Here are some better quotes from the MRVL call taken from (I think) a transcript.
"We are also on-track to introduce multiple embedded SSD products with the mobile market, for which we expect to see revenues in 2015."
Mike Burton - Brean Capital
So looking at the storage market, another nice quarter for SSDs, can you comment on the current pricing environment in SSDs? There was some speculation that there is some increased competition from the Taiwanese competitors. And then also, you mentioned you would start to see some embedded revenues in 2015. Should we assume that's more back end of the year, and is it tied to one more flash OEMs, or for a particular standard?
Sukhi Nagesh - VP, Finance and IR
So are you talking about SSDs from the back end of the year, Mike, or --
Mike Burton - Brean Capital
Well I thought you mentioned embedded, so I assume it was in EMMC that you are talking about? Is it EMMC or UFS?
Sukhi Nagesh - VP, Finance and IR
Yeah, that will be both back end loaded. But as far as pricing, we haven't seen any big changes.We still have -- if you remember on SSDs, we are right now in our fifth generation technology. So on the subject you hear about Taiwanese competition, is just that -- we are just hearing it. I mean, we have significant advantages over many of the players in the market. One of our competitors, has gone away. So we feel pretty strongly about the growth opportunity for our SSD business.
It's fairly hard to follow, but I think MRVL said some interesting things on it's conference call.
1. I think they said for their SSDs to get the super high volume numbers they will need to introduce a 4 channel SSD. SIMO says a big advantage of their SATA-3 SSD is that it is a 4 channel SSD whereas the competition (persumably MRVL) has an 8 channel SSD offering.
2. MRVL indicated they might have some embedded sales in the back half of 2015. It wasn't clear exactly what they meant since they didn't use the term eMMC. MRVL said that they were going to go after the markets held by their Taiwanese storage component competitors, I assume that means SIMO and Phison, so they sounds like they plan to attack SIMO's eMMC markets.
3. There was some discussion about Taiwanese SSD competitors. MRVL dissed them and said that without the "security" features of MRVL's products the Taiwanese couldn't compete. It sounds like MRVL is approaching the SSD market from the very high end enterprise first mover segment., while SIMO is approaching it at first from the high volume client market.
If SIMO is successful in SSDs in 2015 I think they may become a desirable acquisition target for MRVL. MRVL has $2.5 billion cash, so they could buy SIMO with cash if they chose.
Time will tell
Their presentation is archived on their website, lets see if there are any new nuggets......
Jason Tsai, director of IR, is the presenter.
- He reviewed the company
Q&A- Opportunity for non-Samsung LTE customers?
A: They are exploring some opportunities, but it's very early in that process. No non-Samsung LTE revenue is currently in guidance.
He doesn't repeat the question, so I can't tell what the question was.
A: He says ASPs are stable to improving. There is no competition in merchant eMMC, so that pricing is stable. SSD is a new business, so no special view on pricing now.
A: New products are all above corporate average gross margins.
A: Cards and flash drives account for about 1/3rd of total SIMO revenue. It is expected to decline modestly each year going forward, and will be less and less as a percent of SIMO total revenue since the embedded storage area is growing rapidly.
A: SATA-3 revenue in 2014 will be about $15m, Ferri was $20m last year and should grow 20%-30% in 2014.
Q: Any possibility of a 3rd flash OEM? A: Yes!Since the Samsung eMMC program is over, they have some additional resources, and they are exploring taking on a 3rd eMMC customer. These programs take a long time to start, so it won't kick in right away, but it's something to look for in the future.
Q: Will SK Hynix implement it's own firmware? A: Yes, that is already happening for some strategic Hynix customers.
MS also seems to think that Micron and Toshiba will use Phison for their outsourced SSD controller provider, so the 3 SIMO NAND SSD OEMs must be SK, Sandisk and Samsung. Toshiba has a tight relationship with Phison/Kingston so that makes sense, but SIMO already announced that their SATA-3 SSD controller supports Micron NAND, so Micron might be on of SIMO's 3 OEMs. My guess would be SK, Micron and Sandisk.
