Good day, ladies and gentlemen, and welcome to the Second Quarter Silicon Motion Technology Corp. Q2 2014 Earnings Conference Call. My name is Han, and I will be your conference moderator for today. [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 own 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 state 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.

Thank you, and good morning, everyone. Welcome to the Silicon Motion's second quarter 2014 financial results conference call and webcast. My name is Jason Tsai. 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. And we'll conclude with Q&A. Before we get started, I'd 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 the GAAP to non-GAAP financial data can be found in our earnings release issued yesterday. We ask that you review it in conjunction with this call. With that, I turn the call over to Wallace.

Thank you, Jason. Hello, everyone and thank you for joining our earning call. We are excited by our outstanding operating results in the second quarter and the positive direction of our business for the balance of the year and going into the next year. This quarterly revenue grew 31% sequentially and our sales will likely grow another 15% to 20% sequentially in the third quarter to deliver the highest quarterly revenue level in our corporate history. Already this quarter, our NAND side controller-only business, which accounts for 85% of total sales, has already achieved the highest quarterly revenue in our history. With our growing pipeline of what we believe are high-quality business opportunities, we are increasingly confident that our current strong revenue growth momentum will continue from this year through to next year. Riyadh will talk more about financials and guideline later in the call. This quarter, revenue grew 31% sequentially, led by very strong 35% sequentially SSD+Embedded sales. Our SSD+Embedded products are now well over 30% of our total sales. Within our SSD+Embedded products, both our eMMC controller and SATA 3 client SSD controllers grew stronger. Our eMMC sales grew 65% sequentially this quarter, much more strongly than we had originally expected, as our Korean partner, SK Hynix, further increased this global market share along multiple bounds [ph]. Hynix leverages very cost competitive mobile DRAM part to build eMCPs [ph] which are tighter memory solutions that are packaged in NAND flash with our eMMC controllers and mobile DRAM. These eMCPs [ph] are targeted in smartphone OEM that are building mid- to low-cost devices using Qualcomm and MediaTek reference designs that use cost-effective eMCPs [ph]. Hynix's large build of eMCP [ph] coincided with this large 30% NAND flash big growth in the second quarter. Hynix is also rapidly building discrete…

Thank you, Wallace. First I will outline our financial results for the second quarter, and then I'll provide for our third quarter guidance. In the second quarter, revenue increased 31% sequentially to $69.4 million. Our controller sales increased 30% sequentially. And within our controller sales, our SSD+Embedded products grew by over 55% sequentially, while sales of our removable storage products, our card and USB controllers were roughly flat sequentially. Our specialty RF IC sales increased 54% sequentially, as sales from our mobile TV SoC increased and to a lesser degree, we started initial sales of our LTE transceiver to Samsung. Our corporate gross margin increased to 52.2% in the second quarter from 48.6% in the prior quarter due to much higher revenue contribution in the second quarter from our high gross margin new growth products, specifically eMMC and SATA 3 SSD controllers. In the second quarter, our operating expenses increased to $19.9 million as compared to $16.9 million in the first quarter due to higher compensation expenses and R&D tape-out expenses. We ended the second quarter with 751 employees, 13 more than at the end of the previous quarter. Due to higher revenue and gross margins, our operating margin increased to 23.5% in the second quarter from 16.7% in the first quarter. Earnings per ADS in the second quarter were $0.41, an increase from the $0.16 in the first quarter. Stock-based compensation in the second quarter was $0.4 million, lower than $1.5 million in the first quarter due to the timing of share grants. I will now move to our balance sheet and cash flow. Inventory days decreased to 105 days in the second quarter from 108 days in the first quarter. DSO decreased to 52 days in the second quarter as compared to the 59 days in the first…

[Operator Instructions] Your first question comes from the line of Suji De Silva from Topeka.

Can you, Riyadh, repeat what your expectation was for 2014 for SSD growth and what kind of share that implies for the market?

