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Riyadh Lai - Chief Financial Officer

Analysts

Bob Gujavarty - Deutsche Bank

Silicon Motion Technology Corp. (SIMO) Deutsche Bank 2012 Technology Conference Transcript September 12, 2012 11:10 AM ET

Bob Gujavarty - Deutsche Bank

Good morning, everybody. We are fortune enough to have Riyadh Lai, CFO, Silicon Motion this morning. He is going to go through few slides and then I’ll kick it off with Q&A, let see we’ll have spare time for the audience to ask some questions towards the end. Thanks.

Riyadh Lai

Thank you very much, Bob. It’s a -- my name Riyadh Lai. I’m the CFO of Silicon Motion. It’s a pleasure to be here today at the Deutsche Bank conference. I’ll provide a quick overview of the company and go straight into Q&A.

We are a fabless semiconductor company focused on business of designing microcontrollers for solid state storage devices, as well as business of providing specialty RF ICs for mobile devices.

Our key products are memory cards, flash memory cards, USB flash drives and increasingly SoC and embedded controllers. On the specialty RF our key product is LTE transceivers especially for Samsung.

We’ve done phenomenally well. Listening our opinion over the last two years and continue to do well. We grew our revenue 69% last year and the prior year we grew our revenue 52% and this year we’ve guided revenue to grow 20% to 30%.

Last two years our business run well largely because of smartphones and use of memory cards for those smartphones. We grew our revenue sharply as a result of ramp up smartphones and the use of memory cards for those products.

These products are now beginning to, this industry of cards is beginning to mature, gross rates are moderated, but still growing at a modest rate for the balance of year and we believe will also be the case next year with a rise of low cost smartphones from China and other markets with very little embedded memory with and so therefore high bundle rates.

Simultaneously, we’ve already seen, we’ve already expected the moderating rates for smartphones and so, over last few years have invested aggressively to -- on products to drive our long-term growth and these are our new growth products, specifically our LTE transceivers, as well as our SoC plus embedded controllers.

Our LTE transceivers have already started the ramping. We’ve had -- we start ramping over a year ago, last year was our first year which we had one full year of LTE revenue, last year LTE transceivers already accounted for over 10% of our corporate revenue. We had $224 million of revenue last year and LTE already accounted for little over 10%.

LTE will continue to grow this year. We expect our LTE revenue to grow somewhere in the 50% to 75% range for this year. So it will be an important driver for our new growth products this year as well as next year.

In addition to ramp up our LTE transceiver business, we have also been rolling out our SoC plus embedded controllers. The first out of gate is our eMMC controllers. Our eMMC controllers went into production late last year. In Q1 of this year we went into production with one of the major NAND flash vendors and went into production with the second NAND flash vendor in second quarter of this year.

So already we have Samsung and Hynix as our two NAND flash partners for eMMC controllers. Samsung and Hynix are using our eMMC controllers for memory -- for these eMMC memory modules that they have marketed to a large number of smartphone and [handset] OEM.

Already we have 11 OEMs that are using our controllers for their products and these include HTC, Lenovo, ZTE and Huawei among others. We already also design into a number of high profile tablets that are going to be rolling out in second half of this year.

So we are delighted where our business is going and we delighted that our new growth products are taking up the mental that use to be occupied by our card controller as the leading driver of growth to our business.

Our new growth products were 15% of our revenue last year. This year we expect our new growth products to be 30%, 35% of our revenue and to grow further next year. So we are excited where all these new growth products are coming together to develop, to drive our growth, current growth, as well as expectation that these products will further drive our growth for the longer term. And this is especially important as our core product, our card and USB flash drive products the growth of these begin to moderate.

So, I think, what I’ll do is turn to for Q&A with Bob.

Question-and-Answer Session

Bob Gujavarty - Deutsche Bank

Great. Thank you [actually]. Yeah. I think maybe just perhaps, well, tactical given there is a lot of macro uncertainty. I think when particularly interesting point was, you guided 3Q to be in a pretty tight range, just for, historically you’ve kind of given at 10 point range but guided 3Q revenue 5% to 8% Q-on-Q, pretty tight range. Can you talk little bit about your confidence around such a tight range, what’s kind of driving that versus kind of your previous guidance ranges?

