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Silicon Motion Technology Corp (NASDAQ:SIMO)
Q1 2020 Earnings Call
Apr 29, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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 1934 as amended. Such forward-looking statements include without limitations, 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.

Ladies and gentlemen, thank you for standing by, and welcome to Silicon Motion Technology Corporation First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

I'd like to hand the conference over to your first speaker today, Mr. Chris Chaney, Director of Investor Relations and Strategy.

Thank you. Please go ahead.

Chris Chaney -- Director of Investor Relations & Strategy

Thank you, Karina. Good morning, everyone, and welcome to Silicon Motion's first quarter 2020 financial results conference call and webcast. As Karina mentioned, my name is Chris Chaney, I'm Director of Investor Relations at Silicon Motion. Joining me today on this call are Wallace Kou, our President and CEO; and Riyadh Lai, our Chief Financial Officer.

Following my comments, Wallace will provide a review of our key business developments and then Riyadh will discuss our first quarter results and our outlook. We will then conclude with a question-and-answer period. Before we get started, I'd like to remind you of our Safe Harbor policy, which was read at the start of this call. For a comprehensive overview of the risks involved in investing in our securities, please refer to our filings with the US Securities and Exchange Commission. For more details on our financial results, please refer to our press release which was filed on Form 6-K after the close of the market yesterday.

This webcast will be available for replay in the Investor Relations section of our website, 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 results and the matter 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'd like to now turn the call over to Wallace.

Wallace C. Kou -- President, Chief Executive Officer

Thank you, Chris. Hello, everyone and thank you for joining us today. I hope you and your family have remained safe and healthy during these uncertain times. Before I talk about our business, I will take a moment to send our thoughts to those affected by the virus and to thank our public healthcare leaders, doctors and nurses, who have been working tirelessly to keep our community safe during this crisis.

In Silicon Motion, we have planned accordingly to keep our employees safe and busy running. Our employees in US are sheltered and have been working from home. Our large operations in Taiwan with our controller R&D team, our corporate function, as well as our foundry and back-end partners located here have thankfully been less affected due to solid containment efforts by the government.

Nevertheless in unlikely event containment is breached, we are ready to roll out necessary work from home contingency plans, to maintain business continuity. And in China, our employee primarily in Shenzhen and Shanghai, started working from home in late February, and since mid-March have all safely returned to our offices. While we are very much aware of the growing economic consequences of this pandemic, in the near-term, our business had held up well, despite the challenging broader environment.

In the first quarter, we saw the tech food chain restock inventory depleted, after long extended Lunar New Year holiday in China and the building of safety stock. Sale to the channel market which is more fully and dynamic have benefited from restocking. Sale to the OEM market, on the other hand have largely been uninterrupted, with sales taking place according to forecast. And for this OEM market, we currently have a reasonable procurement visibility through the third quarter.

We have also been seeing gradual recovery in Chinese retail consumer demand, post the lockdown. In the first -- in our first quarter, sales declined 13% sequentially to $133 million, but grew 49% year-over-year. Our SSD controllers, eMMC+UFS controller, and SD solutions all grew strongly year-over-year. Earning per ADS for the quarter were $0.80, down from $0.96 in the fourth quarter of last year, but up from $0.42 a year ago.

While our business visibility is now more limited due to global economic uncertainties, we believe we remain well-positioned to grow our business, meaningfully this year led by our growth for all three of the key products, SSD controller, eMMC+UFS controller, and SSD solutions.

Let me now talk more about our key products. Afterwards I will hand over the call to Riyadh, so he can discuss detail of our financial performance and provide guidance. Starting with our SD controllers, sale of our SD controller were down 15% in the first quarter, but up 40% year-over-year. We expect our positive year-over-year momentum to continue at a more measured pace over the balance of this year, as a benefit of NAND price reduction last year continue to play out, in terms of a stronger OEM interest in adopting more SSD in PCs.

PC sales were more than seasonally down in the first quarter as COVID-19 outbreak affected demand and manufacturing supply chain in China. However, towards the end of the first quarter, we started seeing stronger surge in demand for mobile PC with SSD driven by work from home and online learning as the rest of the world started sheltering in place.

Separately, toward the end of the first quarter, we started seeing gradual recovery of SSD sales in the channel market, which includes a fragmented retail and online sale in China and elsewhere as well as system integrators for many industry verticals. The channel market will nevertheless remain fully and dynamic, with limited visibility.

We believe strong demand for PC with SSD will continue into the second quarter, and additionally we can already see some of these OEM programs extending through the third quarter. While currently, PC demand is strong, it is likely demand could weaken, later this year as the global economy issue worsens. We are however expecting client SSD sales to continue growing through this year, even if PC sales were to decline meaningfully due to increasing adoption of SSD versus HDD.

NAND prices fell sharply last year, which incentivized PC OEM to design more PC with SSD. As previously discussed, we won a disproportionately large share of SSD controller for these OEM programs, awarded to merchant controller suppliers last year. Most of these design wins are now shipping, and we expect our SSD controller sales to grow this year, both from increasing adoption of the SSD by OEM, and from market share gain.

