Good day, ladies and gentlemen and welcome to the Fourth Quarter Silicon Motion Technology Corporation Q4 2015 Earnings Conference Call. My name is Jason. I'll be your conference moderator for today. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session. [Operator Instructions] Before we begin today's conference, I've been asked to read the following forward-looking statements. This conference call 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 services, we believe to be reliable, you should not place undue reliance on them. These statements involve risk 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 industries and the effect of such pressures on prices, unpredictable changes in technology and consumer demand for multimedia consumer electronics, the state of any changes in our relationship with our major consumers 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 applies only as of date of this conference call. I would now like to hand the presentation over to our host, Mr. Jason Tsai, Senior Director of Investor Relations and Strategy. Please proceed.

Thank you, and good morning, everyone. Welcome to Silicon Motion's fourth 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 fourth 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 is read at the start of this call. For 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 is 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've 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 pleased to share with you the results of our strong quarterly and full year performance. Silicon Motion 2015 full year revenue and EPS was highest in our company history. Also in the fourth quarter, we beat the seasonal weakness to deliver both gross and record quarterly revenue and just as important, we exited 2015 with a momentum of a strong pipeline for business activities, in fact 2016 to be another strong year. As the world's leading NAND flash controller company, we're a key enabler and beneficiary of the increasingly widespread use of solid-state storage solutions, embedding devices used in the environment that range from mobile to computing, industrial and hyper scale. We've steadily expanded into each one of these markets and build leadership positions. We're the merchant market leader in EMMC for smartphone device and tablets. We're also the merchant market leader in SSD used in PC and other client devices. Recently we've also started shipping high performing enterprise-grade SSD for datacenters. All of these products address the need for important northern growth markets. Already we supply NAND Flash Controller IC than any other company in the world. From 2010 to 2015 over this five-year period, we have grown our revenue either 22% compounded annual growth rate. During the same period of time, our EPS had also grown at 38% compounded annual growth rate. For full year 2015, our revenue grew 25%. Our growth was largely driven by our embedded storage product that grew almost 30% in 2015 and they’ll address a growing demand of solid-state storage devices using a proliferation of applications. Our ten embedded storage products include eMMC and client SSD controllers as well as Ferri industrial SSD and Shannon enterprise SSDs solutions.…

Thank you, Wallace. First I’ll outline our financial results and then provide our guidance. Our solid results for the fourth quarter provided us with a strong finish for the full year. For the quarter, we delivered $98 million of sales, up 3% sequentially at the high end of our guidance at a record high. For the full year 2015 we delivered $361 million of sales, up 25% at the high end of our initial guidance for the year and also a record high. For the quarter our storage products grew 8% sequentially, which is more than offsetting a 30% sequential decline at our specialty RFIC sales, which are now 9% of total sales declined due to mobile TV SOC customer project cancellations and consolidations. While Korean domestic smartphone sales remained stable, sales to Brazil and other markets have retrenched. Our RFIC sales were also affected by a wind-out of our LT transceiver program. For the full year, our storage products grew 25% and our RFICs grew 27%, both contributing positively to our full year 25% growth. Our quarterly storage product sales growth was led by our embedded products, which are comprised of our EMMC and SSD controllers, plus our Shannon and Vera store solutions. Sales of our embedded products grew almost 15% sequentially to account for about two thirds of total revenue. Sales of our expandable products our card and USB flash drive controllers were stable sequentially. Our client SSD controllers grew 20% sequentially. Our EMMC controllers were stable and enterprise SSDs nearly doubled. For the full year 2015, our storage product sales grew 25%. Embedded products grew almost 50% to account for about 60% of total revenue. Expandable products declined 5% to 10%. Our client SSDs grew from roughly $15 million in 2014 to over $60 million in 2016,…

Thank you. Ladies and gentlemen, we would now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Monika Garg from Pacific Crest Securities. Please go ahead. Ms. Garg your line is open. Please un-mute locally.

Yes sorry about that. I was on mute. thanks for taking my question. When do you expect to ramp revenue from 3D NAND controllers?

We expect to ramp 3D NAND controllers from late second quarter of 2016 this year.

Okay, thanks. Then you were expecting eMMC to show 5% to 10% growth now kind of we’re hearing China slowing down and emerging markets slowing down, do you see any risk to that growth?

