD for mobile devices. It is the primary storage for these devices and we've become the leading merchant supplier of controllers for these eMMC memory modules.

We started shipping our eMMC memory modules in the first quarter of last year. We went from 0% market share to 5% to 10% market share last year supplying our controllers to Apple, Samsung and Hynix. Through then, we supplied into five out of the top 10 smartphone OEM's smartphones. These all are the non-Apple stuff.

We are in smartphones that operate android operating systems to RIM to Windows. We are in smartphones, we're in tablets, we're also in some of the lesser smart devices such as smart set-top boxes, smart TVs, game consoles and others. We are also present both in the global flagship products as well as low-cost smartphones.

Globally, we had about 5% to 10% market share. And this year, as the market has continued to grow rapidly with us growing even faster than market, we believe the market last year growing to this year probably grew around 55%. And we will achieve by then, as the year close to, somewhere around 150% revenue growth relating to our eMMC sales, which would take our market share from 5% to 10% last year to about 15%, 20% market share this year. And this is purely from our sales to Samsung and Hynix.

We are also in the process of bringing online a third flash partner to add to our current two flash partners. And with this we believe we can continue to grow rapidly into next year. And so we believe we are well-positioned and this is a part of the overall trend of the end market shifting away from external to embedded, which has affected our business with our external sales declining and with our embedded business this year almost offsetting the declining external sales with the rapid growth of our embedded controller sales.

We are well-positioned for further growth, because of our technology leadership on the eMMC side. We're facing effectively no competition on the merchant side. We are acting as extension of the flash partners' internal R&D ARM as a supplier of eMMC technology to Samsung, to Hynix, and going forward with our third flash partner.

With our third flash partner, we are expecting initial commercial sales to this flash partner to start ramping beginning in the first quarter of next year. So this will be an important catalyst for our growth next year.

The market eMMC, we believe, will probably grow around 25% next year. With our current business relating to Samsung and Hynix, we should be able to grow just as fast as the market. And with our third flash partner coming online, we believe we can grow in excess of the market with this incremental customer.

Now, let me quickly turn to our other product, our LTE product. Our LTE product line is also a major contributor to our strong growth over the last three years. Last year we did about $40 million-plus relating to our LTE transceiver out of the total $281 million of sales. So important part of our total revenue mix last year.

Our LTE transceiver is a custom-designed part. We've been designing LTE transceivers specifically for Samsung and only for Samsung for a number of years. We've been in many of their global flagship products from their first LTE smartphone ever to their Galaxy Nexus going to Verizon, a couple of years ago and last year for their Galaxy S3 for the Korean marketplace.

This year however our LTE business is also going through a transition. Transition not so much, the end-market's evolution as in the case of our controller business, but rather a technology upgrade from older LTE technology to LTE-Advanced with carrier aggregation and a lot of other advanced features.

This year is a transition for our LTE business, because the market is moving towards LTE-Advanced. Samsung mobile for their handsets want to use LTE-Advanced and are procuring LTE-Advanced silicon. But our partner and ourselves, we will not be bringing LTE-Advanced solution until next year.

Samsung's LTE-Advanced baseband is currently in testing at Samsung mobile right now, our LTE-Advanced transceiver is also currently in testing at Samsung, and together the paired chips are also in testing. So depending on how well the testing progresses and we believe it has been progressing fairly smoothly to date, we feel we have a good chance of getting back into the major programs at Samsung.

But as I mentioned, we are still in testing, so there are a lot of milestones that we still need to meet before we can start taking about whether we're going to be generating LTE revenue next year or how fast we're going to be able to grow this business again. But in the meantime, we feel we are strategically well-positioned. Samsung strategically is keen to use more of their own silicon, and we are part of their integrated solution that we're bringing to their mobile handsets.

So in a nutshell, that where our company has been and is heading, we are transitioning away from a lot of older parts to newer parts. On the store side, our transition has been fairly smoothly and is progressing as expected. We have a lot more wood to chop on the LTE side, but overall we feel we are well-positioned for further growth next year.

And just as a summary, our growth next year, we're going to be deriving from both our storage business as well as LTE with eMMC gearing up to ramp again in the first quarter with our third flash partner.

We also have our SLC products, which are already in commercial production, but we are targeting to ramp in a more material way beginning the second quarter of next year. And fingers crossed on the LTE side of business, where we are in testing. And if the testing does progress as planned, then we should have a good chance to getting ourselves back into Samsung's mobile programs.

So with that, I'll open up for Q&A.

Question-and-Answer Session

Unidentified Analyst

Maybe just if you go back on the eMMC side, if I remember well you were working on your UFS2 solution. Could you [technical difficulty].

