Jason Tsai - Senior Director, IR and Strategy Wallace Kou - President, CEO Riyadh Lai - CFO.

Mike Burton - Longbow Research Suji Desilva - ROTH Capital Rajvindra Gill - Needham & Co Anthony Stoss - Craig-Hallum Mehdi Hosseini - SIG Charley Chen - Morgan Stanley Tom Sepenzis - Northland Mike Crawford - B. Riley Rajvindra Gill - Needham & Co.

Good day ladies and gentlemen and welcome to the first quarter Silicon Motion Technology Corporation’s Q1 2017 Earnings Conference Call. My name is Desmond and I will be your conference moderator for today. [Operator Instruction] Before we begin today's conference I have 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 limitations, 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 changes in our relationship with our major customers, and changes in political, economic, legal and social conditions in Taiwan.

For additional discussion of these risks and uncertainties and other factors, please see the documents we file from time to time with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements, which apply only as of the date of this conference call.

I would now like to hand the presentation over to our host Mr. Jason Tsai, Senior Director of Investor Relations and Strategy. Please proceed. .

Thank you and good morning, everyone. Welcome to Silicon Motion’s first quarter 2017 financial results conference call and webcast. My name is Jason Tsai. 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 will then conclude with Q&A. Before we get started, I’d like to remind you of the 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..

Thank you, Jason. Hello, everyone and thank you for joining our earnings call. I am pleased to speaking with you again this quarter. Our first quarter result was high end of our expectation. Our net revenue of $127 million and $0.70 in earning represent a strong execution by our team in spite of very tight NAND supply environment.

Riyadh will discuss our financial performance in greater detail later on the call. As we had previously communicated NAND supply becomes very tight and this has been effecting our sales growth. In the second half last year our model maker customers were affected by NAND supply availability issues.

More recently our NAND flash partners have also been affected by lack of sufficient incremental flash capacity from their own flash, this flash maker do not have sufficient NAND capacity to meet the need of their own product and need for their OEM customers.

Until large amount of new NAND capacity come online NAND flash makers are all actually rushing the limited supply to partially fulfill greater demand. As we had previously discussed continued NAND flash tightness were attributed growth rate of our rapidly growing sales this year. And separately our sales SSD solutions will decline this year.

We do not spend more significant amount of new NAND supply to come online until the second half of this year. In our first quarter sale declined due to seasonal factors and NAND flash tightness. Both our SSD controllers and SSD solution sale declined while our EMC sales were unchanged quarter-over-quarter.

We believe that beginning in the second quarters our sale will start picking up as our large pipeline of design wings will benefit from gradually increasing NAND supply and stronger seasonal demand. So NAND flash industry has been adding a large amount of new 3D capacity since the second half of last year.

The CapEx spend for 3D NAND is one of the largest CapEx spend that we have seen in many years. Other than Hynix, all of the flash maker have already become production of 64 layer 3D NAND. And they are all currently aggressively tuning production yield.

We are confident that we should start seeing meaningful full layer 3D supply in the second half this year of the yield are now approaching level that are suitable for mass production. And in the second half this year we find Hynix to start to gradually ramp their production of semi two layer 3D flash.

In next year, you should expect to start seeing initial production of 96 layers as well as [per sale] QLC 3D NAND. One of the biggest built out of NAND supply is beginning to come online. And we should start benefiting in the second half this year.

These current and upcoming generation of NAND flash technology will continue to drive down NAND dollar per gigabyte cost which will lead to continue as a growth proliferation of NAND base solid phase devices and demand for our controllers. I will now move on and talk about our key products.

We continue to see strong demand for clients B from PC OEM and consumers especially for commercial notebook PC, despite current NAND supply tightness and resulting high NAND and high SSD prices. Many new notebook PC are designed with SSD for reasons relating performance and form factors. Using HDD as an alternative is no longer possible.