The 20x valuation was MS's estimate. But they don't make a lot of sense with that bit of the report. At one point they say 20x the one year forward EPS forecast would get them to $32. One year forward sounds like 2015, but I think they mean 2014 EPS forecast of $1.49 as the "one year forward" forecast? They later say in their "base case" analysis that 17x their "one year forward" EPS forecast gets them to a $32 price target, maybe that is referring to 2015 forecast of $1.98, but 17 x 1.98 would be $34. I guess the conclusion is their "price target" analysis is messy, and probably not too important. Their main pitch seems to be that if SIMO's SSD controller business is as successful as it appears, the stock's PE multiple will expand. It's one of the very few ways to invest in the SSD trend.
It was done out of MS's Taiwan office, so that's probably why it didn't make much noise in the US.
Price target is $32.
This explains why SIMO went up 60 cents on their ex-dividend date of Nov 8th. I thought that was odd, but the recommendation must have pushed the shares up even though it traded ex-dividend.
MS thinks the new TLC eMMC customer is SNDK.
MS thinks SSD controllers are going to be a great segment for the next few years, and the only merchant providers are MRVL, SIMO and Phison. If SIMO does well (which seems likely with 3 NAND flash OEMs and one storage OEM already on board) then SIMO's stock should get a multiple expansion to 20x or so.
I disagree, I don't think SIMO is complicated at all. Anyone who understands semiconductors or the memory industry understands eMMC controllers, SSD controllers, LTE transceivers and the fabless semi model. And I don't think SIMO's valuation is all that low. 10x is OK. As visibility of the SSD program ramps increases SIMO's PE multiple will increase.
If you really think SIMO is so undervalued name me a few small cap fabless semi stocks that trade at 20x. Like....who? There are loads of small cap fabless semis, I don't think they get super high PE multiples. Usually to get a 20x ore higher multiple there has to be high barriers to entry, guarantees of repeat business, and other advantages that are uncommon in the fabless semi model. Maybe LTE is going to go to zero! Maybe SK will develop it's own internal eMMC controller and bye bye SIMO! Samsung just announced some new memory connectivity technology which is 3x faster than eMMC, maybe that will displace eMMC altogether! These concerns are real, so who wants to pay sky high multiples when there is a chance the whole business goes to hell?
arb, no one is insulted by your comments. You seem to be saying something is wrong with management because SIMO's valuation is not as high as you'd like it to be. It's pretty easy to explain the low valuation. From Jan 2013 to May 2014 SIMO's total revenues shrank, declined, went down, oh no (!!!), wrong direction, there was no, repeat, NO growth story with SIMO. To clarify that so you completely understand it, for about 18 months SIMO had NO growth story. None. Nada. It's LTE business and removable card business shrank, and the new products' growth were not enough to offset those declines. It's very difficult to value companies with declining revenues.
And then, since about May/June of this year, SIMO has returned to be a growth story. Will it come to pass? Who knows? It has only been during the last 3-4 months that SIMO has been forecasting significant growth going forward. Are they going to deliver? I hope so, but who knows?
The good thing about the current low PE is, if they continue to deliver growth we should get share price appreciation through both increased revenues/earnings, and hopefully multiple expansion. That's the big double whammy that makes you money. If the revenue growth is there, the share price will go up, don't sweat it. Small cap tech stocks are driven by increasing revenues, not share buybacks or dividend increases.
Next year they have a storage OEM that will be using SIMO's SATA-3 controller for 100% of it's SATA-3 SSDs. In addition they have 3 NAND flash OEMs coming on line in 2015. SIMO's 3x to 4x growth forecast for 2015 is a risk rated assumption. The programs at the OEMs are established programs where SIMO has replaced the previous controller source, so they are ongoing sales programs, not a start of venture.
