Silicon Motion Technology Corp

NASDAQ:SIMO

Earnings Call Transcript 2018-Q4

[Operator]

Good day ladies and gentlemen, and welcome to the Fourth Quarter Silicon Motion Technology Corporation 2018 Earnings Conference Call. My name is Ann and I’ll be your conference modulator for today. At this time, all the participants are in a listen-only mode. Later we’ll conduct a question-and-answer session. 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 conditions 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 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 must advise that this conference is being recorded today Wednesday 30 of January, 2019. I would like to hand the conference over to your first speaker for day, Mr. Jason Tsai, Senior Director of Investor Relations and Strategy. Thank you. Please go ahead.

[Jason Tsai, Senior Director, IR and Strategy]

Thank you, and good morning everyone and welcome to Silicon Motion’s fourth quarter 2018 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 our key 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 US SEC. For more details on our financial results, please refer to our press release, which was filed on Form 6-K after the close of market yesterday. This webcast will be available for replay on our website, www.siliconmotion.com, for a limited time.

To enhance investors’ understanding of our ongoing economic performance, we will discuss non-GAAP information during this call. We use non-GAAP financial measures internally to evaluate and manage our operations. We have, therefore, chosen to provide this information to enable you to perform comparisons of our operating results in a manner similar to how we analyze our own operating results. The reconciliation of 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.

[Wallace Kou, President and CEO]

Thank you, Jason. Hello, everyone, and thank you for joining us today. I will first update you on our business, and Riyadh will review our financials and provide our outlook later on this call. For the fourth quarter, our sale of $123 million declined 11% sequentially, and we are near the mid-point of our guidance range. Full year 2018 sales were $530 million up 1% year-over-year.

Earnings per ADS for the quarter were $0.83 down 13% sequentially. Full year 2018 earnings per ADS were $3.41, up 21% year-over-year. Let me first talk about our clients SSD business, revenue from clients SSD sales increased about 30% for the full year, much stronger than what we expected in the start of this year, although a bit less than our revised 35% target in Q3.

SSD controller sales to our NAND flash partners did increase by about 35% year-over-year. We believe that demand for SSD grew as NAND flash prices declined meaningful and as the affordability improved. In Q4, we were expecting stable sequential SSD controller sales. Q4 SSD controller sales however declined 20% sequentially as our China module maker customer became more (inaudible) adverse in procuring NAND component and building SSD as falling NAND prices accelerated dramatically, despite NAND flash makers holding back NAND shipment and building inventory. Module maker became more cautious and they now want to try to catch a falling knife.

Looking to 2019, we believe our clients SSD controller sales will continue to grow and NAND prices will fall further. NAND industry supply will grow robustly this year as the yield improve on 96 layer 3D NAND and 64 layer QLC NAND ramps. Demand for all major market segment on the other hand remains soft at today’s and additionally inventory level as a NAND vendor are at an elevated levels.

It is very likely that NAND prices will continue falling rapidly in the first half of the year and increasing likely that the NAND prices will fly at a more moderate rate in the second half. This pricing trend will help improve affordability and incremental demand for client SSD.

Despite (inaudible) the industry trend, cell visibility this year is significantly more limited than in the past. Some of our NAND flash partners will typically provide us with 12 months controller procurement forecast have reduced their forecast period to just six months. We believe they are struggling with their own limitation in operational visibility due to demand uncertainty from weakening Chinese economic conditions, US-China trade negotiations and other issues.

Additionally, todays NAND market conditions are very volatile and NAND vendors are still revising plans for reducing their NAND inventory to minimize impact to their profitability. Despite this newer term limitation to our cell visibility, we are pleased by our solid designed pipeline and momentum going in to 2019.

Exiting Q4, we had over 70% more clients SSD controller program, with our three NAND flash partners that we had to prior years. These programs [include] SSD controller for managing 64-layer QLC 3D NAND and 96-layer TLC and QLC NAND. We recently began shipping our SSD controller to a NAND partner for one of the world’s first 96-layer TLC based SSD.

