Jason Tsai - Director of IR Wallace Kou - President and CEO Riyadh Lai - CFO.

Daniel Amir - Ladenburg Jaeson Schmidt - Lake Street Capital Suji De Silva - Topeka Capital Markets Monika Garg - Pacific Crest Mike Crawford - B. Riley & Company Rajvindra Gill - Needham & Company Mike Burton - Brean Capital Tom Sepenzis - Northland Capital Markets Charlie Chan - Morgan Stanley Anthony Stoss - Craig-Hallum.

Good day ladies and gentlemen and welcome to the First Quarter Silicon Motion Technology Corporation Q1 2015 Earnings Conference Call. My name is Lee and I'll be your conference moderator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session.

Before we begin today's conference, I have been asked to read the following forward-looking statements. This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and the Section 21E of the Securities Exchange Act of 1934 as amended.

Such forward-looking statements include, without limitation, statements regarding trends in the semiconductor industry and our future results of operations, financial condition and business prospects.

Although such statements are based on our own information and information from other sources we believe to be reliable, you should not place undue reliance on them.

These statements involve risks and uncertainties and actual market trends and our results may differ materially from those expressed or implied in these forward-looking statements for variety of reasons.

Potential risks and uncertainties include but are not limited to continued competitive pressure in the semiconductor industry and the effect of such pressure on prices, unpredictable changes in technology and consumer demand for multimedia consumer electronics, the state of any change in our relationship with our major customers and changes in political, economic, legal and social conditions in Taiwan.

For additional discussion of these risks and uncertainties and other factors, please see the documents we file from time-to-time with the Securities and Exchange Commission. We assume no 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, everyone, and good morning. Welcome to Silicon Motion's first 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 first 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 the market yesterday.

This webcast will be available for replay on our website, www.siliconmotion.com, for a limited time. To enhance investors understanding of our ongoing economic performance, we will discuss non-GAAP information during this call. We use non-GAAP financial measures internally to evaluate and manage our operations.

We have therefore chosen to provide this information to enable you to perform comparisons of our operating results in a manner similar to how we analyze our own operating results. The reconciliation of the GAAP to non-GAAP financial data can be found in our earnings release issued yesterday. We ask that you review it in conjunction with this call.

With that, I will turn the call over to Wallace..

Thank you, Jason. Hello everyone and thank you for joining our earning call. Silicon Motion delivered solid result for the first quarter 2015, revenue came in slightly above the high end of our guidance range. Likewise gross margin also came in at upper end of guidance.

Our client SSD controller revenue doubled sequentially, better than expected and our eMCC controller revenue was similarly stable sequentially. Riyadh will discuss our financial in greater detail later in the call. Last week, we announced acquisition with Shannon Systems, China's leading enterprise SSD company.

Before I talk about our acquisition, let me update everyone of our client SSD and eMCC controller business. First, our client SSD. We are very excited how this controller sale are scaling and this quarter as mentioned our SSD controller sales doubled sequentially, and are already 10% of our total revenue.

Sales to our NAND flash and the storage OEM partner and our module maker customers are all progressing better than expected. In March, our SSD controller sales have already increased to over 1 million units a month. We believe it is very likely that we have already become the second largest merchant supplier of controller for SSD today.

This quarter we increased the number of PC OEM that are using SSD with our controller to five, up from three that we talked about last quarter, four of the top five global PC OEM are now using SSD with all controllers.

SSD are increasingly affordable and will become even more affordable as NAND flash cost SSD to fall further, with use of TLC NAND, 3D NAND and TLC 3D NAND. The absolute dollar cost of an SSD is already only a bit higher than HDD. Last year a quarter of our notebook PC including Macs were already shipping with SSD.

Next year a few of our flash partners are targeting half of our notebook PC to be shipping with SSDs. To further improve our affordability of client SSD, in August last year we released our controller solution for managing TLC NAND, the world's first firmware plus high resolution available.

TLC NAND as you may know is much harder to manage compared to MLC NAND. But importantly TLC is around 20% to 25% cheaper per bit than MLC. Beginning in the first quarter we started shipping our TLC SSD controller in commercial volume to module maker with a channel business.

Our NAND flash partners will start using our TLC SSD controller in the second half of this year for supplying SSD to OEMs. In the first half of next year we will start initial sales of our NAND flash partner of our controller for managing their upcoming CD NAND.

We believe we are on track to deliver $45 million to $60 million of client SSD controller sales this year and are excited about next year. Development of our controller for the flash – for our flash partners enterprise grade SATA 3 SSD are progressing smoothly and that we expect to start shipping in second half of this year.

We also launched our PCIe client SSD controller towards the end of this year. Now let me turn to our eMMC. This quarter our eMMC business grew well over 50% year-over-year and sale was seasonally stable quarter-over-quarter as expected.