Towards the end of the year, we will be bringing to market four different PCIe Gen 4 controller to specifically address four different market segments from enterprise to client, from high performance to mainstream and value line. Applications covered by our solution will include data center, PC and gaming consoles. Separately, planning ahead our engineering work is already well under way in architecting controller for next generation of PCIe technology, PCIe Gen 5.

Now, let me turn -- the strength of our SD controllers sales momentum later this year will depend on NAND supply demand condition, and related NAND price expectation. If hyperscale data center demand for enterprise SSD continue to be strong in the second half of this year, incremental supply of NAND for client SSD could be more limited, and our sales momentum could decelerate.

On the other hand, our sale momentum, could accelerate in the second half, if there is excess NAND supply from continued weak smartphone sales and the slowdown in hyperscale datacenter investments. Moving over to our enterprise SSD controllers, we have been shipping our enterprise controller for both Alibaba and Baidu’s Open Channel PCIe, NVMe SSD using their data center since the third quarter of last year.

Sale of this controller will scale further, this year as we ship through the full calendar year and at much larger volume. Separately, we have been shipping our 16 channel SM2270 for Kingston's U.2 data center class DC1000 ACP and our [Indecipherable] for Kingson KC2500 SSD with end to end data protection, targeting the work station and high performance computing market.

Now, returning to our eMMC+UFS controller for the mobile embedded storage market. eMMC+UFS controller sales declined 20% sequentially, but it grew more than 100% year-over-year. We expect our positive year-over-year momentum to continue. So, at a more moderate pace over the balance of the year, the smartphone continues to quickly transition from legacy eMMC to newer UFS embedded storage technology.

Two-third of our mobile embedded storage controller sales are already UFS controllers. Last year UFS was adopted primarily by premium phones. This year, we expect a meaningful portion of the much larger mainstream phone segment to also adopt UFS. For the full year, we are expecting strong UFS controller sales to our UFS customer and solid eMMC and UFS controller sale to Chinese module maker customers, and anticipate further contraction of our legacy eMMC controller sales to our Korean customer.

We are excited that our US UFS customer is in the industry technology leader, the first to bring to the smartphone market high performance uMCP with the LPDDR5 mobile DRAM, a product well positioned with OEM to scale rapidly. We are already shipping volume UFS 3.1 controllers and planning ahead R&D work for UFS 4.0 with data transfer rate even faster than PCIe Gen 4 has already began.

Near term, we still have risk exposure relating to our Korean customers. But, let me put this into perspective. Sales to this customer have already smaller than sale to our Chinese module maker customer, and we expect module maker sale grow this year to largely offset this Korean downside risk. Our module maker customer continues to successfully grow the eMMC sale to Tier 2 and Tier 3 low-end smartphone OEM in China, as well as to set-top box, smart TV and other device OEMs.

Since COVID-19 has expanded on a regional epidemic to a global pandemic, we now expect demand for smartphone to fall below our original expectation from early this year. In the first quarter, smartphone manufacturing and sale in China were affected by the lockdown in the country. But, since the end of the lockdown, smartphone sale in China have started to improve, but with the viral outbreak now a global issue, smartphone demand in the rest of the world has also been affected.

Nevertheless, we continue to expect strong UFS growth this year because we believe the transition from eMMC to UFS will more than offset weakened small --smartphone sales. Now, I will provide a few comments on our SSD solutions. SSD solutions sales grew about 15% sequentially in the first quarter, and about 70% year-over-year. We expect our positive year-over-year momentum to continue at roughly this pace, over the balance of this year as our Shannon Open Channel SSD for Alibaba scale further, supported by Ferri industrial SSD sales growth.

Beginning in the second quarter, our Alibaba project will be entirely on a consignment basis. Our commercial agreement where Alibaba procured NAND flash and consigned to us for our contract manufacturer to build SSD. Our Alibaba project is progressing smoothly both in the delivery of SSD as well as engineering work for the next year new projects.

To summarize, our first quarter performance was within our guidance and we remain optimistic about growing our sales through the rest of the year, despite the challenges posed by the COVID-19 pandemic. Our position in each of the three main engine of growth, SSD controller, eMMC+UFS controllers and SSD solution remains solid, and we are actively working to expand our market leadership with next generation technology and solutions. We believe scientists and doctors will soon find a way to defeat COVID-19 and we would like to come out on the other side, with an even stronger business.

Now I will turn the call over to Riyadh, to discuss our financial result and our outlook.

Riyadh Lai -- Chief Financial Officer

Thank you, Wallace, and hello, everyone. I will discuss additional details of our first quarter results, and then provide our guidance. First, I would like to mention 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 yesterday.

In the first quarter, revenue declined 13% sequentially but increased 49% year-over-year. Controller sales were seasonally soft and furthermore were affected by China's COVID-19 lockdown. SSD solutions grew sequentially with the ramp of new Shannon data center SSD projects. Gross margin in Q1 decreased to 48.2% from 49.3% in the prior quarter, due to changes in product mix. This quarter, sales of lower gross margin SSD solutions grew while higher gross margin controllers declined. Gross margins for both controllers and SSD solutions were stable sequentially.