Our SATA 3 SSD, we're expecting revenue that is higher than what we had originally expected. Originally we're expecting $10 million to $15 million for the full year. We're now expecting $15 to $20 million for our SATA 3 client SSDs.

I thought you gave '14 guidance as well, in terms of a multiplier.

This is for next year. Next year we're expecting this revenue to scale further, scale 3x to 4x.

3x to 4x. And what kind of share does that kind of growth imply, do you think, for the marketplace?

We do not have a particular market share target at this moment. This business is new. Our revenue is now entirely based on the program wins that we have secured so far, which includes one SSD OEM targeting the PC industry as well as 2 NAND flash partners with multiple design wins at all 3 OEMs.

A question on the SSD as well, in terms of these follow-on programs you're getting from the OEMs and the flash vendors, are they larger programs than the initial one? Was the initial one something of a test and the newer ones are kind of upping to more of the platform there? And how does the revenue in '14 for SSD ramp, is it linear or is it back-end loaded?

We believe our engagement with the NAND makers SSD programs are the major project inside their programs. And the revenue growth will be significant in 2015.

Let me add, some of these program wins are for the entire SSD family. So the volume could be quite significant.

And maybe a last question on the OpEx here. Do you expect that to grow the headcount and R&D to support these programs in '15, or is the run rate from exiting '14 relatively the rate for '15?

We are hiring very aggressively. But just I think every company [indiscernible] recruit enough talented people that you wanted. But we have started very aggressive programs. And through the recruiting, through the school, through referral programs, we are trying to increase our R&D development force as quickly as we can.

Your next question comes from the line of Anthony Stoss from Craig-Hallum.

Riyadh, if you wouldn't mind taking us through kind of what you're thinking now in terms of 2015 OpEx, do you think that will moderate a little bit here heading into '15? Also longer term, in terms of your gross margins, what are the ticks and tacks on how you think they'll shake out over time?

We're trying to manage our operating expense as effectively as we can. Dual requirements, on one hand, we would like to start generating positive operating leverage where we can start piling on more revenue and then having more of that dropping to the bottom line. On the other hand, we have a lot of new programs in our SSD and embedded space where the eMMC or SSD we have a whole slew of new SSD programs with multiple OEM customers whether there is a major device OEMs or the NAND flash partners of ours for multiple generation of products. And these are all expecting to require a lot of resources. So in sum, we're seeing more and more opportunities. And based on our current headcount and available resources, we are sort of required to turn all of these opportunities, even some large OEMs. So you can expect us to scale our investment in headcount and infrastructure to match the level of interest in business activities we're seeing. Our target gross margin is 50%. And while this quarter it's been higher because of the greater mix of our new growth products, specifically our higher gross margin eMMC and SATA 3 eMMCs, what we're trying to do is manage our overall gross product mix that is coming in our long-term target of 50%, which remains our focus. We expect to see some pricing declines at some of our project scale and volume related pricing terms kick in. We also expect our gross margin to fluctuate from quarter-to-quarter due to the mix and timing of new products. But believe 50% is a healthy long-term target for us.

And then as a follow-up, Riyadh, anything to be concerned about in terms of sourcing, given the very strong revenue ramp? How you're finding your component supply?

Our primary component supply is foundry. TSMC is our primary foundry partner and we also use SMIC. And as the leading supplier of SSD+Embedded in the space, we have strong support from our foundry partners. They like to back the leaders in each of the spaces that require their services. But one indicator of the support and the relationship with our foundry partners, we made a $4.5 million security deposit at TSMC in order to ensure that we have the security of foundry services.

Your next comes from the line of Jaeson Schmidt from Lake Street Capital.

Just wondering if you could talk a little bit about current competition and if you're seeing any pricing pressure out there.