We are seeing the Chinese domestic smartphone market becoming saturated, which is leading to decelerated growth in demand. However we're also seeing strong demand from other emerging markets including India, Southeast Asia and Latin America and these regions together represent a market opportunity even larger than what we've seen China over the last few years. These markets are primarily being supplied by Chinese OEMs. So the demand for our eMMC solutions particularly for the low end to mainstream smartphones continue to remain quite robust. We’re also seeing increased adoption of eMCP embedded memory solutions for low end smartphones displacing the raw NAND currently being used adding additional opportunities for embedded business. Nearly half of the world’s mobile phone users today are still using feature phone that has not and have not yet compared over to smartphones. So the market opportunity to supply this market will represent several more years of modest unit growth for the market. As our business model is based upon unit volume growth and not on increasing dollar content or adoption of high end smartphones, we expect to continue to grow consistently and stably despite the challenging smartphone market dynamics and volatility.

Thanks. Just the last one, on the client SSD side could you maybe remind us like how much was a mix of two bit per sales and three bit last year and how do you see that changing this year?

We believe majority of our client SSD controller shipping in last year first three quarters MLC based. So start from late Q3 we're moving from TLC, while Q4 the TLC base will be around 25%, but with the growing demanding from major OEM and NAND procurements and basic demand lower cost SSD, which is stronger demand for TLC PCIe SSD in 2016. We believe in the entire 2016, the TLC PCIe SSD will be more than 50%.

Thank you so much.

Thank you for the questions. Our next question comes from the line of Mike Burton from Brean Capital. Please go ahead.

Hey, guys and congrats on another great quarter and guidance. Just -- really good progress across all front but in client SSD, what do you believe your market share is now and your goal for market share and what do you expect the market growth to be this year versus the growth that you expect in that segment?

I think we have already won most of the client SSD controller program released by the NAND flash makers to merchant controller vendor. We already shipping to Micron and SanDisk well to add our third flash customer in the fourth quarter. Our fourth flash partner remain on track to begin production in the year with all the four flash customer ready secure multiple clients SSD program win. So we have the confidence ongoing SSD shipment. We believe in 2015 our market share for client SSD will be around 20% to 25%. Our targets long term will be towards 35% to 40%.

Thanks and then you're guiding for a better than seasonal March quarter looks like primarily related to the SSD ramp you have in some of the eMMC strength, but given the rapidly changing mix for you guys, how should we be thinking of your seasonality going forward pass the March quarter?

There no consistent quality seasonal patterns for our consolidate sales, our quarterly sales embed many trends, our rapidly scaling client SSD controllers, our more stable eMMC controller sales growth, new addition of Shannon, which has a rather lumpy quarterly seasonal pattern and mature and client expandable storage sales. These trends could change when our client SSD controllers become more scaled out and if a few year's time and Shannon -- and when Shannon reaches the largest scale with a more diversified set of customers.

Okay. And then last one for if, you could talk a little bit on client SSD, you'll talk a little bit about the inventory situation you're seeing in that market and some other semiconductor companies actually describe some weakness in notebooks and SSDs in general, you guys are obviously growing right through that, but do you see any sort of inventory within the client SSD market right now? Thanks.

We see the current inventory suggestion is low today in the channel on OEM side.

Perfect, thanks.

But we do not believe there any inventory issues related to client SSD solutions or client SSD controllers.

Thank you for the questions. Next question comes from the line of Charlie Chan from Morgan Stanley. Please go ahead.

Hi, Wallace, Riyadh and Jason. Congratulations for the solid gross sales. So my first question is on the margin trend and the ASP trend for your SSD controller because you're adding several high end products in your portfolio. So how should we think about the blended ASP trend for the SSD controller and combined with your potential cost reduction by migrating to more advanced [indiscernible] foundry, can we expect margin expansion for the SSD controller this year?

Product by product, part by part our gross margins are fairly -- have been fairly stable and we believe will continue to be fairly stable, but having higher gross margin products this is giving us a opportunity to blend it down by being more aggressive with products with lower gross margin such as our expandable products. In our most recent quarter, our gross margin decreased from the prior quarter's 51.6% to this quarter and this Q4 is 50.1% and this is the result of embedded storage gross margin continuing to be about corporate average and our expandable grows margin products also continue to be below corporate average but these expendables have dipped a bit as a result of expandable product mix shifts. Within our expandable storage products, we have USB flash drive and card controllers. Our USB flash drive sales increased in the most recent quarter whereas our card controllers decreased. Our USB flash drive controllers are our lowest gross margin products and so by selling more of those products our gross margin for expendables have come down, which has affected our gross margin for this quarter.

So my follow-up question is really on the disk removal cards controller business. Is it fair to say now is a purely commodity and is very hard to differentiate anymore?