We are value-add eMMC controller partner to SK Hynix and other NAND flash vendors and do now believe our solid leadership with Hynix and others will change either this year or the next. We believe we are on track to deliver eMMC sales growth that is at least as fast as 15% to 20% market growth expected for this year.

We are currently sampling our eMMC 5.1 at our NAND flash partners and in the first half 2016 we will be introducing our controller supporting TLC and 3D NAND for both UFS2 and single chip PCIe SSD embedded storage solutions. So majority of smartphone today are only just progressing from using eMMC 4.5 to eMMC 5.0.

This February JEDEC announced eMMC 5.1 as the newest high performance and cost effective standard for eMMC and eMCPs. Our eMMC 5.1 IOPS strength is two to three times faster than our eMMC 5.0. Our eMMC 5.1 is currently under verification at our flash partners and will start volume production in second half of 2015.

This year and next we believe eMMC 5.1 will account for significantly larger part of the embedded market than UFS2. UFS2 was announced by JEDEC back in 2013 and over the last 2 years was actually promoted by leading application processor vendors. Currently however, only Samsung, Galaxy S6 flagship is using UFS2.

We believe UFS2 rollout this year will be very limited as it is expensive, require significant software engineering and resources to implement and JEDEC has now defined a cost effective integrated solution with mobile DRAM for USF2.

In the first half of 2016, when premier smartphone will probably adopt next generation embedded memory, OEM will need to decide whether to use USF2 or even faster single chip PCIe SSD using the popular PCI standard. Also our USF2 and single chip PCIe SSD solution will all be ready in the first half 2016.

Smarthphone OEM are currently divided on which embedded memory solution will be more popular and we are prepared for either option. Furthermore, to address OEM affordability issue and to target higher density equipment, our upcoming USF2 controller have being designed specifically to managing both cheaper TLC NAND flash and higher density 3D NAND.

We will be ready to support Hynix and our other NAND flash partners on their USF2 and single chip PCIe SSD solution when the market is ready to scale. Last Friday, we announced the acquisition of Shannon Systems, China's leading enterprise grade PCIe SSD and storage array vendor. We are excited about this acquisition.

Let me explain what this acquisition means for us. Over the last few years, we have been actually exploring ways to enter the storage device side of market by selectively crossing over from being a pure controller vendor.

There are certain niche market that are underserved by the flash makers and module makers, by leveraging our controller expertise and our engineering supporting structure we can support OEM unique application with customized SSD solution. And by doing so, we are expanding to total addressable market for us and our flash partners.

Let me be clear, our strategy is not to compete against our flash partners. Our strategy is in fact to supplement our NAND flash partners activities. The flash market, the flash maker typically focus on larger markets, such as smartphone and PC and large OEM customers to effectively sell through their large and expanding capacity of NAND flash.

They tend to take more wholesale approach with their business. We pick the niche opportunity not covered by their wholesale approach. Niche opportunity that we are talking includes sub market that are sub scaled to our flash partners, our market with difficult barrier to entry.

For example, our FerriSSD targets small niche application that require industrial quality, customization and dedicated support, application underserved by the flash vendor and module makers.

Our FerriSSD are widely used in point-of-sale system used major retailer and convenience store chain, office automation equipment and automotive infotainment systems. Our Shannon acquisition on the other hand is focused on China and increasingly for attractive market that require significant local touch and pay their support.

China's stay home and state consol enterprise are increasing seeking to only buy locally developed technology as part of the government’s cyber subservience team, policy and the governments increasingly restricted about procuring US and other non-Chinese IT product.

Even China's private sector is increasingly towing the party line and giving preference to local vendor, same channel R&D, manufacturing and supporting team are entirely in China, Shannon is less handicapped compared to foreign vendor. We intend to maintain the local company profile advantage after we complete our acquisition.

Shannon also has the support of flash maker that are using Shannon to indirectly participate in China's fast growing enterprise SSD market. Shannon is a innovative Chinese company co-founded by the former chief architect of Marvell SSD controllers.

The co-founder together have over 150 patterns to their names and as Shannon they have developed a unique architecture for implementing enterprise grade PCIe SSD, which enable Shannon to launch in 2014 the industries first 3.4 terabyte PCIe SSD with ultra low assets latency and a very low power envelope of less than 25 watt.

Because of Shannon's unique architecture as PCIe SSD are heavy, scalable and the example is already shipping 30 terabyte PCIe SSD today.

More recently and also based on the unique architecture Shannon introduced PCI array technology, an innovative flash array solution that offer enterprise customers uncompromised performance and high of their ability.

Shannon has already successfully expanded its customer base to more than 80 companies in China and become China leading Internet Company in e-commerce, online travel and mobile security as key customers. Shannon also being shipping SSD to government agencies, financial institution, Telco’s and leading enterprise in tradition industries.