Riyadh Lai

We've been upgrading our eMMC technology and expanding our portfolio of eMMC products since our initial launch in first quarter of last year. Our initial product was a eMMC 4.41. We have already started rolling out to eMMC 4.5, which is in the third quarter, about a quarter of our total eMMC shipment. We're going to be rolling out eMMC 5.0 in a few quarters time.

And we also have of UFS coming along, which we'll probably start the initial Silicon sometimes late next year, with the time to be confirmed. But that's where we're heading, expanding our overall portfolio of products, everything from eMMC focusing on SLC, MLC and with our third flash partner that I've talked about earlier, we're going to be rolling out TLC.

But with UFS, UFS is a very interesting piece of technology where with UFS the performance becomes comparable to SATA III, and so this is a interesting opportunity that is leading to conversions between the SATA products and the eMMC products and the opportunity to go into the PC side of it through eMMC.

Unidentified Analyst

[indiscernible].

Riyadh Lai

It is. That's correct. It's a TLC-focused business. We've been designing specifically a TLC controller for their eMMC product.

Unidentified Analyst

And how does it look, obviously Hynix doesn't do TLC, but with Samsung, how does your position on the TLC side looks versus MLC for eMMC competitors?

Riyadh Lai

With the Samsung and Hynix, we are supplying just eMMC part that is focused on using their MLC NAND flash. For the third flash partner it is the controller that's designed specifically to manage their TLC flash. So it's a difference of market segmentation and it's part of our overall strategy in bringing more customers, more OEM customers into our eMMC mix, where they're not using our controllers to fight amongst each other, but customer base, so for us it's a strategy of layering in customers where it's all about expanding the overall incremental TAM for us versus our customers fighting amongst each other for the same pie.

Unidentified Analyst

Any opportunities like expanding TLC with Samsung overtime?

Riyadh Lai

It's a possibility. We have among the best TLC controller technology in the marketplace. Currently Samsung is using their own TLC technology for both their eMMC as well as their SSD. But it is a market opportunity for us, but for our side, Samsung right now, we are only supplying them with the MLC-based eMMC solutions.

Unidentified Analyst

[indiscernible] markets now already. I mean, why Q2 next year would be more of a pickup for you volume wise? What are the figures basically exploiting your business in first, second quarter of next year?

Riyadh Lai

We have a few catalysts that are going to be playing out starting early next year. The first catalyst for us would be our eMMC business. While we expect our eMMC business in the first quarter to rebound, because of the seasonal pickup relating to Samsung and Hynix, which will get us back to third quarter level. Fourth quarter for us this year will be a seasonally down quarter relating to high eMMC, but it should rebound in the first quarter, backup to the third quarter levels. But just as importantly, we have our third flash partner, which will start ramping in the first quarter of next year. In the second quarter of next year, we have our SSD business that's we've been in commercial sampling as well as generating initial, but fairly insignificant commercial sales in China right now.

We've been working with our OEM partners in bringing our products into the PC OEMs food chain. If everything works according to the process that we've been working towards, we expect to begin initial commercial sales relating to our OEM business, our bigger OEM programs beginning in the second quarter. And so if these milestones continue to hit, then we expect a material improvement in our SATA III client SSD business in the second quarter, which will be incremental to the rest of our business. And then of course, we have our LTE business, which is maybe more than difficult to forecast at this point in time.

Unidentified Analyst

[indiscernible] in the short-term are you're seeing some seasonal correction in Q4, is that correct? And then you expect more [indiscernible] short-term market environments as you're developing [indiscernible].

Riyadh Lai

Our fourth quarter is a down quarter as we've laid out as part of our third quarter earnings announcements. Our third quarter revenue will be down, roughly 6% to 12%. A big factor in our seasonally down fourth quarter is relating to seasonal correction relating to our eMMC. Our eMMC business is tied to smartphone, largely tied to smartphone handset sales and that peaks in the third quarter of this year.

It was seasonally down in the third quarter, but that part of our business will start rebounding in the first quarter and our eMMC sales should get back to third quarter levels in the first quarter of next year, with growth continue beyond that. So our seasonal patterns are no longer the old seasonal pattern where our largest dollar quarter is the fourth quarter with eMMC becoming a larger part of our mix. The third quarter is shaping up to be the larger dollar quarter.

Unidentified Analyst

Any question from audience?

Unidentified Analyst

[indiscernible]

Riyadh Lai

Samsung is our largest customer. They were about a third of our revenue last year. We sell a lot of products to them. We have our LTE products, we have our eMMC, we also have our card controllers. We act as the extension of the R&D ARM, if you will, but let me also step back, and say, we are not a extension of Samsung. We are a merchant supplier of controllers. We try to be independent and neutral, where we are able to work with all the flash partners and be a balanced supplier to the marketplace.