Recently a NAND tag reported a very significant breakthrough for us of one of the world’s leading module maker with whom we previously had a real business engagement. I may also note that, while falling NAND flash prices were driving increased SSD adoption long term, the effect is not immediate. Sale of SSD to PC OEM are generally based on long term contracts that take time to renegotiate, but NAND price falls and new device qualification takes time, even as OEMs steadily increase the numbers of platforms using SSD.

Module makers are opportunistic so react more rapidly to falling NAND prices, but as previously discussed they are more (inaudible) when NAND prices aren’t falling dramatically. We remain optimistic that over the next few years almost 300 million client HDD currently shipping annually will be mostly replaced by clients SSD, and we remain the leading merchant supplier of controller for these SSD, whether to NAND flash makers or to module makers for either the OEM market or the channel market.

Now, let me now update you on the progress of our datacenter and enterprise tender and open-channel NVMe SSD controller. We are progress well with our two highly skilled customers. The performance tuning of open-channel SSD for Alibaba and another PATA customer using these new controller is progressing smoothly and we remain on track to begin volume commercial production of our open-channel SSD around the middle of this year.

For Chinese hyperscalers, unlike their US counterparts, we cannot just provide them with an SSD controller. In order for us to sell an SSD controller to Chinese hyperscalers, we must convert our controller in to complete SSD solutions. We are also engaging with other global hyperscalers relating to our datacenter SSD controller, and initial feedback we have gotten has been very encouraging.

Turning to eMMC plus UFS controllers; sales this quarter were down about 13% sequentially. For the full year 2018, sale of our eMMC and plus UFS controller were down about 10%. We were impacted by declining global smartphone shipment and (inaudible) for declining Chinese domestic smartphone market in to which we were a big exposure.

In 2018, we made a strong progress growing the sales of our new UFS controller to our US flash partner, and believe our customers UFS mobile embedded memory cells for the year pretty likely exceeded the UFS sale of our other mobile embedded memory customer who are using their own UFS controllers.

For the full year, our UFS controller sales accounted for more than 10% of our overall UFS plus eMMC controller sales. In 2019, we will continue to actively support our UFS partner in their UFS mobile embedded memory cell growth objective focusing to leading global smartphone OEMs. Additionally in 2018, our primary eMMC controller customer started diversifying away from low end, low density mobile application and redirected their NAND supply to our SSD and other applications.

During the year, we sharply increased our support and sales of the eMMC controller to the Chinese module makers, who have been tapping in to this new market opportunity. In 2019, we believe our primary eMMC customer will further diversify away from mobile application and we will continue to actively support our China module makers who are seeking to grow their sales of eMMC mobile embedded memory.

Now let me discuss SSD solutions business; sales for this sector grew modestly in Q4, as our Ferri industrial SSD sales was stronger than expected, which partially offset the expected continued decline of our Shannon datacenter SSD sales. In Q4, we provided a small shipment of open-channel NVMe SSD to Alibaba and another Chinese hyperscaler for live testing in their datacenters. We continue to make a solid progress in delivering towards our milestones, which includes optimization and fine-tuning our [key] performance with low latency, and we remain on track to believe volume commercial sales in second half of this year.

2019 will be a challenging year for us, nevertheless for the factors that we can control, we feel good about the solid progress that we have made. We continue to win a [disproportionally] last year of all the client SSD controller project awarded by NAND flash vendors to merchant suppliers. We are actively working to help our US NAND flash partner grow their UFS embedded memory sales and gain market share.

We are also actively supporting Chinese module markers grow their presence in the eMMC embedded memory market and our new open-channel SSD project continues to track towards the second half of 2019 demand.

Now let me turn the call over to Riyadh and to discuss our financial performance and more about our outlook.

[Riyadh Lai, CFO]

Thank you Wallace, and Hello everyone. I will summarize our financial results and then provide our 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 in included with the earnings release issued today.