Q&A - Talk about headcount. A- We have been increasing headcount aggressively. We have close to 800 employees, 2/3rds are engineers. A lot of development is on eMMC and SSD projects. We still need more engineering resources because there are more projects to take on if they have the engineering capacity. PCIe gen 2 and gen 3 will roll out in H2 2015. We plan for operating expenses to increase at a slightly slower rate than revenue growth. 30% operating margin is reasonable.
Q&A - Talk about enterprise SSD market. A- SIMO has a strong presence in all storage segments where they play, other than enterprise storage. Enterprise market is the next step, they are planning to enter, but it will take time. Stay tuned.
Q&A - Discuss the slowdown in China. A- SIMO is growing rapidly in China not due to inventory build, but due to high exposure to the cheap Chinese smartphone market. The total China phone market is so so, but Chinese cheap phone OEMs are going gangbusters, and they're using SK/SIMO eMMC.
Q&A - Talk about LTE. A- There aren't many LTE transceiver makers. They are forecasting flat 2015 sales at $12 million because they don't have visibility. SIMO thinks they are in 2% of Samsung's LTE phones, so if Samsung just increases their internal procurement a little bit, the upside is huge. But, who knows?
Q&A - What's the upside to gross margins? A- Mix has higher gross margins, and should have higher gross margins for the foreseeable future. This allows SIMO to be more aggressive with legacy products, and milk the removable storage cash cow
Lets see if there are any nuggets, the call is on the SIMO website.
- The SIMO CFO reviewed product segments, market shares and growth rates, nothing new.
Q&A - Describe eMMC Q4 expectations. A- Usually Q4 is soft, but we'll still grow more than 50% year on year.
The driver of their eMMC growth is SK's strength in the area - combination of SIMO controller + SK NAND flash + something about inexpensive component manufacturing = great popular product for SK. SK accounts for well over 90% of SIMO's eMMC sales.
Q&A - Do you expect eMMC market share gains next year? A- Perhaps, SK remains well positioned, and they are now targetting both low and high end, so the opportunity to grow is there. Next year eMMC should grow 15%-20%, SIMO at a minimum will grow at that rate.
Q&A - Will SK develop their own controller or get another eMMC controller supplier? A- All the controllers for SK's eMMC are jointly owned and custom designed, so SK partially owns the technology. If there were a risk to lose SK as a customer SIMO should get that visibility. At the moment SIMO doesn't see any risk of SK taking on a second controller maker or developing their own internal alternative. SIMO thinks they will remain as 100% provider of SK's eMMC controllers.
Q&A - How about diversification? A- SIMO gets diversification through end markets. SIMO is in 10 of the top 10 non-IOS smartphones. SIMO is in both the high and low end of the smartphone market. So SK's diverse customer base is how SIMO gets "diversification". Also, the new TLC eMMC customer will diversify SIMO's end market. TLC is weaker than MLC, but it's also cheaper, so if they get it to work it will likely grow.
Q&A - Talk about 2015 SSD expectations. A- Client SSD is doing better than expected. They sampled their first SATA-3 controller in summer 2014, and began shipping in 2014. 2014 sales are to the channel market, and SIMO's success here is due to Sandforce exiting the market.
The presentation is on the SIMO website. Lets see if they provide any interesting nuggets:
- In 2014 eMMC will grow about 20%, SIMO's eMMC will grow well in excess of 50%
- eMMC market will continue to grow strongly next year
- client SSD controllers began shipping in Q1 2014, and they expect to capture 20% of the "after market/channel business" for SSDs by the end of the year. (Not sure what he means by the 'after market')
Then, at about the 4 minute mark, the audio goes silent. Oh well! It starts again at about 6 minutes.
Q&A - NAND makers stress importance of controllers, can you discuss why you are successful as a merchant when all the NAND makers focus on internal controller solutions? A: Our technology is good. We have the track record and are cost competitive. Our success is SK Hynix's success.
Q&A - DIscuss the process of adding a new eMMC customer. A - There are limted customers for eMMC, and they don't want to help their customer's competitors.