So we work with Samsung, we work with Hynix and we are also working with other flash makers as an extension in their R&D ARM. So we are very careful in how we firewall our business where one OEMs business does not impact another OEMs business. But we've been working very closely with Samsung, and we are also working closely with Hynix, and we're also going to be working very closely with other flash partners in growing our overall partner.

All we want to do is have a more diversified OEM customer base, but to your question, what value do we add to Samsung or for that matter other flash partners, we work as a extension in their R&D ARM. Samsung or the other flash customers as big as they maybe they do not have infinite R&D resources. For certain products, we have better technology than they have. For example, TLC and some of the algorithms relating to flash controlling, our technology are better than what the flash makers have. So by leveraging our resources they can achieve better solutions for their products that they're selling.

At the same time, for certain flash partners, we help offload resources that they can then devote for products that they have higher internal priorities, for example, PC SSDs or the enterprise stuff that they rather focus on versus the more consumer-based products. You also have to factor that some of these products, the economics for the flash partners from a controller perspective may not necessary pay for them to focus resources on.

On the card side, a card controller is roughly $0.25; a eMMC controller, as sophisticated as it is, the dice are very small, and the ASCs are roughly $0.50. So for a flash maker, the question to them is whether they want to devote resources for a $0.50 part or devote resource for other solutions.

Unidentified Analyst

[indiscernible].

Riyadh Lai

We're not that bigger company. So it's not so much the dollar resources, it's more about the R&D engineering talent. We are fabless. We don't own our own fabs, we primarily give to CSMC to fabricate our parts. So the key is really, that the IP that we've been able to develop over time, we've been doing NAND flash controllers for over a decade, and so this accumulation of all the resources, all the know-how that we've built over time.

So when we started going into the eMMC side, the only reason why we were able to go in were for a few reasons. One, we had technology that was much better than what our customers had, and so essentially we had to vow them. Second, we had to be very price competitive; and thirdly, we had to be able to convince them that we have the quality and can meet the time-to-market that they're expecting. We have to have all of these three ingredients, before they would be comfortable in giving business to them.

So on eMMC side, we vow them by providing a product that had significantly better high ops performance than what they were able to achieve with their own solutions. And we were able to do it with one channel versus what they were doing with two channels, two data path. They were doing it with two data path and we're doing it with just one data path, and achieving significant better performance.

And through the use of just one data path, our dice is smaller and our power consumption is significantly lower than their. So for them this is a compelling reason to try our technology. And through the use of this technology, they've been very competitive in marketplace, growing market share and similarly we've also grown our controller market share.

Unidentified Analyst

[indiscernible].

Riyadh Lai

We do not have any merchant competitors right now. While you may argue the competitors that we have are the flash makers, but if that was the case then we will not be in a position where we are now, but rather the flash partners or the flash makers, our partners versus our competitors.

Unidentified Analyst

There is obviously a significant shift on the manufacturing side happening [indiscernible], how you're preparing for that on the microcontroller side, as I'm assuming that what's the core skill set from an engineering standpoint is similar, there will be algorithms you have to develop, would be somewhat influenced by the differences between 3D NAND flash drive versus [indiscernible].

Riyadh Lai

The trend is towards 3D NAND. Across the board, all the flash makers are working on their 3D NAND technology, and that sooner or later they will be rolling out commercially and will scale. We have been working with all the flash makers. They've been taking us through their tutorials to ensure that to prep out with the technology that they are planning to bring to market, the issue that they're facing, and how we can help address these issues from a controller perspective. So as part of that, we've been developing controller technology to manage the expected issues, and to manage overall the 3D NAND that they plan to bring the market.

A lot of the 3D NAND technologies from a controller perspective are evolutionary improvements of the technology products that we have, that we've bringing to market, whether it's relating to error correction wear-leveling or the power management, the rewritables, if you will. Moving from 2D to 3D, our error correction wear-leveling have been improving as flash have become less and less reliable, if you will. From a performance, slower performance, less write-cycles, less data integrity, all these issues require more robust and sophisticated controllers.

So moving from planer NAND to the 3D, its part of that overall trend and we've been working very closely with the flash makers and bringing technology. So when these products, ECD products come to the market, you should expect our controllers to be available to support their part.

Unidentified Analyst

So you don't see any inherent difficulties from a controller standpoint, for [indiscernible] reason I'm saying that it maybe switching to going core on some of your peers on the controller side [indiscernible], perhaps because I guess the initial Samsung rollout one would expect would be 100% Samsung controllers actually next year?

