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Silicon Motion Technology Corporation (SIMO) Q4 2018 Earnings Conference Call Transcript

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Silicon Motion Technology Corporation  (NASDAQ: SIMO)
Q4 2018 Earnings Conference Call
Jan. 30, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen and welcome to the Fourth Quarter Silicon Motion Technology Corporation 2018 Earnings Conference Call. My name is Ann and I'll be your conference moderator for the day. At this time, all participants are in listen-only mode. Later, we'll conduct a question-and-answer session.

Before we begin today's conference, I've been asked to read the following forward-looking statements. This conference call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 as amended. Such forward-looking statements include, without limitation, statements regarding trends in the semiconductor industry and our future results of operations, financial 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 a variety of reasons. Potential risks and uncertainties include, but are not limited to, continued competitive pressure in the semiconductor industry and the effect of such pressure on prices, unpredictable changes in technology and consumer demand for multimedia consumer electronics, the state of and any change in our relationship with our major customers and changes in political, economic, legal and social conditions in Taiwan.

For additional discussion of these risks and uncertainties and other factors, please see the documents we file from time to time with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements, which apply only as of the date of this conference call. I must advise you that this conference is being recorded today, Wednesday, 30th of January 2019.

I like to hand the conference over to your first speaker for today, Mr. Jason Tsai, Senior Director of Investor Relations and Strategy. Thank you. Please go ahead, sir.

Jason Tsai -- Senior Director of Investor Relations and Strategy

Thank you and good morning everyone and welcome to Silicon Motion's Fourth Quarter 2018 Financial Results Conference Call and Webcast. My name is Jason Tsai and with me here is Wallace Kou, our President and CEO; and Riyadh Lai, our Chief Financial Officer.

The agenda for today is as follows: Wallace will start with a review of our key business developments, Riyadh will then discuss our fourth quarter financial results and provide our outlook. We'll then conclude with Q&A. Before we get started, I like to remind you of our Safe Harbor policy, which was read at the start of this call. For a comprehensive overview of the risks involved in investing in our securities, please refer to our filings with the US SEC. For more details on our financial results, please refer to our press release, which was filed on Form 6-K after the close of market yesterday. The 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 GAAP to non-GAAP financial data can be found in our earnings release issued yesterday. We ask that you review it in conjunction with this call.

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

Wallace C. Kou -- President, Chief Executive Officer and Director

Thank you, Jason. Hello everyone and thank you for joining us today. I will first update you on our business and Riyadh will review our financials and provide outlook later on this call.

For the fourth quarter, our sales of $123 million, declined 11% sequentially and were near the midpoint of our guidance range. Full-year 2018 sales were $530 million, up 1% year-over-year. Earning per ADS for the quarter was $0.83, down 13% sequentially. Full-year 2018 earning per ADS was $3.41, up 21% year-over-year.

Let me first talk about our client SSD business. Revenue from client SSD sales increased about 30% for the full-year, much stronger than what we expected at the start of this year, although a bit less than with our revised 35% target in Q3. SSD controller sales to our NAND flash partner did increase by about 35% year-over-year. We believe that demand for SSD grew as NAND flash prices declined meaningfully and SSD affordability improved. In Q4, we were expecting stable sequential SSD controller sales. Q4 SSD controller sale, however, declined 20% sequentially as our China module maker customer became more risk adverse in procuring NAND component and building SSD as falling NAND prices accelerated dramatically. Despite NAND flash maker holding back NAND shipment and building inventory, module makers became more cautious and they now want to try to catch a falling knife.

Looking to 2019, we believe our client SSD controller sales will continue to grow as NAND prices fall further. NAND industry supply will grow robustly this year as the yield improve on 96-layer 3D NAND and 64-layer QLC NAND ramps. Demand from all major market segment on the other hand remains soft at today's prices and additionally, inventory level in the NAND vendor are at elevated levels. It is very likely that NAND prices will continue falling rapidly in the first half of this year and increasingly likely that the NAND prices will slide at a more moderate rate in the second half. This pricing trend will help improve affordability and create incremental demand for client SSD. Despite positive industry trend, sales visibility this year is significantly more limited than in the past.