In Q4, revenue declined 11% sequentially. For full year 2018, revenue grew 1% year-over-year. Growth for our three key products are as follows; SSD controller sales declined about 20% sequentially, but for full year 2018 grew by about 30% and accounted for nearly 40% of sales. eMMC plus UFS controller sales declined about 15% sequentially and full year 2018 declined about 10% and accounted for about 25% to 30% of sales. And SSD solution sales grew about 5% sequentially and for full year 2018 declined about 5% and accounted for nearly 20% of sales.

Gross margins in Q4 declined to 50.5% from 51% in Q3 due to declining high gross margin controller sales and increasing lower gross margin SSD solution sales. Gross margin for the full year increased to 49.3% from 48% in 2017 due to more favorable product mix. In 2018, our higher gross margin controller sales grew while our lower gross margin SSD solution sales declined.

Operating expenses in Q4 declined to $31.4 million from $33.1 million in Q3 due to lower year-end bonus accruals. Operating expenses for the full year increased very modestly to $128.5 million from $127.8 million in 2017. Operating margin in Q4 declined to 25.1% from 27.1% in Q3 as lower revenue and gross margins were partially offset by lower operating expenses. Operating margin for the full year increased to 25% from 23.6% in 2017, primarily because of gross margin improvements.

Our effective tax rate in Q3 declined to 8% from 12% in Q3 due to the benefit of a one-time reversal of previously accrued tax liability. Our effective tax rate for the full year declined to 11% from 21% in 2017, primarily due to more favorable tax arrangements from business process restructuring. Earnings per ADS in Q4 declined to $0.83 from $0.95 in Q3. Earnings per ADS for the full year increased to$3.41 from $2.81 in 2017.

We ended the year with 1,307 employees, an increase of 15 employees from Q3 and an increase of 57 employees from year-end 2017. Stock based compensation and our operating expense which we exclude from our non-GAAP results was $12.1 million in Q4 higher than the 4.5 million in Q3 due to the seasonal timings of RSU awards. Stock based compensation was $20.4 million for the full year, higher than the $15.2 million in 2017 due to higher RSU awards.

We had $289 million of cash, cash equivalents and short term investments at the end of Q4, $20 million less than in the previous quarter and 78 million less than a year ago. Cash flow from operation generated $35 million in cash in Q4. In Q4, we had $5 million of CapEx primarily for routine purchases of software and design tools. In November, we paid $11 million of dividends to shareholders, the first $0.30 per ADS quarterly installment of our annual $1.20 per ADS dividend that was announced in October of last year.

In the fourth quarter, we spent $35 million to repurchase 1 million ADS at an average price of $34.52. This is our first quarter of share repurchases as part of our $200 million 24 months share repurchase program that was announced in November of 2018.

Now let me turn to our Q1 and full year 2019 outlook; first I will reiterate that while we can provide full year directional trends and likely scenarios for our key products as well as outline related risks and opportunities. Visibility of our sales is worse than usual as our customers are also operating with worse than usual business visibility. Without a clear sales forecast, we believe that guiding directionally for the full year is more prudent than guiding with false precision to a specific sales range.

In Q1, we expect revenue to decline 16% to 21% sequentially with broad based weakness in near-term demand. For full year 2019 until we receive more concrete procurement forecast from our customers, there is a reasonable likelihood that our sales revenue this year could be approximately the same as the prior year.

Now let me provide color on our key products. In Q1, we expect our client SSD controller sales to be roughly flat sequentially. Based on the discussions with our customers, we are expecting more positive SSD controller sales momentum to begin around the middle of this year when several major OEM SSD projects are scheduled to start. While we currently do not have sale forecast beyond six months from our largest customers, we anticipate that with lower NAND prices, these programs should lead to stronger SSD adoption growth in PCs in the second half of this year and also solid growth for the full year.

