Ladies and gentlemen, this conference call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 19333 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 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; in 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 conference call. I would like to hand the conference over to your first speaker for today, Mr. Jason Tsai. Please go ahead.

Thank you and good morning, everyone. Welcome to Silicon Motion's third quarter 2017 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 CFO. The agenda for today is as follows. Wallace will start with a review of our key business developments. Riyadh will then discuss our third quarter financial results and provide our outlook. We will then conclude with Q&A. Before we get started, I would 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 before 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 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 earning call. Let me start by talking about market condition affecting our business followed by an update of our key products. Riyadh will talk about financials and guidance later in the call. In the third quarter NAND industry supply increased meaningfully as flash makers continue to make good progress in improving manufacturing yield. Our SSD solution sales benefited significantly from the increase in NAND flash supply. Supply for the NAND flash however remained elevated which continue to temporarily affect adoption of client SSD and demand for our controllers. That said, we believe market conditions are gradually moving toward the direction of falling NAND flash prices. NAND flash makers starting major production of 64-layer 3D NAND late last year and early this year. Production yields continue to improve rapidly and are approaching mature levels. We are seeing good supply of the 3D NAND in the marketplace from most vendors, but available only if buyers are willing to pay the high asking prices demanded by flash vendors. This better availability of flash is enabling us to sell more Ferri and Shannon SSD solutions than we had expected three months ago, and significantly more than we had expected at the start of the year. This quarter sale of our SSD solutions grew 50% sequentially, following a 30% increase last quarter. NAND availability will continuously improve as supply continues to increase. NAND pressured prices remain elevated, but perhaps not for long, clearly SSD saw less prices sensitive applications such as for enterprise, industrial, commercial and automotive markets are able to afford NAND but at today’s elevated prices. This supply and sales of our differentiated customary designed SSD solution for industrial and hyper-scale application has been able to grow rapidly despite a high price…

Thank you, Wallace. And hello, everyone. I will summarize our financial results and outlook. Before I begin, I would like to reiterate that our comments today will focus primarily on our non-GAAP results unless otherwise specifically noted. A reconciliation of our GAAP to non-GAAP data is included with the earnings release issued today. Our third quarter revenue decreased 4% sequentially, as our client SSD and eMMC businesses declined, partially offset by rebounding sales of SSD solutions. We expect our Q4 revenue to increase sequentially 2% to 7% to $130 million to $136 million led by rebounding client SSD controller sales and stable SSD solutions, offset by softness of other products. We expect our 2018 revenue to grow led by rebound in our client SSD controller sales, continued growth of our SSD solution sales and stable eMMC controller sales. Let me provide additional color on our key products. Our client SSD controller sales declined as expected. Client SSD controllers declined approximately 10% sequentially as continued high-NAND flash prices and corresponding high-client SSD prices affected demand for our controller. For Q4 we expect our client SSD controller sales to rebound strongly, sequentially and sales of our new PCIe NVMe SSD projects begin, with Q4 likely the peak quarter this year. We expect client SSD controller sales in 2018 to increase strongly with growth dependent on the rate of NAND prices fallen. Our eMMC controller sales declined approximately 20% sequentially as SK Hynix rebalanced their limited supply of NAND away from smartphones towards other applications. For Q4, we expect our eMMC controller sales to decline further sequentially. For full-year 2017, our eMMC controller sales will only fall slightly because our flash component had pre-built inventory in the first half of the year. We expect our eMMC controller sales in 2018 to be similar…

Thank you, sir. [Operator Instructions] We have the first question from the line of Mehdi Hosseini. Please ask your question.

Yes. Two follow-ups. Your revenue per employee has consistently declined over the past four to six quarters, and the decline is very significant. And obviously you are investing in R&D and for future. And in that context, when should we expect to see the leverage? When we should we expect to see the scaling of revenue? I understand that NAND tightness. But most of your investment has been in the higher ASB products, which could offset some of the tightness. And in that context again, I’m just trying to better understand when the scale is going to happen especially with the higher ASB products. I have a follow-up too.