Well, I won't say it's hard to differentiate anymore. I think we remain to the high end, more differentiated and more dependable solution for expandable storage. For example SDA now we're leaving the position to launch higher rent and IR performance for the card. It's the first time for the card marker try to match embedded solution. So this could create a potential growth in the future and you have a better technology because Google, Android 6.0 and 7.0 require higher end performance. So I think clearly, we see the margin saturated and the price is very competitive. But as there will be opportunity for us to focus on high end and differentiated solution to sustain our market share and potentially also stabilize our sales revenue.

Okay. Thank you, Wallace. So my next question is on the RFIC business outlook. So it seems like your visibility on the LTE transceiver is very low this year, but I think this business is captive business with your key customer. So will your customer compensate your safe cost for example the fixed R&D cost given your renewal likely to be very small for this year?

Yes. I think that we're not developing new LTE product in 2016. However, we'll continue selling business opportunity with Samsung and other LTE modern player. So I think that we're not going to tape our new LTE products in 2016, but R&D, because they can be used for other product line in TLC.

Okay.

Charlie, let me just also add as Wallace mentioned, we've been working on a few other opportunities outside of Samsung and potentially also within Samsung. But a lot of these projects are still early stage and if they do become something more material, we will be talking about them.

Okay. Understood. Thank you very much.

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

Hey guys. Nice execution in a weak macro. Two part question. Can you talk about maybe beyond just 2016 what you expect growth rate wise for Shannon Systems and how the gross margin might change over time on Shannon? And I don't know if I missed this, but if you would mind talking about your PCIe controller for 2016 kind of the expected timeline of when you think the ramp will begin thanks?

For Shannon Systems, we completed our acquisition mid of 2015. So for 2015 we consolidate half year sales, half year sales equated to under $10 million revenue. For this year 2016, we expect Shannon to do about $20 million to $30 million. And based on the business development activities that are taking place at Shannon, we feel fairly comfortable that Shannon should go up to -- should be able to grow their revenue to about $75 million by 2018.

Regarding our PCIe product, we’re engaged with two flash makers for PCIe solution. We believe on current pipeline development process we believe the product will be ramped up later to Q3 timeframe this year.

Let me also get back to you on your other question about gross margin, we’re not going to talk specific about each one of our embedded products gross margin profile, but what I can say is our overall embedded storage gross margin is about corporate average. Part by part, our gross margins have been fairly stable and we expect this trend to continue this way.

Thank you for the questions. Next question comes from the line of Tom Sepenzis from Northland Capital. Please go ahead.

Yeah. I’m sorry can you just talk about the emerging markets you mentioned a couple that I think it was Latin America, Southeast Asia and somewhere else that you were seeing growth and you expect that could actually be bigger than what you've seen in China over the last couple of years? Did I hear the correctly?

Yeah, I believe this relates to overall smartphone unit growth. For this year 2016, we’re expecting smartphone unit growth to grow somewhere in the 5% to 10% growth rate and this I believe is fairly consistent with forecast from other parties within the industry including Qualcomm and others, markets research firms, brokerages. So I think our forecast are well within this range and this is based on the forecast of growing 5% to 10% includes both replacement demand from more developed market as well as consumers buying their first smartphone from emerging markets and some of these emerging markets like India, Latin America and other markets are fairly large and we believe represents plenty of opportunity for modest later growth for the foreseeable future.

Great. Thank you and a couple of other companies have mentioned on their quarterly calls here in the last week or two that they're starting to finally see some uptick of 4G in India. I’m just curious as to whether you're seeing as well?

We don’t make smartphones. So I think we’re not best place to talk about that. We make controller for eMMC and India is a great opportunity for Hynix to be selling their phones -- their controllers -- their eMMC into that market. A lot of the very low end smartphones in India and some of the other markets are using raw NAND and so by converting the usage for new models from raw NAND to eMCP, this represents upside opportunities for our business.

Great, thank you and congratulations on the quarter and the outlook.

Thank you for the questions. Next question comes from the line of Jaeson Schmidt from Lake Street Capital. Please go ahead.

Hey guys, thanks for taking my questions. Wondering if you could talk about how we should look at the industrial SSD business both this year and going forward?

The global industrial SSD business is growing and they cover from measuring motion, multi-function printers, industrial PCs through automotive. So we see the trend is the growing, however currently the total volumes are still relatively small compared with commercial consumer client SSD. But industrial SSD, the gross margin is better than consumer commercial SSD. So we think that in the next few years, maybe we can grow scale to a certain level and that will have a more visible contribution to our sell revenue and NAND profit.

Okay. And then looking at the client SSD market, are you guys seeing any changes from a competitive landscape point?