Riyadh Lai

Sure. Sure. Increasingly we have better visibility of our business especially with the OEMs that are driving both our core products, as well as our new growth products. And through these OEMs we have better visibility of our business. OEMs like Samsung for our card business, as well as Samsung for our LTE transceiver business.

And on the eMMC side our major, two major customers, Samsung and Hynix. And so through the visibility that our OEM customers have provided we feel fairly confident that the forecast we’ve provided are fairly good one.

Bob Gujavarty - Deutsche Bank

Great. One thing about the [guys] as well as the gross margin is 47% to 49% that a little bit Q-on-Q. Can you talk a little bit about maybe product mix, is there, what’s happening in the quarter per se on the gross margin and kind of what do you think happens to gross margin in directionally afterward?

Riyadh Lai

Sure. Our targeted gross margin for our business, our mobile gross margin is 50% and for the last many quarters we’ve guided in 48% to 50% range though in certain quarters, some of our product mix, as well as product cycle may affect our overall growth profitability and that’s certainly going to be the case in Q3.

So as a result we’ve guided to slightly lower 47% to 49% gross margin for our business and this again will be result of some gross margin shifts, as well as some shift -- product mix shift as well life cycle changes in our business. We have products of lower gross margin, as well as product of high gross margin and sometimes the shifting of our product mix will affect our overall gross profitability.

Bob Gujavarty - Deutsche Bank

Got it. Given the, I mean, you, I think you’ve a great outline of your growth businesses versus kind of more established businesses. Can you talk a little about maybe perhaps seasonality is not applicable to the growth businesses? But typically do you have a favor for what the seasonality is and perhaps kind of the more mature parts of our business? So, how do you think about for the mature parts of the business, heading into the fourth quarter?

Riyadh Lai

Sure. Historically, our -- the seasonal pattern for our business has been weak first quarter and we start increasing in Q2 with our strongest Q-on-Q growth for Q3 and the largest dollar revenue in Q4.

But this seasonal pattern has all been the case for a number of years, especially with devices, smartphones over the last few years has affected overall seasonality pattern that we were formally accustom to seeing.

And then more recently our new growth products these LTE transceivers, as well as eMMC transceivers, our eMMC controllers are affecting the overall pattern. So right now, we do not have a clear sense of what the longer-term seasonal patterns would be. But foreseeably it could revert to the old handset, smartphone related pattern.

Bob Gujavarty - Deutsche Bank

Got it. And maybe just a follow-on, if Samsung, there was traditional chatter that they do some inventory adjustments towards the end of the year, the calendar year, November, December. Have you seen that particularly or is that something that’s -- is it anecdotal or is it true? Just curious if there is some seasonal pattern to help Samsung conduct their inventory and since Samsung is obviously an important account for you, does that factor into your results?

Riyadh Lai

Samsung is a very large company and they have products that are ramping. So whatever inventory management that they have, it’s going to be in line with what they are expecting to sell their products and how they are going to build for.

And so as a result, their requirement, their inventory built will be preplanned for the procurement or components from us. So we, it depends on what they want to do and how their products sell and we will adjust our business accordingly.

Bob Gujavarty - Deutsche Bank

All right. Any questions from the audience?

Unidentified Analyst

On the handset side I think, can you just talk a little bit about how you actually got such a good traction in the transceiver side of things? What differentiates your product versus some of the more competitive or traditional competitors in this space then I have a follow-up on that, please?

Riyadh Lai

Sure. We’ve been doing specialty RF products, specifically transceivers for phones for a long, long time we acquired a company in Korea called FCI in 2007. FCI was Korea’s first transceiver company, originally to establish to provide transceivers for Qualcomm baseband parts for the domestic Korean market. So this business has been supporting Samsung and other major Korean handset OEMs for a number of years.

So when Samsung decided that they were going to do their own LTE baseband a couple years ago, they came to us and asked, whether we could provide a transceiver solution to mash their roadmap, their technology and product roadmap? We have been doing this work for especially for Samsung for over two years now. We had our first full year of revenue last year.