In 2015 Shannon expect to rapidly scale sales to approximately $14 million to $18 million and should be mildly profitable. We expect to complete this acquisition by July.

As I mentioned at the start of the call, we are off to great start this year, led by our client SSD and eMMC controllers we are assume as Shannon's fast growing enterprise SSD solution to our business. I am pleased that our team has been executing very well and delivering.

I will now turn the call over to Riya to discuss our financial performance and outlook..

Thank you, Wallace. First, I will outline our financial results for the first quarter and discuss the financial details from the Shannon acquisition. I will then provide our second quarter and full year 2015 guidance. In the first quarter revenue grew slightly sequentially to $80.6 million and grew 53% on a year-over-year basis.

Our storage product sales decreased 3% sequentially and accounted for 79% of total revenue. Within our overall storage products, our embedded storage, our eMMC client SSD and industrial SSD controllers, plus our Ferri products grew 9% sequentially, primarily due to the strength that we are seeing in client SSDs which Wallace had talked about earlier.

Sales of our renewable storage products, our card and USB flash drive controllers declined 21% sequentially due to seasonality, flash availability and market maturity. Renewable storage declined 4% year-over-year. Our specialty RF IC sales increased 14% sequentially led by new mobile TV wins.

Our corporate gross margin decreased slightly to 52% in the first quarter from 52.5% in the prior quarter due to more aggressive ales of legacy, non-embedded storage products. In the first quarter our operating expenses increased to $22.5 million, as compared to $21.4 million in the fourth quarter, due to higher headcount and compensation expenses.

We ended the first quarter with 838 employees, 14 more than at the end of the previous quarter. Due to lower gross margins and higher operating expenses, operating margin decreased to 24.1% in the first quarter from 26% in the fourth quarter. We achieved quarterly net income of $16.6 million and earnings per ADS of $0.48.

This quarter we have updated our non-GAAP definition to improve the quality of our data and improve transparency. We have removed the impact of foreign exchange gain or loss from our tax line, which should make our taxes more predictable and consistent with our mobile tax rate.

We have also removed tax benefits in our tax line related stock based compensation and other expenses, excluded from our non-GAAP measures. Stock based compensation in the first quarter was $1.5 million lower than $4 million in the fourth quarter. I will now move to our balance sheet and cash flow.

Inventory days decreased to 106 days in the first quarter from 118 days in the fourth quarter. DSO increased slightly to 40 days in the first quarter, as compared to the 37 days in the fourth quarter. Payable days decreased to 42 days in the first quarter from 44 days in the fourth quarter.

Our cash, cash equivalents and short-term investments increased to $200.5 million in the first quarter as compared to $194.9 million in the fourth quarter. Primary sources of cash in the first quarter came from $16.6 million in net earnings.

Primary uses of cash in the first quarter that were not related to working capital, included $1.8 million of routine purchases of software and design tools, $5 million of quarterly dividend payments. Now let me discuss some of the financial metrics related to our Shannon acquisition and the financial impact to our P&L.

Last Friday, we announced reaching agreement to acquire Shannon Systems for total purchase price of $57.5 million. This $57.5 million includes $40.4 million in cash, $13.1 million in Silicon Motion ADS, which are issued only the management team and employees and subject to a three to five year lock up with annual release.

And $4 million of cash earn ups payable if Shannon were to achieve certain 2015 revenue targets. For the full year 2015 we believe Shannon should achieve $14 million to $18 million in sales and we expect to complete our acquisition by July.

The amount of revenue that we will consolidate will depend on the timing of when our acquisition closes and timing of revenue bookings. Shannon will not affect our gross margin profile and will be slightly EPS accretive this year and more accretive next year. I will now turn to our guidance.

For the second quarter we are expecting our revenue to decrease 5% to 10% sequentially and the following. Our eMMC controller sales to grow sequentially and as seasonally expected, our SSD controller sales to scale and grow strongly sequentially and our removable storage controllers to rebound.

Gross margin in the second quarter is expected to be 50% to 52%. Operating expenses in the second quarter is expected to be $23 million to $24 million. Stock based compensation in the second quarter is expected to be less than $0.5. For the full year 2015, we are expecting revenue to increase 17% to 25%, as compared to 2014.

This forecast does not include the benefit of our Shannon acquisition. As previously provided, full year gross margin range of 49.5% to 51.5% and full year operating expenses ranging from $91 million to $97 million both remain unchanged. Our stock based compensation range of $11 million to $13 million and 18% mobile tax rate also remain unchanged.

We will now open the call for your questions..

Thank you. [Operator Instructions] Your first question comes from the line of Daniel Amir from Ladenburg. Please go ahead..

Great. Thanks a lot, and congratulations on a great SSD quarter. First question is here with regards to Hynix. You know there is discussion whether Hynix will develop an internal control or not. You know, you seem to be pretty confident that you can maintain that business going forward.