Regarding the eMMC, we believe we're the only meaningful merchant eMMC controller providing the market today. We partner with flash OEMs to extend their already resource and R&D capability. I think some outstanding TLC flash management and with LDPC ECC engine, the [indiscernible] hardware decode and SLD caching [indiscernible] is very unique. It's a complementary to our flash partners. We will continue to outsource more mainstream high-volume product, while they focus on their own internal resource for more [indiscernible] high-end solution for major OEMs. We believe that barrier to entry to getting higher and higher with only merchant supplier and with a successful track record in shipping hundreds of millions of units annually is very difficult for any new competitors to come into the market this point in time without high track record and to deflate our leading position in the market. For SSD, we believe the LSI go to [indiscernible] Seagate also how to clean up the market competitive landscape. We are very confident in our product and increasing pipeline of design wins from OEM customers in a testament to the competitiveness of our SSD solutions. I think our technology in SSD really built from the ground with a very, very meaningful[ph] effects with the engagement, the depth, the know-how of NAND, we are in a very unique position to cover for 1v 15 nanometer, 16 nanometer TLC all the way to 3D NAND. So we are in very good position that other NAND makers even from merchant group can't compete with us today.

And then are you at all concerned about any potential channel inventory glut in any of the product lines?

Regarding eMMC, I think our NAND maker partner, they monitor it very carefully. They track every week about the channel inventory. So we don't really see the inventory is too high. They have reverse search engine in their factory. But I think they monitor carefully. We also monitor channel and OEM side very carefully.

Your next question comes from the line of Rajvindra Gill from Needham & Company.

I know it might be a bit too early to talk about 2015, but you gave some indication on some of the piece parts. But in '14, you guys grew 22% to 27% or expected to grow. And arguably as you go into 2015, you're starting to see a ramp on the SSD side as well as ongoing growth at eMMC as well as from stabilization on the legacy business. So I'm just kind of wondering how we should look at the kind of long-term growth rate. Is this a company that could be growing 15% to 20%-plus, given some of the big markets that are open to you?

So currencies on sidelines and product positioning and our engagement with the NAND makers, we believe we will also continue to grow strongly in 2015 and beyond. And it's a matter of how quickly we see the embedded SSD, plus embedded storage controller and how big market grow and how big opportunity we can take. We believe we can continually expand engagement opportunity with NAND maker in both eMMC as well as SSD.

It's perhaps a little premature for us to be giving a consolidated revenue growth target for next year. But what we can do right now, given all the various program wins that we've already put in place and where we're expecting revenue beginning in early half of start of next year, we can start giving you pieces where you can start getting a feel of how we're going to be growing our revenue next year. Starting first on the eMMC side of the business, we have very strong traction with Hynix who got a TLC NAND flash partner. We should at least grow in line with the market next year. And we believe the market for eMMC should grow about 15% to 20%. Moving over to SATA 3 part of the market, this year we'll probably do $15 million to $20 million of SATA 3 client SSD revenue. Next year, based on the traction that we have with our 3 OEMs and the multiple program wins that we have secured so far, we believe that we should be able to scale our business 3 to 4 times what we think we can achieve this year. LTE, we're on track to deliver $12 million of LTE revenue this year. And going into next year, we think we should be able to deliver at least $4 million of LTE revenue next year. On our older products, our removable storage revenue relating to card controllers and USB controllers, we believe this part of our revenue should remain flat or decline mildly next year.

And with respect to some of the LTE programs, the 2 additional ones that you announced, the 2 additional programs, can you maybe elaborate a little bit further on the design wins? And you talked about that you've seen renewed interest, I guess, in Samsung. Can you talk about what Samsung's strategy is in the development of their own LTE base band and as well as their ability to integrate into the app processor? Can you talk a little bit about that?

We said before, we do not believe that Samsung commitment to their own platform has changed. We believe that is their part of long-term strategy to utilizing more internal strength in their content and capture more value chain economics. The percentage model using their own baseband versus third-party has varied over the past couple of years. But our understanding from our conversation with Samsung, they want to use their own baseband in more models. When their baseband in the beginning parts of that become more mature, more cost competitive, they're going to shift more model for internal solution.

