Good day, ladies and gentlemen, and welcome to the Silicon Motion Technology Corp. Third Quarter 2014 Earnings Conference Call. My name is Hui 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 37A of the Securities Act of 1933 and Section 31E 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 all 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 obligation to update any forward-looking statements, which apply only as of the date of the 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 Third Quarter 2014 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'd like to remind you of our Safe Harbor policy, which was 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 results can be found in our earnings release issued yesterday. We ask that you review it in conjunction with this call. With that, I will now turn the call over to Wallace.

Thank you, Jason. Hello, everyone, and thank you for joining our earning call. We are very pleased to report for the third quarter's record revenue, net profit and earning per share. We're also on track to deliver the full year the highest revenue in our Company’s history. We are confident that with a solid foundation of growth drivers now that we have been building, you should expect Silicon Motion to reach even high levels of sales and profitability next year. In the third quarter, revenue increased 25% sequentially to $86.6 million. This rapid growth was led by a 25% sequential revenue growth from our embedded storage products which are comprised primarily of our eMMC, client SSD and industrial SSD controllers. Riyadh will discuss our financial in greater detail later in the call. This quarter sales of our embedded storage products which accounts for nearly 2-thirds of our NAND flash controller business and are well over half of our total revenue continue to strongly outperform. Embedded solid state memory based on NAND flash such as those managed by our controllers will continue to rapidly proliferate and is increasingly found in consumer electronics and commercial and industrial applications. You will find our controller widely used in embedded memory for running code and storing data in devices and application that are important part of our daily lives, from personal gear and such as smartphones, tablets and PC to equipment and system communication and networking companies, major retailers, as well as in our cars and our workplace. We have the broadest portfolio of NAND flash controller solution in the industry and have become the leading merchant supplier of these controller to NAND flash makers and other OEMs. In the third quarter our eMMC controller, the largest of our embedded storage products continue to exceed…

Thank you, Wallace. First I will outline our financial results for the third quarter, and then I'll provide our fourth quarter guidance. In the third quarter, revenue increased 25% sequentially to $86.6 million, a record quarterly revenue for Silicon Motion. Our controller sales increased 23% sequentially and within our controller sales our embedded storage products or eMMC and SSD controllers grew by over 25% sequentially for reasons that Wallace had earlier talked about. Sales of our removable storage products, our card and USB flash drive controllers increased by 19% sequentially due to better flash availability to module makers. Our specialty RF IC sales increased 48% sequentially, as sales of our LTE advanced transceivers to Samsung rebounded. Our corporate gross margin increased to 52.9% in the third quarter from 52.2% in the prior quarter due to higher revenue contribution in the third quarter from our higher gross margin, and new growth products, specifically our eMMC and SSD controllers and LTE transceivers. In the third quarter, our operating expenses increased to $21.1 million as compared to $19.9 million in the second quarter due to higher compensation expenses. We ended the third quarter with 783 employees, 31 more than at the end of the previous quarter. Due to higher revenue and gross margins, our operating margin increased to 27.3% in the third quarter from 23.5% in the second quarter. We achieved quarterly net income of $19.7 million and earnings per ADS of $0.57 both also new corporate records. Stock based compensation in third quarter was $4.3 million, higher than the $0.4 million in the second quarter due to timing of share grants. I will now move to our balance sheet and cash flow. Inventory days increased to 112 days in the third quarter from 105 days in the second quarter due to inventory…

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

In terms of Hynix and the great growth you've seen in eMMC in China, what's the opportunity for further share gain in that market in the 2015 timeframe? Are they reaching a point of saturation, or is there more room to run for eMMC.

I think we believe we can continue to grow faster than the market and gain share. We are enabling our customer to offer a more differentiated product and gain market in embedded memory market. We do transitioning from the very low end 4.41, 4.5, 5.1 and it soon will be 5.1. The ASP also will increase from 4.41 to 5.1, based on high performance and much better error correction. So we believe we should continue to expand to take from the more volume low-end to expand to more volume to the mainstream high-end, and that will grow our total revenue in eMMC in 2015 and 2016.

And then, on the NAND SSD side, you've been playing in the entry SSD market, but it sounds like your products are coming out for mainstream and higher performance SSDs. How much more competitive is that area, or do you think you can come in with a similar sort of value proposition for the mainstream and high end for SSDs?