Leading research firms like Garners are now recommending to their incorporated customers that all PC procurement should be using SSD that’s for both notebooks and desktops because of better performance reliability power consumption and total cost of ownership.

We are confident that over the next few years as a cost of NAND continue to decline effectively the majority of 500 million a year client story devices market well be served by the HDDR replace. Our industry leading highly customizable turnkey hardware plus some of our SSD controller sales decrease in the first quarter as expected due to seasonality.

Despite these challenging our client SSD controller sales will grow nearly 40% in the first quarter as compared to a year ago. And then, we manage on track to grow our client SSD controller sales 20% to 25% for the full year. We remain the leading merchant controller supplier for client SSD with the market this year are possibly 30%.

To our flash maker partners and module maker customers we continue to maintain strong presence in both PC and OEM and China markets.

We started this year with more client SSD controller design wins then at the same time last year and with a much broader portfolio of controller solutions from PCIe NVMe that range for high performance obligation to low cost DRAM-less and PCIe PJA devices.

We believe sales from our pipeline of client SSD controller design wing will scale when NAND flash supply improve in the second half of this year. Almost all our new design wing that were entered production this year are for PCIe and the MES SSD and will use either 48 or 64 layer 3D NAND.

Let me update you on our enterprise grade SSD controller development. As we have discussed last quarter we are currently developing turnkey enterprise grade controller solutions.

Most specifically we are currently engaged and in product development when OEM owns several enterprise grade turnkey SSD Controller projects that involve both engineering or both highly customized enterprise grade controller hardware and firmware. These SSD controller projects are all for hyperscale data center.

And I expect it to go into production next year. These are the deals with our controllers our performance optimized and designed to deliver performance superior to standard of the rack high end enterprise grade SSD. Overall we are pleased with our delivery of our SSD controller target and growth objective.

Our product road map in standing portfolio for design wins coupled with factory material improvements in supply of variability beginning in the second half of this year. Point to continuing strong SSD controller sales growth next year. I'll now turn to our EMC and UFS controller.

Demand of our EMC controller remains steady in the first quarter, in line with both our expectation and the past seasonal patterns. Demands for our SK Hynix remains stable and demand for EMC and EMCB embedded memory from smartphone OEMs in China and elsewhere also remain stable.

We are outsourcing broadening adoption of EMC beyond smartphone and tablets. A smart TV, streaming center bus, Nintendo Switch console, SAS spec TiVo, Amazon Echo Speakers, automotive and other AI and IoT devices. Our UFS project aren’t progressing as expected.

Our nano-sized palm held using our UFS 2006 2001 controller has already secure as a first discreet UFS embedding memory designing with a global top five android smartphone OEM. And its own track to picking volume production in the second half of this year. Separately, we expel our UFS controller for SK Hynix UMCP to launch later this year.

But it is increasing likely that timing of UMCP support by media tag and other leading AP vendors who are bit delay until the first half of 2018. We are very well positioned for this eventual high volume low out of UFS. But until that happens, bare many new confusion from a UFS sales will remain small.

We remain comfortable that our EMC and UFS controller sales this year are on track to growing about 5%. Finally, I would discuss our APD solutions. Demand of our channel enterprise D continue to be very strong. And new project with our primary Chinese hybrid scale customer has already selling shipping in the second quarter.

So, pace over there infrastructure build out is surveying, driving strong incremental demand for our enterprise D. as now for the kindness in the NAND market we are all facing today ends a last five supply commitment that our customers are being able to secure. We believe our channel enterprise D will have going this year.

Sale of Ferri Industrial SSD unlike our channel enterprise D were stable in the first quarter and will also grow in the second quarter. To summarize, to file our growing pipeline of business with the customers and the expanding portfolio of controller and SSD solutions.

Our business momentum this year especially the first half of this year, has dampened by NAND industry supply panels. This high wing to our business shield lesson in the second half of this year. For new NAND supply come online and we sure be very well positioned for 2018 growth.