Mehdi, that’s a very good question. We do actively, as management, look at that metric headcount, revenue per headcount, and we actively use that as a means to measure our performance on a long-term basis. But that said, we have limited the numbers of new hires and scale back the portions of our operating expense as much as we can. But we need to continue to make sure that we are investing in our future. We need to make sure that new products such our enterprise SSD controllers remain on track to drive our long-term growth. Where it makes sense we will delay spending, but we need to be forward-looking to make sure that our portfolio of growth products remain well positioned for upcoming technology migrations and other market opportunities.

Let me rephrase the question. What if demand tightness were to be more structural the migration to higher layer count 3D NAND is lower than previously expected. Is that going to change product portfolio for you, is that going to change priorities within the company which is also tied into the revenue per employee that I was referring to in my first question?

Well currently Mehdi, we have lot very important projects that are critical for our long-term future and these projects will require a lot of engineers and these are commitments that we have in place for our customers, our current customers as well as future opportunities. And so these projects need to continue to move ahead.

Yes, let me add a comment. We expect to see supply continue to grow meaningfully as such market flash makers are aggressively ramping production of 3D NAND and improving the yield, better manufacturing ability and the introduction of next generation NAND such as QLC and 96-layer will help accelerate the growth through 2018. We believe QLC will move into production by next year Q2 and we should see 96-layer 3D NAND into production by second half next year. So there really [indiscernible] confident about the NAND maker progress and we can grow with NAND improvement and our term for the [indiscernible] should be in right direction.

Okay. Thank you.

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

Let me ask the question. So a two part on mobile. Your top customer announced the other night that they achieved a technological breakthrough and will be using in-house controllers starting at 72-layer NAND. So first, do you still expect to sell eMMC or eMCP to them at 72-layer in going forward? And then second, how was the progress on your UFS or UMCP controllers relative to the two flash OEMs that you talked about before, should we expect that start to ramp in 2018? I know the market is going to be muted but just any progress there. Thanks.

Yes, I think our relationship with Hynix remain strong as ever, we are still working on new project with them, supporting their next generation 3D NAND embedding memory. As we have said, we are complementary to outside partners. Our R&D resources help extend the internal capability. As Hynix recently said with the growth in the number of products their capacity is limited so for controller they should continue to coorperate with outside partners. We believe they try to use higher layer of the 72-layer for eMMC they target for new potential projects or new customers to expand their market position. And regarding UFS our first U.S. customer has began shipment already and will begin sampling our second generation UFS solution this quarter. So we are happy with the progress we are making here. It’s challenging for UFS that [indiscernible] UFS embedding memory is very expensive and performance improvement are marginal. Hence OEM are not in hurry to widely use UFS. And thus AT makers have been slow in loading our UFS support to a broader range of AT beyond very high end. [indiscernible] OEM requirement, so we [play] (ph) our eMMC sale revenue remain flat in 2018.

Thanks. And then secondly on gross margins, you mentioned mix is a driving factor. Riyadh, I was hoping, if you could help quantify, how much of that is mix of SSD solutions versus your controller businesses, or it is still related to older generation of controllers within client, still shipping is the tightness in NAND? Thanks.

What I can say is that in near-term, our gross margins are slightly below our 50% target, largely because of unfavorable product mix. Our controller gross margins remain very stable above our corporate average. This year, our client SSD controllers sales have been soft because of high NAND prices, which have been effecting our end-market demand. And eMMC controller sales have also been soft, but because of our flash partners rebalancing of their limited NAND capacity towards other applications. Our SSD solutions as we talked about on other hand have grown strongly for two consecutive quarters and looking ahead our corporate margin should improve when our client SSD controller sales rebound, which will begin in the fourth quarter.

Thanks.

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

Hi, Wallace. Hi, Riyadh. Can you remind me the typical seasonality of the SSD solutions business, whether hyper-scale customers trend order more in certain quarters in the year and whether that would play out in 2018, given the flash tightness or loosening that’s happening?

