Good day ladies and gentlemen and welcome to the Fourth Quarter Silicon Motion Technology Corp. Q4 2014 Earnings Conference Call. My name is Leslie. I will be your conference moderator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator instructions] Before we begin today's conference, I have been asked to read the following forward-looking statements. This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and the 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 results may differ materially from those expressed or implied in these forward-looking statements for 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 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 Silicon Motion's fourth 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 fourth 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 the 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 will turn the call over to Wallace.

Thank you, Jason. Hello everyone and thank you for joining our earnings call. I am delighted to be speaking with you today. 2014 was an outstanding year for Silicon Motion and we achieved record revenue and profitability. Our strong performance was achieved primarily by continuing strengths of our embedded storage products with eMMC sales growing over 50% this year and SSD tracking accelerating [ph] with new OEM SSD platform wins. While our fourth quarter was seasonally soft as expected, revenue nevertheless increased 53% year-over-year and EPS increased 58% year-over-year. Riyadh will discuss our financials in greater detail later in the call. Several years ago I had discussed with you that solid-state storage will be both creating new storage solutions for new classes of devices, as well as taking over storage currently provided by mechanical legacy solutions such as HDD. Over the last few years we have been seeing a proliferation of NAND flash-based storage solutions both [ph] eMMC and SSD going to these devices from consumer rented smartphone, tablet, and PC to SSD and embedded memory in industrial, commercial, communication and enterprise applications. For Silicon Motion we have been building [Indiscernible] and scaling one product after another. Our eMMC and SSD controllers are now in most of these applications. By the second half of this year we are also going to start supplying SSD controllers for enterprise applications. Last year our overall embedded storage product already accounted for over half of our total corporate sales and the superior sales growth of this embedded product will continue to drive Silicon Motion growth for the foreseeable future. We started shipping client SSD controller about a year ago and in our first year sold about $15 million of SATA 3 client controllers, primarily to module makers for retail channel business. Last year we…

Thank you, Wallace. First, I’ll outline our financial results for the fourth quarter and then I’ll provide our first quarter and full year 2015 guidance. In the fourth quarter revenue decreased 7% sequentially as expected to $80.5 million. Our controller sales decreased 9% sequentially and accounted for 81% of our total revenue. Within our controller sales, our embedded storage products or eMMC and SSD controllers declined by 15% sequentially due to the expected seasonal decline in our eMMC business. Sales of our renewable storage products, our card and USB flash drive controllers were flat sequentially as strong high end UHS card controller sales were offset by Chinese low cost card weakness. Our specialty RF IC sales increased 5% sequentially and accounted for 16% of our fourth quarter revenue. Our corporate gross margin decreased slightly to 52.5% in the fourth quarter from 52.9% in the prior quarter due to lower revenue contribution from our higher gross margin eMMC controllers. In the fourth quarter our operating expenses decreased to $21.4 million as compared to $22.1 million in the third quarter. We ended the fourth quarter with 824 employees, 41 more than at the end of the previous quarter. Due to lower revenue and gross margins, our operating margin decreased to 25.9% in the fourth quarter from 27.3% in the third quarter. We achieved quarterly net income of $16.6 million and earnings per ADS of $0.48. Stock based compensation in the fourth quarter was $4.2 million similar to the $4.3 million in the third quarter. I’ll now move to our balance sheet and cash flow. Inventory days increased to 118 days in the fourth quarter from 112 days in the third quarter. DSO decreased to 37 days in the fourth quarter as compared to the 42 days in the third quarter. Payable days…

Thank you, sir. [Operator Instructions] We have the first question from the line of Daniel Amir, please ask your question.

Thanks a lot, thank you for taking my call. So couple of questions here. First of all on the guidance, can you give a bit or better information here on the margin outlook for 2015 given that the range that you provided is a bit lower than what you posted in the past couple of quarters and kind of what goes into that? And second is related to the operating expenses that as well as looks like there is a bump up here in ’15 compared to your recent run rate of low 20s as you guided 91 to 97 and what factors go into that? And then I’ve another follow up, thanks.