Operating expenses in Q1 were $37.3 million, down almost $0.8 million from the prior quarter, primarily due to slightly lower R&D take out expenses. Operating margin in Q1 was 20.1% a decrease from 24.4% in the prior quarter. Our effective tax rate in Q1 was essentially zero because of a one-time tax benefit relating to the reversal of a previous accrual for tax risk. This risk did not materialize after a recent tax audit, and so the accrual was reversed.

Earnings per ADS in Q1 were $0.80 compared to $0.96 in the fourth quarter of last year. Stock based compensations in our operating expenses which we exclude from our non-GAAP results was $2.5 million in Q1. We had $372 million of cash, cash equivalents, restricted cash in stock -- short-term investments at the end of Q1 compared to $300 million at the end of the prior quarter.

We paid $12 million in dividends to shareholders, the second quarterly installment of our $1.40 per ADS annual dividend that was announced in October of last year. We did not repurchase any shares during the first quarter. Now, let me turn to our second quarter guidance and forward-looking business trends. For the second quarter, we expect revenue to grow in the range of flat-to-up 8% sequentially, to approximately $133 million to $143 million, because of growing global economic uncertainties, we are providing a wider than normal guidance range.

We expect sales growth of all three of our key products to be, flat-to-up in the second quarter. We remain optimistic about growing our full year sales and continue to believe all three of our key products should contribute towards full year growth. In the second quarter, we expect gross margin to be in the range of 47.5% to 49.5% with the midpoint slightly higher than what we delivered in the first quarter. Gross margin for our controllers should remain stable sequentially and gross margin for our SSD solution should improve as Alibaba sales change to a consignment arrangement.

In the second quarter, we expect operating margin to be in the range of 20% to 22% with midpoint roughly one percentage point higher than in the first quarter. We expect our effective tax rate for the second quarter and the full year to be in the 10% to 15% range. We are well-positioned financially to weather a potentially severe economic recession. We have a debt free balance sheet and $372 million of cash. Our business continues to generate strong free cash flow, $33 million in the first quarter.

Our flexible capitalized fab-less business model is resilient and has been stress tested. In 2009, during the severe recession that followed the global financial crisis, our sales halved, but we continue to generate positive free cash flow. We quickly rebounded and sales recovered within two years. Obviously, this is not a situation that we welcome again, and we do not know the severity of the upcoming economic slowdown, but must be prepared. Given the limited business visibility later this year, we believe it is more prudent to preserve liquidity and so we will not be repurchasing our shares during the second quarter.

This concludes our prepared remarks. We will now open the call to your questions.

Questions and Answers:

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Anthony Stoss from Craig-Hallum. Please ask your question.

Anthony J. Stoss -- Craig Hallum -- Analyst

Good morning everybody. Nice execution especially in the gross margin improvement side guys. A couple of questions, in the past couple of conference calls, you talked about having roughly 1% of the infrastructure spend in Alibaba, and whole lot of goal for several years later to get to 20%. Has anything changed or improved in that, that makes you more confident that you can move well above 1% that's the first question. Second question, on the ASP side -- so in the past, you've talked about taking market share, you discussed that this morning. Can you walk us through, kind of the conversion from SATA to PCIe and how your ASPs are improving? And then I have a follow-up after those two. Thank you.

Riyadh Lai -- Chief Financial Officer

Tony, first on the Alibaba business, we are clearly executing very strongly. Our products that -- open channel products from -- that we started delivering in the third quarter last year, we continue to deliver. The projects that we were working on last year are now in execution, we have been delivering since the first quarter, and we will deliver throughout the rest of this year, and we are already working on projects for next year. So, very well setup for further growth next year, and so we are fairly confident that our -- the share of business of SSDs at Alibaba will continue to increase in the next -- in the next few years.

To your second question about ASPs and market share. Our ASPs have been improving, and this is a typical situation where we have older product cycle out and newer product cycle in, so we have the SATA3 cycling -- the legacy product cycling out and the new PCIe growing, and then furthermore Wallace talked about the upcoming PCIe Gen 4 that we will bring -- we will be bringing to market later on this year. So, this will all be very helpful in our overall ASPs and margin profile. And furthermore these -- as we continue to stay ahead, in terms of technology for example investing in the PCIe Gen 5, this will help us continue to maintain our market leadership in terms of technology and solutions that we bring to our customers.

Anthony J. Stoss -- Craig Hallum -- Analyst

Okay. Two quick follow ups. Wallace talked about having visibility through Q3 now on the SSD controller side, would you expect your Q3 sales from that segment to be above seasonal or above what you've seen in the past, and then also Riyadh, I know you're not guiding to -- but any thoughts just on where gross margins go from Q2 levels, into the back half of the year?