Typically at least on last year's patterns, our hyper-scale SSD specifically relating to Alibaba program, started kicking in the first quarter. They scaled in Q2 and peak seasonal sales in Q3 before scaling down in fourth quarter as programs end. That was what we were originally expecting for this year, but due to strong demand for our products coupled with pretty good availability of NAND flash prices, the programs have extended into Q4. So our overall SSD solutions in Q4 will be at a similar level to Q3.

Okay. That helps, thanks. And for the newer open channel products you have, are those the same hyper-scale customers you have for the SSD solutions today, Shannon or are those new customers you are getting to actually.

We can’t comment specifically about our customers at this stage. Our products are not in production. But, we do have two hyper-scale customers for our open channel SSD. The first, will begin commercial sampling this fourth quarter and second in the first half of next year.

Okay. And then another question, can you remind me - ASB differential for the enterprise PCIe, SSD or client PCIe, SSD versus traditional SATA SSD controllers? Thanks.

We are not going into the specific of products that are in production but they are going to be - our enterprise grade SSD controllers will be multiples - ASBs will be multiple of the benchmark $5 that we have for our client SSDs.

Great. That color helps. Thanks guys.

We have the next question from the line of Jaeson Schmidt [Lake Street Capital Markets]. Please ask your question.

Thanks for taking my questions. How should we think about your embedded card and USB business going forward?

We believe our embedding micro SD card business will decline continually, but slightly because now markets are stable. We do see some demand from India smartphone, however bigger NAND maker have less interest to produce the low density NANDs. So we see that card business will remain stable or slightly decline.

Okay. That’s helpful. And how should we think about OpEx wrapping in 2018? Do you guys anticipate needing to add significantly the headcount to go after these opportunities?

But we will continue to add headcount next year. But generally the way we plan our operating expense is somewhere in line with revenue growth. We typically plan our operating expense growth in line with revenue growth at the start of the year. And if we are able to grow much faster than operating leverage kicks in. And currently we are looking at next year that way, but we will keep you posted as we firm up our plans going into next year.

Okay. Thanks a lot guys.

We have the next question from the line of Mike Crawford [B. Riley & Co]. Please ask your question.

Thank you. Can you tell us a little bit about the facts of your Bigtera acquisition, the software defined storage platform that you spent just $2.9 million of cash on the quarter while the further payments as well?

Let me answer your second part about the payments. There is a tail payment roughly about a little over $1 million that we will be paying in about a year’s time.

Okay.

So the Bigtera acquisition we made was a further expand and expand our products very long-term. Software defined storage is very important part for hyper-scale data and storage [indiscernible] to develop solid platform. That can be scale out more efficiently and effectively. I think this put a data center in enterprise market, Bigtera software defined storage components, our channel SSD design, capability and our core controller expertise. We are actually spending our technology footprint to adhere longer term opportunity, and help us understand more about today the challenging and the gap about enterprise, call centers so that help us make better enterprise controller for the future use.

Okay. And Wallace the company has a number of these appliances, do you expect - is there a much revenue associated with the existing picture appliance business or this is more of a technology buy?

We are definitely aiming for growing the revenue with software-defined storage solution and [indiscernible] if any greater selling in China initially and we may go back to U.S. in the long-term.

Just to add further. The business is very small. It’s essentially a start-up with negligible revenues at this stage.

Thank you, Riyadh. And then last question is on your forthcoming SM2264 third-gen PCI product. So does that still stretch up for release in the second half of 2018?

Yes, I think we are going to have multiple 16-nanometer PCI [indiscernible] product line. The gen four solution for 2264 is positioned for sampling in early 2019 and production in late 2019 or early 2020 which will be aligned with the Intel platform chipset.

Alright. Thank you very much.

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

Hi this is [indiscernible] on behalf Rajiv. I have a question around the Shannon systems or SSD solution system as a whole. Obviously you guys saw some pretty good straight this quarter and are guiding for continued strength in the fourth quarter. I just wanted to kind of get a frame work of how we should expect that business to continue throughout 2018 in terms of an overall mix of your total business. Are you still guiding that up throughout the whole year coming off of pretty strong 2017, should we expect that to taper off a bit and then also just wanted to get a better profile of what the gross margins in that business should be going forward? I know you guys had talked about new businesses should have gross margins closer to corporate average. Then I have one follow-up.