I will now turn the call over to Riyadh to discuss our financial performance and outlook. Riyadh Lai Thank you, Wallace and hello everyone. I will summarize our financial results and outlook. Before I begin, I'd like to reiterate that our comments today will focus primarily on non-GAAP results unless otherwise specifically noted.

A reconciliation or a GAAP to non-GAAP data is included with the earnings release issued today. Our first quarter revenue decreased 12% sequentially but increased 13% as compared to the first quarter of last year.

For the second quarter, we are expecting revenue to increase 5% to 10% sequentially driven by growth from our embedded storage products which are our prime SSD and EMMC controllers, plus our industrial and hyper-scale SSD solutions.

Our embedded storage product sales continue to be roughly 80% of total revenue in the first quarter and will remain roughly 80% of total revenue in the second quarter. Let me provide additional color on our key products. Our client SSD controller sales decline by approximately 20% sequentially but increased about 40% year-over-year.

Sales continued track towards 20% to 25% full-year growth for 2017 with stronger sales expected in the second half of the year. You should expect our client SSD controller sales to become materially bigger than our EMMC for full-year 2017. EMMC controller sales growth were approximately flat sequentially but had increased about 15% year-over-year.

Sales continued to attract towards approximately 5% full-year growth for 2017 was second half sales comparable to the first half. SSD solution declined approximately 10% sequentially but decreased about 20% year-over-year. Sales of our SSD solutions are still tracking towards a four year decline of 15% to 20% in 2017.

Our Ferri industrial SSD should grow this year while our Shannon hyperscale SSDs will decline. Our first quarter gross margin increased to 51% from 50.2% in the previous quarter due to temporary lower cost of sales relating to our SSD solutions. Our first quarter SSD solution sales were utilizing lower cost NAND inventory procured a few months ago.

This temporary benefit will reverse in the second quarter as more recent procurements on NAND have been at a higher cost. This is why we are expecting our second quarter gross margin to revert to the 48.5% to 55.5% range. Without your inventory based on the average cost method.

For the full-year we continue to expect gross margin in the 49% to 51% range. Our first quarter operating margin decreased to 26.4% from 30.4% in the previous quarter due to higher operating expenses and lower revenue offsetting the benefit of higher gross margins.

Our first quarter operating expense of $31 million is the same amount as the operating expense implied by the midpoint of our previous revenue gross margin and operating margin guidance.

Our first quarter operating expenses 10% higher than the previous quarter primarily because of the normalization of reoccurring accruals and foreign exchange changes.

For most of last year, we over accrued a certain compensation expense and reversed this accrual in the fourth quarter and this resulted in the first quarter's accrual being compared against the reversal. Additionally, roughly 2/3rds of our total employees are based in Taiwan and paid in NT dollar terms, in NT dollars.

And in the first quarter, the NT dollar strengthened shortly against the US dollar resulting in much higher compensation expenses in US dollar terms. Our total headcount this quarter increased to 1149 which was 27 more than the fourth quarter. Tape out expenses were similar to the previous quarter.

Looking into the second quarter, we are expecting operating margin in the 25.5% to 27.5% range with midpoint of this range similar to our first quarter operating margin. We are expecting operating expense next quarter to be similar to our first quarter. Our effective tax rate in the first quarter was 27%. This is higher than the 20% modal tax rate.

We anticipate our effective tax rate to remain elevated to one or two more quarters due to the mix of offering entities that are possible and incurring tax expenses with entities generating pretax losses. Our first quarter EPS was $0.70, lower than last quarters $0.95.

Total stock based compensation in this quarter was $3 million lower than the $8 million in the previous quarter due to the seasonal timing of RSU awards and consistent with the timing of past years. For the full-year we expect stock based compensation in the range of $15.5 million to $16.5 million.

Let me now talk about a few key items from our balance sheet. We have $304 million of cash, cash equivalent and short term investments. $27 million more than in the previous quarter and $113 million more than a year ago. In February 2016, we paid $7 million of dividends to our shareholders.