Wallace C. Kou -- President, Chief Executive Officer

I think it's very clear to us, OEM customer give us really [Indecipherable] to the end of Q3, and with a very clear forecast. And we do see the program because every PC OEM they started changing new program from end of the September, that's why our visibility -- the current program extend to end of the Q3. I think regarding our -- the momentum for our star rating for the growth, it all depends on NAND allocation from our major NAND partner because, as you know, you all know well, this first half data center demand very, very strong.

Some NAND maker allocate tremendous NAND output to data center. In the second half, the NAND -- the data center demand still maintained strong -- we see the NAND or SSD acceleration will be slowed down. However, if data center demand it become more moderate, and smartphone remain very weak and we do see NAND maker will allocate more NAND to client SSD controller. So, our situation to whether we can see further acceleration of our ASIC controller all depend on NAND balance in the market.

Riyadh Lai -- Chief Financial Officer

Tony, let me also get to you on your fourth question relating to our gross margin profile for the second half of the year. We expect our gross margin for our controllers to continue to remain stable throughout the rest of the year. They've been stable in the first half year, and we expect gross margins for our controllers to be stable for the rest of the year.

At the same time, beginning in the second quarter, our gross margins for our SSD solutions have improved a bit, with the transition of our Alibaba sales to a consignment business arrangement, which helps our gross margin there. So, as the year progresses, what we'll need to focus on, is the mix of products, the mix of our controller sales versus our mix of solutions sales, the more controller sales, the better our gross margin and conversely the more solution sales gross margin could dip a bit in -- from period to period.

Anthony J. Stoss -- Craig Hallum -- Analyst

Understood. Thank you.

Operator

Your next question comes from the line of Mehdi Hosseini from SIG. Please ask your question.

Mehdi Hosseini -- SIG -- Analyst

Yes. Thanks for taking the question. I want to go back and revisit the gross margin profile and your solution business is seeing improving gross margin because of the consignment -- your mobile exposure, I would expect would also see a better gross margin because of UFS. In that context why should gross margins remain stable? Why shouldn't it improve from here on? And I have a follow up.

Wallace C. Kou -- President, Chief Executive Officer

Okay. Let me give you the answer quickly. For Alibaba consignment business, see Alibaba normally, the main ramp up is Q3 and ramp down in Q4. So Q2 just start to ramp, so the consignment contribution for gross margin in Q2 is not as significant. Regarding UFS controller, I cannot comment regarding the gross margin, but I think the primary -- we sell to the -- one of our US customer, but ASP is a much higher. However, the volume is also -- moment is higher. But gross margin, it all depends -- the business turn with our major customer.

Riyadh Lai -- Chief Financial Officer

Mehdi, let me also add further to what Wallace communicated. We have a lot of products; we have a lot of controllers, we have older products, newer products within our mobile embedded storage product class. We also have a lot of products within our SSD controllers from our older SATA programs to our newer PCIe. We have many different categories of products, and so, we are always constantly blending old products and new products. And so, as a result we've been able to hold our gross margin quite stable and part of blending obviously is coming from new products like the UFS products and the PCIe Gen 4 products.

Mehdi Hosseini -- SIG -- Analyst

Sure. Thanks for the detailed color, and then one question for Wallace and specifically as it relates to a strategy. You're doing a good job in accruing cash. I understand why you want to be prudent and put the buyback on hold, but I guess I'm also thinking that in uncertain environment like current environment due to the coronavirus, there may be M&A opportunities as the prices may become depressed, and in that context Wallace, do you see M&A now a higher priority than a buyback?

Wallace C. Kou -- President, Chief Executive Officer

I think under the market uncertainty with many, many potential changes, it's not a good time to buy -- to do the share buyback. We are not trying to compete with our shareholder regarding purchase a cheaper stock. Our goal is to add value to our shareholder, to continue growth for the business.

Mehdi Hosseini -- SIG -- Analyst

Does that mean that M&A becomes a higher priority?

Wallace C. Kou -- President, Chief Executive Officer

It probably won't be the best timing either, regarding the M&A during this moment.

Riyadh Lai -- Chief Financial Officer

Yeah. Broadly Mehdi, there is just a lot of uncertainty, especially as the year progresses, and as you know transactions take time to execute and the more uncertainty, the more difficult it is to plan accordingly for the execution of these hyper projects.

Mehdi Hosseini -- SIG -- Analyst

All right. Thank you.

Operator

Your next question comes from the line of Craig -- B.Riley FBR. Please ask your question.

Craig A. Ellis -- B.Riley FBR -- Analyst

Yes. Thanks for taking the question, and gentlemen congratulations on the good execution in the first quarter. So, I just wanted to start with a follow up to the point on SSD solutions and generations of the product that you have -- shipping to your lead customer. The question is, as you go from shipping first generation, since the third quarter of last year to second generation and third generation, later this year. Is there overlap in those product sales or as you're bringing out next generation product, does that really cannibalize prior generation, and what are the margin implications within that business, as you go from one generation to the next?