Let me first just sort of outline our SSD solutions in the very general term sort of explain what we are trying to achieve. We are not trying to transform ourselves into a module maker. Our strategy for doing SSD solutions is to leverage our unique controller technologies to expand into markets under service by the NAND flash makers and module makers. These are both our traditional customers. NAND flash makers prefer high volume wholesale markets, not small niche high touch markets and module makers have limited technological capabilities and through their limitations of both parties it creates opportunities for us to service. And looking into our business, we’ve been very disciplined in approaching the SSD solutions market. We regularly walk away from market segments and customers that do value our technology and we do not expect this to change going forward. We will continue balancing the growth opportunities of our controllers with the opportunities of our SSD solutions to maintain gross margin around 50%, 50% remains our long-term model gross margin target.

Thank you. We have the next question from the line of Betsy Van Hees. Please ask your question.

Thanks so much for taking my questions. I had a couple for you. In regards to the client SSD business, the challenges you had at first of the year was effective, we were seeing reallocation of NAND supply to the higher ASP hyper-scale products data center. And now it seems that the challenges, the client SSD business is having its elevated NAND prices. When you give your guidance for Q3 and you talked about this meaningful inflection that we were going to see in Q4, were you anticipating that we were going to see reductions in NAND pricing, was that part of your thought process, when you were talking about a meaningful in client SSD business in Q4?

We originally expecting some price reduction in Q4, but this has not materialized. Prices for now and continuing to be elevated, elevated for a bit longer than we had expected. And so this is causing some delay with some of our program launches, but we are however expecting fairly strong rebound of our client SSDs in fourth quarter of this year.

And so with pricing of NAND, where does pricing need to go, where does it need to fall for [indiscernible] seen a really big rate coverage in client SSD business, and conversely if NAND doesn’t fall next year, what does that mean for the client SSD business, can we expect it to be exceptionally challenged, or will you still be able to see some growth in that business?

We believe, we start to see NAND price start to decline gradually. There is some indication the pricing will come down soon, [indiscernible] are trying to maintain high price for NAND, but [indiscernible] NAND, they are starting two module maker. We believe moving to second quarter for 2018, the QLC SSD solution into production and 96-layer coming in the second half of next year, NAND price should go down quickly, and we see that as NAND price trend for 2018.

Betsy, let me also add, we have a number of programs that have just entered initial productions. These are our second generation PCIe NVMe client SSD controllers. These have just entered into production. We have a very large portfolio programs that are going to go into production over the next two quarters. We have fairly high confidence with our flash partners that these programs will be entering production over the next two quarters and we believe these are going to be time pretty closely with the continued supply increase of NAND especially relating to the 64-layer 3D.

Thanks, Wallace and Riyadh for the additional color on that, I appreciate that. [indiscernible] tax rate trending down, how should we looking at the tax rate for next year. Is it going to - should Q1 be flat and then it trends down from there, or can we start to see trend down starting in Q1 of next year?

Our tax rate recently has been a little bit elevated as of R&D tax credits in Taiwan expiring at the end of the 2016, but our statutory tax rate in Taiwan is essentially 17% plus a 10% and retain earnings for tax, and so our overall Taiwan tax is closer to 29%, 28% to 29%. But we also operate in Korea, China, the U.S. and elsewhere. So our blend of tax rate is actually closer to 20% from a modeling perspective. In 2017, our effective tax rate however has been higher than this, but as our business is continued to evolve and progress, we expect our taxes to gradually trend towards 20% next year. In the first quarter we will start [inching down] (Ph), but it will take some time for to reach our model of 20%.

Thanks a lot for that additional color. And last question for me is on also on seasonality. So Suji asked a question about seasonality for the hyper-scaling, how about client SSD given the fact that we normally see seasonality down, I would say sharply in Q1? Could we expect it to be even more challenged in the Q1 given the fact that we have got the higher NAND prices for the client SSDs? Or how should we be thinking about that for seasonality?