We expect eMMC plus UFS controller sales to decline further in Q1 as both smartphone and demand and related smartphone build activity remain weak. For the full year, we expect global smartphone shipments to continue falling and this could affect our eMMC plus UFS controller sales. Additionally, the strength of our full year eMMC plus UFS controller sales will be dependent on our NAND partner maintaining or gaining UFS market share.

Strengths of our sales will also be dependent on the ability of our Chinese module maker customers to scale their eMMC sales if our primary eMMC controller customers were to diversify further away from this market. Based on our order books we are expecting sales of both Ferri industrial SSDs and Shannon datacenter SSDs to decline in Q1. Sales forecast from our customers suggest that our Ferri SSD sales should grow modestly this year. Our Shannon SSD sales should start rebounding in the middle of this year, when our open-channel SSD projects start volume the commercial production.

Q1 gross margin is expected to be between 47% and 50%. While we will benefit from favorable mix of higher gross margin SSD controller sales, our eMMC gross margin will fall as we sell more older parts. Gross margin of our SSD solutions and legacy products such as memory card controllers should also decline. For the full year, if our product mix remains the same as 2018, our gross margin should remain unchanged year-over-year. Since our business is dynamic, it is likely that our product mix could change quarter-after-quarter.

Q1 operating margin is expected to be between 12% and 16%. We expect Q1 operating expenses to be higher sequentially due to more R&D project tape-outs. For the full year, we expect operating margin to be similar, to remain the same as 2018 if gross margin were to remain unchanged year-over-year. We expect to continue to tightly managing operating expense this year.

Stock based compensation in Q1 is expected to be in the range of $4.5 million to $4.6 million and for the full year to be roughly similar to 2018. Tax rate in Q1 is expected to be approximately 18% and for the full year to be approximately 15%.

This concludes our prepared remarks, and we will now open the call to your questions.

[Operator]

[Operator Instructions] our first question comes from the line of Mehdi Hosseini of SIG. please ask.

[Mehdi Hosseini, SIG]

A couple of follow-ups, the SSD shipment in Q4 was better than expected, I just want to understand, were these primarily shipments to the channel distributors or was it directly to the end customer? And as a follow-up to your expectation for a meaningful pickup in the second half especially with the new projects on open-channel. Can you provide us some anecdotal hollow data point that would help with confidence that hockey-stick ramp to these new products are actually still on target, and NAND prices have been going down for more than a year and at the same time we will be waiting for this project ramp. I am just wondering if you could add some more color here.

[Wallace Kou, President and CEO]

Our SSD shipments in Q4, we do have a multiple distributor, however all sells through to the end customers. But due to the inventory NAND price decline, our module customers become more cautious to take order. So for OEM I see there’s very strong and same as we forecast. Regarding the Shannon, the open-channel SSD produce, I think as we said, we are progressing very well with our two hyperscaler customer in China, and we are in the final tuning. We already started live testing in two datacenters since December.

Now we are in the final tuning and they also need to modify the phone software and we are tuning the performance as well as reduce the latency to meet all the different applications. As you all know, datacenters have multiple applications, different units have different demand, so their complexity is very large. We have very high confidence so far, we will ramp our open-channel SDD product by middle of this year.

[Mehdi Hosseini, SIG]

It seems to me that these customers are less price sensitive and actually when these ramp happens, they start in the middle of the year, they could actually be margin accretive. Am I thinking right about this, anything else?

[Riyadh Lai, CFO]

Mehdi, these are our SSD solutions and so these SSD solutions of our generally have materially lower gross margins compared to our SSD controllers. While these products are also - these open-channel SSD controllers are going to be using our controller, so we’re going to be able to recognize the controller profitability. The bulk of the bill of materials for these SSDs are NAND flash and since NAND flash accounts for a very large part of the build, those [bump] costs are around, gross margins from these sales are much lower than our traditional controller products.

[Operator]

Our next question comes from Karl Ackerman of Cowen. Please ask the question.