Wallace C. Kou -- President, Chief Executive Officer

So, regarding the enterprise SSD solution business model, the revenue we plan really is a design win from last year. So, that this year all the product in under development is prepared for next year revenue ramp. So, this is one year ahead when you really -- before you have a revenue. So, the pricing everything will be discussed by end of the last year regarding this year was volume, was pricing, and was really NAND with a qualification in NAND mandate.

So, regarding Alibaba consignment NAND procured is what is procured by Alibaba themselves, but they have nothing to do with us. But, when we go to second generation, for example, that's really for is it -- is 2021 sale revenue, for this year still maintain the first generation, even with shipping partially from third quarter last year; main volume to maintain the same solution, because enterprise customer would like to see the stability of product shipment.

Riyadh Lai -- Chief Financial Officer

Craig, let me also add to what Wallace said with the gross margin. The gross margin of our Alibaba program last year were less attractive because of NAND pass-through. We were not selling to Alibaba under a consignment model last year. Last year's business with Alibaba, we bought the NAND, NAND was -- would flow through our balance sheet and our P&L and so the gross margin related to these sales were fairly low.

Beginning in the first quarter, we started transitioning from this buy and sell to a consignment and going into the second quarter, all of our sales to Alibaba will be on a consignment basis. And so, as we move to consignment basis, the gross margin are going to be a lot more attractive, and so as we look into next year, when everything should be in full consignment model, our gross margin will continue to be quite good for -- as it relates to our Alibaba sales.

Craig A. Ellis -- B.Riley FBR -- Analyst

Excellent. And then, and then just a follow-up regarding next year since both of you mentioned it that within the last month or so even last -- there's been reports that, that customers planned capex for next year will increase very significantly in over a multi-year period, so can you just talk about the volume expectations that are part of the discussions, you've been having with the next-gen products for calendar 2021. How has that changed year-to-date, in light of the changing expectations?

Wallace C. Kou -- President, Chief Executive Officer

We are very -- we feel very happy for our customer to have a -- such a big investment for the capital, for the data center. However, we cannot really discuss regarding the portion of how many bit of pie we got from our customer. But, we remain in very strong relationship and working for new technology to grow together for next year.

Craig A. Ellis -- B.Riley FBR -- Analyst

Excellent. And then, if I could just follow-up with one more back on the SSD controller side of the business. I believe, there was a mention of gaming platforms and the potential to participate in those. Can you just talk about that opportunity, and how that could unfold and are there some of the similar NAND supply implications for participation there? What are the key variables that would determine, whether you could be in and any thoughts on share would be helpful as well? Thanks gentlemen.

Wallace C. Kou -- President, Chief Executive Officer

I think our customer are all interested in growing their presence in key market segment, consumer electronics of which gaming console is a part, is one of big three clients of this segment; the other two segment are PC and external storage. Our focus is to provide SSD controller, so our customer can compete to win. Our customer are programmed into the market segment and customer to focus, when they have a choice. Gaming console OEM should start introducing their first device with SSD later this year, with the first year volume likely small. I think you should expect to see our controller in gaming console SSD in the near future when volumes scale. The OEMs refresh their console design annually, and we do have a very, very strong product for PCIe Gen 4 being in that category.

Craig A. Ellis -- B.Riley FBR -- Analyst

Thanks guys.

Operator

Your next question comes from the line of Karl Ackerman from Cowen. Please ask your question.

Karl Ackerman -- Cowen -- Analyst

Hey. Good morning everyone. How would you characterize control our inventory levels at your mobile and SSD controller customers? Additionally, are you also seeing any abnormal amount of order cancellations or push outs from either mobile or consumer SSDs or perhaps any order push-outs from the social media company in your Shannon business? Then I have a follow up.

Wallace C. Kou -- President, Chief Executive Officer

It's very hard for us to comment the inventory level for our customers. I think, for large customers they all have a different strategy and allocation when they see certain market, and decline they will move to -- to work to data center PC client SSD. We don't know exactly how they manage because every major customer for the smartphone maker, minimum they have to keep a two month inventory, that is a standard rule. But, we really cannot comment, we don't know their inventory level.

Karl Ackerman -- Cowen -- Analyst

Got it. Thank you, Wallace. And just back on capital allocation and inventory, I know that inventory days ticked up a few weeks in the March quarter. How do you think about working capital for the June quarter, and for the balance of the year, particularly as we switch to a consignment model for your SSD solution business? Thank you.

Riyadh Lai -- Chief Financial Officer

Karl, our inventories at the end of the first quarter went up a bit. It went up to roughly 128 days, which is higher than 101 days in the prior quarter, but it's still much lower than the 154 days that we had a year ago. So, if you were to look at our -- the four quarters of last year, and look at the inventory days of -- average inventory days of the four quarters of last year, they averaged about 132 days. So, 128 days that we had in Q1 is still lower than the average of last year, so, we feel fairly comfortable about our inventory days. We've been investing in terms of working capital, in terms of inventory, building inventory to support our OEM SSD and mobile controller programs. So, these are all very necessary working capital investments in order to support our customers.