Some of our NAND flash partner would typically provide us with 12-months controller procurement forecast, have reduced their forecast period to just six months. We believe they are struggling with their own limitation in operation visibility due to demand uncertainty from weakening China economy conditions, US-China trade negotiation and other issues.

Additionally, today's NAND market condition are very volatile and NAND vendor are still revising plan for reducing their NAND inventory to minimize impact to their profitability. Despite this near-term limitation to our sales visibility, we are pleased by our solid design pipeline and momentum going into 2019. Exiting Q4, we had over 70% more client SSD controller program with our three NAND flash partners than we had the prior year. These programs improve SSD controller for managing 64-layer QLC 3D NAND and 96-layer TLC and QLC NAND. We recently began shipping our SSD controller to a NAND partner for one of the world's first 96-layer TLC based SSD. Recently, AnandTech reported a very significant breakthrough for us as one of the world's leading module maker with whom we previously had a zero business engagement.

Let me also note that while falling NAND flash prices were driving increasing SSD adoption long-term, the effect is not immediate. Sale of SSD to PC OEM are generally based on long-term contracts that take time to renegotiate when NAND price fall and new device qualification take time even as OEMs steadily increase the number of platform using SSD.

Module makers are opportunistic, so react more rapidly to falling NAND prices, but as previously discussed, they are more risk-averse when NAND prices are falling dramatically. We remain optimistic that over the next few years that almost 300 million client HDD currently shipping annually will be mostly replaced by client SSD and we remain the leading merchant supplier of controller for these SSD, whether to NAND flash maker, automotive maker, for either the OEM market or the channel market.

Now, let me now update you on the progress of our data center and enterprise standard and open-channel NVMe SSD controllers. We are progressing well with our two hyperscale customers, the performance tuning of Shannon open-channel SSD for Alibaba and another BAT customer. 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. For Chinese hyperscalers, unlike their US counterparts, we cannot just provide them with an SSD controller. In order for us to sell an SSD controller to Chinese hyperscalers, we must convert our controller into complete SSD solutions. We are also engaging with other global hyperscalers relating to our data center SSD controller and initial feedback we have gotten has been very encouraging.

Turning to our eMMC+UFS controllers, sales this quarter were down about 15% sequentially. For full-year 2018, sale of our eMMC+UFS controller were down about 10%. We were impacted by declining global smartphone shipment and more meaningful decline in China domestic smartphone market into which we have a big exposure. In 2018, we made a strong progress growing the sales of our new UFS controller to our US flash partner and believe our customers UFS mobile-embedded memory sales for the year very likely exceeded the UFS sale of our other mobile-embedded memory customer who was using their own UFS controllers.

For the full-year, our UFS controller sales accounted for more than 10% of our overall UFS plus eMMC controller sales. In 2019, we will continue to actually support our UFS partner in their UFS mobile-embedded memory sales growth -- growth objective focusing to leading global smartphone OEMs. Additionally in 2018, our primary eMMC controller customer started diversifying away from low-end, low density mobile application and redirected their NAND supply toward SSD and other applications. During the year, we sharply increased our support and sales of eMMC controller to Chinese module makers who have been stepping into this new market opportunity. In 2019, we believe our primary eMMC customer will further diversifying away from mobile application and we will continue to actually support our China module makers who are seeking to grow their sales of the eMMC mobile embedded memory.

Now let me discuss our SSD solution business. Sales for this sector grew modestly in Q4 as our Ferri industry SSD sales was stronger than expected, which partially offset the expected continued decline of our Shannon data center SSD sales. In Q4, we provided a small shipments of open-channel NVMe SSD to Alibaba and another Chinese hyperscaler for live testing in their data centers. We continue to make a solid progress in delivering toward our milestones which include optimization and fine-tuning our SSD performance with low latency and remain on track to believe volume commercial sales in second half of this year. 2019 will be a challenging year for us. Nevertheless, for the factors that we can control, we feel good about solid progress that we have made.