We continue to grow this business this year. We're in our fourth-generation of product. We have a product roadmap that matches with Samsung. Our transceiver is designed specifically for Samsung.

So this roadmap includes [cost] roadmap, technology roadmap with improving data rates, including LTE advance further down the road. We also have further integration of other solutions required where our transceiver now also includes say, HSPA, HSPA-plus as part of our Silicon for its backwards compatibility required in many markets.

So to your question, it’s a combination of the long relationship that we’ve built with Samsung, as well as the cost that we’ve established where they recognize our expertise in providing these custom specialty RF solutions for interesting growth products.

Unidentified Analyst

Good. And as my follow-up on, seems like the relationship is very strong with Samsung. But Samsung historically is -- next-generation products come out, they will put up their own baseband, but over time then they will go back to merchant vendors like a Qualcomm. So it seems to me that would be a risk to you?

Describe how you mitigate that risk? Do you agree that that’s the direction is likely to go in LTE going forward, or do you try to actually start to partner with other baseband vendors as well? Thank you.

Riyadh Lai

For our transceiver business, we are not the main actor. We are simply a co-star. The main star in the LTE business is Samsung’s LTE baseband. So when Samsung’s mobile phone division is choosing, how they want to develop their LTE smartphone, it’s the decision-making is whether if they want to choose to use their own internal basebands versus a Qualcomm part.

And so I believe from there you have the multiple vendor strategy, as well as the diversification of risk between the use of internal versus external and that will be the Qualcomm part.

So right now, if they are using a Qualcomm part, it would be Qualcomm providing both their transceiver, as well as baseband. In the case of Samsung using their own internal baseband, LTE baseband, it would be paired up with our transceivers. So we believe that’s how they are mitigating the risk internally between [season A versus season B].

Longer-term, we think Samsung is very keen to capture more of the economic and hence that’s why they’ve developed their own LTE baseband. They have one of the largest pools of IP related to LTE that we believe that there's the portion of the global SIM No IP for LTE owned by Samsung is similar portion to Qualcomm. So they are very aggressive and trying to capture more of the economics through IP and silicon side.

Unidentified Analyst

Could you talk a little bit about the content per handset on the transceiver side? How do you see those trends going? I think you maybe going from one -- two transceivers to one. Do you see that content changing over the next, I don’t know, six months to a year?

Riyadh Lai

For these transceivers that we are providing to Samsung, we have a road map that includes continuous cost reduction as well as road map of integrating more functionality into our solutions as well as improved performance over time. So as part of this trend, we have -- we started out with initially a very basic LTE transceiver to where we are now integrating HSPA, HSPA plus.

So in the case of Korean market place, where we are supplying the Galaxy SIII LTE transceivers. We’re providing both for WCDMA networks in Korea as well for their CDMA networks. So through this, we have expanded the technology required to support the various types of their interface solutions required by the market place and its part of value added that we are providing to Samsung, increasing value added based on their technology roadmap and as part of that, we try to capture as much of value to providing value added to Samsung.

Unidentified Analyst

Maybe I’ll take one. I think one -- perhaps, Mr. Lai, not well the story about SIMO is the fact that you’ve been able to improve your ASP over the last couple of years by adding some higher value segment to the market. How do you see that shifting? Is that sustainable given your MLC and eMMC. It sounds like it is. What do you think about ASP, does that continue to be a tailwind for you this year and next year as we go into these higher values?

Riyadh Lai

Over last two years, our ASP improvements have been almost entirely the result of -- talking about ASP just for controllers, it’s been result of providing higher value added controllers specific for just cards and USB flash drive. Now going forward, we’re adding in addition to controllers for cards and USB flash drive mixing in the higher ASPs of eMMC and SSDs.

But sticking to just the card and USB flash drive business, which was the bulk of our business over last two years. We were already able to generate improving ASPs and that’s a result of NAND Flash getting to be more and more complicated, more and more difficult to manage as it gets weaker and weaker over successive generations of geometry node migrations and a move to TLC and because flash is getting weaker and weaker, you need more robust controllers to manage these weaker components in order to develop the same value and consumer user experience. So that had resulted in better pricing for us as a result of providing more value to our customers.