We are not quite sure about the actual seasonality of client SSDs. So we would imagine that it will probably similar to client ACDs. So for our own business, in particular, the seasonal patterns - we have not seen seasonal patterns as it relates to our own business given the sharp ramp that we had last year and this year because of the tight NAND flash conditions affecting the end demand. Traditional seasonal patterns probably also do not apply. Looking into the first quarter, it’s still too early to say, but we are pretty excited about how our business is progressing.

So, let me add a comment. We believe some design pipeline and production ramp up, our Q1, we should see also slightly growth for the client SSD.

Alright. Thank you so much for letting me to ask the questions. I really appreciate it.

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

Yes. Hi. Thank you. So I’m just wondering in terms of the growth margins. Is the rebound contingent on a bounce in mobile? And would it be prudent to think of that as more likely a Q2 event and a Q1 event?

So our gross margin is not contingent on rebound of our eMMC controller sales. We are expecting our eMMC controller sales to rebound in the first quarter, but we are not expecting that to be the key mover of our overall corporate growth margin moving up. It’s largely this simple. We have lower gross margin, higher gross margin products. Our lower gross margin products are SSD solutions, our higher gross margin products are essentially a lot of the controllers. So as our client SSDs start ramping, rebounding with better NAND flash prices that should be the key driver to bring our gross margins up.

In addition when the NAND price going down, our procurement for the NAND price going down, which are better margins for the enterprise SSD solution.

Great. Thank you. And then, on their call last night Western Digital stated that NAND flash pricing has leveled off, but they don’t think that it will decrease until after Q2 at least next year. So does that make it more difficult if that were to come true would that make it more difficult for you to show revenue growth in 2018 or do you think you can still get there even at the back half weighted?

There are six NAND makers today. We cannot comment for particular NAND maker. Different NAND makers have a different strategy regarding their NAND sale [indiscernible] seeing the indication we believe there will be more NAND coming to the market and we believe the NAND price would go down and so that is a direction we are seeing today.

Great. Thank you so much.

We have the next question from the line of Donnie Teng. Please ask your question.

Hi thank you for taking my question. My first question is regarding your full-year client SSD and SSD solution guidance, because previously last quarter we mentioned about the full-year client SSD this year will be flat last year. But now given the stronger SSD solution sales in the fourth quarter, could you remind us what the latest view on this year for client SSD and SSD solution?

Sure. For the full-year our client SSD sales should be down a little bit compared to last year while our SSD solutions will be similar, but likely also down a little bit compared to last year which is very different from what we were originally at the start of the year. At the start of the year as you may recall we were expecting our SSD solutions to be down quite significantly and now we are expecting that to be fairly low, it’s a little bit down compared to last year.

I have a follow-up question. We know that the enterprise related demand is still quite strong, so NAND supply is still very tight. But how you will have stronger fourth quarter for the SSD solution, what is the strategy for fourth quarter?

This relates to what you were talking about. Demand for enterprise is very strong. And given the better availability of NAND, our Alibaba program has extended third quarter level over to the fourth quarter.

Great, thank you. My second question is related to our client SSD outlook for next year. So are we expecting our client SSD controller shipment growth to be similar to the overall client SSD shipment growth next year?

I believe our 2018 client SSD controller shipment will grow very, very strong and much stronger than 2017 and because we have a multiple projects in NAND OEMs as well as we will have multiple products coming with the design pipeline. So we do see [indiscernible] Q1and Q2 and moving forward to Q3, Q4. So this we have very high confidence for client SSD. We should become the new leader in PCIe NVMe for merchant company.

Alright. Our target is to gain market share, next year, right?

Absolutely.

Okay. Thank you.

As there are no further questions at this time, I would now like to hand the conference back to Mr. Wallace Kou for closing remarks.

I would like to thank all of you for joining us today and your continuing interest in Silicon Motion. We will be attending several conferences in Asia, in U.S in the fourth quarter. Details of these events will be available on our website. Thank you and goodbye for now.

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