So today all our SATA 3 SSD are shipping with MLC NAND. I think next year you're going to see from first quarter we're going to be shipping SATA 3 SSD with TLC and as we moving forward by May 2015 we are going to be shipping with even 3D NAND. So by second half of 2015 we are going to launch PCIe gen 2X2 and followed by gen 3X2 and gen 3X4. So I think from second half 2015 you're going to see our high-end SSD product line when moving to mass production.

Okay. Great. And last question maybe for Riyadh. The gross margin here is above, I think, your long-term target. You've guided it down a little bit. For ‘15, is the mix that you expect going to allow it to stay above the high end or would it trend back toward that range?

Suji, it’s little premature for us to be talking about 2015 -- exact 2015 gross margin. Longer term our gross margin is 50% and it still will remain 50% as our long term target. And we expect to see some pricing decline as some of our products scale more meaningfully and as volume related pricing terms kick in. So we expect our margins to fluctuate from quarter-to-quarter due mix and timing of these products as what've seen in both Q2, Q3 and Q4 this year. But still believe that 50% is a healthy long-term target for us to achieve.

And your next question comes from the line of Jaeson Schmidt from Lake Street Capital Markets.

I'm wondering if your eMMC assumptions for next year assume any significant return from Samsung

I think this will be difficult to comment to the question. I think it depends on the opportunity and depends on NAND and depend on market sector, if our customer prefer to enter. I think there is always opportunity to engage business with other NAND makers, not just particularly with Samsung. We believe when we have spent more R&D resource and without this opportunity for us to engage business with Samsung for eMMC

And then, Riyadh, looking at the OpEx line in 2015, do you guys anticipate having to significantly ramp your headcount to go after all these opportunities?

We're seeing a lot of business opportunities. As we're seeing more and more business opportunity and based on our current headcount and available resources we are still turning away business opportunities even from large OEMs. So we definitely need to continue scaling our investments and headcount and infrastructure to match the level of interest and business activities that we're seeing. But from an operating margin perspective, our operating margin target remains 30% and we are going in that direction as what you've seen from recent quarter. So we believe that as we scale our revenue, we can still scale it faster than operating expense growth. And that should be the case for 2015. We'll definitely provide you with more color as we progress into the following quarter.

Okay. And then just finally, wondering if you could comment on your thoughts on the current channel inventory in your core USB and card businesses.

Generally, the channel inventory for removable storage is fairly lean and we don't believe that currently it's any different from what we've seen in the past, that there is not much inventory -- excess amounts of inventory out in the channels.

And your next question comes from the line of Daniel Amir from Ladenburg.

Just a follow-up on the gross margin question from before. Can you give us a little more insight in kind of what has a bigger impact in terms of the moving parts for your gross margin? Is it more of the product mix, but then you're also coming out with TLC, which should improve your cost as well? Or is it really the ASP impact that it would be predominantly on your removable market, which is still something that is a mature market and definitely has some impact?

A lot of the benefit that we're getting from the gross margin uplift has been product mix related as we sell more of our new gross products our eMMCs, our SSDs and in the third quarter we also got a rebound from our LTE transceiver. So all these products have above corporate average gross margin. As we continue to sell more of these it will continue to improve our gross margin profile. But that said quarter-by-quarter there are product mix shifts in the fourth quarter. We're expecting seasonal softness relating to seasonality -- the annual seasonality of our eMMC sales and longer term as we scale some of our business programs, there's certain volume related pricing actions that will kick-in then. So longer term our gross margin profile should trend toward 50%.

So Daniel, let me add a comment. Generally speaking our embedded controller have high margin than removal storage product. So based on product mix quarter by quarter, so we will have certain margin shift.

Right. Yes, I guess the product mixes has the biggest impact. I guess that's the way to look...

You're correct.

Okay. So this is a follow-up question on, just on your LTE business. So you're seeing kind of -- you're expecting '15 to be a similar level to '14. Is that based on what you're currently seeing in terms of designs that you're currently modeled at Samsung, or do you already have some sort of visibility into Samsung's future designs that you're going to be in? I mean Just trying to get a little more -- I know it's a lot smaller than it used to be and it doesn't impact your revenue top line as much as it used to, but just to get a bit more color on your level of comfort on this business.

So you're correct, Daniel. So I think the current forecast for 2015 were based on the current design win and was in production from maybe Q4 or Q1 moving forward. So I think it's still too early to determine how many new design win we may have for next year. But we are in testing in a number of new design win. But whether those product go into production remains to be seen but we will try to update the coming quarters of our program for next year.