What gives you that confidence, and you know what are the risk associated weather, one of your larger customers decide to diversify, you know it's controller supply in the I've a follow-up? Thanks..

Seeing this Daniel, we have being dedicate controller technology partner of SK Hynix for their eMMC business for several years now. So our joint development effort we have been – we have seen Hynix here scale to see significantly over the past three years to over 25% of the overall market.

We help them to become very successful and have done well ourselves. They obviously have their own controller technology and have always a few wholly internally development solution in parallel to ours. More recently, they owned UFS2 which is currently in testing.

In the past and now when they come to actual commercial production they have always used our controller because of better performance and cost and track record and supporting structure. I mean, three more specified above UFS2.

JEDEC announced a standard way back in 2013, but adoption by smartphone OEM has been slow, even right now because of the high cost and technologically issue such a significant investments in software development to incorporate UFS2 into their handset. Something not many OEM have the resources or capability to support.

Total smartphone growth is now been driven by a low cost and mainstream devices and industry – the eMMC 4.5 were of course is been replaced by the much faster eMMC 5.0.

And later this year they will rollout even faster eMMC 5.1, very fast, but very expensive UFS2, talking niche premium smartphone, like the Galaxy S6 and that there are no UFS2 eMMCP and for single chip posses with having mobile DRAM and really that’s not play well for Hynix strengths.

For the premium phone OEM are still divided between supporting UFS2 and even faster single chip PCIe SSD. We believe both our UFS2 and single chip PCIe SSD controller will be ready in the first half 2016. And eMMS our controller also support TLC and TLC 3D NAND which Hynix is aggressively ramping.

Our Hynix leadership continue to be very solid and we don’t believe will be any change this year or to next, or future..

Great. Thanks for the detail volumes. The other question is around Shannon, can you give us some idea what Shannon did last year in terms of revenues and what type of growth rates we should think of this business given assuming 14, to 18 this year? Thanks..

Daniel, for the calendar year Shannon is targeting $14 million to $18 million is sales, representing a 4x increase from last year. Since we'd be completing this acquisition by the end of July, we anticipate consolidating roughly half of the full year target revenue in the full year 14 to 18, roughly half of that.

Based on projections, we believe this acquisition will be mildly accretive to us in 2015 and significantly more accretive in 2016.

More broadly, the overall Chinese internet market is still growing quite robustly and at this point in time we hesitate to provide you with a more long-term revenue growth number for Shannon, but obviously the market is growing rapidly and we are well positioned..

Okay. Great. I'll get back into the queue. Thanks..

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

Hey guys, thanks. Taking my questions. Just a follow-up on.

Shannon, wondering if you could provide any details surrounding their ASP profile?.

So, regarding Shannon ASP profile, is regarding the density they provide. They are shipping from 2 terabyte to 3.2 terabyte and up to 6.4 terabyte. They believe they also have provide solution up to 30 terabyte. And really is price of big range about the product based on customer need..

Okay..

We're talking about many thousands of dollars per unit..

Okay.

And then Wallace could you describe the current supply and demand environment you're seeing in the overall NAND flash market?.

I think for the second quarter, we could see flash ability to be a little tight due to the shipping, the manufacturing process geometry 1z [ph] which is equivalent to 16 or 15 nanometer and related lower initial yield. Our flash supply in the second half of the year will also depend on the availability and adoption of CD NAND.

So I think that it’s – we have to see the result and to see what is balance as supply demand..

Okay. Great, thanks. And then the last one from me.

Do you guys still expect to do about $12 million in the transceiver businesses this year?.

Absolutely, we're in track with $12 million LTR product business..

All right. Thanks a lot guys..

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

Hi guys, thanks for taking the question.

In terms of the Shannon acquisitions, can you talk about the SSD controller team that acquiring in the benefit for your controller roadmap and how those teams will work together?.

Okay. So very good question its, I think or you can see Shannon has very deep understanding of enterprise SSD system and Chinese storage market. As SMI we have best mill house [ph] to NAND technology and we have very close to that AC solution for SSD and we have complete firmware technology among the SSD area.

So combined together, I think we create a value to accelerate Shannon the enterprise SSD business and array star solution to grow in the China market. So that a synergy. It also help us to enter into China market by providing the solution and cost from client SSD controller to enterprise SSD solution and the start array solution..

Okay. Great. And then you just talked in the last question about the NAND supply demand, can you talk about the SSD supply demand situation.

I know the – it will be more cautious three months ago, it sounds like they are building again for the channel, can you just talk about how that’s perhaps slowing there?.

I think in the first quarter we experienced very exciting SSD demand. I think what we said in March our unit shipments over 1 million units. So I think the second quarter we also see the – continue to see the strong demand from both our OEM customers, as well as the module maker for the channel business.