We continue to win a disproportionately large share of all the client SSD controller project awarded by NAND flash vendor to merchant suppliers. We are actively working to help our US NAND flash partners grow their UFS embedded memory sales and gain market share. We are also actively supporting Chinese module makers grow their presence in the eMMC embedded memory market and our new open-channel SSD project continue to track toward the second half of 2019 ramp.

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

Riyadh Lai -- Chief Financial Officer

Thank you, Wallace, and hello everyone. I will summarize our financial results and then provide our outlook. Before I begin, I would like to reiterate that our comments today will focus primarily on our non-GAAP results, unless otherwise specifically noted. A reconciliation of our GAAP to non-GAAP data is included with the earnings release issued today.

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

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

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

Our effective tax rate in Q3 declined to 8% from 12% in Q3 due to the benefit of a one-time reversal of previously accrued tax liability. Our effective tax rate for the full-year declined to 11% from 21% in 2017 primarily due to more favorable tax arrangements from business process restructuring. Earnings per ADS in Q4 declined to $0.83 from $0.95 in Q3. Earnings per ADF for the full-year increased to $3.41 from $2.81 in 2017. We ended the year with 1307 employees, an increase of 15 employees from Q3 and an increase of 57 employees from year-end -- increase of 57 employees from year-end 2017.

Stock-based compensation in our operating expense, which we exclude from our non-GAAP results was $12.1 million in Q4, higher than the $4.5 million in Q3 due to the seasonal timing of RSU awards. Stock-based compensation was $20.4 million for the full-year, higher than the $15.2 million in 2017 due to higher RSU awards.

We had $289 million of cash, cash equivalents and short-term investments at the end of Q4, $20 million less than in the previous quarter and $78 million less than a year ago. Cash flow from operations generated $35 million in cash in Q4. In Q4, we had $5 million of CapEx primarily for routine purchases of software and design tools. In November, we paid $11 million of dividends -- $11 million of dividends to shareholders, the first $0.30 per ADS quarterly installment of our annual $1.20 per ADS dividend that was announced in October of last year. In the fourth quarter, we spent $35 million to repurchase 1 million ADS at an average price of $34.52. This is our first quarter of share repurchases as part of our $200 million 24-month share repurchase program that was announced in November 2018.

Now let me turn to our Q1 and full-year 2019 outlook. First, I will reiterate that while we can provide full-year directional trends and likely scenarios for our key products as well as outline related risk and opportunities, visibility of our sales is worse than usual as our customers are also operating with worse than usual business visibility. Without a clear sales forecast, we believe that guiding directionally for the full-year is more prudent than guiding with false precision to a specific sales range. In Q1, we expect revenue to decline 16% to 21% sequentially with broad-based weakness in near-term demand. For full-year of 2019, until we receive more concrete procurement forecasts from our customers, there is a reasonable likelihood that our sales revenue this year could be approximately the same as the prior year.

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

We expect eMMC+UFS controller sales to decline further in Q1 as both smartphone and demand and related smartphone build activity remain weak. For the full-year, we expect global smartphone shipments to continue falling and this could affect our eMMC+UFS controller sales. Additionally, the strength of our full-year eMMC+UFS controller sales will be dependent on our NAND partner maintaining or gaining UFS market share. Strength of our sales will also be dependent on the ability of our Chinese module maker customers to scale their eMMC sales if our primary eMMC controller customers were to diversify further away from this market.

Based on our order books, we are expecting sales of both Ferri industrial SSDs and Shannon data center SSDs to decline in Q1. Sales forecasts from our customers suggest that our Ferri SSD sales should grow modestly this year. Our Shannon SSD sales should start rebounding in the middle of this year when our open-channel SSD projects start volume commercial production. Q1 gross margin is expected to be between 47% and 50%. While we will benefit from favorable mix of higher gross margin SSD controller sales, our eMMC gross margin will fall as we sell more older parts. Gross margin of our SSD solutions and legacy products such as memory card controllers should also decline. For the full-year, if our product mix remains the same as 2018, our gross margins should remain unchanged year-over-year. Since our business is dynamic, it is likely that our product mix could change quarter-after-quarter.