Can you talk a little bit about the pricing by product and kind of where you see that heading for the future?

We do see the market demand lower-cost high-performance products and cost could be competitive. However, we believe because we're continuing to launch in the new premium lines through the SATA product mix, we believe our gross margin and ASP could be relatively stable.

Our mobile storage blended ASPs should over time blend up as our revenue mix include more higher ASP products like eMMC and SSD controllers. But let me also add on our apples-to-apples basis that ASP of our products have been fairly stable because of the increasing span of the technological bridge that our controllers provide. Wallace had mentioned that our job is in designing increasingly sophisticated controllers that bridge the gap between OEMs' expectations of ever better and faster storage devices, better performance. But at the same time, the components that they're using, they're seeking to use cheaper and cheaper next-generation flash components are getting weaker and weaker. And so the job of our controller is to bridge this ever widening gap, and this represents value. So we're seeing more stable blended ASPs for example in our eMMC controllers now that we have a broader portfolio of controls and with the broader portfolio of controls, we're seeing stability. And it's coming from having inventory of 4.1, 4.5 and 5.0. But generally from a modeling perspective, you should think about modeling for flat ASPs we've been able to successfully overlay new higher ASP products against the decreasing ASPs of our older generation products, which should result in flattish ASP trends.

Your next question comes from the line of Mike Crawford from B. Riley.

Further regarding the ASPs, would you say that the embedded mobile storage ASPs are still about 2x that of the removable storage controller ASPs?

As a rough benchmark, our eMMC is roughly $0.50. This is a rough benchmark. Our products are not products that we supply to the market, so this is just some...

The same generation of products, ASP is going to decline from next year. We're also bringing the new generation like we're going to have eMMC 5.1 by the end of this year. We'll even have USS [ph] by the second half next year. So through the proper product mix, we should be able to maintain a stable ASP for our flash controller.

And then in 2012, Samsung, I believe, was 32% of revenue. About what percent of revenue is Samsung so far in 2014?

Samsung's present percent has declined compared to past years for 2 reasons. They used to be a very big buyer of our controllers for bundled cards. We no longer do much bundled cards. We have also reallocated our engineering resources in -- previously we were supporting Samsung for eMMC. We've now reallocated that resource to support our TLC NAND flash partner for their TLC eMMC products. And so it's a declining trend. But this year, we expect Samsung to be a 10% customer.

And then you talked a little bit about some of the consumer SSD controller products you'd be introducing likely next month. Could you just add some more color on to what you intend to be bringing and showing?

We mentioned we have won a major design win through the OEM customer. We'll bring the solution to one of the top 3 PC OEMs. The first will be cache SSD. Then I think really the later of this year, we're going to enter 2 more major PC OEMs. So I think on what we said, they're coming to award us, they're going to convert all SATA SSD solution to SMI controller through the 2015. In addition, I think we have been engaged with 2 NAND makers with multiple projects on most production we'll see in early 2015, which will somewhat cover entire product lines for the SSD products. So this will bring us great momentum to grow throughout 2015 to 2016.

[Operator instructions] Your next question comes from the line of Tom Sepenzis from Northland Capital Management.

I think in your prepared comments, you mentioned that Samsung has gotten down to less than 5% of your eMMC revenue. Did I hear that correctly?

Less than $5 million.

And is that just market share loss or are they going in a different direction? What's driving that?

I think we mentioned the legacy programs has been last for almost 1.5 years, so it's running, and at the same time also move to more evolving internal solutions. However, I think Samsung will give us longer-term projects, because the market has uncertainty regarding USS. So some projects has probably taken longer to materialize. We allocate our R&D resource for much better near-term revenue growth. That's why we're allocating more R&D resource to the other TLC eMMC projects NAND makers for the near term. But when we start to recruit more R&D resource that we can get with more NAND makers for broader business.