Unidentified Analyst

Great. And just to clarify, eMMC comes in at a higher ASPs and even your kind of removable storage controller?

Riyadh Lai

That’s right. Our typical card USB controller, the average ASP is around $0.25 and for our eMMC controller, it’s roughly two x of that.

Unidentified Analyst

Great. Further on the controller side, the flash controller side, given as you pointed out, how critically important it’s going to become -- already is for flash performance. Is that market going to remain a merchant market or captive market where the NAND suppliers play to -- it’s a critical technology for them to own…

Riyadh Lai

It’s a very good question. But it’s going to be a combination, will continue to be a combination of controllers being developed internally by the flash makers as well as controllers that they will seek to outsource from merchant like ourselves.

All of the NAND flash makers have their own controller technology because they need internal controller technologies to validate the flash components that they have produced, in short what they have produced actually works. So you need to have controller technology internally to do all this.

But in addition, as flash goes into more and more applications, you have competition amongst the flash makers, amongst the OEMs which is resulting in a lot of pressure on OEMs and flash makers to come up with more economic, more differentiated solutions that allow them to provide more differentiated solutions, become more competitive in the market place.

And for some of those solutions, they are turning to controller makers like ourselves. We are primary beneficiary of this trend. Originally, it was the outsourcing of high controllers to move from flash makers using their own internal controllers to the use of merchants suppliers for card controllers. As pricing of card controllers came down, it was lower economical for them to develop card controllers internally. So they outsource to us and the majority of card controllers now outsource to merchant folks like ourselves.

The second way we believe is going to be eMMC which is now beginning to take place where flash makers like Hynix and Samsung have already started outsourcing some of their requirements to ourselves as a result of more competitive dynamics on the eMMC front. We’re taking a better economics and better solutions by outsourcing folks to -- from companies like ourselves.

Further down, we think some of our other more higher volume cost competitive products will also be moving in that same direction and one of the new products that we have recently gone to market with is controllers for NAND-cache for PCs. These are lower density SSDs used to improve PC performance. We have recently provided us solutions to one of the big NAND flash guys where they have sort their OEMs, these 32 gigabyte NAND flash solutions. So we believe this is going to be a mix wave of products if you allow for outsourcing.

Unidentified Analyst

Actually maybe -- maybe actually follow-up on that, may be talk about the traditional SSD flash-cache market that you mentioned your participation in the cache market when do you think that become meaningful and then maybe expand on that and to maybe the general purpose SSD market. How do you see that playing out? Is that a segment that SIMO find attractive or if why or why not?

Riyadh Lai

It’s a -- for the NAND-cache business, it goes with our overall business model of being the outsource partner to the flash makers. For cards, we provide our controllers to both module makers as well as flash makers. The flash maker is the growing part of our business.

Moving to eMMC, it’s a replication of that business model where flash makers have come to us asking for us to provide a competitive cost performance controllers and taking I think business model further the next way of products that they come to us for solution is NAND-cache. Its -- these NAND-cache solutions we think are going to be very exciting.

We have already started shipping the product that we have announced -- one of the major PC OEMs have started shipping all-in-one PCs in the U.S. market to a number of major retailers like Wal-Mart. This product is a all-in-one PC with 1 terabyte hard disk drive plus 32 gigabyte SSD use for NAND-caching to improve the overall performance that gives consumers [reversible] growth in our opinion.

They are ready to use their standard hard disk drives, a large capacity chip hard disk drive as well as to use the SSDs to improve the overall user experience, better blued up speed, better data retrieval form the hard disk drive via the SSD cache, where you are able to have performance that comparable to -- almost comparable to pure SSD system, but you get a lot bigger storage 1 terabyte versus the much smaller capacity that you typically find with pure SSD systems.

So, its quite exciting for us longer term. This is going to be -- we believe internal part of our business, the revenue contribution from NAND-cache this year is very small, but should begin to increase materially next year.

Unidentified Analyst

I am curious about the traditional SSD, pure SSD market, its not a market that SIMO is pursuing aggressively, just curious what your thoughts are on that market, you just state with your overall strategy why or why not?