Q1 operating margin is expected to be between 12% and 16%. We expect Q1 operating expenses to be higher sequentially due to more R&D project take-outs. For the full year, we expect operating margin to be similar -- to remain the same as 2018 if gross gross margin were to remain unchanged year-over-year. We expect to continue tightly managing operating expense this year. Stock-based compensation in Q1 is expected to be in the range of $4.5 million to $4.6 million and for the full-year to be roughly similar to 2018.

Tax rate in Q1 is expected to be approximately 18% and for the full-year to be approximately 15%. This concludes our prepared remarks and we will now open the call to your questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, we'll now begin the question-and-answer session. (Operator Instructions) Our first question comes from the line of Mehdi Hosseini of SIG. Please ask.

Mehdi Hosseini -- Susquehanna Financial Group -- Analyst

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

Wallace C. Kou -- President, Chief Executive Officer and Director

Yes, for the -- our SSD shipment in Q4, we do have multiple distributor. However, all sales through (ph) to the end customers right? Due to the inventory NAND price decline, our module customers become more cautious to take order, but for OEM, I'm seeing this very strong same as we forecasted. Regarding the Shannon, the open-channel SSD produce, I think as we said, we are progressing very well with our two hyperscaler customer in China and we are in the final tuning. We already started live testing in two data centers from -- since December.

Now we're in the final tuning and they also need to modify the phone software and we are tuning the performance as well as reduce the latency to meet all the different application.

As you all know, data center have a multiple application, different business units have different demand, so the complexities are very large. We have very high confidence. So far, we will ramp our hybrid -- our open-channel SSD product by the middle of this year.

Mehdi Hosseini -- Susquehanna Financial Group -- Analyst

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

Riyadh Lai -- Chief Financial Officer

Mehdi, these are our SSD solutions and so these SSD solutions of ours generally have materially lower gross margins compared to our SSD controllers. While these products are also, these open-channel SSD controllers are going to be using our controllers, so we're going to be able to recognize the controller profitability, the bulk of the bill of materials for these SSDs are NAND flash and since NAND flash accounts for a very large part of the bill or the bom (ph) costs, our gross margins from these sales are much lower than our traditional controller products.

Mehdi Hosseini -- Susquehanna Financial Group -- Analyst

Okay. Thanks so much.

Operator

Thank you. Our next question is from Karl Ackerman of Cowen. Please ask your question.

Karl Ackerman -- Cowen and Company -- Analyst

Hi, good morning, gentlemen. I want to go back to Mehdi's question on the Shannon and Ferri guidance. Within your implied revenue guidance for the Shannon systems and Ferri SSD business units, how do you think about the implications that falling NAND prices will have on your ASPs. I am of the assumption that those SSDs are priced on a 90 day lag. And I guess, are there certain take-or-pay contracts you have in place that underscore your more bullish outlook or I guess, is your expectations of a second half ramp driven primarily by improvements in demand elasticity? And I have a follow-up, please.

Wallace C. Kou -- President, Chief Executive Officer and Director

So, I think for data center customers, it's not like a channel or module customer, even like PC OEM. I think the pricing, they will be discussed settled (ph) even from last year December. So there are all lines of volumes, all lines of delivery everything. So with the price, they would definitely (inaudible) that can predict for 2019, but all the prior supply volume need to be settled. I think this is very common for either China as well as in US.

Riyadh Lai -- Chief Financial Officer

Let me also clarify, we have our SSD client -- client SSDs, where we are supplying controllers to both the NAND flash makers as well as to module makers. These flash makers or module makers are using our controllers to build SSDs for PCs and other client devices. For these sort of products, these are very sensitive to changes in the price of NAND and these are the products that are going into applications that are currently mostly using hard disk drives and as such, they are very sensitive to changes in price relative to HDDs and so these are products where we're expecting price elasticity of demand to have a major -- a much larger impact to our overall sales. Now, these products are very different from the data center SSDs that Wallace had talked about. These are the SSDs that are going to Alibaba where we're using our new open-channel SSD controllers, but we're also building an entire module. These applications are much less price sensitive to changing prices of NAND.