[Karl Ackerman, Cowen]

I want to go back to Mehdi’s question on the Shannon and Ferri guidance. Within your implied revenue guidance for the Shannon Systems and entire SSD business units, how deep are the implications that falling NAND prices will have on your ASPs? I am of the assumption that those SSDs are priced on a 90 day lag. And I guess on a certain (inaudible) pay contracts you have in place that underscores your more bullish outlook, our guess is your expectation with second half ramp driven primarily by improvements in demand elasticity. And I have a follow-up please.

[Wallace Kou, President and CEO]

For datacenter customers, it’s not like channel or module customer, even like PC-OEM. By seeing the pricing they will be discussed and settled given from last year’s December. So they are all lines of volume, all lines of delivery, everything. So as the price, there was (inaudible) to the scene they can predict for 2019, but all the price supply volume need to be settled. I’ve seen this is very common for either China as well as in the US.

[Riyadh Lai, CFO]

Let me also clarify, we have client SSDs where we are supplying controllers to both the NAND flash makers as well as to module makers. These flash makers and module makers are using our controllers to build SSDs for PC and other client devices. But these are products, these are very sensitive to changes in the price of NAND and these products are going in to applications that are currently mostly using hard disk drives, and as such they are very sensitive to the changes in price relative to the [HEDs] and so these are products where we are expecting price less demand to have a much larger impact to our overall sales.

Now these products are very different from the datacenter SSDs that Wallace had talked about. These are the SSDs that are going to Alibaba where we are using our new open channel SSD controllers, but we are also building an entire module. These applications are much less price sensitive to changing price of NAND.

[Wallace Kou, President and CEO]

The price will be starting to decline quarterly, the price will be settled, negotiated, settled even by last year December.

[Karl Ackerman, Cowen]

For my follow-up, on your module business, it would seem to transition from eMCP to eMCP based smartphones could be fairly lumpy. Based on your impressive outlook for 2019, how are feeling about reigning in fixed cost as you also contemplate UFS acceleration and customer concentration risks.

[Wallace Kou, President and CEO]

Regarding the UFS, we work closely with one of our US flash NAND maker and we are in very good progress because today the major smartphone player for android is just above a (inaudible) maker is very, very straight forward. I think that our partner and customer focus on the five leading smartphone makers and we are already in initial shipment for some program, and certainly we are in the process in qualification. So I think we have pretty good confidence and visibility about the ramping, about the program.

In addition for the China module maker, due to low end smartphones still pretty healthy growing in the Indian market, so the NAND maker, they have a lot to do low density eMMC or eMCP. So we believe our China module maker customer they can grows very rapidly for the low end, low density eMMC and eMCP product for the low end smartphone market.

[Riyadh Lai, CFO]

Let me also add to your question relating to managing our operating cost, operating expense given the dynamic nature of our business. This year visibility is weaker than what we typically have, but we will continue to tightly manage our operating expenses as necessary. We’re also working on right-sizing operations at our core products that are currently less profitable and secondly we’re also taking action on non-core products. Nevertheless, for important products like our SSD controllers and our UFS controllers, you should expect us to continue actively investing resources even when near-term business visibility is less clear. Continued technology and product development of both hardware and firmware are critical for our future success.

[Operator]

You have a question from Gokul Hariharan of JP Morgan. Please as your question.

[Gokul Hariharan, JP Morgan]

So first of all SSD adoption as well as planned SSD controller growth. Riyadh could you repeat your expectation for the full year, did I hear right if you said that in the full year you are expecting through pretty much the flat line. Secondly, could you talk a little bit about what has been the inhibitor in terms of growth, given the pretty sharp decline in NAND flash prices, and is there a very difference, the [key things] you’ve seen in terms of growth between your PC-OEM customers and some of the module makers particularly the China module makers that was my first question.