Daniel for our 2015 full year gross margin, we’re expecting 49.5% to 51.5%. As more often our revenue come from embedded storage products we’re seeing an uplift to our gross margins. However our long-term target remains at 50% and we expect to manage our gross margins by adding in additional lower gross margin businesses to mix our overall corporate gross margins closer to our longer term 50% target. Our fourth quarter gross margin was slightly higher than expected due to product mix even though more of our revenue did come from renewable storage products but within this product loop we also have higher versus lower gross margin products and in the fourth quarter we saw the mix skew towards higher-end higher margin retail card controllers which provided the overall uplift. Longer term, we look at our business from a portfolio approach and from time to time we’ve the opportunity to mix down our gross margin slightly by being more aggressive in pursuing additional sales in the removable storage market, our card and USB flash drive products which we’ve very strong market positions in which we can more aggressively defend. To your other question about operating expense Daniel, we’re expecting $91 million to $97 million for the full year. We’re going to be continuing to increase our operating expense by a certain amount. We continue to manage our operating expense carefully and scale our resources in markets where we see significant growth, for example, our SSDs and these are investments that will generate good ROI for our R&D. Our goal is to continue to grow revenue at above market rates but to increase our operating expense at a more modest pace. So we’re, while we’re targeting 20% operating margin, we’re not putting a 30% operating margin - I’m sorry, we’re not putting a timeframe on reaching this target.

Okay, great. Just follow up question on the SSD business, so you now have a fourth partner here in NAND, partner here to use the SSD, I mean, can you - what type of visibility do you have in the client SSD business and also you mentioned that the enterprise SSD you’re going to start shipping in Q4, I mean, how big of an opportunity is that for SIMO in the enterprise given that historically the company is more focused on the consumer client side? Thanks.

Hi, Daniel. I think we have now secured a full flash OEM sort of three kinds of decontrol there as well as storage OEM. I think, we’ve mentioned two of these flash OEM has already entered production in the beginning of the first quarter. We are very happy with the program we’re making and look forward with the multiple project, multiple design wing and pipeline and our expectation to grow this business 3x to 4x is based upon the forecast we have received from our customers and how quickly we can grow our SSD revenue will be larger depending on how aggressively OEM and pushing their product and how quickly PC OEM push IZ and KU with SSD. Regarding the enterprise application, we mentioned all kinds of solutions of controller with [indiscernible] with enhancements, with latency will be perfectly positioned for hyperscale application in data center. The hyperscale solution is a very low latency [ph], high endurance and very low cost. So TLC based SSD will be ideal solution to service market and is a very high growth market. And we believe with our technology working with the NAND maker together we can provide very different solution to catch other upcoming markets. And as of today, we do not plan to enter [indiscernible] their market we need to provide the solution. Currently we don’t have that infrastructure ready but when the market grows we will make proper decision to sustain our growth for the future growth.

Daniel, let me also add the enterprise SSD market, while this is very significant move for us into this space in partnership with our NAND size partners, in the near term you should not expect this to be a significant revenue contributor to our business especially for this year, 2015.

Okay, thank you.

We have the next question from the line of Jaeson Schmidt please ask your question.

Hi guys. Thanks for taking my question. Just wondering if you could talk about your outlook on the supply and demand environment within the NAND flash market and how you view your visibility into that market?

We have same flash availability improve in the second half 2014 and our module maker customer are taking advantage of those lower costs and flash to be of the more cards and flash drives. For 2015, we believe there could be some oversupply in balance this year, we are seeing a bit of oversupply now with the seasonal weakness in smartphones and tablets. We could see this continue throughout the year depending on the availability and adaption of 3D NAND later this year.

Okay. And then, do you still expect your PCIe SSD controller to launch in the second half of this year and wondering if you could talk about your expectations for revenue contribution this year?

I think we believe PCIe will enter the market by second half of 2015. However, its percentage would be very small. We believe PCIe will come to -- with the biggest scale in 2016 but even that we believe the market percentage would be around 15% to 20%. But moving forward, I think PCIe will become the bigger business for a company semiconductor industry. We are working with three of the NAND makers together we believe will deliver TLC based 3D NAND solution in the beginning of 2016 to the market.

Let me also add, our PCIe SSD controllers while it's going to start going into market for 2015, you should not expect it to be a significant revenue contributor. It will be a more important source of revenue contributor for next year.

Okay. Thanks guys.

We have the next question from the line of Anthony Stoss. Please ask your question.

Hi guys. I have a couple of questions. First of all congrats on adding the fourth NAND flash maker to the rosters. Given your guide for the full year does that contemplate existing design wings that you have in hand right now. I guess moreover would additional wings be accreted to that revenue guide for the full year? Secondly, Riyadh if you wouldn't mind you are talking about your position or exposure on the China smartphone market, how do you think you guys are exposed and how you think you can benefit? And then, the last question is, you are talking about taking share in quite a few or most of your businesses, do you have to use price or is that purely under performance of your products? Thanks.