Wallace C. Kou -- President, Chief Executive Officer and Director

The price will be starting decline quarterly, the price will be settled -- negotiate, settle down even by last year December.

Karl Ackerman -- Cowen and Company -- Analyst

That's clear. I appreciate that. For my follow-up, on your mobile business, it would seem the transition from eMCP to uMCP based smartphones could be fairly lumpy. Based on your implicit outlook for 2019, how are you thinking about reigning in fixed costs as you also contemplate UFS acceleration and customer concentration risks? Thank you.

Wallace C. Kou -- President, Chief Executive Officer and Director

Regarding the UFS, we work closely with one of our US flash NAND maker and we are in very good progress because today, the major smartphone player for Android is just about five (ph) maker, it is very, very straightforward. I think that our partners and customer focus on the five leading smartphone maker and we are already in initial shipment for some programs and certainly, we are processing qualification. So I think we have a pretty good confidence and visibility about the ramping about of the program. In addition, for the China module maker due to low-end smartphone, still pretty healthy growing in the India market. So for NAND makers, they have less interest to do low-density eMCP or uMCP. So, we believe our China module maker customer, they can grow very rapidly for the low-end low density eMCP or uMCP product for the low-end smartphone market.

Riyadh Lai -- Chief Financial Officer

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

Karl Ackerman -- Cowen and Company -- Analyst

Thank you, gentlemen.

Operator

Thank you. We have a question from Gokul Hariharan of JP Morgan. Please ask your question.

Gokul Hariharan -- JP Morgan -- Analyst

Yes, hi. Thanks, Wallace and Riyadh. So first of all, on SSD adoption as well as SSD controller -- client SSD controller's growth. Riyadh, could you repeat your expectation for the full-year? Did I hear right, if you said that the full-year you're expecting to pretty much a flat line? Secondly, could you talk a little bit about, what has been the inhibitor in terms of growth given the pretty sharp decline in NAND flash prices?

And is there a very different behavior you are seeing in terms of growth between your PC OEM customers and some of the module makers particularly the China module makers? That was my first question.

Wallace C. Kou -- President, Chief Executive Officer and Director

Yes, regarding our SSD controller growth, we believe on unit-wise (ph) we definitely will grow roughly around about 20% or higher. However, due to the NAND price decline sharply, our SSD might be impacted. So also we'll work very hard for the gross margin. In addition, we believe -- because of the falling NAND prices will drive increasing adoption for long term, but the effect is not immediate. Sales of SSD to PC OEM are generally based are generally based on long-term contracts. That take time to renegotiate when NAND prices fall and new device qualification take time and so we are -- our OEM project seems very stable and -- but just visibility only about six months and as previously discussed, there are more risk averse (ph) for module maker to take the -- our controller due to the sharp NAND price drop, but we still own very large percentage of module maker for SSD. So we are confident when the price becomes stable and the demand, our visibility will be much stronger this year.

Riyadh Lai -- Chief Financial Officer

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

Gokul Hariharan -- JP Morgan -- Analyst

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

Wallace C. Kou -- President, Chief Executive Officer and Director

We have been working with this particular leading module maker in the world since early 2018. It's quite interesting they come to us and looking for a long-term partnership. So, we have a multiple program working with this customer from channel as well as to PC OEM and a future enterprise product just step-by-step, but we generally try to be quiet at the moment. Hopefully, we're going to see very bright result in the future.

Gokul Hariharan -- JP Morgan -- Analyst

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

Riyadh Lai -- Chief Financial Officer

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

Gokul Hariharan -- JP Morgan -- Analyst

Okay, thank you.

Operator

Thank you. We now have Rajvindra from Needham and Company. Please go ahead with your question.

Rajvindra S. Gill -- Needham and Company -- Analyst

Yes, thanks for taking my questions and I joined a little bit late, so you might have mentioned this before, but I just wanted some more clarification about the comment that the flash vendors are unable to provide a full-year forecast. Usually it's 12 months and now you're saying they can't (ph) provide six months and you had mentioned that the NAND pricing has fallen significantly, but it doesn't necessarily -- it takes time to see those effects in the marketplace.