So far I think we are the only merchant controller player with both hardware firmware solution and qualified by NAND maker and PC OEM and I think most of the NAND SSD maker focus on the internal controller resource enterprise SSD for high end. For mainstream high volume and I think we can provide the total solution with a occupied solution and with high quality and good performance. That’s why I think we have a better economy of scale and we have very deep and broad management technology and our focus business is streamlined to focus specifically on profiling solution well. So that’s why I think currently we did not see any competitor threaten our market position.

All right, thanks a lot.

Thank you for the questions. Next question comes from the line of Suji De Silva from Topeka. Please ask your question.

Hi guys, congratulations on a strong year results here. For the PC market the OEM market the SSD attach rate, can you talk about where you think it is right now and what you think it might grow to exiting '16 whether that will ramp up or stay level?

Regarding the client SSD PC market, we think in commercial -- in commercial product line, we believe the adoption rate for SSD is above 50% in 2015, but consumer lines is just about 10% or less. So I think going forward I think the adoption rate majority will come from commercial lines and in commercial note book. So I think we believe by the end of 2016 and I think it will be probably more than 60%, 70% for SSD based on the price trend. However, we also hear the feedback from NAND maker if a 200 gigabit SSD to price for either $14 range there will be majority PC maker will link through SSD even for some desktop or consumer PC.

Great and then your relationship with SanDisk, I’m wondering if you see any impact from the pending SanDisk Western Digital merger and any thoughts -- if not any thoughts on what they’re maybe due for that relationship either -- are there opportunities or risks to that?

We do not foresee any impact of our business as a result of Western Digital acquisition of SanDisk. The demand for third-party merchant controller remains strong and Western Digital does not possess any controller technology or semiconductor technology for client SSD or expandable storage. So we still see seasonal opportunity for us with new combined company. Many believe that that will be well relied on SanDisk growth, the client SSD and the expandable storage business. Our business engagement and relationship with SanDisk should remain unchanged.

Great. And then my last question it’s been a couple of quarters now since you’ve acquired Shannon Systems. I’m wondering your thoughts on further acquisitions, any product holds or whether you’re still in the process of digesting Shannon before you do more activity? Thoughts there would be helpful, thank you.

Shannon was a very exciting acquisition for us. With Shannon we're now a leading vendor of enterprise SSDs to the Internet companies in China that service some of world’s largest internet markets. We will continue to look at M&A opportunities, but now that we closed the acquisition our immediate priorities include integrating Shannon and helping them to scale their revenue.

Great, thanks guys.

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

Thank you, Riyadh you talked about Shannon sales trending stably in Q1 which by that I think you mean flat at near $6 million for Q1, but then if you just kept that rate flat through the year, that's already the midpoint of the $20 million to $30 million guidance you gave for the year, which doesn’t -- is that you’re being conservative or is there something else potentially going on there?

The revenue for Shannon in Q1 should be fairly stable compared to Q4. Shannon’s revenue because of its more concentrated customer mix of large customers can be quite lumpy quarter after quarter. For the full year, we're expecting revenue in the $20 million to $30 million range.

Okay. Thank you and then further regarding Shannon, you did pay another $4.6 million towards that acquisition in Q4 and I believe there might be $32 million still remaining to be paid and can you remind us A, if that's accurate and then Billion, what the timeline might be for those payments.

Our final purchase price of Shannon was $55.6 million. We paid $51.6 million at closing midyear $40.4 million was in cash and remaining was in stock. We then made for that payment of the $40 million was not paid completely at that point in time. $4.6 million was deferred and for that amount we paid that in the fourth quarter.

Great. So that’s done and then you also had this one-time facilities purchase in Q4, which you invested $12 million of cash and is that -- do you expect -- when is the next time you might have to do more of a outsized CapEx investment beyond the lower maintenance levels we've seen?

The purchase of our facilities relates to integrating our Shannon business with our other operations in Shanghai in order to drive synergies and work more efficiently and more cooperatively we've pulled our teams into one new location and so the purchase relates to operating facilities for our combined team.

Okay. Great thanks. And then final question is on the client SSD trend, how do you see your ASP's there today versus what it might be a year or two from now?

Our ASP's rollout products are fairly stable and they’ve been very stable over last many years and we believe we will continue to be very stable over the coming period of time. All the products that we have long track records including expandable products, they've been consistently around $0.25 for EMMC that we've been shipping since 2011, 2012. They’ve consistently been about $0.50. We have a shorter track record for our client SSD's and we believe that we've been shipping the ASPs have been around $5 and should remain at this level.

So let me add a comment, when move to PCIe product naturally will be higher than the SATA controller. So because PCIe in the much bigger die size so relative PCIe will be higher in SATA controller.

Great. Thank you very much.