Q&A - What are price points for eMMC, SATA and removable cards? A - roughly, cards are 25 cents, eMMC is 50 cents, and SATA-3 SSDs are $5, PCIe will be $10.
Q&A - Discuss gross margins. A - Gross margins are more affected by competition than price of the product. Cards are more competitive than eMMC and SSD. They are the only meaningful merchant eMMC provider.
Q&A - Discuss the 2015 SSD revenue guidance of 3x to 4x growth. A - $45m-$60m in 2015 seems reasonable. They have 3 NAND flash OEMs and a storage OEM, 3 of those 4 customers will begin sales in Q1, with the 3rd NAND flash OEM beginning sales in H2 2015.
Q&A - Discuss LTE, can you get customers other than Samsung? A - There are limited customers other than Samsung.
SIMO traded ex-dividend on Thursday, and STILL went up 60 cents more than the preceding day's close. I'll take it.
The next meaningful thing for them I suppose will be investor conferences. They present next Tuesday at RBC and Wednesdsay at Wells Fargo. Maybe they'll clear up any misconceptions that came out of the call and the Q3 results.
Where are these new reports? Do you have any link? If true, that sounds pretty good. I didn't know that Apple and Samsung were both already using TLC in their eMMC packages, the SIMO TLC eMMC customer isn't supposed to really get rolling until Q1 next year.
4- The industrial SSD business may decline - based on what they said on the call I got the impression that industrial SSD gross margin is below SIMO's 50% target, so they may be passing up on the opportunity to develop these products. If so, it could be a ~$20 million revenue headwind to overcome.
I'm not sure why the wind has been taken out of SIMO's sails following the strong Q3 report. Maybe investors were expecting Q4 revenue to be up sequentially, I don't know. Q4 may be up from Q3 if the quarter winds up better than expected (as has happened in Q2 and Q3). Anyway, here are my concerns for SIMO over the next year or so.
1- My main concern (which may be totally unfounded) is whether SK will remain a strong customer for MLC eMMC controllers. SK has said that they are transitioning a lot of MLC product to TLC next year. They didn't specifically say eMMC product would transition, but it's possible SK transitions its large MLC eMMC business to TLC eMMC, and uses something other than SIMO's controller in the eMMC package. SIMO only said they would grow at least in line with the eMMC market in 2015, and I think that implies the new 2nd eMMC customer may grow, but SK could theoretically shrink and SIMO still grow in line with the eMMC market. I have no idea if this is a serious concern for SIMO, but I would like to see them discuss it. If their SK business is expected to grow in line with the eMMC market, then why aren't they guiding SIMO's eMMC business to be significantly above eMMC market growth as the new 2nd eMMC customer will all be new incremental SIMO business? This is my only really big concern with SIMO now. The others are teeny in comparison.
2- LTE is a wildcard, they may get no more design wins. Nevertheless, at least it is producing now, so probably it will do OK, and probably better than their current guidance of flat in 2015.
3- The 3 NAND OEMs for the SATA-3 MLC SSD controller may be duds. I recall three years ago they had 2 eMMC OEM customers, SK wound up being awesome, Samsung apparently wound up being a dud. We won't know the answer until the 2015 year progresses, but still. You never know with these guys. The potential seems huge, but the potential for an OEM program to die out exists as well, time will tell.
- Q4 revenue guidance of down 5% to 10% is better than I expected, means about $80m in Q4.
- The ramp of the new eMMC MLC customer in Q1 next year combined with the beginning of volume production of the SATA-3 SSD for 2 of the 3 NAND OEMs should allow Q1 2015 revenues to be UP from Q4 2015. That means each quarter of 2015 may be MORE than $80m. That's huge.
- LTE up in Q4 versus Q3 is good, but this is a small area now relative to other areas
- Operating expenses are permanently higher, and going still higher. I guess that's necessary for growth, but it hurts EPS. Time will tell if its worth it.