[Wallace Kou, President and CEO]

Regarding our SSD controller growth, we believe that the only way we definitely will grow roughly around about 20% or higher; however, due to the NAND price decline sharply our SSD by be impacted, so also we’ll work very hard for the gross margin. In addition, we believe because of falling NAND prices we’re try to increasing the adoption for long term, but the effect is not immediate. Sale of the PC-OEM a journey based on long term contract that takes time to renegotiate, when NAND prices fall and new (inaudible) take time. And so our OEM project seems very stable and with visibility only about six months and as previously discussed there are more risk up here for module maker to take our controller still to the sharp NAND price drop. But we still own a very large percent of the module maker for SSD, but we have confident when the price becomes stable in the demand, our visibility will be much stronger this year.

[Riyadh Lai, CFO]

Gokul, let me just add to what Wallace has talked about. While we are expecting our SSD to be flat in Q1, we are expecting very strong growth for the full year. Just our visibility is quite limited given that our largest customers our NAND flash partners have not been able to provide us with full year forecast this year. So instead of a 12 month sales procurement forecast to us this year, they are not providing us with six month procurement forecast. So this is limiting complete visibility that we have. We have theoretical visibility in terms of the dynamics of our industry and the projects; we’re expecting a lot of our PC-OEM projects to start ramping mid-year point. But the exact sales volume we still do not visibility for that. And so instead of giving you a false precision by providing a dollar sales growth range, we decided that its’ more prudent just to provide directional trends for our key products.

[Gokul Hariharan, JP Morgan]

Okay, so with design win Kingston, how does it look from a market share perspective given that they have been pretty much exclusively using one of your competitors’ controller solutions, does that mean that there is a meaningful potential increase in market share given their position in the channel market?

[Wallace Kou, President and CEO]

We have been working with this particular leading module maker in the world, I think the early 2018, its quite interesting they come to us and looking for a long term partnership. So we have multiple program working with this customer from channel as well to PC-OEM and the future enterprise product. Just step by step, although we try to be quite this moment, hopefully we’re going to see very bright result in the future.

[Gokul Hariharan, JP Morgan]

And last question I had was on eMMC and UFS, actually customer mix changes in pretty tough market environment as well towards more Chinese module makers as well as your US NAND flash customer for UFS. Do you see any margin changes happening, given that you are yielded to some margin pressures in Q1 in the eMMC business? Are there any meaningful margin pressure emerging in the eMMC business?

[Riyadh Lai, CFO]

We have a few trends Gokul, we have the trend of eMMC converting to UFS, and in the initial stage of where the UFS volumes are small, the gross profitability of UFS products are better than the segment average for eMMC plus UFS. But overtime when UFS becomes the primary type of embedded memory for mobile devices the gross profitability will converge. So this is one of the trends. The other trend that we’re seeing especially in Q1 is, in Q1 we’re going to be temporarily shipping a lot of legacy eMMC parts within the eMMC segment, and for these older legacy parts the gross margins at lower end this is affecting our segment as well as contributing to overall lower gross profitability.

[Operator]

We now have Rajvindra from Needham & Company. Please go ahead with your question.

[Rajvindra Gill, Needham & Company]

I just wanted some more clarification about the comment that the flash vendors are unable to provide a full year forecast, you know usually its 12 months and now you’re saying they can’t provide six months. And you mentioned that the NAND pricing has fallen significantly, but it doesn’t necessarily – it takes time to see those affecting the market place. I’m just trying to understand that because in the past [playing] as it is it’s a very price elastic market; you would see adoption pretty quickly. So why is it that this particular time its different from – is it different from other period where we have seen NAND pricing drop and there’s a lag that’s having – that’s taking effect.

[Wallace Kou, President and CEO]

I think there’s a couple of factors here, first of all it’s the NAND inventory, the other thing is very, very high level. And it would take time for NAND maker to sell through the inventory, and they still have the output come out in Q1 and Q2. So each of the NAND maker are designed, they are receiving the full cap on PC-OEM also it only has six months, they don’t have a full year visibility. So they will like to be more cultured, give a six months forecast instead of one full year forecast, so that’s the current situation. But the deserving production is very solid and naturally we have a more deserving pipeline in our hand and you’re seeing, because 96 layer TLC and (inaudible) layer QLC design for both SATA and PCIe, we have 70% more than last year.

