Good day, ladies and gentlemen, and welcome to the Second Quarter Silicon Motion Technology Corp. Q2 2015 Earnings Conference Call. My name is Valarie and 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]. I must advise you that this conference is being recorded today. 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 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 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 obligations 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, Valarie, and good morning, everyone. Welcome to Silicon Motion's second quarter 2015 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 second quarter financial results and provide our outlook. We will 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 Web site, 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’m pleased to announce another solid quarter for Silicon Motion with revenue in the second quarter increasing by 8% sequentially to $87.2 million, our highest quarterly revenue in our company history. Our revenue growth was lead by client SSD controller sales, which grew by approximately 40% sequentially and is now 15% of our total sales, up from about 10% last quarter and more than what we saw all of last year. We are excited about the success that we have been achieving in SSD and believe we are well positioned for further growth from now through next year. Our SSD controller sales have been solid in growth. Growth will pick up over the next two quarters. And on July 1, we closed our acquisition Shannon Systems, China’s leading enterprise-class PCIe SSD company. Riyadh will discuss our financials in greater detail later on the call. Let me start by talking about our client SSD controller solutions. Early last year, we started shipping client SSD controllers and all of our sales were to module makers for channel markets. Early this year, in addition to expanding sales to module makers, we also started shipping our client SSD controllers to two flash makers and the storage OEM. And through our OEM, we started shipping to global Tier 1 PC OEMs. We expand our multiple program wins with our two flash partners to scale further as the year progresses. And towards the end of the year, we expect to begin initial sales of our client SSD controllers to two additional flash makers. We believe that based on our pipeline of design wins by the end of this year, we will be the world’s largest merchant supplier of client SSD controllers. We currently…

Thank you, Wallace. First, I will outline our financial results for the second quarter and then provide our third quarter and full year 2015 guidance. In the second quarter, revenue grew 8% sequentially to $87.2 million and grew 26% on a year-over-year basis. Our storage product sales increased 11% sequentially and accounted for 81% of total revenue. Within our overall storage products, our embedded storage products, primarily our eMMC, client SSD and industrial SSD controllers, plus our Ferri products increased by about 10% sequentially and accounted for well over half of our total revenue. Sales of our removable storage products, our card and USB flash drive controllers, increased by about 15% sequentially as this segment rebounded from the seasonally weak first quarter. Our specialty RF IC decreased 5% sequentially. Our corporate gross margin decreased to 51% in the second quarter from 52% in the prior quarter, due to the increase in sales of our removable storage products. In the second quarter, our operating expenses increased to $22.9 million as compared to $22.5 million in the first quarter. We ended the second quarter with 852 employees, 14 more than at the end of the previous quarter. Due to the higher revenue and stable operating expenses, operating margin increased to 24.8% from 24.1% in the previous quarter despite slightly lower gross margins this quarter. We achieved quarterly net income of $17.8 million and earnings per ADS of $0.51. Stock-based compensation in the second quarter was $0.3 million lower than the $1.5 million in the first quarter. I will now move to our balance sheet and cash flow. Inventory days decreased to 103 days in the second quarter from 106 days in the first quarter. DSO increased to 48 days in the second quarter as compared to the 40 days in the first…

Thank you. [Operator Instructions]. Our first question comes from the line of Mike Burton from Brean Capital. Please go ahead.

Hi. Thanks for taking my question. I was hoping you could help us understand the current dynamics in the eMMC market a little bit better. How did those revenues track across the June quarter? And then it appears some suppliers like Qualcomm got some negative surprises towards the end of the quarter, and I was wondering if you saw that and help us understand if you’re starting to see either too much inventory in your channel or further downstream? I’m just asking relative to your guidance for Q3 and Q4 where you’re expecting an unseasonal Q4 pickup.

As in the same quarter, Qualcomm margin sales were flat sequentially. Demand is weaker than we had expected at the start of the year. We have taken down our market growth expectations from 15% to 20% to 10% to 15%. With a record number of design wins secured for the second half of this year, many of these new designs already entered production, and we believe that with a broad range of design wins for the balance of the year and the current pattern in the backlog, we’re on track to meet our original goal of growing at least in line with the market held by with a slightly different seasonality than what we have normally seen. Finally, we’ll begin ramping in to using their new cost effective 16-nanometer TLC NAND paired with our controller in the fourth quarter this year. We have already secured design wins that will enter mass production by the end of this year.