I'm just trying to understand that, because in the past, the client SSDs has been a very price elastic market, you would see adoption pretty quickly. So why is it that this particular time is different from -- is it different from other periods where we have seen NAND pricing drop and there's a lag that's taking effect?

Wallace C. Kou -- President, Chief Executive Officer and Director

I think there's a -- there's a couple of factors here. First of all is the NAND, the inventory is in the very, very high level and it will take time for NAND maker to sell-through the inventory and still (ph) have the output come out in Q1 and Q2. So each of the NAND maker are designed -- they're receiving the forecast on PC OEM also only you have six months. They don't have a full-year visibility. So they would like to be more cautious to give (ph) a six month forecast instead of one year -- full-year forecast. So that's the current situation, but design win and production is very solid and when actually we have a more design win pipeline in our hand and you're seeing, because 96-layer TLC and (inaudible) QLC design for both SATA and PCIe, we have 70% more than last year. Now for China module maker, due to the NAND price decline sharply, so they try to be more cautious, they do not want to buy a large volume of NAND.

So they step-by-step monthly buying the NAND and ship the product based on their customer demand. So our visibility for module makers is even worse. That's why we -- very hard to us to give very concrete guidance. We understand client SSD demand is very strong and continually from Q2 all the way to the end of the year, but we cannot give a concrete number regarding how much sales revenue grow for client SSD at this moment.

Rajvindra S. Gill -- Needham and Company -- Analyst

That's very helpful, Wallace. Is this a -- based on your experience, is this a unique -- a very unique situation that we're in right now where even the NAND makers are not getting forecasts -- full-year forecasts from their customers or is this kind of par for course when we are in this situation?

Wallace C. Kou -- President, Chief Executive Officer and Director

I would say, this is a very unique situation right now. Many, many people in the food chain underestimate the NAND oversupply situation.

Rajvindra S. Gill -- Needham and Company -- Analyst

Now, the oversupply situation, are you seeing this being driven also because of weakening demand obviously in smartphones than in other markets. Is this just purely supply -- oversupply because of the transition to 3D NAND. Any kind of comments on the demand part of the equation?

Wallace C. Kou -- President, Chief Executive Officer and Director

There are many factors, many data point here that relates to global economic slowdown, relate to US China trade war, relate to many, many uncertainty. Also smartphones slowing down and the replacement cycle extended and PC market, it just stays flat or just declined gradually. So I think the situation -- because the yield of a 3D NAND is much better than in the past. So the NAND output the big growth just compared with current economic situation, it doesn't match and the gap becomes very big.

So NAND makers all try to find a effective way to move the inventory. We definitely benefited some of the movement to move the inventory because client SSD are probably the best vehicle to move the NAND, but however the current situation is very unique, it's very special and it never happened before in the past.

Rajvindra S. Gill -- Needham and Company -- Analyst

And last question in terms of your view of NAND supply and the NAND ASP is falling, any sense there in terms of how much more over -- what is the supply from your vantage point? How much greater is that going to be than say previous thinking and any view on NAND pricing, how much is it going to fall this year based on your expectations?

Wallace C. Kou -- President, Chief Executive Officer and Director

I think it's very hard for me to comment for that because that's a NAND maker related question. I think you can see the other financial reports, everybody really have a very, very high inventory -- excess inventory, they need to figure out how to move, but however, Q1 also is a weak season for the full-year and we definitely can see gradually rebound from second quarter and all the way to the higher season in Q3, Q4 and we're going to see more applications to consume the NAND. We're going to see data centers start to repurchasing the NAND from late Q2 to early Q3. So I think that eventually, the difficult situation will be resolved, but the Q1 is the worst season for the full-year.

Rajvindra S. Gill -- Needham and Company -- Analyst

Thank you.

Operator

Thank you. (Operator Instructions) Our next question is from Mike Crawford of B. Riley FBR. Please go ahead with your question.

Michael Roy Crawford -- B. Riley FBR -- Analyst

Thank you. Do you think in 2019 you're going to end up having a new number one customer displacing your prior top customer?