Okay. Just a final question on the SSD side. Given that you're getting into markets of SSD which require more software knowledge as well, do you feel that you have all what you need currently in terms of software capability, or are you still looking for assets or looking for people in the software space?

So at this moment regarding client SSD, especially SATA 3 client SSD, we believe we have all the know-how in the software algorithm and architecture and technologies. We believe we can expand very broadly from floating gate MLC to TLC including the 3D NAND MLC to TLC. But regarding the resource, we are always short of resource because we turned down many, many big projects from NAND makers and OEM customers. We need to continue to grow the team because each of OEM demand very heavy for our resource. Each OEM demand has multiple projects in the pipeline, not just single project, and they don't even work with you if you only can one single project. So we have to very carefully to grow, to trend in R&D with discipline, with experience and through -- from the project kick-off to mass production and including the customer service. So that is including tremendous R&D resource we need to recruit and build a more balanced team.

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

On the eMMC, you said you will continue to grow faster than the market, which would imply some market share gains. I was wondering if you could talk a little bit about the competitive landscape in eMMC with respect to where they are on the process node and TLC and where you are. And if you could talk about the fact of trying to diversify away from SK Hynix, which is -- it seems like that still is the bulk of your eMMC revenue. If you can provide any metrics of some of the non-SK Hynix customers, if that's approaching a certain percentage of your overall eMMC revenue that would be helpful as well.

So today I think we still do not see any meaningful merchant competition for eMMC controllers. We view ourselves as complementary to the flash OEM, owing to no effort. I think where they focus on high-end more differentiated product while we engage with the mainstream and higher volume solution. As you can see moving to 2015 or ’16 will be more low cost and low-end smartphone growth. That’s why we count on the high growth from OEM to grow the eMMC. On the other hand I think our product support for the other TLC base and NAND OEM customers, we believe this year their sales revenue is around less than 5% of total eMMC shipment. This was due to their internal NAND allocation. But we believe this program will bring us much faster next year. So we also try to increase R&D resource to engage the other NAND makers which are meaningful for almost a year. So that’s why we have very high confidence to grow eMMC through 2015 and beyond.

Rajiv, let me also add, the barriers to entry are getting higher and higher eMMC controllers. We're the only merchant supplier with a successful track record. We are shipping several 100 million units annually and it’s very difficult for newcomers to come into this market at this point in time without the type of track record to displace our leading position in the marketplace.

And on the SSD side, I guess a similar question as well in terms of the competitive landscape as you move upstream a bit. Can you talk about what are some of the challenges you're experiencing? What are some of the opportunities that you're benefitting from? If you could talk a bit about that, that would be helpful as well.

I think from our experience to supporting module makers to channel aftermarket, not moving to PC OEM and we engage with the 3 different NAND makers for multiple projects. And we do gain experience and learning a lot from these programs. The major challenge is really I think different OEMs different NAND makers have a different requirement, different perspective and different qualification processes. And this require dedicated team. And dedicated team is not just R&D team, including verification also field supporting team. So the challenge is really for us to grow further, growing quickly and it's really to grow our R&D resources and the total headcount for SSD team. I think the reason we are really recognized by NAND makers, major OEM customers because we have a complete technology, support both hardware [indiscernible] as well as firmware with a complete algorithm. And we also -- all the analogue IT including the D3 ML5 are developing in house, who have complete technology cover from SATA to PCIe gen 2, gen 3, even the future gen 4 technology. And we have a more business than we can take today. We just need to grow our R&D team.

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

In talking about your expected SSD growth next year, am I right in thinking that you're referring solely to the client and cache SSD business when you're talking about the 3x, the 4x growth comparison for next year?

That’s correct.

And then on top of that you also have your Ferri branded industrial SSDs, which I believe were nearly $19 million in revenue last year? That should be growing as well on top of that. Is that correct?

That is correct.

Okay, and is that business -- that's a little slower growth, being an industrial business, or how should we think of that business, growing 20%?

I think that we will provide more clear update in probably next quarter's earning call because we -- as you know we are a controller company. We do provide some solution for industrial grade if the margin meets our own company policy. So we are not trying to aggressively grow that product if the margin is not meeting our company policy. But if there’s a good program and is sustainable in long term industrial grade. We definitely deliver our Ferri product line.