Great, thanks. And then looking at also client SSD ramps and how that’s expected, are you expecting within that – what’s your expectation for market growth within PCs in the second half? Are you expecting really a pick up there or is it really more from the design wins that you have in the second half?

I can say that we have a very broad range of SSD design pipeline. We have announced we are winning with the four NAND flash partners and one OEM maker. We entered multiple design wins to PC OEM. We do see very strong backlog and then we see the [indiscernible] OEM. We see continued growth. As you can see we have ample new products and the growth driver that will add to our revenue growth and share gain for next year. We believe we can continue to grow at least 50% next year, above the market growth rate into 2016.

Great. Then last one from me. Sorry if I missed this, but did you break out the contribution by Shannon in Q3 or how that business is tracking towards the second half? Thanks.

Mike, our Shannon guidance for the full year – this is the full year including the portion where we’re not consolidating. Their due to deliver $14 million to $18 million for the full calendar year as we are going to only start consolidating starting on July 1, so we’ll be consolidating for both third and fourth quarters. So we should be consolidating at least half of that full year revenue target amount. In terms of impact to our overall financials, as you’ve seen from our guidance for gross profitability, there is no impact to our financials. And as we have previously mentioned, we expect Shannon to be very mildly EPS accretive to our business this year and more accretive next year.

Perfect. Thanks.

Thank you. Our next question comes from the line of Charlie Chan from Morgan Stanley. Please go ahead.

Hi, Wallace, Riyadh and Jason. Congratulations for good second quarter results. So for third quarter guidance, if we exclude Shannon Systems contribution, I think you already gave us a lot of guidance, what would be the revenue growth in 3Q? And do you think that is normal for your exceeding business?

Charlie, there’s some moving pieces in our business. As you’ve seen, the previous seasonal patterns that we’ve seen in our business in past years do not quite fit this year’s business plan. So this year we’re going to have sequential growth in the third and fourth quarters, very different from what we’ve seen in the past. What we’ve seen in the past is stronger growth in the third quarter and sequential decline in the fourth quarter. We don’t believe that’s going to happen this year. Instead, we’ll have sequential growth in the third quarter and again sequential growth in the fourth quarter, again because of the pipeline of business wins that Wallace had talked about earlier today including our eMMC continuous sequential growth as well as strong client SSD sequential growth and of course layering in the Shannon business.

Yes, so according to our calculation if we exclude Shannon Systems contribution, the third quarter gross could be only slightly up like 5%. So I’m not sure how much that’s coming to [indiscernible] recent demand weakness because essentially you are seeing some very weak data points across PC and China smartphones. So I just want to make sure that the company has discounted some of [indiscernible]?

There are some pieces of weakness in our business, Charlie. The key part that’s weak within our portfolio of products is our removable products. Our removable storage will be down sequentially in both the third and fourth quarter, and so that will impact our overall numbers. But I’ve said we will have sequential growth in the third and the fourth quarter. If you were to exclude Shannon, we would still be expecting sequential growth in our business both in the third quarter and the fourth quarter.

Okay, understood. Thank you very much.

Thank you. Our next question comes from the line of Mike Crawford from B. Riley. Please go ahead.

Thank you. In the eMMC or in the embedded controller market, previously I think you had [indiscernible] on the UFS2 might be a short-lived marketplace [indiscernible] and pending adoption of PCIe controllers in the second half of 2016. Is that a timeline you still see or is that PCIe you’re seeing later down the road?

During last quarter’s earnings call and we do have certain OEM customers, they serve PCIe solutions [indiscernible]. But I think now we confirm UFS will become in the high-end premium line for 2016. Currently probably only Samsung Galaxy S6 carries a UFS but we believe that UFS probably will enter the high-end premium line model in second half 2016 or 2017.

Right. And previously I’ve heard you talk about some certain disadvantages in terms of difficult to interact with the memory and placing more burdens on designers versus PCIe express. So what’s different now? Why is that UFS solution seem more powerful built today?