So it seems that this year still to the price structure hit a right point, so the members SSD [ph] is growing probably more 80% or double than last year..

Okay. Great. Thank you..

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

Hi, thanks for taking my question, couple of question on the Shannon side. Could you may be talk about the supply agreement you have signed for the NAND vendors.

So you don't run into any supply problems for this product?.

I think Shannon already have supply agreement with the current NAND supplier. And I think after the acquisition we might or add one more NAND supply vendor to balance and we're price comparative and because the – when the business scale up, we believe that two supplier maybe will add more value to compete in the market..

Got it. I mean you've been traditionally in the controller business, that has helped you now like to take kind of a NAND pricing risk on your end.

But given this the acquisition, now you could be carrying some NAND pricing risk, how do you kind of look to elevate that risk?.

I think here as we, first of all from to our perspective Shannon to date they have a pretty good NAND supplier agreement with the current NAND partners. And we also have a very strong relationship with all the NAND makers.

I believe for TLC 3D NAND will become very important into 2016 and we will have a – we are in the process to negotiate, discuss, better contract and more stable contract with NAND supplier who is not playing in enterprise SSD in China market, than we added value to the NAND maker, as well as to our business..

Monika, let me also add a bit more about the – your question about NAND flash price risk by taking on NAND flash components is as inventory. We don’t take too much of these components.

We take pretty much what we need to ship our products for upcoming quarter and we regularly negotiate and purchase NAND flash component on a fairly regular basis, in order to not hold so much inventory.

We appreciate the risk, but it’s also important to manage down this risk by not holding to – on to these components more than – for more than we need for our operations..

Thanks. Just a last one from me, you talked about next year you expect to ramp 3D NAND based solutions for your OEM partner.

Could you maybe talk about in the beginning, when the solutions you expect is it more on the client SSD sides or more on the other end on the retail end of the market?.

We believe treating then will be a variable to both OEM and the channel module customer in first half of 2016 and our SSD controller, both SATA and PCIe will be ready by first half of 2016 to support the variety of 3D, especially TLC 3D NAND from multiple NAND supplier..

Got it. Thank you so much..

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

Thank you.

Riyadh, you mentioned that you didn’t expect Shannon to change your gross margin profile, but then you said in 2015, how is that business scales in 2016, when that be fair to think that enterprise SSD gross margins get down, maybe closer to the 40% range than the corporate average?.

The gross margin of the business is similar to our gross margin and so therefore we are not expecting to impact our business and so in my word I've been talking about..

So let me add a little bit, for certain more commoditized enterprise SSD the margin may go – look a lower, both for fair niche area, the margin will be higher, for corporate niche we believe that gross margin was similar to our corporate gross margin..

Okay.

And then just to reiterate, its sounds like your intention with Shannon is to stay within this niche of enterprise SSDs for internet companies in China, thereby avoiding certain channel conflicts with other partners and customers and is that right now your – kind of your long-term vision for this business or do you think this is a business that might scale on to some other niches as well?.

I think Shannon were focused in China, their focus in China coupled with China protection policy in favorable local IT vendor, I think show us strong competition with our OEM partners and was a important consideration for our acquisition. So we do not want to compete with our NAND flash partners.

But China as you know, the large, the world's large internet market is also one of the largest and fast growing market for enterprise SSD in the world and we see that ample opportunity for continue growth in this market. So this moment we have no intention to grow to other region. I think we have plenty of opportunity to focus growth in China alone..

And as this business gets bigger, are you worried that as a fabulous summary company that you're going to run into the same problems that have plagued virtually every other controller supplier in the space that’s come before you that Fusion-io and OCZ and stuck in [ph] that landscape is littered with companies that ran in to problems because they didn’t own their own flash?.

I think we all learned from all the previous acquisition and how they see, how they felt, we think we have a better strategy to have a better strategy negotiated with NAND partner and some NAND partner are in discussion with us to negotiate whether it was partitioned by a sell region, by product to grow those together.

But we state we have not intention to compete with the NAND partner, naturally enabling the NAND sell for their own partner, also they can sell solution in some region we have no interest to sell to..

Mike, let me also add, the acquisition – this acquisition of Shannon, import criteria for – and reason why we went into this acquisition is because of China and its protectionistic policies.

This a protective market where other flash vendors which are all non-Chinese will have increasingly a difficult time providing their enterprise grade SSD solution into that market. China wants to buy its own SSDs, wants to by SSDs that are developed internally within China, main China.

And so by acquiring companies that is developing and doing all this internally in China where we're spot of being competitor to NAND flash partner, in fact we are acting as a partner to help them sell their NAND into China through Shannon..

That’s very helpful. Thank you. And then last question comes back to UFS, I think Wallace on the last call we talked about whether it was UFS 2.0 or UFS 2.1 that you're working on, is maybe you could clarify that.