To your first question about the number of design wings, platform wings that we have with Flash OEMs and other OEMs for our SSD programs, we are sticking to our 3x to 4x increase in our SSD revenue to the $45 million to $60 million for the full year. Our outlook takes into consideration a number of variables including the availability of our customers’ businesses and how quickly some of these relationships and sales to their customers will ramp. If any of these variables, these factors vary significantly from what we have been discussing with our customers, we could see some variations to our guidance but there are puts and calls and overall on a blended basis we feel fairly comfortable that we are going to be able to get to the 3x to 4x increase for our SSD revenue this year.

And let me add, a portion of our embedded eMCC controller business is targeting at Chinese smartphone and the tablet OEM for their domestic and export market. China OEMs are the primary supported supplier of the smartphones and tablets for emerging markets such as India and Southeast Asia and Latin America. Other China domestic sale have a decelerate but we believe the export market still remains very robust.

Again taking share collection Riyadh, price or is it performance related?

I am sorry could you repeat your question again?

You have mentioned on the call several times about taking share in your various businesses, do you have to use price and is that kind of the thought basis in your gross margin guide being done from where you are currently at or is it purely performances wire winning and taking share?

For removable storage product, I think the price is very competitive. So in order to gaining more markets, variable market share, I think maybe we will have to sacrifice some margin in order to gain more share. For the embedded storage product, our margin looks very solid and we will grow as our OEM and NAND makers growth for the SSD product. So it’s the product mix. So we believe when NAND is more variable, when we try to take a more share for removable storage and we may be affected a little bit by the gross margin.

Okay. Thank you, guys.

We have the next question from the line of Mike Burton, please ask your question.

Hi guys. Thanks a lot for letting me ask the question and congrats on that fourth OEM as well. The transceiver as we saw a nice sequential increase in mobile communication this quarter and typically weak quarter, did you feel that transceivers ended this year at approximately $12 million or is the guidance for that business to be down in 2015 and how do you expect that business to trend in Q1?

I believe, first of all our LTE guidance with a full year $12 million based on the program we already win. And we already secured the program. We are continuing to try to win 2015 modules and before we secure the program I think we are staying with the $12 million assumption. In addition, we also whilst trying to grow NAND [indiscernible] in second half but that would be probably not significant at the moment.

Okay. And then on eMCC did you mention if you are already shipping to our second NAND flash OEM if not can you give us an update on the timing of that ramp and/or how do you expect seasonality of the eMCC overall outlook for this year? Thanks.

I think, overall I think we are seeing more into using TLC eMCC for our NAND OEM. As we mentioned, the other NAND OEM business primarily focused on TLC based eMCC, we have seen Apple recently adopt TLC flash for their flagship devices and this has created additional interest on the smartphone makers. But we expect to grow our TLC eMCC business this year less than 5% last year and to probably 5% to 10% more. So OEM began shipping in the first quarter of 2014.

Thanks again.

We have the next question from the line of Suji De Silva. Please ask your question.

Hi guys. Nice job on the quarter, on the year and strong performance there. In terms of SSD can you talk about whether the gross margin today is accretive to that business and whether as you scale that business if the gross margin improves there further?

Yes, our gross margin for the SSD products are above corporate average size just as our other new gross product, gross margins above but on a blended basis, we manage our business on a portfolio pros by having more higher gross margin products, it also means that we can be aggressive in defending our businesses, our older businesses, the removable storage controller businesses that have lower gross margin. We can be more aggressive in defending our market share into those products.

Okay, great. And then, for the 2015 guidance there, should we expect that- sequential growth each of the quarters or is there back half load to that guidance we had?

It should be fairly consistent growth quarter after quarter.

Great. And my last question on SSDs, you talked about the competitive landscape there in terms of what your market share is and what it might be existing 2015 and what competitors are doing versus you guys in that market?

I think we are very confident in our product and the increasing pipeline of design wing in OEM customers. I think this is very competitive of our SSD solution. In light of acquisition of [indiscernible] we are seeing a tail wing for our business as OEM looked at alternative long-term controller supplier. Our unique combination of performance and cost has opened up many opportunities for our controllers we are actively working with number of a new customers for the current and the future generation products and we are excited about the opportunities we see in the market today. We offer flab to market capability and one flash OEM can do internally on any of our merchant competitor with gradually evolving NAND flash market the timely implementation of the new and more cost effective flash is the competitive advantage that is critical to the long-term growth of SSD. We believe our technology is very unique and our technology especially for the TLC NAND and 3D TLC NAND is very, very unique and we believe this will make us very tangible compared with the combined landscape that’s why it makes us a very different attracted to the OEM customers.