Let me try to expand this. From the software-related upon view, PCIe has been established for many years. That’s more robust. There’s no doubt about it. I think customers can adopt PCIe if a bigger [ph] processor support PCIe. However, as you can see market trend moving to the lower cost, PCIe based PGA solution was still more expensive than UFS. And UFS is also much more expensive than EMC. So that’s why although it is challenging for UFS because of software latest structure but we believe the premium line in late 2016 or 2017 will adopt for UFS as a current trend. But PCIe maybe going to wait further, maybe 2018 as Intel is pushing harder for PCIe to enter mobile phones. Cost is everything.

Okay. Thank you. And then separately your industrial SSD and they will stay out of blended products, what is the volume of that blended products in the second quarter, and do you expect that to be slow growing still?

Mike, we don’t break out those products. Those are much smaller, but those products will continue to grow. They’ve been growing and will continue to grow. Full year, probably grow around 10%, 20%.

Thank you. The final question is just on the RF transceivers, do you see any change to that business in this year versus last? And maybe outlook for next. Thank you.

As you know, our LTE forecast this year, the revenue expectation this year is $12 million. It was similar to last year as well as the prior year. So that remains unchanged. We also have our mobile TV products where we’ve got an uplift to our business in the first quarter, but at the same time we – it was unusually high in the first quarter and now we’re coming back to more normalized levels in the second quarter. And therefore you saw the sequential decline in our RF sales in the second quarter. But overall, our RF business is not – they are not going into growth markets, so you should not be modeling growth for those products. They were pretty stable but certainly not for growth markets.

Thank you very much.

Thank you. Our next question comes from the line of Tom Sepenzis from Northland Capital. Please go ahead.

Thank you for taking my questions. I’m just wondering in the second half of the year, Q3, Q4, how Shannon looks? It is going to be relatively liner. I mean should we expect the same amount of revenue or near the same amount of revenue for both quarters or will Q4 be higher than Q3, any kind of help you can give us there would be appreciated?

Q4 will be higher than Q3 for our Shannon revenue.

Okay. Thank you. And given the --

Given the size of the business, we’re not going to be breaking out the details of the Shannon revenue contribution and also for competitive reasons.

Okay. Then given the strength in the removable storage in the June quarter and how that led to the declines in the gross margins. When do you expect the gross margins to come back up in Q3 as that drops again as a percentage of the mix?

Well, for the balance of the year we are expecting our gross margins to be fairly stable, so we’ll be delivering based on the guidance that we have provided. So there’s not going to be any abrupt or sharp changes to our gross margin profile for the rest of the year.

Okay. So I guess my question really is the June quarter was all of the weakness in the margin relative to the removable storage products or was some of that pressure in some of your other product lines.

The increased sales of our removable storage, those are up about 15% sequentially. It was a big factor for the slightly lower gross margins compared to the prior quarter. Prior quarter was 52, this quarter it was 51.

Great, thank you. And then lastly, just in terms of any kind of visibility you might have in Q3 and Q4, you’ve mentioned that your eMMC business will increase both quarters. This is not really market growth or driven by the market itself. This was driven by product rollouts. Is that correct?

I think because we have 60 new design wins in pipeline and some just went into production and they’ll have a firm appeal [ph] and backlog with our major [indiscernible]. So we’re pretty sure about there is sequential growth Q3, Q4 with eMMC and both client SSD product line.

So it’s less market growth related and more your particular product portfolio related in terms of --?

The market for eMMC while the growth – we’ve taken the growth numbers for the market. We’re still expecting the market to grow 10% to 15% this year. So part of the contribution will be coming from market. And ideally we like to do more than the market, but as a base case we’re expecting to grow in line with the market.

That’s very helpful. Thanks very much.

Thank you. Our next question comes from the line of Anthony Stoss from Craig-Hallum. Please go ahead.

Hi, guys. A couple of questions, Riyadh, probably for you. Can you give us a general sense of what you expect in 2016 over 2015 just from the Shannon Systems growth rate? Also, is the Shannon Systems gross margins higher than what you’re reporting on a corporate average for Q2? And then lastly, given you guide, you’re calling for a higher OpEx in Q4 if you’ve already factored in Shannon in Q3, can you help give more detail on why you expect OpEx to up in Q4? Thanks.

Shannon is expected to grow quite strongly next year, at least as fast as the market if not much more fast, so much faster than the market. Market for NAND flash SSD is based on several analysts surveys that we’ve seen suggest that on a CAGR basis, it’s still going to grow at least on a 30% basis, 30% CAGR for the next several years. This is the growth of the enterprise SSD market. China market for enterprise SSD should grow faster and therefore our Shannon business should grow faster than that. In terms of its impact to our gross profitability, it is a small part of our business. So as you’ve seen for the second half this year when we started consolidating Shannon, the impact to our gross margin is negligible. We’re still going to be bringing in our gross margin at similar levels.