And then also I do know that you have been working on UFS, so you just think that this is going to be – maybe there will be or maybe a small window where UFS solutions are competitive in the market quickly overcome as we see it now, by PCIe controlled embedded member solutions is that accurate?.

Let me answer your first question first, we are in the developing a UFS 2.0. We focus on TLC NAND and TLC 3D NAND support. We believe next year for the TLC we'll become more important because embedded we move into the higher density.

Now regarding UFS, and single chip PCIe solution, I think today in the market the high end JEDEC have started define UFS from 2013. However it’s a promotion effort come from the chip set, our AP became processing vendor. But they weren’t very successful.

The reason is they take a lot of software effort and to enable the command queue and multi strap operation. As you know, under [indiscernible] there's now standard software enable go to device level, so you need to add many middle layer from where our driver to enable the performance to reach the highest performance.

So company like Samsung mobile they have a many, many R&D, software R&D effort to do the development. So that’s a challenging part for UFS to be adopt wisely by many smartphone marker, especially in China. Now there is other income pan and lead, as you know for Intel and promote the PCIe base solution as a BGA single chip BGA package with a NAND.

And I think because in PCIe today they have a complete infrastructure, other software being developed in the past 10 years, so it’s a well suitable for the mobile devices, not just a PC.

So I think we – but we don’t know which content is going to win, so we develop both solution, both solution will be ready in the first half of 2016 and we will watch out what requires for a need that UFS2 or single chip PCIe SSD, either way we'll have solution.

But in our belief and our position eMMC and eMCP still will occupy majority market share in the next two years..

Great. Thank you very much..

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

Yes, thanks for taking my question and congratulations as well on fantastic results. Two questions, one on the eMMC and the China handset market. You talked about growing at least in line with the market 15% to 20%.

One to talk about what are some of the differences this year versus last year, what you're seeing in the China handset market in terms of market share dynamics.

Samsung with the S6 appeared to be a bit of a better product line, than last year so are – could you be seeing more increased competition in the China handset market from Samsung and that could affect your business recently SK Hynix.

So I want to talk a little bit about the China handset market and what's going on there? And maybe just a start of that question first..

So that mean this year's market trend, as well as different than last year.

We believe there will be a lot of consolidation and some company going to continue growth, some probably going to decline, while there are many report, some is certain chip set supplier sales have slow down in China domestic market smartphone and some data suggest local market increasing saturated.

But also some report say there is strong demand because of like company – region like India and this have a growing rapidly. But overall we think the smartphone market should grow at least 15% to 20% this year. I think this growth lead by low cost smartphone, primary in China.

Now, we provide eMMC controller for both premier smartphone and low cost smartphone and supply to all the non-Apple industry leader, including Chinese OEM focus on emerging market growth. In Q1 our eMMC sales was as expected, seasonally weak, but nevertheless, grow 55% year-over-year.

This growth rate will moderate as the year progress due to all of the loss number. For the full year our eMMC should grow at least fast from market growth. Regarding Hynix, UFS 2, I think you all know Hynix established R&D I think three years ago and focused on UFS 2 development.

I think every NAND company need to have their own R&D development to provide a solution to meet their long-term growth and there is nothing wrong or nothing different than how we work with other NAND marker, sometime we have very clear partition, they work on a high end, and we work with the mainstream, because they focus on technology, we focus on the unit and volume, right.

But as Hynix in the past we don’t any R&D. Now they have R&D that being developed for three years they want to deliver UFS solution I think that’s great, but they are target for the premier line and that is a very niche market.

I think we will also provide alterative UFS solution for both Hynix and other NAND vendor, particularly which support TLC and the TLC 3D NAND, we believe they will become mainstream.

But to date, probably only Samsung have TLC capability for embedded solution and we are the strongest supplier to enable TLC into the embedded business and we think we'll have a much better opportunity into our fitting and beyond to enable embedded business, not just for Hynix for all the NAND makers..

Great. And last question on the Shannon acquisition, you talked about one of the ways that you can avoid channel conflict from the flash vendor is that you are buying a local kind of Chinese supplier and the Chinese only want to deal with local Chinese vendors.

But I mean, what happens is, a larger flash vendor buys a local Chinese company as well and to think in that perspective, so I am just wondering are there other or maybe you can describe the Chinese SSD landscape in terms of the existing suppliers that are currently there and if the Chinese internet market is growing at a fast rate that’s a big opportunity, why wouldn’t other vendors, particularly some of the US vendors get into this market vis-à-vis in acquisition in the China market?.

Raj, in terms of the high end enterprise grade SSD market, PCIe SSD market, it’s essentially if you're looking for world class solutions, it would be Shannon and two of the global NAND flash vendors.

So that’s essentially - it’s a fairly small and tight market, you have a smaller players that are targeting the low end, but if you're going after the high end as what Shannon has been doing, it is a very small group of suppliers..