Second, $0.20 per ADS quarterly installment of our annual $0.80 per ADS dividend. This concludes our prepared remarks. We will now open the call to your questions..

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

Hey thanks, guys. I wanted to ask first on the EMMC the mobile business, curious what you're seeing there, I realize are you shipping a little bit earlier into the flash OEMs but clearly many suppliers been affected by an inventory crush in Chinese handsets.

Given your orders, what's your outlook there versus normal seasonal patterns for the second half?.

And we believe we see the second quarters were being in line with the first quarter. Second half, it depend on the inventory adjustments, turning forecast we believe it's similar to the first half..

Okay. And then, also on just going up there two and on the UFS site sounds like your immediate text support certainly has pushed out adoption.

What's your expectation for UFS as share versus EMMC for the market as a whole this year and next and can you help us understand how you planned to win versus some of the internally supply controllers?.

The Courtney major UFS adopted Centaur mobile, but the all the galaxy series user adopted UFS solution and we do see the CA there being more see China smartphone maker, the flashing model, a WUFS. So, we believe this year the UFS marquee share will be around about 15%, 20% a month enjoy smartphone.

But however, results the UMCP will be very difficult to UFS to become the mainstream. Become majority smartphone maker will like to combine NAND and Dearing together into one PGA package. We believe this we need effort from meta tag to become main players when mean mainstream smartphone chipset to a WMCP maybe in second half 2018 or 2019..

Okay. And then I apologize if I missed it, but any update on the fourth flash OEM for client SSD, I realize it's not in the guidance but there's a look closer to ramping this year versus next and any color you guys can help with on what are some of the factors holding up on that ramp, thanks..

And then timing of this new project is depending on the improvement improving availability of the NAND. With the NAND condition remaining tight, our force founder has postponed the rollout of this new product until availability improved for then the current situation..

Great, thank again..

Thank you for the questions. Next question comes from the line of Suji Desilva from ROTH Capital. Please go ahead..

Hello, well Riyadh. So, you kept you reiterate the full-year revenue guidance but the second quarter was a little it below where I was, makes then more backend loaded year which is consistent with your commentary.

Would necessary with the fourth quarter be above seasonal and actually show an improvement from what you expect or would be very third quarter loaded?.

So, from our perspective there is not much change in terms of our full-year outlook and also the sequential quarterly pieces that adds up to the full-year numbers.

Our first quarter numbers are a little higher than or the high end of our original guidance or second quarter numbers are pretty much are consistent with what we are originally expecting and so second half of the year is going to be second half loaded for a full-year.

So, we're expecting our business to grow each quarter to 2017 as NAND availability gradually improves this year with stronger growth in the second half. The NAND supply does increase faster than what we're currently expecting. We can certainly see some upside to our current expectations.

But conversely, if the challenges in improving manufacturing the lots of 3D NAND or not result as expected. We could see potentially a tighter NAND flash ability. But on balance, this scenario doesn't seem less likely.

So we continue to expect that tightness in the market will be resolved later this year and we expect our 2018 growth to strengthen materially from this year as all of NAND flash makers wrap their 64 and 72 layer 3D into full production..

Let me add points. The reason we have confidence for Q4 which is overcome to seasonality because through the current design pipeline there is NAND supply sufficient we are confident the Q4 and second half will have much stronger sale growth..

Okay great, that’s very helpful color and then also on the SSSD with NAND tightness here, can you tell us where the PC attach rates are in your perspective and where you think they'll be exiting ’17 and perhaps in ’18 and whether that's kind of blow your prior expectation given the tightness or tracking to it? Thanks..

Suji, PC attach rates should be at a higher level but as you know NAND flash availability is affecting the amount of NAND that can be used to build client SSDs and also the current higher price of NAND and higher price of SSDSs is also impacting the transition of HDs to SSDs. So those are factors that are affecting where we are now..