And then, on the R&D front and the CapEx in the quarter, there was $4.5 million spent on the purchase of facilities. So is that more of a one-time kind of extra CapEx, or do you see more expenditures like that in the next year? That's part one of the question. And if you could give some sense of how many -- what rate of employee growth you would like next year, that would be helpful as well.

Mike, this is a onetime expenditure. Every few years when we run out of office space to house our expanding R&D team, it's necessary for us to find new facilities to house them, to house their equipment, testing gear, etcetera and then as well I talked about earlier, we're rapidly expanding our SSD engineering team and as a result we need to acquire additional facilities to house them and so that's where that CapEx is related to. And then you should expect our employee headcount to continually increase as we seek to do more OEM business. Right now it's difficult to give you exact number how much -- how many headcount we anticipate to hire but you should expect us to continue to aggressively hire in order to take on more OEM projects.

And then last question, also on SSDs. So when you're moving to these full-size SSDs where you've been designing for PC OEMs, I imagine that's where you might start to see some of these volume discounts which might bring the gross margin related to that particular revenue down closer towards that 50% target?

So our full size SSDs in production this year from first quarter should channel module customers. Our full size SSD into production with top tier PC OEMs will be in the early first quarter of 2015.

From a margin perspective our volumes for SSDs right now for our OEM partners are just beginning to come on stream and will be coming on stream in the first quarter of next year. So once they are a certain size -- once they reach a certain size there are volume related discounts that we will provide. So all-in-all we are targeting our gross margin profile to be into the 50% level and so long term you should expect that.

I think our current on the other line, average gross margin is higher than our corporate gross margin. So we believe when SSD product line revenue grow, we should see a better margin mix.

Your next question comes from the line of Tom Sepenzis from Northland Capital Markets.

I'm just wondering, you mentioned in your prepared comments that Samsung was going to be up sequentially in December. Is that eMMC only, or does that include the LTE business?

It is related to LTE. This is -- as you know in the third quarter our LTE revenue rebounded sharply because of new LTE programs that went into production. These will continue to grow into the fourth quarter. So that's where our Samsung related revenue growth is coming from.

Great. And just to clarify, next year any other design wins would be incremental to the $12 million estimate?

Some of our LTE programs will continue production well from this year into next year. So we are working to secure additional -- to design wins and currently based on what we can see, next year our LTE revenue should be similar to this year's LTE revenue. But if we can gain additional design wins, additional to what we currently expect there could potentially be upside. But as we see it right now, $12 million this year, $12 million next year.

And then just from a housekeeping perspective, traditionally in December your stock-based comp goes up. Is that something we should be expecting this year as well?

Our stock-based compensation amounts, it all depends on the granting of our stock-based compensation, when our compensation committee passes these. So for the fourth quarter what we're expecting is $4 million to $5 million.

And your final question comes from the line of Monika Garg from Pacific Crest Securities.

First just a housekeeping. Inventory in dollar terms has grown significantly last 2 quarters. So is it the kind of new level to think about, or do you think it comes down going forwards?

If you are asking about inventory, our inventory levels are little on the elevated side compared to what it is historically and it's all related to the builds necessary to support the rapid ramp of our sales as you witnessed in the last few quarters. The inventory levels will come down as we consume what we built. So that should go down now over next few quarters to a more normalized level.

Okay. Thanks. Then if you look on the eMMC side, more than 90% of your revenue is really coming from Hynix, and Hynix has indicated that they're looking to develop internal eMMC controller. So the question is do you think they are looking to develop something, or can they develop a controller? And if they do, how can that impact your business?

So I really cannot comment in detail. Where I can give example, the development general solution, including our controller with their firmware or their controller with their firmware. So this is all the part of their solution. So if it’s our controller with their own firmware and we count the same revenue.

There are no further questions on the line at this time. I would now like to hand the conference back to Mr. Jason Tsai. Please continue.

I would like to thank all of you for joining us today and your continued interest in Silicon Motion. We'll be at the following conference this quarter. In November, we will be presenting at RBC Technology Internet Media and Telecommunication Conference in New York, Wells Fargo Tech Media and Telecom Conference in New York, JPMorgan Global T&T Conference in Hong Kong, UBS Global Technology Conference in San Francisco. In December we will be presenting at the Credit Suisse 80th Annual Technology Conference in Scottsdale. Details of these events are available on our website. Thank you and goodbye for now.

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