Very well. Thank you for the color.

We have the next question from the line of Mike Crawford. Please ask your question.

Hi yes. Mike Crawford from B. Riley & Company. Within eMMC I think you are shipping mostly the eMMC 4.5 controllers today with probably 5.0 overtaking some point during the year, I mean, 5.1 ramping later in the year. Are we at the point yet where margins are starting to have peaked on the 4.5 controllers side?

Let me just rephrase this. In last year, 70% of our shipments above 4.5 and 30%, less than 30% is for 5.0. In this year we do see with 4 -- 5.0 will continue to grow probably to 40% or 50%, we also see 5.1 going to flagship model of OEM customers. But in addition for that the legacy controller, the gross margin is going to decline however we also developed a new [indiscernible] 5.1 controller tailored for TLC and low density eMMC product. This is going to help us balance our eMMC controller gross margin for the long term.

Mike, for this year you should expect our eMMC gross margins to be fairly stable throughout the year. Our eMMC gross margins are above corporate average and will stay that way for this year.

Alright, thank you. And then as you come to market with a UFS part, I think with that are you going to skip UFS 1.1 and just go straight to UFS 2.0 that’s a little bit faster or what's the plan there?

We are going straight to UFS 2.1.

2.1?

Yes.

Okay, thank you and then last question. If you could comment some more on your new SVP, I believe perhaps only at the second SVP you have in your company why you chose to leave Hynix to work with you at a time when the company's relationship is now ever been stronger? Thank you.

Yes, it seems that we are very happy to have Mr. Bay joining our company. He has a very great experience and knowledge, very deep knowledge in the NAND industry. Well known person in the Korea. I think with his joining, we are tightening our relationship with Hynix and also expand our business with all of the other OEM customers.

Alright. Thank you.

We have the next question from the line of Tom Sepenzis. Please ask your question.

Yes. Good morning and congratulations on the nice results on the great year. I am just wondering if you can talk a little bit about your USB in card outlook for the full year in ‘15, as it's bottomed out here and looking to be flat for the year, how should we be looking at that?

Our removable storage controller business should be flat to down about 10% for the full year. It looks like a stabilized but these products are fairly mature.

Great, thank you. And then, on the last call you mentioned that there were other potential customers for the LTE transceiver business. I am just wondering if you can provide us with any color on how those negotiations are going and when we might expect some wins there or further news?

So I think our LTE market is very big. We also starting to engage NAND, Samsung and OEM customers. But at the initial engagement this is very small. Until we have more meaningful design wings on revenue we are going to report to the investors.

Thank you very much.

You should expect it to be insignificant. We will keep you posted if there are further developments.

Thanks Riyadh.

We have the next question from the line of Rajvindra Gill. Please ask your question.

Hi, this is Josh for RG, congrats on the good year and thanks for taking my question. Most of them have been answered. I’m wondering if you could provide little more color on to where some of the OpEx investments are going to be taking place may be helpful? Thanks.

Our operating expenses investments were largely related to our SSD programs as you have heard from our call today, we have a lot of OEM programs, we have four NAND flash engagements, we also have a engagement with a storage OEM, a lot of these programs require lot of R&D resources. And so, our investments in our operating expenses are primarily related to headcounts in support of these OEM programs.

To be more precise, 50% of the operating expense is really because of technology non-transition from 55 nanometer to 40 millimeter and 28 nanometer. So that cost is very expensive compared with the 2014 55 nanometer. So we have probably more than 70% where we use 40 nanometer of eMMC.

Okay. Thank you. That's helpful. Then lastly, any time you’ve LTE traction at a bigger customer so we think that of similar to how you answered that previous question and look out for announcement when the times comes, I guess just anything on timing would be helpful? Thank you.

The question is related to LTE, we will keep you posted we are at early stages of engagement and if there is anything material we will keep everyone posted on our development on that front.

Okay. Thank you.

[Operator Instructions] As there are no further questions at this time, I would like to hand the call to Mr. Wallace Kou for closing remarks.

I would like to thank all of you for joining us today and your continued interest in Silicon Motion. We will be at the following conference this quarter. In February we will be presenting at Susquehanna Annual Semi, Storage and Technology Summit in New York. In March, we will be presenting at Morgan Stanley Investor Conference in Hong Kong Merrill Lynch, Conference in Taipei, Northland Capital Market Growth Conference in New York. Details of these events are available on our website. Thank you and good bye for now.

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