Riyadh Lai

We are also focused on the more mainstream pure SSD controllers, the larger capacity SSDs. The market opportunity is as there -- we have chosen to allocate our resources for the time being where we’re able to pursue opportunities that are potentially higher volume. The PC SSD market has been growing very nicely. But overall volume relative to the potential volume for NAND-cache seems to favor NAND-cache versus pure SSDs.

Unidentified Analyst

On the NAND-cache side, do you see that -- do you have insight to whether that’s better or more likely market directions in actual hybrid drives the upstate, just much of way you put the NAND, how do you see that developing from what you said?

Riyadh Lai

Its alternative. NAND-cache is alternative to the hybrid drives that are also coming to the market. It remains to be seen how the market shakes out and which one becomes the more government type of platform. One obviously being led by the flash makers, flash makers are going after the cache business and so we are supplying controllers to the flash makers for these sort of products.

Another end, you’ve got the hybrid drives are led more by the hard disk drive makers. So, it remains to be seen which one will be the more successful ones, but currently we’re putting our bet behind the flash makers.

Unidentified Analyst

Maybe talk a little bit of about where we are -- where are we in the eMMC kind of the growth prospect here because I think there is maybe some misunderstanding that we are kind of volume to from this strategy and this growth trajectory, but it sound like you just started shipping meaningful volumes like where are we working to go here in terms of just maybe volume from way to quantify what inning we are in SIMO’s ramp of eMMC?

Riyadh Lai

We have two major NAND flash partners when we have supplied eMMC controllers too. These major NAND flash makers are keen to grow the overall eMMC market, therefore our smartphone, tablets as well as other devices.

eMMC is essentially the SSD for mobile devices. It’s SSD for smartphones, SSD for tablets and potentially you can also go and become the SSD for competing devices. We’re very excited about where our eMMC business is going. We are still at the very early stages of our eMMC growth curve.

We’ve had our first full quarter ramp of a -- our eMMC business with the NAND flash makers. We started going into production with our first NAND flash partner in Q1, but in Q1 we do not have a full quarter of revenue.

So, our full -- first full quarter of revenue was in fact Q2. And so based on this, we’ve got big expectation of where our eMMC business could go. We strongly believe that in the few years time our eMMC revenue will be as big if not bigger than our current card controller revenue.

So, as the card business becomes more mature, eMMC is going to be taking over most -- all other smartphones that are non-iPhones already in eMMC. So its already a substantial market. On the tablet side, all of the non-iPad tablets are all using eMMC. So again, another major market for eMMC.

So it’s important for us to be part of this play and we are already making important headways into this. We have design wins via our NAND -- our two NAND flash partners into 11 OEMs. OEM count will continue to increase. These OEMs are using our -- using eMMC of our flash partners without controllers for the smartphones as well as tablets and so we’re very excited where this is -- where this is all going.

Bob Gujavarty - Deutsche Bank

Okay. And since we have (inaudible).

Unidentified Analyst

Just to follow-up on that a little bit, can you talk about the competition there, I believe it’s both merchant and captive and talk about competition on both side and how do you differentiate?

Riyadh Lai

Yeah. eMMC for these products initially was all done internally by the flash makers, but as the market becomes more mature, more competitive, OEM versus OEM, they are now seeking more cost competitive solutions that provide a good performance cost mix, it allows them to deliver into the marketplace.

When you look back at the card business, initially it was also internal where they are now largely the whole outsource, we believe the same trend is also taking place. A typical card controller is about $0.25. eMMC controller is only 2x of that. So, based on the economics as well the large support required to drive the eMMC business, the flash makers have decided that, it makes a lot of sense to outsource.

You have substantial amount of support you require to deliver competitive solutions to the marketplace. So we are doing a lot of that. It’s not just a hardware and firmware we are providing. We are also providing substantial amount of support and customization and entailing our solutions for our customers and their OEM customers.

Bob Gujavarty - Deutsche Bank

Great. Looks like we’re about running out of time. But thank you, Riyadh for sharing your morning with us and look forward to see you again.

Riyadh Lai

Thank you, Bob. It’s pleasure to be here.

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