Regarding the increase for our operating expense in Q4, because Shannon Systems is going to hire more – recording more R&D and we have a more – then project tape-out. That’s why the operating expense might slightly increase compared to Q3.

Thanks for that, Wallace. And lastly, have you guys seen much of a change in terms of your ASPs for eMMC side? Is it more competitive? Is it pretty stable? Just curious on pricing. Thanks.

Our ASPs have been fairly stable for our products. Our mobile storage blended ASPs should blend up over time as our revenue mix includes higher ASP products like eMMC and SSD controllers. The blending of our ASP for each one of our individual products such as eMMC has been stable. Each generation product has a short lifecycle, as you may know. Each starts life at a higher than average ASP and then decays. We are constantly bringing new generation of products to keep our blended ASPs stable. If they’ve been stable then we expect our eMMC ASPs to continue to be stable.

Thanks, Riyadh.

Thank you. Our next question comes from the line of Jaeson Schmidt from Lake Street Capital. Please go ahead.

Hi, guys. Thanks for taking my questions. Most of my questions have been answered but just wondering if you could talk a little bit what you’re seeing from a pricing environment standpoint in the client SSD market?

Client SSD pricing definitely is very competitive today in both Shannon and OEM side. That’s why NAND makers tried to bring the next generation technology and tried to meet customers’ expectation. That’s why we’re going to see more TLC NAND coming to the market for SSD but primarily for the channel for retail. However, I think next year you’re going to see 3D TLC NAND coming that’s target for the PC OEM. And we believe in the next – currently the 128 gigabyte pricing range is about $40. We believe the 250 gigabyte in the next 18 to 24 months will be moving to an amount of that range. So that’s the price pressure and price trend. But we definitely as you know 48 out of 64 [ph] is stacked TLC 3D NAND is going to help to migrate to that range with the next two years.

All right, thanks guys.

Thank you. Our next question comes from the line of Suji De Silva from Topeka. Please go ahead.

Hi, Wallace. Hi, Riyadh. Nice job on the quarter. Just to understand the SSD guidance, you said 45 million to 60 million and now you’re guiding to the high end. Is that increase to the high end now with Shannon versus before?

No, it does not include Shannon. Our 45 million to 60 million guidance for SSD, that’s for our client SSD controllers. Shannon is for enterprise-grade PCIe SSD. That’s very separate – very different from the controllers that we’re delivering to the likes of Micron and other customers of ours. The 45 million to 60 million are just controllers for client SSD. We are now guiding towards the higher end of this range.

Okay, great. Thank you for the clarification, Riyadh. And then what do you think your SSD share opportunity can be in the '16, '17 timeframe versus today?

We definitely target to around 40% maybe 2016 or '17 for client SSD.

For client SSD, great.

Let me also add. By the end of the year, we believe that our market share for our client SSD, we should become the market leader, the merchant market leader for our client SSD, so exceeding the market share of the current market leader.

Okay, great. And then last question you talked about UFS coming up the curve versus PCIe. Can you talk about your product roadmaps and whether you have any UFS product on the roadmap and then the PCIe products and the timing of those?

Our UFS product will be available in early Q1 2016 and we’re currently engaged with multiple NAND makers to prepare as the market becomes mature and enter into premium line from smartphone makers. Our PCIe product for high end is available today. I think we’re going to – showing the Flash Memory Summit two weeks from now and our cost effective PCIe solution will be also available in late Q1 and Q2 next year that target for mainstream PCIe also can be used as a PGA solution.

Okay, great. Thanks, guys.

Thank you. [Operator Instructions]. Our next question comes from the line of Rajvindra Gill from Needham & Company. Please go ahead.

Hi. This is Joshua Buchalter on behalf of Raj. Congratulations on the solid progress. I was hoping you can provide a little bit more color on the [indiscernible] flash partners that are coming on line towards the end of this year, should we expect them to be of a similar scale as what we’ve seen this year and also should we see a larger jump up towards Q4 when they come online? Thank you.