- They said the MLC SATA-3 SSD controller will be closer to $15m than $20m in 2014.
- They added a 3rd SATA-3 SSD NAND OEM, but didn't raise forward 2015 SATA-3 SSD guidance. In fact they lowered it, since 3x to 4x $15m is less than 3x to 4x $20m. Isn't this 3rd customer going to buy anything?
- LTE in 2015 seems still totally up in the air. Their hope that it remains at about $12m seems to be just that, hopeful. I guess that's also natural until they get the design wins, but it's not inspring confidence.
- They said eMMC is 2015 will perform at least in line with the overall eMMC market. SIMO should be doing much better than "the market" in 2015 since the 2nd eMMC customer is ramping in Q1 2015. If SIMO only does as well as the eMMC market in 2015, and the 2nd customer ramps well, it means the 1st customer (SK Hynix) will decline. Is this what they meant to say? If SK performs in line with the eMMC market in 2015 and the 2nd customer ramps in 2015, SIMO should again SIGNIFICANTLY outgrow the eMMC market.
- Inventories went up $10m in Q3 despite expectations of declining revenues in Q4. That should have been discussed in greater detail, but they didn't seem to think it a big deal on the call.
That was a very average call! But, we still have expectations for lots of programs that ramp in Q1. I don't think it's dead money for 90 days, anticipation of a good Q1 (which will probably have up sequential revenues from Q4) may lift the shares. Or may not, we'll see.
Q: R&D and CapEx in Q3. What was the purchase of a facility? Will this large expense recur? A: The $4.5m expense was a one time expenditure for office space. The S&D engineering team is rapidly expanding, that was the $4.5m CapEx. Employee headcount will likely continue to increase as they seek more OEM business.
Q: Will the mass production of SSD controllers in 2015 lower gross margins due to volume price reductions? A: Volumes are just beginning, and once they get large they will get volume related discounts. But the long term gross margin target is 50%, but the SSD products NOW are higher than 50% gross margin.
Q: Northland Capital. Samsung up in December Q? A: Yes, that is LTE sales.
Q: Does next year's $12m reflect existing design wins, or do you need additional design wins to get to $12m? A: They need some design wins to get to $12m next year, but if they get more wins, next year could be higher than $12m
Q: Pac Crest - Why is inventory so high? A: Elevated now, the build is due to the rapid ramp of the last few quarters. They should decline over the next few quarters.
Q: eMMC from Hynix, might they take controller development internal? A: No real comment.
Lake Street Q: will Samsung be an eMMC customer in 2015? A: Difficult to comment. It depends on a lot of things.
Q: What's Op Ex forecast for 2015? A: We have lots of business opportunities, and we are still turning away business opportunities despite their recent expense growth. SIMO is still trying to get to 30% operating margin. More color on 2015 forecasts next quarter.
Q: What does channel inventory look like in USB and card businesses? A: it's generally very lean, and they think it is lean today.
Ladenburg - Discuss gross margins. A: Product mix has helped them recently. New products have above corporate average gross margins.
Q: LTE business, why is 2015 expected to be similar to 2014? A: No real answer.
Q: SSDs - do you have the software capabilities to make good SSD products. A: In SATA-3 we have all the know how.
Q: Someone - talk about eMMC. A: There is no meaningful eMMC merchant competitors. In 2015 low end smartphones will grow, and that's where SIMO is involved. The 2nd eMMC customer will ramp quickly next year. The barriers to entry in eMMC are getting higher and higher. SIMO is the only customer with a successful track record, and they ship 100s of millions of units per year.
Q: Talk about SSD challenges and opportunities. A: SIMO needs to grow R&D resources.
B. Riley Q: The 3x to 4x number refers to what? A: Client and cache SSDs.
Q: How about Ferri SSDs? A: It will also grow.
Q: Talk about Ferri. A: SIMO will provide more clear update in Q4, but they aren't aggressively growing Ferri.