And in addition, the acquisition of preparation [ph] not so because the protection from China, and also Shannon have a very unique technology [indiscernible] for PCIe SSD. That’s why it’s very scalable and grow very fast in the next few years.

Together with our new haul [ph] in the NAND and then AC controller and we can provide main device solution to serve even China customers..

Got it. I'll just squeeze one more question, I'll get back in the queue. Are the flash vendor – earlier this month talked about problems with PCIe and basically indicating that there has been a shift away from PCIe to SaaS and SATA SSDs, given the cost performance dynamics that are occurring in that market.

So therefore the PCIe market is starting to shrink a little bit or is not as big as what people usually anticipated? Just wondering, what your thoughts on that market as you kind of move into enterprise and if you could talk a little bit about your PCIe enterprise strategies relative to some of the bigger competition in the US and how should we think about that? Thank so much..

I think in different region, maybe their standard different, the demand also different. And we cannot comment other customers or partners during, their intention [ph] or their market focus, but in China PCIe is a way to go for enterprise SSD..

Very good. Thank you..

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

Hey, guys. And congratulations on the strong reporting guidance, especially in the – considering some of the end market trends. Most of my questions have been asked, but on the strong guidance you gave, clearly testament to your design wins and ramps. But are you seeing any impact in – from currency fluctuations on end demand.

I know you already spoke about mobile devices, but on any of your other segments and how are you planning to deal with that going forward?.

In terms of foreign exchange there is negligible impact to our business where they regard our OEM customers or our module makers and how that also flows to the end consumers. At least there is something which relates – as it relates to our products..

Okay. And then just on Hynix side. We've heard Hynix make noise about its own internally developed silicon and firmware in the past.

Given your comments earlier to Dan's question, and is it fair to say you don't really view their comments last week is an indication that there are any further along to implementing on their solutions than they are in the past.

And then further from your conversations with your customers, how many OEMs you believe will implement UFS in 2015 and then 2016? Thanks again..

So I think let me try repeat, we cannot comment what Hynix try to do. By the way I want to redefine Hynix own solution, either we provide turnkey, both strong firmware and hardware for our controller or we provide the reference design they were modify from some where and use our hardware, they will trend – it’s their own solution.

We support customer whatever they like to differentiate their solution and we are related with Hynix very close, very strong and we will continue grow in the next few years. And regarding the OEM for this year we believe only one smartphone marker use UFS 2 and majority supply from Samsung their own solution..

Great. Thanks again. And congrats..

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

Hey guys, thanks for taking my question.

I was just wondering what with the Shannon acquisition, obviously we're moving into the enterprise, put the space with your own internally developed products, are you planning on supporting two different architectures moving out a couple of years or do you plan to integrate the two different platforms on maybe the same software architecture over time?.

So regarding Shannon, we have real architecture, do a continued growth for their own solution with their own firmware and our value is we will follow the standard PCIe SSD [ph] and that is standard. But we focus on client side, some time because we can use for the low end standard enterprise SSD.

So Shannon can use that as a foundation, develop their software, put together to scale it, to be larger array or low end enterprise solution. But their main focus is high density beyond 6.4 terabyte or 30 terabyte SSD solution..

Great. Thanks. And Riyadh, I think you said that the $14 million to $18 million in revenue expectation this year is just a half a year of revenue? Was that – did I get that right….

The 14 to 18 is for – $14 million to $18 million of revenue expected from Shannon is for the calendar year 2015.

So we are targeting to close our transaction by July, so depending on how much revenue they are going to be booking as the year progresses and if we were to close by our expected July timeframe we should be consulting roughly half about that..

Great.

And what was the growth rate expectation for the Internet in China next year?.

Well, there were many reports about how fast it’s expected to grow. I think the third party research numbers will probably be a better indication to you, for your purposes. But China is only one of the fastest growing Internet market and it’s already the largest Internet market in the world out there with plenty of world class internet companies..

Great. Thank you so much..

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

Hi, Wallace. Hi, Riyadh. Congratulation for good result and good fusion M&A. So when we get a chance about Shannon's market share in China data center market.

Do you have that kind of data?.

No we don’t. As Shannon's market share in China still very small, but the customer base is very broad, it’s over 80 customers right now. We believe they have a great potential, together we can help them to accelerate growth in the next few years..

Okay.

So when we look at their gross potential, you see many from the market share again or the organic growth of China data center demand?.

I'll won't state it, because of the China data center demand, I think we have a four specific category to growth and some relate to Internet e-commerce, some relate to the China banking , some relate to the certain industry, we cannot comment this moment.

But I think we have specific market to grow and demand what was a China government related company, how they develop new development, like China grade related business..

Charlie, let me add, the growth of this company is going to be coming primarily from the growth of the overall enterprise class SSD market. The market is very small because the adoption of SSDs in China is roughly two or maybe three years behind the western market.