But we should expect to grow around 20% with client SSD average..

Right, okay great thanks guys..

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

Thank you and congrats on solid results or you whether through this NAND tightness supply situation.

So well a question on the enterprise grade SSD turnkey solution targeting hyperscale customers, you are showing next year production, can you may be elaborate in terms of what the design process has been like, what the transition has been from a technological perspective from moving from kind of client SSD to more enterprise grade SSDs and how your sales force has adapted and engineers have adapted to that transition..

As we see from late last year this year, the strong demand for data center and I think that’s the one of the main reason causing a NAND tight supply in 2017 and we see the strong demand not just Northern America and China, there is through all the region worldwide and we see there's a tremendous demand regarding enterprise SSD solution as well controlling because all of the customer looking for differentiable solution.

Clearly, I think from last year Q4 we will make a determination to develop enterprise grade SSD controllers.

Currently we are working closing with the one leading and major worldwide enterprise customers and we do work closely, we had a face to face meeting every months, weekly conference every week to review the schedule and all of the key feature have focus down the production in early 2018 and enterprise customer they do need standardized PCIe NVMe and SATA solution.

They also need a very high performance and suitable for this purist data center. So that is a very important for them to be more flexible to use a solution can serve different purposes.

So that's why tailor our controller both hardware firmware to meet enterprise customer need with the ease of solution to bring our ST portfolio to a next level and can quickly help to grow both controller business and NAND capacity business..

Very good and on the client SSD side, you kind of maintaining the 20% growth year over year on average. Can you perhaps talk about the competitive landscape; I know one of the other competitors in the space has ceded a lot of share to you but they're now saying they have a turnkey solution with firmware and software firmware and hardware.

Wondering if you're seeing any competitive pressures on the client SSD side?.

We cannot comment on our competitor but we can say we are still the leading merchant supply of turnkey controller solution for the client SSD for mainstream high volume SSD of flash partner and module maker customer preferred turnkey solution having able them to gain market faster and more cost efficiency.

I think we alerted from SATA III to now PCIe NVMe solution, our second generation PCIe NVMe just coming out, we offer Gen3/4 A channel, Gen3/4 four channel, PJA, PCIe PJA solution as well as DRAM-less solution. So, we have a stronger broader portfolio with our turnkey solution.

We do now see any meaningful attraction from any of the emerging controller supply, we act as an extension of our flash partners and R&D and enable them to go up to a broader range of the end market quickly and cost efficiently.

Currently because of the tightness of supply, every NAND maker have a certain and prefer allocation for NAND but we believe our turnkey solution will continue to be preferred and we believe we will continue grow with our client SSD and currently Intelmicron they both they are using our turnkey controller solution and we mention the forced NAND maker when NAND flash supply sufficient and with net production..

And last question for me you mentioned that overall the production yields on 3D NAND for the rest of the other flash makers are going up and they are aggressively tuning the yields.

Can you maybe provide some color in terms of kind of what percentage of the overall NAND supply you think is 3D NAND currently and then you mentioned SK Hynix is gradually ramping the 72 layer and that should start to possibly affect your business? Can you talk a little bit about their process and how the transition to 96 layer next year is going to affect your business positively?.

We cannot comment regarding the NAND makers, their own strategy in mix as you know the transition from 2D to 3D really take time. All SAS maker, they are more cautious to invest capital equipment before they see visible and meaningful yield for transition.

So the transition is very dynamic and the good news is that we see all the NAND maker ready to ramp the 34 stack 3D NAND and Hynix also will be ready to wrap the 72 stack NAND from Q3 this year.

This is how soon, how fast they came ramping to the scale and we cannot comment but we believe NAND supply will improving second half and we believe the NAND supply will be more sufficient in 2018. That will be our benefit to SMI.

Regarding 96 stack 3D NAND and the quad bit/cell QLC 3D NAND and we already discussed, engaged with all the NAND maker will provide the solution our controller firmware will be ready to support the TLC 3D NAND and when they move to mass production..