Riyadh Lai -- Chief Financial Officer

Mike, can you come again? Your question is -- are we going to have another large customer replace our current large customer?

Michael Roy Crawford -- B. Riley FBR -- Analyst

Yes, do you think we'll have a change in who would your largest customer is from what -- the prior number of years has been Hynix?

Wallace C. Kou -- President, Chief Executive Officer and Director

Well, we cannot -- we really don't know that. I think we definitely have a growing customer from NAND makers. We also have a growing strong customer for module makers.

Michael Roy Crawford -- B. Riley FBR -- Analyst

Okay and just switching gears a little bit to regarding open-channel. So I know visibility, one, if I just directionally, how do you see potential pathways for open-channel controllers in SSD comprising 1% of your total business, say there's a more of design win thing in 2019 and then you see a real ramp up in 2020? Or what -- directionally, where do you see that heading?

Wallace C. Kou -- President, Chief Executive Officer and Director

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

Michael Roy Crawford -- B. Riley FBR -- Analyst

Okay, thank you. And then just the last question. In the US market or both markets, I mean, the initial opportunity is to get into a data center application, but how far off are we talking when you consider open-channel SSDs helping to handle data being generated in the increasingly autonomous automobiles and other applications.

Wallace C. Kou -- President, Chief Executive Officer and Director

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

Michael Roy Crawford -- B. Riley FBR -- Analyst

Okay, thank you.

Operator

Thank you. My next question is from the line of Anthony Stoss of Craig-Hallum. Please go ahead.

Anthony J. Stoss -- Craig-Hallum Capital Group -- Analyst

Hi, guys. Riyadh, can you indicate if you have any open-channel revenue in your essentially flat 2019 revenue guide? And if you do, maybe a little bit of a range. Second question on the -- again on open-channel, can you also provide more color on the tuning that still needs to be done, if it's done on Silicon Motion's side, it still needs to be done on Alibaba's side? And then lastly, I would also love to hear a little more color on, you talked about design activity on SSDs being strong, maybe kind of share with us what you think in terms of number of designs that will go live in the second half of '19 versus second half of '18. Thank you.

Riyadh Lai -- Chief Financial Officer

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

Wallace C. Kou -- President, Chief Executive Officer and Director

Regarding the tuning process, I think the hyperscalers and us both need to put the effort in doing the tuning process. Well, you know the -- each of the data center, they probably provide -- they have 20, 30 (ph) different business units and applications are quite different and so the test condition and requirement are also different. That's why they complicate the whole process. That's why, maybe, you wonder why is the tuning taking so long because when it start a couple of hundred board testing on the (inaudible) server, it just takes time to see the result, different workload and all the different condition.

So it just -- it's in the final stage of the tuning process. That's why we have pretty good confidence and the production will happen in mid of this year and as a schedule from last year and we should see the meaningful revenue from open-channel SSD solution through the two China hyperscalers customer.

Anthony J. Stoss -- Craig-Hallum Capital Group -- Analyst

Thank you, Wallace. And then Riyadh, getting back to the design activities, kind of what you expect in terms of number of units launched in the second half of '19 versus second half of '18, I guess I'm driving at is if you take second half of '19 and the first half of 2020, kind of more accurate picture in your business. So any color would be helpful?

Riyadh Lai -- Chief Financial Officer

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

Anthony J. Stoss -- Craig-Hallum Capital Group -- Analyst

Okay, thank you.

Operator

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

Wallace C. Kou -- President, Chief Executive Officer and Director

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

Operator

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

Duration: 56 minutes

Call participants:

Jason Tsai -- Senior Director of Investor Relations and Strategy

Wallace C. Kou -- President, Chief Executive Officer and Director

Riyadh Lai -- Chief Financial Officer

Mehdi Hosseini -- Susquehanna Financial Group -- Analyst

Karl Ackerman -- Cowen and Company -- Analyst

Gokul Hariharan -- JP Morgan -- Analyst

Rajvindra S. Gill -- Needham and Company -- Analyst

Michael Roy Crawford -- B. Riley FBR -- Analyst

Anthony J. Stoss -- Craig-Hallum Capital Group -- Analyst

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