Karl Ackerman -- Cowen -- Analyst

Thank you.

Operator

Your next question comes from the line of Suji Desilva from ROTH Capital. Please ask your question.

Suji Desilva -- ROTH Capital -- Analyst

Hi Wallace, hi Riyadh, nice job on the execution in these challenging times. So, a couple of questions. First of all, on the SSD controller, do you expect -- what was your share in SATA and then do you expect a similar or higher share in PCIe controllers?

Wallace C. Kou -- President, Chief Executive Officer

So we -- I think we mentioned in the last -- fourth quarter, probably the first time we see our PCIe sale revenue exceed SATA, but we didn't really comment regarding the unit. So far, within the SATA, the total unit still maintained very healthy -- the channel market, and they're going to stay for the long tail in the channel market. But PC OEM they are quickly transitioning from SATA to PCIe. Most of our new design socket, design project all PCIe, NVMe.

Riyadh Lai -- Chief Financial Officer

So, broadly let me also add, Suji. We believe our market share has been increasing. It was roughly a third last year, and then likely have inched up and we believe will continue to inch up as this year progresses.

Suji Desilva -- ROTH Capital -- Analyst

Okay. So PCIe has already crossed over here. And then second question on SSD solutions, a lot of questions on the call I know, but can you compare what to expect the peak revenue to be, given all the moving parts for this business in the next few quarters versus what it was the prior peak, just to understand relatively quantitatively qualitatively, how it will compare?

Wallace C. Kou -- President, Chief Executive Officer

In normal regular season, the peak sale revenue for SSD solution will be in Q3.

Suji Desilva -- ROTH Capital -- Analyst

And I was talking about the magnitude of the peak Wallace, whether it will be similar to the prior peak or whether it'd be higher or lower given the...?

Wallace C. Kou -- President, Chief Executive Officer

We really cannot comment the reality -- the peak will be -- what's the magnitude, but really the Q3 will be the major sale demand from the SSD solution, especially for Alibaba.

Suji Desilva -- ROTH Capital -- Analyst

Okay, fair enough. And then, my last question is on the UFS market and smartphone. Do you have a sense of what the exiting 2020 attach rate or mix of UFS in the smartphone market is relative to end of 2019, just to understand how quickly it's ramping up in the mid-range versus the premium?

Wallace C. Kou -- President, Chief Executive Officer

And because we see the Qualcomm really support the uMCP, this is a UFS controller with NAND and mobile DRAM that really speeds up to transitioning for uMCP to replace eMCP for mainstream smartphones. We see the transition moving very quickly, but definitely by end of this year I think that uMCP and UFS will be more than 50%, 60% of the total smartphone market. So, the transition is very, very fast, very, very quickly we do see in all the major smartphone OEMs favor UFS and uMCP solution.

Suji Desilva -- ROTH Capital -- Analyst

Okay. Thanks for the color there. Good. Thanks guys.

Operator

Your next question comes from the line of Gokul Hariharan from JPMorgan. Please ask your question.

Gokul Hariharan -- JPMorgan -- Analyst

Yeah. Hi, thanks for taking my questions. First of all, let me ask a little bit about how you feel about demand. I understand that there are a lot of volatility and variability in demand. But, if I think about second half, among the three segments on a half on half basis, do you feel that all three segments are likely to struggle, and we should see probably flattish or even declining half on half momentum for all three segments, or do you think that some segments could actually still power through and continue to grow in the second half of the year?

And also on the demand side, could you talk a little bit about -- compared to the previous call for the Q4 2019 earnings call, could you talk a little bit about where the demand has increased, especially because of the stay at home, work from home kind of demand. Has it been primarily SSD controllers in the PC OEM side, or have you also seen some increases in the SSD controller for channel customers, as well as on the SSD solutions? And I have a follow up question as well.

Wallace C. Kou -- President, Chief Executive Officer

Okay. Let me answer your first question, regarding COVID-19 impact -- regarding global economic -- regarding the second half. Although our visibility is not clear for second half, but we believe for SSD solution and our client SSD will maintain strong regarding growth rate. For smartphone/mobile because really there's a big uncertainty, because we think we have a good momentum, because we have a great design win and pipeline from both US OEM and China module makers, we own majority with China module marker design wins, but it's very difficult to predict smartphone trend. As you can see Samsung and Apple all cut their forecast.

So, really I think we have to watch month by month to see how the recovery will go, that is -- so we have confidence, all our three product lines are going to grow compared with last year, but for the second half, we are pretty sure our SSD solution and client SSD controller will continue to grow.

Gokul Hariharan -- JPMorgan -- Analyst

Do you worry that there is any sort of pull in demand that has happened in Q1 and Q2 which could result in some weakness in the PC side of the equation. I think some of the other semiconductor company such as Intel and AMD have talked about PC likely to kind of cool off going into second half, given a lot of the pull in demand. So, do you still feel comfortable that the SSD controller can still grow, even if PC demand is down half on half in the second half of the year?