Thank you all..

Thank you for the question. Next question comes from Anthony Stoss from Craig-Hallum, please ask your question..

Hi guys.

Wallace may be if you won’t mind commenting you mentioned that the bulk of your SSD wins for the second half of the year are our PCA refresh, the bump you see in ASP and if that’s changed up from what you expect in the past and similar question on the enterprise server market, as you launch in early ’18 may be a range of what you would expect on an enterprise server controller it would be helpful..

Tony I'll take this question. Our ASPs as for all of our new products they always come in slightly higher than our corporate average but as these products become mainstream, ASPs converged towards our average ASP for a specific class of products. So this is going to happen again with and it's happening now with our new PCIe products.

New products coming in the high ASPs and as they ramp and become mainstream so our ASPs will converge. The question about enterprise grade control ASP’s, this is proprietary and it's not a arrangement we are going to be talking about on calls..

Okay follow up question and overall in gross margins given your fairly increasing SSD revenue and the layering on of enterprise, would you expect your kind of the next move your 49% to 51% gross margin goes that will goes higher, sometime in ’18 or how should we think about gross margins longer term..

This business model as you know that has a wide range of products, some products the gross margins are higher than corporate average and other products the gross margin are lower and we actively managed our the components products with higher and lower gross margin and we've been able to deliver our goes profitability as we're up to 50% and we'll continue to be able to deliver gross profitability towards the 50% going forward and you should expect us to manage our business with this objective in mind..

Thanks Riyadh..

Thank you for the question. Next question comes from the line of Mehdi Hosseini from SIG. Please go ahead..

Yes, thanks for taking my question. I want to go back to the media tag commentary and whether understand your overall market share especially with the Android.

It's very obvious that media tag may have lost market share and I'm just wondering if you have as much exposure to the other AP providers as you do to the media tag architecture or any kind of commentary that you can provide will be helpful as to how the market share dynamic or competitive landscape in the AP market is impacting and I have couple of follow ups..

I apologize, maybe I did not state regarding media tag AP, clearly. Actually REM CEMCP can work for every chips that maker including qualcomm, Mediatek, Samsung, Intel or spectrum and we are nothing to do with just media tag only.

While we mentioned that are UFS UMCP product which is M is media and will allow media tag to promote, because they're pure sides and more suitable for UMCP for mainstream market and it look like this year they are going to lay the support for UMCP that’s why we believe to production of our UMCP may be what you lay from late of this year to first half of next year..

Doesn’t that imply that your UFS share may be less than prior generation primarily due to the fact that Mediatek is late?.

UFS today is still very small, between 15% to 20% for overall market and Samsung Galaxy is a primary adopter for UFS. First still remain very small portion of a total Android smartphone. We maintain about 30% to 35% market share. We saw EMC and EMCP and SK Hynix are major customer for EMC controller..

Okay and your exposure to the Chinese IDC internet data center service providers, it seems to me that something has changed because in the past you were after opinion that those kind of customers would have the scale to be able to procure NAND well in advance and now it seems like the NAND shortage has adversely impacted repeat business, I am just trying to understand to what extent it is really, it is in fact NAND shortage or whether it has more to do with design cycle and what were those customers are doing with their products.

It seems to me that they're two separate issues going on..

First we mentioned, this year especially the NAND shortage start from June last year. The last year the shortage due to the smartphone double the density of the storage, not just iPhone, all the entry phone double the density that momentum cost the NAND shortage. This year it is quite different.

The main reason for the NAND shortage is the in shorter change strong demand from data center. So, it is not just a sour'ish points if it be, the PJA, the HDD, all increase the density built to the strong demands on data center.

Regarding the our specific customers, they want more SSD solution to be spend their infrastructure because the mobile user per terabyte is increased very quickly. Very internet incumbent company long to solve data traffic problem.

