Storage-oriented chipmaker Silicon Motion (NASDAQ: SIMO) reported its fourth-quarter 2018 earnings results on Jan. 29. The company, which mainly builds controller chips for products such as PC-oriented solid-state drives (SSDs) and smartphone storage, reported revenue of $123.4 million, down 9% from the same period a year ago. Earnings per diluted share were $0.83 on a non-GAAP basis, up about 5% year over year.
The company's outlook for the first quarter of 2019 calls for revenue on a non-GAAP basis to fall between $97.5 million and $103.6 million, down significantly from the $130.3 million it generated in the first quarter of 2018.
A smartphone logic board with a chip being removed from it.
Image source: Getty Images.
To get some additional perspective on the results, the outlook for the first quarter of 2019, and management's longer-term view, here are three must-see quotes from the company's most recent earnings call.
NAND pain is Silicon Motion's gain
Prices of NAND flash -- a type of computer memory that's used as storage in PCs, smartphones, and data-center servers -- have been on the decline, to the chagrin of major NAND flash memory producers. That pain, however, is Silicon Motion's gain.
Silicon Motion CEO Wallace Kou explained on the earnings call that in 2019, the company thinks its "client SSD controller sales will continue to grow as NAND prices fall further."
The idea is simple: NAND flash is the largest contributor to the bill of materials of an SSD. So if NAND prices fall, flash-based SSDs should become cheaper, boosting sales. Silicon Motion makes controller chips that control how data is read and written to NAND flash -- not the NAND itself -- so the company benefits when more SSDs are sold.
With that said, Kou cautioned that despite the "positive industry trend, sales visibility this year is significantly more limited than in the past." Previously, the company's NAND flash partners would give Silicon Motion insight into how many controllers they would need for the next 12 months. Now, some of those partners "have reduced their forecast period to just six months," Kou said.
"We believe they are struggling with their own limitation in operation visibility due to demand uncertainty from weakening China economy conditions, U.S.-China trade negotiation, and other issues," he said.
Longer-term opportunity
Kou offered some longer-term commentary with respect to the opportunity in the client SSD market -- that is, the market for SSDs that go into personal computers. He said the company is "optimistic that over the next few years that almost 300 million client [hard-disk drives] currently shipping annually will be mostly replaced by client [SSDs], and we remain the leading merchant supplier" of controllers for those drives.
That forecast isn't far-fetched. One of the two major manufacturers of hard-disk drives, Western Digital (NASDAQ: WDC), indicated at its analyst day in December that it expects the total addressable market (TAM) for hard disk-based client devices to decline from $11.4 billion in its fiscal 2018 to just $5.6 billion by fiscal 2023. However, Western Digital has its own rather substantial SSD business, so it's not reluctant to talk about portions of the hard-disk TAM that SSDs will overtake.
It's important to keep in mind, though, that Silicon Motion was careful to say it's the leading merchant supplier of such controllers. Many major SSD makers, like Western Digital, build their own SSD controllers in-house. So while Silicon Motion still enjoys a large and growing TAM, large portions of the overall SSD market will be closed off to the company as a result of that vertical integration.
Data-center progress
Silicon Motion has a strong position in client SSD controllers, but the company has been working to break into the market for data center-oriented SSD controllers, too. On the call, Kou provided some insight into the progress the company is making on that front.
For the company to sell SSD controllers to Chinese hyperscale data-center customers, Kou said, it isn't enough to just hand them a controller chip and call it a day. Instead, he said, "we must convert our controller into complete SSD solutions."
That was the rationale for the company's 2015 acquisition of Shannon Systems, a company that bills itself as "a leading supplier of enterprise-class PCIe [peripheral component interconnect express] SSD and storage array solutions to China's internet and other industries."
"We are progressing well with our two hyperscale customers, the performance tuning of Shannon open-channel SSD for Alibaba and another BAT [an acronym for Chinese tech giants Baidu, Alibaba, and Tencent] customer," Kou explained. "Using this new controller is progressing smoothly, and we remain on track to begin volume commercial production of our open-channel SSD around the middle of this year."
The data-center SSD opportunity could be a big one for Silicon Motion, and over the next year or so, investors should start seeing these efforts bearing fruit in the company's financial performance.
Investor takeaway
Silicon Motion is worth a look for investors who want to capitalize on the industry shift toward SSDs. The company's product execution in its core markets looks sound, and it's expanding into new areas -- such as data-center SSD solutions -- that could potentially drive significant revenue and profit growth over the long haul.
The stock also isn't particularly expensive, trading at around 13.1 times expected 2019 earnings and just 11.2 times expected 2020 earnings. I'll be keeping this one on my tech stock watch list.
Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Baidu and Tencent Holdings. The Motley Fool is short shares of Western Digital. The Motley Fool has a disclosure policy.