Now for China module maker, due to the NAND price decline sharply, so they try to be more cultured. They do not want to buy a large volume of NAND. So they step by step mostly find the NAND and ship the product based on the customer demand. So our visibility for module maker is even worse. That’s why it’s very hard for us to give a very concrete guidance. We understand clients demand is very strong and continuing from Q2 all the way to the end of the year, but we cannot give a concrete number regarding how much sell revenue growth for clients would be at this moment.

[Rajvindra Gill, Needham & Company]

So that’s very helpful a lot. Is this based on your experience, is this a unique situation that we’re in right now where even the NAND makers are not getting the forecast, even full year forecast from their customers or is this kind of part for course, when we are in this situation for (inaudible) NAND?

[Wallace Kou, President and CEO]

I would say this is a very unique situation right now. Many, many people in the food chain under estimate the NAND over supply situation.

[Rajvindra Gill, Needham & Company]

The over-supply situation are you seeing that it’s been driven also because of weakening demand, obviously the smartphones’ in another market. Is this just purely supply – over-supply due to the transition to 3D NAND, any kind of comments on the demand part of the equation?

[Wallace Kou, President and CEO]

There are many factors, many data points here that’s related to global economic slowdown, related to US China trade war, related to many, many uncertainty, also smartphones slowing down and the [NAND] cycle extended, and PC market it just stays flat or just decline gradually. So, I think the situation because of the yield of the 3D NAND is much better than the past. So the NAND output, the big growth compared with current economic situation it doesn’t match and the gap becomes very big. So NAND makers all are trying to find the effective way to move the inventory, we definitely (inaudible) some of the movement to move the inventory, because clients are probably the best vehicle to move the NAND. But however, the current situation is very unique, it’s very special and they would never have them before in the past.

[Rajvindra Gill, Needham & Company]

And last question in terms of your view of NAND spit supply and NAND ASPs falling, any sense there in terms of what is the supply from your vantage point, how much greater is that (inaudible) say previous thinking and any view on NAND pricing, how much is it going to fall this year basing your expectations?

[Wallace Kou, President and CEO]

I think it’s very hard for me to comment for that, because that’s a NAND nature related question. I think you can see all their financial report and if at all they really have very, very inventory, ex-inventory, they need to figure how to move. But however Q1 also is a weak season for the full year and we definitely can see gradual rebounce in the second quarter and all the way to the higher season in Q3-Q4. And we’re going to see more indication to come through the NAND; we’re going to see data centers about to reproaching the NAND and (inaudible) Q3. Do I think that eventually the (inaudible) will be resolved, but the Q1 is the worst season for the full year?

[Operator]

[Operator Instructions] our next question is from Mike Crawford B. Riley FBR. Please go ahead with your question.

[Mike Crawford, B. Riley FBR]

Do you think in 2019 you’re going to end up having a new number one customer displacing your card, top customer?

[Riyadh Lai, CFO]

Mike come again, your question is, are we going to have another large customer replace our card launch customer?

[Mike Crawford, B. Riley FBR]

Yeah, do you think we’ll have a change and who would be your largest customer somewhat in the prior number of years (inaudible).

[Riyadh Lai, CFO]

I think we definitely have a growing customer from NAND makers. We also have a growing strong customer from module makers.

[Mike Crawford, B. Riley FBR]

And just switching gears a little bit to regarding open channel. So, I know visibility (inaudible) just directionally how do you see potential capital raised for open channel controllers and SSD comprising a percentage of your total business. Say is it more a design win thing in 2019 and then you see a real ramp up in 2020 or what – directionally where do you see that heading?

[Wallace Kou, President and CEO]

I think as we said for China enterprise SSD business we have to sell a NAND enterprise controller as they enterprise these solutions. So that is really ASD solution selling to the two China major hybrid scaler open channel. We believe this year the percentage from the overall demand probably this year is very small, but gradually they will increase and those are very important really for their data center storage. And for the US development, I think we are still working and cooking with each of hyper scaler, but maybe they don’t call it open channel, but they have the similar concept and requirement, they want to have a tailored enterprise controller, with tailored [firmware] together to meet a specific demand application. And we are in parallel process for both enterprise open channel solution in China and enterprise controller engagement for US market.