They want a faster low [indiscernible] I think it's not a China maker, all the leading US Company they also suffer NAND shortage for this year. I think it's a global issue, it's a very common issue everyone know is not particular for one customer and this is a whole NAND industry, the NAND is in severe shortage entire supply..

Sure. And then one quick follow-up for Riyadh.

Your year-end revenue guide of flat to up 10%, does the up 10% imply that the 3D NAND yields have improved and there is no shortage or does that mean that there is just some marginal improvement, so that if the yields were to improve the faster rate, they would actually be upside to the high end of your revenue guide?.

Our guidance is May is more the latter what you stated.

Since our customers are still working through there, our business partners or flash partners are still working through their production yields, they really are not in a position today to be willing to commit to volume that they still have not been able to deliver because they're still improving their yields.

While they have a plan yield improvement plans they still need to achieve those numbers and until they achieve those numbers, those numbers are still planning number. And so, going back to our numbers, where we're working more on a conservative set of numbers without the high yields are being rolled into expectation.

So, if the flash makers are able to achieve the higher yields there, potentially it could be upside to our numbers, but we currently are not able to commit to that because our business partners haven’t achieved them yet and we're dependent on them to achieve before those numbers roll into our numbers..

Got it. Thanks, so much..

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

Hi, [indiscernible]. So, I want to follow-up the question regarding polish stenski, because Wallace has mentioned that on last year chance [indiscernible] this year we see that NAND cost is double.

So, do you see that both for EMMC and SSD and customers are downloading the NAND density for [indiscernible] to fulfil a more devices with those SSD feature? Thanks..

We believe the smartphone maker they also get a wipe on NAND supplier, because they do see the shortage, so we see the densities will remain the same as the second half last year. This year major is due to the strong demand on data center and much stronger than everybody playing early this year.

And even our major customer from CE data center, our internet incumbent company, they also supply regarding the stronger demand globally. And we do, we cannot comment regarding iPhone other's plan but for general speaking, for all the entry smartphone density maintain the same as the second half last year..

Charles, let me also add. There's a bifurcation on the client SSD side. For the client SSD is going to PC OEMs, it seems that the density have been inching up but on the other hand for client SSD's going into the channel market, as flash availability is highly rationed, a lot of the channel players have been building at lower densities.

So, there seem to be that bifurcation because of the higher prices. And similarly, if for the channel side of the market because the higher prices, it looks like they maybe ought to be able to do business more profitably by going after the lower density densities..

Okay. Got it, thanks. And over on the 3D NAND, so we all know that your opponents are rending at production, here etcetera. But that's purely on absolute [indiscernible] NAND flash to the quarter. The [indiscernible] didn’t grow over the second quarter, thereafter the [indiscernible] number..

Yes. It looks like that way. We're expecting to see big shipment growth to accelerate in the second half of the year, as a lot of the new 64 layer capacity reach go into full production. Going to full production still means that there is still lot of that yield improvement upsize to be delivered.

But the full production should be happening more in third quarter second half timeframe and when that happens, we should start seeing more significant quarter-over-quarter bit growth, compared to what we're seeing in the first half of the year..

Yes, thanks. This is what I wanted to know.

And lastly, on the enterprise SSD control IT business, you want to rent it 30 next year right? So, you guys have told me, do you think [indiscernible]?.

I think the enterprise server, our data center all have deepened demand. Today SATA still maintain the last percentage also SAS still growing replace a SAS HDD. But a PCIe has the stronger momentum and to our product we're focused on PCIe for enterprise and we will offer a both to right isle, also heavy isle.

So, we have different software matching, to me because of me tailored for the customer's requirement..

Okay, understood. Thank you, very much..

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

Hi, thank you for taking my question and congratulations on the good results in March.

I'm just wondering, given the expected growth in NAND, when should we expect that pricing will come down enough for your to start seeing some movement on the channel business?.