I think additional NAND makers for SSD, I think the size could be a little bigger than where we are today, but it depends – it definitely is up to customers’ ramping speed. I think we’re going to provide a TLC solution with our 3D NAND. And hopefully I think because we are the leading provider for 3D NAND, we can take advantage about the market trend and then can enlarge our market share and support our NAND makers.

Let me also add. With the pipeline of OEM wins, with NAND flash makers, with our storage OEM, with our module makers, with various platform wins and all of these customers, we’re very comfortable about coming in at the higher end of our $45 million to $60 million guidance range for our client SSD. We’re also very confident that we’re going to be able to scale our client SSD by an additional 50% next year.

Okay, great. Thanks, guys, and congratulations again.

Thank you. Our next question comes from the line of Monika Garg from Pacific Crest Securities. Please go ahead.

Hi. Thanks for taking my questions. There have been news coming out that Hynix has developed its own UFS controller solutions. Could you maybe talk about as market moves from eMMC to UFS in 2016, '17, how could that impact your eMMC revenue?

I think Hynix has developed their own UFS solution three years ago. We’re talking about very high end. Naturally, I think they target for gear 3 by 2. We target for gear 3 by 1 for mainstream UFS markets. But as of today, UFS still remains a very neat and only probably one smartphone marker with one model. We believe probably until late 2016 or 2017, UFS will enter in the premium line and high-end model, maybe very few smartphone makers were adopted. So I think we are still continuing to collaborate Hynix not only for eMMC but also UFS because there is still a variety of memory. I think our UFS controller will support both TLC and the 3D NAND and would expect to become major for the Hynix [indiscernible] for the coming years. And we do have many value-add features in the product line to expand and – not just Hynix also we’ve got it to other NAND makers throughout '16 and '17.

Got it. Just for clarification, did you say when you will be ramping another NAND flash maker in U.S. for second half of this year? Was it for 3D NAND TLC or NAND TLC?

We can only say we are engaging with multiple NAND makers for UFS2 solution and they were ramping with different types of NAND, as UFS2 markets become mature and becoming meaningful in late 2016 or 2017.

Okay. Thanks. That’s all from me.

Thank you. Our next question comes from the line of Charlie Chan from Morgan Stanley. Please go ahead.

Thanks. So some follow-up questions on the SSD business. So do you expect some contribution of PCIe SSD product in your client SSD business this year?

So we do not see any PCIe product when into mass production for this year.

Okay. Is this sort of in line with your schedule, because I thought in your coming design win of a new OEM, some of that should be PCIe related?

I think that each of the NAND OEM, we do have multiple projects not just one project, and we’ll start from SATA eventually going into PCIe. As I believe in 2016, PCIe should remain a relative small portion compared with SATA3. And as the market grows, we believe PCIe will contribute more revenue for our company. But I think in consensus to 2016, PCIe probably is still around 10% to 15% market share.

Okay, got it. And just want to make sure for your eMMC business, are you going to add a new customer besides Hynix or there’s already in your customer as one of these [ph]?

I’ll say we have been working with a small group NAND partner developing eMMC controller for the embedded solutions. Whether it’s eMMC or eMCP, now we do have a more R&D resource to do this. And we have good Chinese walls [ph] and probably Chinese walls to manage our different NAND flash partner proprietary projects. Our now Hynix business currently is very small, but you should expect this to increase materially next year. We’ll brief you more on this as this project gets closer to production.

Okay. Thanks. So just lastly, just want to confirm, so in the second half you should add two new NAND flash OEM customers instead of just one, right, in second half?

That’s correct. This is for SSD, it’s not for client SSD. Currently, we have design wins with four NAND flash partners; two are in production. Of the two, one is Micron. And by the end of this year, we’ll have two more NAND flash partners, so altogether we’ll have four. These all four are client SSD.

Okay. Thanks.

Thank you. There are no further questions, and I’ll hand it back to Jason 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 conferences this quarter. In August, we’ll be presenting at Pacific Crest Conference in Vail; Jefferies Semiconductor and Hardware Conference in Chicago. In September, we’ll be presenting at JPMorgan Asia Pacific Equity Conference in New York; Citi Global Tech Conference in New York; Brean Capital Tech Conference in New York; [indiscernible] Tech Conference in Taipei; and Deutsche Bank [ph] Tech Conference in Las Vegas. Details of these events are available on our Web site. Thank you, and goodbye for now.

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