[Mike Crawford, B. Riley FBR]

And just the last question in the US market, both markets the initial opportunity is to get in to data center applications. But how far off are we talking when you consider open channel SSDs operating to handle data being generated in increasingly autonomous automobile and other applications?

[Wallace Kou, President and CEO]

We really don’t know, but we know that’s really working well for certain data center application and the specific business structure, because we do see the test result and that’s why we get a good collaboration and work together with the two hyperscaler customer in China.

[Operator]

Our next question is from the line of Anthony Stoss of Craig-Hallum. Just go ahead.

[Anthony Stoss, Craig-Hallum]

Riyadh can you indicate if you have any open channel revenue in your essentially flat 2019 revenue guide, and if you do, maybe a little bit of range. Second question, on the again on open channel, can you also provide more color on the tuning that still needs to be done if it’s done on (inaudible) side, and it still needs to be done on Alibaba’s side? And then lastly I would also love to hear a little bit more color on, you’re talking about design activity on SSD has been strong, maybe kind of share with us what you think in terms of number of designs that have gone live in the second half of ’19 versus second half of ’18?

[Riyadh Lai, CFO]

I’ll start with first of your three question and Wallace will probably take the remaining two. We’ve provided a very good volume to our open channel SSD to our two Chinese hyperscalers, Alibaba and all the BAT customers. These initial test board were provided to them in Q4 of last year. So they’re already testing right now, as they have our SSDs in live situations and are testing, and we’re tuning and optimizing our software to get the performance to where it needs to be, with the expectation that by mid of this year we’re going to be able to start volume production for the remainder of the year and the second half of this year. So we are expecting meaningful revenue contribution from these open channel SSDs and this is how we’re intending to drive our growth and maintain similar revenue for SSD revenue for full year compared to last year.

[Wallace Kou, President and CEO]

Regarding the tuning process, I think that the hyperscalers and us both need to put effort in doing the tuning process. As you know that each of the data center they probably - provided 20 different business units and [indications] are quite different. And so the test condition and requirement are also different, otherwise they complicate the whole process. That’s why maybe you wonder why this tuning is taking so long, because when it started a couple of hundred board testing on a couple of hundred server, it just takes time to see the result, different work flow and all the different conditions. So it’s’ just is in the final stage of the tuning process that’s why we have pretty good confidence and the production will happen in mid of the year and as a schedule from last year, and we shall see the meaningful revenue involving China SSD solution through the two China hyperscaler customer.

[Anthony Stoss, Craig-Hallum]

And then getting back to the desired activities, kind of what you expect in terms of number of units launched in the second half ’19 versus second half of ’18, I guess on driving at as you take second half of ’19 and first half of 2020, kind of more accurate picture in your business. So any color would be helpful?

[Riyadh Lai, CFO]

As we talked about earlier in the call, we have a lot of programs with kind of the depot rounds. We have 70% more programs exhibiting last year compared to what we had a year ago. So we’re very well positioned. We are going in to this year with our NAND flash partners to go in to lot of our OEM programs, PC-OEM programs. So from a programs perspective the key factor that we can manage were very well set up. Now what we’re waiting for is better procurement forecast from our customers so that we can have better revenue visibility, but as things stand, we feel very good about where we are today.

[Operator]

And ladies and gentlemen, this does conclude our Q&A session. And I’d like hand the conference back to Mr. Wallace Kou, President and CEO.

[Wallace Kou, President and CEO]

I would like to thank all of you for joining us today and your continued interest in Silicon Motion. We’ll be attending several investor conferences in Asia and the US in the first quarter. Details of this event will be available on our website. Thank you and good bye for now.

[Operator]

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