Thank you for the questions. Next question comes from the line of Rajvindra Gill from Needham & Company. Please go ahead.

Hi this is Josh in for Rajiv. Thank you for taking my questions and congratulations on the continued results. I just wonder -- most of my questions have been asked already, but I just wanted to clarify did you say that the LTE business is not included in the fiscal year guidance or is there no growth included?

That’s correct, we have not backed in LTE -- projected LTE revenue into our full year guidance this year. While we're expecting some amount of LTE revenue this year because of the poor visibility of this LTE revenue stream for purposes of providing guidance we have not baked in any LTE revenue assumptions into our full year guidance.

Okay. Thank you and then regarding the 256 gigabit, when do you expect to cross that $40 threshold?

We believe when 3D TLC NAND reach the $48 stack and the 256 gigabyte SSD, probably won't hit the $40 range. And this has happened as early as sometime late this year.

Okay. Great. And then just my last question I know in the past you talked about maybe working with some customers on EMMC, being honest, can you maybe talk about any progress you’ve made there? Thank you.

Yes, we do have some others EMMC customers I think the -- we’re emerging controller supplier. So we always explore business -- opportunity with many flash partners. So currently I think because highly consensus they’ll almost as 80% of EMMC controller. However, we do work with several other module maker including one smartphone maker for EMMC solution collaboration.

Okay. Thank you and congratulations again.

Thank you. Next question comes from the line of Daniel Amir from Ladenburg. Please go ahead.

Great, thanks a lot. Thanks for squeezing me in. So on the expandable storage part, historically in the past few years this business has declined around low single digits. You’re now guiding this business to decline about 10% in 2016. So what's changing there? Is it you're walking away from business? Is pricing gotten a lot worse? What's the thought process around that business now?

That there will be market for expandable products memory cards and USB flash drive, these are very mature markets. These are also markets that are in secular decline, have been in secular decline for a number of years. We believe that these trends will continue. Last year just in 2015 our expandable sales declined about 5% to 10%. We believe this year probably declined by a similar range and so for purposes of providing guidance we believe declined 10%.

Okay, 10% is a little different than 5% and so it’s more like 5% to 10% similar like it was as in '15?

Yeah, that’s right, that’s right. Q – Daniel Amir: Okay. So follow-up question just on the RFIC business, you’re doing obviously extremely well in your SSD business growing markets. What's really the rationale to continue invest in this business? It doesn’t seem like there is many synergies with the other parts of the business. You’re now not really investing anymore in LTE, skill set of some of the engineers on the RF is different than the skill set that you need on the storage side and it seems like this business has become somewhat volatile at least on the mobile TV segment from quarter to quarter. So it’ll be great to just get a little more clarity a bit on the strategy of this business segment given that it’s still 7%, 8% of your revenues?

So Daniel I think as you know that LTRs alone you cannot sell that, you need LTE modem partner together. And while we sent some five years ago they don’t have LTRS, now they have their own internal solution. So by natural they will try to prefer using internal solution. However LTE is not just only used for Smartphones. They can use a very wide range applications including the car, tablet and also M2M applications. So I think we are working with them some and try to support supply the area they don’t have internal resource to do and we can still sell LTE, RF user product. The same token China also have growing LTE base the developers. So we're also looking for opportunity how we can collaborate to grow their total LTE solution together. So we’re not using the R&D to develop a new LTRF. However we are looking to expand potential solution to continue to maintain LTE sell revenue. You’re correct LTRF engineer cannot do SSD hardware development. But our RF is really very wide range and we do have some other new products, which are not LTE they relate to wireless areas. When it become mature and become more visible, we will introduce to all the analysts and the shareholder.

Daniel, let me also add, our FCI business did very, very well last year. They grew well over 25% revenue growth. We're -- as Wallace mentioned, we continue to look for additional challenge channels for LTE products and the timing and visibility of these potential projects are uncertain. And so as we've always said, if our LTE business does not meet our long-term growth and profitability objectives, we could be open to strategic options.

Okay. Great. Thank a lot. Thanks for clarification.

Thank you for the questions. With that, ladies and gentlemen, I would now like to turn the call back 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 March we'll be presenting at the Morgan Stanley 2016 TMC Conference in San Francisco, Northland Capital Markets 2016 Growth Conference in New York, Susquehanna's Fifth Annual Semi, Storage & Technology Conference in New York, UBS Technology One-on-One Conference 2016 in London, Merrill Lynch Conference in Taipei, Morgan Stanley Hong Kong Investor Summit in Hong Kong. Details of these events will be available on our website. Thank you and goodbye for now.

Thank you ladies and gentlemen, that does conclude our conference for today. You may now disconnect your line.