But they are seeing same sort of adoption curve that we've seen in US and European markets from several years ago.

The rapid adoption its very strong interest by corporate’s, whether a private sector or public sector, whether small companies or internet large internet companies, including government agencies, very strong interest across the board to use SSDs for various different types of applications, many that Wallace has just talked about.

And because of this – we're at the ground floor of the growth curve.

There is tremendous, we believe there is tremendous growth available in this market and so the growth of this company and just to wrap up, is with the industry rather than try to take market share from existing players because the larger growth is going to be coming from the industry..

Okay. That’s very clear. So just one housekeeping question. So, you seem to be revising up your full year guidance range, right. The low end growth is now at 17% year-on-year growth.

So any segment of business you see upside for three year for example SSD or mobile TV?.

Well Charlie, the number that we've taken up to bottom end of our range because mathematically that’s how it’s going to be. It works out because for the first quarter we delivered at the high end of guidance and going into second quarter, we believe we are providing fairly robust sequential growth going into the second quarter.

So by definition mathematically our overall number for the full year needs to go up. In addition, we have not start rolling in expected revenue, revenue that we're going to be benefiting from as we consolidate Shannon in the second half of the year. So it could be potentially some upside.

But we'll provide more color in terms of how much to expect and revise our guidance as the year progresses. But in the meantime, we're going to hold to what we just stated..

Okay.

Because I thought you may see some upside for your SSD revenue forecast, are going to change the range of US$45 million to US$60 million for this year?.

We're going to hold to the guidance that we've previously given and what – and the guidance that we have reiterated as part of this webcast..

Okay. Lastly, lots of investors are asking UFS 2, is that any possibility Hynix instead of going into very difficulty technology, they come back for the more matured eMMC control IC. Because as they – by doing that they may save more cost than doing niche market.

What's your thought on that?.

You mean from development or from selling?.

On development?.

Naturally they always have a R&D team development eMMC because they also need to train their R&D and continue right. But you know when the solution is down, it’s selling its down. Its really waste of time and money and to re-do it again. So I think for eMMC we continue 100% of Hynix market share.

For UFS2, we also sincerely wish Hynix can be successful, but all have very good year as to solution ready in the first half of 2016 and support TLC and TLC 3D NAND. So I think we have pretty good opportunity to grow and UFS scale up to the market..

Let's start with the next question. Thank you..

Charlie, let me add before we move on, the bulk of the market still relates to eMMC the bulk of the market the bulk of where Hynix is going to be targeting their embedded memory, it’s still going to be eMMS progressing from eMMC 5.0 to 5.1 and so forth.

UFS is just targeting at the very high premium end of the market and for the next year or two it’s still going to be very, very small part of the overall market..

Okay. Understood. Thank you very much..

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

Hi, guys. Couple of things, first on the PCIe side, can you give us a sense of where you stand integration wise with your NAND flash partners. If you think you can hit the ground running pretty quickly to ramp in 2016 quickly? And then secondly Riyadh, you are at 128-gig on the SSD side at 60 bucks.

When do you see that heading kind of sub 40 based on TLC? And lastly, do you – any of your major competitors have any affected TLC support right now? Thanks..

Regarding our PCIe development, our first PCIe is [indiscernible] by four. We are receiving for Silicon just a couple of weeks ago. We are on track as we believe we'll be moving to mass production by end of the 2015. We are lined up with our major NAND partners and to launch with their program progressively.

So we believe from 2015 we'll be at three, at least three major NAND maker lined up with PCIe solution..

To your other question about SSD – pricing of SSD coming down, and approaching parity with HAD. We are still a little bit higher, but we are approaching that direction and part of it is coming from the greater use of TLC as on a blended basis.

But NAND flash prices have continue to come down and so there is a lot of interest from OEMs to use SSDs and that’s why we are aimed at lot of interest also from the flash vendors to move in that direction. And so a lot of IOVA [ph] believe that by next year half of all notebook PCs could be very well be using SSDs..

Thank you..

Thank you. There are no further questions on the line at this time. I'll now like to hand the call back to Mr. Wallace Kou for management's closing remarks. Please continue..

I would like to thank all of you for joining us today and your continuing interest in Silicon Motion. We will be at the following conference this quarter. In May we will be presenting at the Silicon Corporate Day in Singapore and Hong Kong. Jaffray TMT Conference in Miami, B.

Riley Annual Investor Conference in LA, Morgan Stanley GM Conference in London, Ladenburg Investor Day in New York, Great Hallum Annual Investor Conference in Minneapolis. In June we'll be presenting at Bank of America-Merrill Lynch Global Technology Conference in San Francisco, Silicon Corporate Day in London.

In July we'll be presenting Morgan Stanley GM Conference in San Francisco. Details of these events are available on our website. Thank you and good bye for now..

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