Let me add some more color. As you know, we're eMMC engineering resource constrained. So we're reallocating our resource from Samsung to our TLC NAND flash partner. The impact of this reallocation is not big, because our annual eMMC revenue with Samsung is, as Wallace pointed out, less than $5 million. We expect our eMMC revenue this year with our TLC flash partner to already exceed our cumulative eMMC revenue with Samsung. As we continue to expand our R&D resources and continue our dialogue with Samsung for next-generation, it's possible that we could work with Samsung again in the future.

And then in terms of the new LTE platforms, is this 3 distinct handsets, or is this just different geographies of the existing one that you had?

There's 3 different handsets, 3 different smartphones.

For next year then, the $12 million that you're targeting for next year is likely a conservative estimate if you're talking 3 different Samsung handsets. I mean are these all high-end handsets or some of them targeting a low- to mid-range as well?

For Samsung mobile, we're targeting a high-end handset. However, in second half 2015, we are also engaged with a non-Samsung LTE transceiver business, which will be more mid- to low-end.

So is Samsung selling the solution externally? Did I get that right?

No. We're working with other LTE transceiver partners and baseband partners. And so there's the opportunity for this to go beyond just Samsung.

Your next question comes from the line of Monika Garg from Pacific Crest Securities.

First just a housekeeping, the inventory in the dollar amount increased quite substantially quarter-over-quarter. Anything particular reason or it's still kind of anticipated sales for the next quarter?

Monika, you're not coming through very clearly. Could you repeat your question more loudly please?

The inventory in dollar amount increased quite substantially. Could you just help us understand that?

Our inventory has actually decreased. Our inventory decreased from 108 days to 105 days in the second quarter.

I was just looking at the dollar amount and looking through the last 7, 8 quarters.

Well, our revenue also increased quite significantly. Our inventory level has risen, but it’s part of primarily as a function of our ramping revenue. Our revenue increased 31% this quarter.

What was the eMMC revenue from Samsung last year?

Less than $5 million.

Then for the LTE business, given basically the run rate of this business, have you thought about spinning off this business?

We're always looking for strategic opportunities. But as things stand, Samsung is still connected to this business. And this is important part of our business. But if the business does not perform, does not continue to meet our strategic objectives, we could be open to more strategic options.

What do you think is the OpEx of running this business right now, kind of any ballpark, any way to think about it?

Talking about our total OpEx?

No, sorry, for the LTE part of the business.

The business has operating expense that is appropriate for its level of revenue. And we don't break out LTE specific operating expense.

Could you talk about what you're seeing in the NAND supply right now in the market? Last quarter, you commented that you thought market could be tight in the second half. Is it the same viewpoint or kind of your viewpoint talking to the NAND vendors?

Overall, their ability was good in the second quarter, but we believe that NAND market will experience tightening in the beginning of the third quarter. The growth of the industry this year is still expected to be over 30%. But the big demand is increasing very rapidly largely from the quicker adoption of the client SSD as well as continuing growth of smartphone and tablet. PC client SSD has become the largest end market for NAND flash and continuing to grow very rapidly, as they're nearly doubling the big demand this year as compared with '13. We do not expect this tightness to impact our SSD or eMMC business. We think the NAND, the big growth eventually will reach balance by year-end.

There are no further questions at this time. I would now like to hand the conference back to Mr. Wallace Kou. Please continue.

I would like to thank all of you for joining us today and your continuing interest in Silicon Motion. We'll be at the following conference this quarter. In August, we'll be presenting at the Pacific Crest 16th Annual Technology Leadership Forum in Vail. Jefferies Semiconductor & Hardware Asset Day in Chicago. In September, we'll be presenting at the Citi Tech Conference in New York, Brean Technology Conference in New York, JPMorgan Asia-Pac Equity Conference in Boston, Lake Street Capital Conference in San Francisco and Credit Suisse Asian Tech Conference in Taipei. Details of these events are available on our website. Thank you and good bye for now.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may all disconnect.