Wallace C. Kou -- President, Chief Executive Officer

Yeah. That is correct because our major customer for first half, the NAND makers, they allocate much more NAND output to data center. So, we really did not really benefit much stronger PC OEM demand for first half, but we already see the growth because we have a much broader socket from broader customer base. So, we see the second half, if data center really demand slowing down our smartphone maintains weak position, our NAND makers -- our OEM customer will reallocate NAND output to client SSD.

Riyadh Lai -- Chief Financial Officer

Gokul, let me also add. When we look at our visibility, we're looking at our visibility from two different perspective. The perspective of our order books, and the perspective of a more theoretical approach. Our order books today for our OEM programs relating to both on the controller side as on the SSD controller side, as well on the mobile controller side, we already have visibility extending through to the third quarter.

It's the fourth quarter that's a bit more problematic, right. But at the same time when we look at our overall business, from a more theoretical approach, based on a more sensitivity analysis what we also see is, even if overall PC sales were to decline and decline meaningfully, and also what if overall mobile phones were to decline fairly meaningfully this year -- we believe our overall SSD controller as well as UFS controller sales will continue to do very well because of the transition.

The transition on the PC side from HDD to SSDs, the speed of this transition will continue to offset the slowdown -- potential slowdown of PCs, and likewise, on the smartphone side, if smartphones were to decline meaningfully, the speed of the transition from eMMC to UFS will more than offset the decline of overall smartphones.

Gokul Hariharan -- JPMorgan -- Analyst

Okay. Thanks Riyadh. One quick follow up on the inventory, could you talk a little bit about -- is the inventory that you carry on the balance sheet mostly solutions related, NAND flash, for example? Or is it a significant part of it is controllers as well? And any thoughts on how you will -- your inventory is likely to look at, especially for the controller side, exiting Q2?

Riyadh Lai -- Chief Financial Officer

Gokul most of our inventory are for controllers. Controllers that we have built for the important OEM programs that we're expecting to ship in upcoming months and quarters. But, we also do have some flash that we've built for our non-Ali SSD solutions projects, and so those are also important for our business that we're expecting in upcoming quarter.

Wallace C. Kou -- President, Chief Executive Officer

And let me add a comment regarding our inventory. As you all know, TSMC the foundry capacity is overbooking, it's about 100% overbooked to 50% overbooked. That's why the lead time become much longer. In normal -- in normal period, the lead-time is about like a 2 month to 2.5 months. Now, the lead time is 4 months to 6 months depending on the geometry and technology. That's why I think 128 days, that really is the minimum we need because the cycle time, when you give appeal to [Indecipherable], it takes that much time for four months, that's the standard for TSMC policy today.

Gokul Hariharan -- JPMorgan -- Analyst

Okay, got it. Thank you.

Operator

Your next question comes from the line of Ari Shusterman from Needham & Company. Please ask your question.

Ari Shusterman -- Needham & Company -- Analyst

Hey guys. It's Ari I'm taking the question for Raji Gill. So first, wanted to talk about your expectation for client SSD growth in the second half 2020, given the different scenarios you guys outlined, particularly regarding hyperscale SSDs, the growth -- how the growth of that was -- the supply of client SSDs and their business?

Riyadh Lai -- Chief Financial Officer

We are expecting our overall SSD controller sales to continue to grow strongly with PC -- near-term, we have a lot of demand from our customers for work from home, online learning that's driving a lot of incremental procurement in near-term. And as the year progresses, we're going to continue to expect more PCs to continue to ship with SSDs, as they transition away from hard disk drive. So, this is a longer term trend that we've been seeing and we will continue to see through the rest of this year.

Ari Shusterman -- Needham & Company -- Analyst

Okay. And yeah, regarding your Ferri products line, can you provide some color on the traction that has been receiving?

Wallace C. Kou -- President, Chief Executive Officer

Our Ferri product line, last year is due to the price declines that's why we slowed down a little bit, but this year we are growing into the right direction. Our major growth from Ferri product line is one, for automotive, second is really for the server BOOST storage product and we will see very strong growth and rebound starting from Q2 this year.

Ari Shusterman -- Needham & Company -- Analyst

Okay, that's all from me guys. Thank you.

Operator

Your next question comes from the line Donnie Teng from Nomura. Please ask your question.

Donnie Teng -- Nomura -- Analyst

Thank you, Wallace and Riyadh for taking my question. My first question is also regarding the gross margin. I think, it probably has been answered, but just little bit curious about -- because in the first quarter guidance, you gave a relatively conservative gross margin guidance, but in the result is like -- you still reached like over 48% gross margin, and the second quarter gross margin guidance also, not that bad compared with the first quarter guidance. So just curious of what exactly changed when we gave off the first quarter guidance already this year versus the result and guidance right now? Is there any new products that maybe previously we did not include in our guidance, such as like infrastructure related controllers. Just curious about that. Thank you.