Riyadh Lai

It depends on products. Certain products they may initially seek to roll out as a management, where the controller is embedded in that overall solution. But for its other products, they will be bringing wafers to market and these will be products where they will require merchant suppliers to supply those to them and there are same products where they may seek to procure controllers directly from us, and so it depends on certain products and the timing of these products. And also from our perspective, until these products become meaningful with significant skills, it doesn't really pay for us to start supplying controllers for 3D NAND from day one.

Unidentified Analyst

Maybe moving to LTE, so I mean obviously, we have a good idea what happened for [indiscernible] this year. At this juncture from a [indiscernible] standpoint, if Samsung was to rollout a key new smartphone in Q2 on the high-end, could you be ready for that or is the timeline between current basically testing through the product shifting [indiscernible].

Riyadh Lai

The clear answer to you is I don't know, unfortunately. We are transceiver and their baseband, it is a integrated solution. There are two dice, but its integrated solution. And this integrated solution is currently testing at Samsung mobile. We need to complete the testing. We need to, if there are any issues, the issues need to be resolved. And depending on issues, if any; resolution, if any, that will dictate how quickly we're able to move towards commercialization of this latest integrated solution.

So until we have better clarity on how the testing has progressed or will progress, and how that will lead to design wins internally at Samsung and the scale there will be design wins. Unfortunately, I can't provide more color than what I've said. There is still too many unknowns things for me to say one way another way, whether we're going to be in or out of those Samsung programs, especially the near-term.

Unidentified Analyst

Actually, I know this is a Samsung mobile product [indiscernible], and you did talk about basically them already shipping integrated product to the third-party IT provider for the product side basically, I think that's [indiscernible] everybody. If that was to develop, would that have an impact on the Samsung mobile business and how do you look at the validity of Samsung to actually push forward or [indiscernible].

Riyadh Lai

We're not involved in on the Samsung baseband and application parts of their business. Our transceivers developed specifically for what their baseband specifications requirements are, and from our perspective it's integrated into their baseband. And as you mentioned, this baseband that has been developed by Samsung Mobile versus LSI teams. So they had a lot of different teams within their corporation working on different times on similar programs.

The program that we've been working on is the program that has been going into their mobile phones over the last three years or four years. The baseband that has been going into Samsung LTE phones have been coming from Samsung mobile itself. And that is the time that we're working and that is also the team that we're currently working with and we'll see where that goes. On the LSI side unfortunately I can't provide.

Unidentified Analyst

[indiscernible].

Riyadh Lai

I mean I don't have insight in to how their organization works, especially in terms of how and why and when they may want to integrate their different programs. At times they have programs that compete against one another internally; at times they've been integrating their team in order to drive better uses of resources.

Going forward, I don't know what their plans are for their various teams. But strategically, they are committed to their baseband program on the LTE side of their business. They've been working on this for a number of years, everything from the pattern and know-hows to the silicon, they've gone through many generations.

And right now, outside of Qualcomm, the only other company with meaningful experience on LTE silicon is just Samsung. So they've done well and we expect that they will continue to do well for us. And our partner Samsung, fingers crossed in how the testing progresses, but so far so good.

Unidentified Analyst

[indiscernible].

Riyadh Lai

We believe we have an opportunity to increase our market share at our customers right now, because we are helping them increase their overall market share globally. To your question, the share of wallet, I'm assuming you're saying share of their wallet. At Hynix, we're already at 100%. We've been on 100% since at least mid-last year. With Samsung, we're increasing steadily our market share at Samsung. But overall, it's all about also increasing their market share in the marketplace.

So last year we had 5% to 10% global market share. This year we're looking at 15% to 20% market share. The market also has been growing rapidly. The market grew by about 55% significantly faster than what we originally expected at the start of the year in large, as a result of the low-cost smartphone rollout over China. And we've helped them become very competitive, especially in Chinese marketplace.

In China, we have significant higher market share than the 15% to 20% that we're expecting this year, we have close to 50%. And this is the result of our competitive solutions that we're bringing to our customers and they're taking that and winning market share in China.

But more to your question, whether we can continue to increase our market share within our customers, there is still room to grow, especially at Samsung and we are also starting from ground zero with our third flash partner. So there obviously will be internal share wallet to gain there. And in plus by helping our customer become competitive in the market share, we also seek to grow faster than market growth.

Unidentified Analyst

And I guess just on that, if you look 12 months out or 18 months out, how would you look at how the eMMC business be between Samsung, Hynix and that third vendor. I mean how many, would be that for the first vendor.

Riyadh Lai

We're still waiting for the latest forecast from our customers. And so we'll be providing guidance going into next year for 2014, relating to our eMMC, how fast, how we expect it to grow, and that will be dependent on the actual forecast that we get from our customers as well as our third flash partner. So it's a little too early for us to say exactly what the numbers are going to be.

Unidentified Analyst

Thank you very much.

Riyadh Lai

Thank you for inviting us.

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