It's a very a naturally difficult question. When NAND supply become improve, we are supposed to seen the price come down. But I believe NAND maker will maybe have different pricing strategies and price strategy. So, we believe the NAND price will maintain stable a little higher in Q2 and moving the Q3.

But there from Q3, maybe the price will become soft. When a more supply coming in the market..

So, should be expect that business to pick back up in 2018?.

Definitely..

Great. Thank you, very much..

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

Thank you. In the past month we've seen SSDs come out, wasn’t more favorable reviews that SSDs including your SM2260 controller.

So, I'm wondering if you think that is true versus those reviews are accurate versus more earlier reviews and how often you update firmware for that control or how much of that might be to be more stable NAND from your OEM partners?.

I think some review would, it's just as better or true, be like a very early stage and first product. We're continue improve our firmware and upgrade to our customers and because today due to the tight NAND supply, so if the customer have lag momentum to launching a new product.

But our second generation PCIe are coming very strong, we believe and many customer can see our product coming are found they could do a Q3 into the market. And we offer as I said offer PCIe Gen3/4 A channel and four channel for mainstream.

They all design by 28mm process and with a very high performance low power and can very competitive in the beginning player today..

So, you would attribute that better performance due more to your second generation controller than to more stable NAND flash, so..

I could. Yes, do you know the A2B performance that depend on controlling our criteria and the firmware algorithm was on NAND in sale? And so, they all combine together and also dependent to empty by so we cannot comment who played the most important role.

But we believe how the leisure will be addressed by our young generation PCIe product line which is much a stronger positioning because that can interface with all types of device treating NAND. They will match a TLC or QLC..

Okay. Thank you.

And then, last question is on these enterprise grade controller projects you're working on, is when you started generating sales of these controllers, what type of ASP are we looking at and will these be grouped in with Shannon sales or else somewhere else?.

Mike, as I previously talked about, we're not be commenting specifically about the pricing, the prices, of are enterprise grade SSE controllers given the proprietary nature of our business arrangement with our customers.

But as we talked about early in the call, we got several of these hardware plus firmware SSE controller projects was with this OEM for hyperscale datacenters and these are projects they're going to enter into production in 2018 now. Wallace had also talked more about this.

But on the fed, even before this project, we already part of enterprise as a C market. We already we've been supplying our highly customized Shannon hyperscale SSD tuitions and our and then we've been also supplying tuitions our controllers client grade SSD hardware we specially develop enterprise grade firmware.

And so, this is a continuation of what we're doing..

Let me add a comment. Regarding this model, we wish enterprise solution of under Shannon operation, we focus a one particular OEM and after it went to mass production, we have two other major OEM we engage. But regarding enterprise controllers under offer by SMI..

Okay, great. Thank you, very much..

Thank you, for the question. We have a follow-up question from Rajvindra Gill from Needham & Co. please go ahead..

Yes. Just Riyadh a follow-up on the tax rates.

So, should we be modelling kind of 27% for second quarter and third quarter and have that come down back to 20% or how should we think about that?.

That's correct. Our tax rates are a little elevated for the first quarter end. We'll remain elevated for one or two quarters more given that we have a mix of offering entities that have higher that are profitable and entities that are making pretax losses which is dragging on our overall pre-taxed income.

And so, when you sort of look at our effective tax rate calculate on a consolidated basis, that's going to pull up our effective tax rate. But longer term, you should expect our tax rates to normalize and we should be back down to 18% next year..

Rajvindra Gill:.

Thank you. Thank you, for the questions. [Operator Instructions] There are no more questions from the line. I will like to hand the call back to Mr. Wallace Kou, CEO, for closing remarks..

I will like to thank all of you to join here today. And you're continuing inching flicker motion. We will be attending over a dozen conferences in Asia, US and London this quarter. Detail of this event will be available on our website. Thank you, and good bye for now..

Ladies and gentlemen, that does conclude the conference for today. You may now disconnect the line..