Riyadh Lai -- Chief Financial Officer

Well Donnie, originally we were expecting slightly stronger overall revenue growth for the first quarter, and we ultimately came in the lower half of what we had guided. So, for us to have made our stronger number that we were originally anticipating, we were anticipating slightly stronger SSD solution sales. And so if we had the stronger SSD solution sales, our overall gross margin would have been blended down, more than what we saw when the SSD solutions were at slightly lower levels.

Additionally, our SSD solution -- the gross margin, also improved a little bit versus what we had originally anticipated. So, a combination of these two factors help boost our overall gross margin profile for the first quarter.

Donnie Teng -- Nomura -- Analyst

So, just a quick follow up. So, is there any like -- or is there any gross margin improvement for like controller business as well or it's just maintained as previous level, like last year?

Riyadh Lai -- Chief Financial Officer

Our controller gross margins, sequentially, from fourth quarter, first quarter were very stable. They're essentially unchanged sequentially.

Donnie Teng -- Nomura -- Analyst

Okay got it. And my second question is regarding to your second half outlook, potentially. So, it sounds like, as Wallace said for SSD solution and client SSD controllers, you probably are more positive on that. Just curious about whether our growth momentum -- in terms of both quarter-on-quarter and year-on-year or just simply referring to year-on-year growth? Why I am asking…

Riyadh Lai -- Chief Financial Officer

For both. For both quarter-to-quarter, year-over-year.

Donnie Teng -- Nomura -- Analyst

Okay, got it. And may I have a follow up, is that you mentioned about maybe some NAND suppliers will translate their NAND to consumer products in second half, if there is any demand slowdown on the maybe server side. [Indecipherable] referring to like customer like Intel, what I asked is because it's like Intel seems like to have stronger momentum for server side in the first half, and also, I think their client SSD consortium in the first -- client SSD consortium in the first quarter is not that high for Intel's product?

Wallace C. Kou -- President, Chief Executive Officer

We really cannot comment individual customers, because every customer have their choice, priority regarding how to maximize their best interest and profit. So, that's why -- but overall, we believe our client SSD will continue to grow strongly in second half, even quarter-to-quarter or year-over-year. But it doesn't matter NAND, really data center demand is stronger or weaker, I think we can grow either in mobile side, our client SSD, our enterprise SSD solution.

Donnie Teng -- Nomura -- Analyst

Okay, great. Thank you.

Operator

Your next question comes from the line of Jeff Hsu from MS. Please ask your question.

Jeff Hsu – Morgan Stanley -- Analyst

Hi. Thanks for taking my question. So, first I want to quickly follow up on Donnie's question on the China SSD solution opportunities. So, I think -- let me try to ask the question in a different way. So, if we look at your key Chinese customers' recent announcement in the cloud investments, how does that affect our outlook, compared to last time when you provided your SSD solutions outlook?

Wallace C. Kou -- President, Chief Executive Officer

I think, their announcement will be for three year capital investment. I don't think it will affect our outlook for this year. And just remember our business with the Alibaba is changed to consignment base. So revenue at a dollar sale is not that great, but the margin will be wonderful.

Jeff Hsu – Morgan Stanley -- Analyst

Okay, okay thanks for that. And maybe just a very quick follow-up, when you mentioned first quarter SSD solution revenue was tracking a little behind your original expectations -- may I understand like, how longer is your typical order visibility in your SSD solution business?

Wallace C. Kou -- President, Chief Executive Officer

Regarding the Q1 -- particularly, regarding our SSD solution portion, there is a couple of million dollars which we're supposed to ship, and we cannot ship. It's not because customer can't sell or postpone, it's because if certain material were being impacted by China lockdown, and customer cannot produce and ship the product to their end customer, that's why that revenue is being postponed. So normally, I think our visibility is very high for SSD solution, the order will probably -- $4 million to $6 million [Indecipherable] to us.

Jeff Hsu – Morgan Stanley -- Analyst

Okay, thanks that's very helpful. And maybe, if I may ask a second question on your full-year outlook. So, if you look at -- just to recap the comments, you mentioned during this call, so the client SSD outlook remains pretty strong with visibility extending at least, at OEM side into third quarter. SSD solution's visibility also seems pretty well. So, I'm curious, by the withdrawal of your full year guidance, does that imply fourth quarter uncertainty is really, really high and that may like fluctuate so much compared to your previous guidance you provided?

Riyadh Lai -- Chief Financial Officer

Jeff there are a lot of -- broadly what we've seen is a regional epidemic issue centered in China, expanding into a massive global pandemic was economic issues -- a regional economic issue broadening into a massive global economic recession, likely a severe one. And so, as the year progresses the more, we're going to be facing -- more and more uncertainty.

From our own perspective, our order books, we have order book visibility through the third quarter, but when it comes to the fourth quarter, we no longer have that. And with all the various moving parts, we feel that if our large OEM customers are -- don't have visibility in the fourth quarter, then that -- it will also impact our own visibility. So the prudent thing is to not guide what we do not have.

Jeff Hsu – Morgan Stanley -- Analyst

Okay. Thanks. Thanks, Riyadh. That's very helpful. So, that's all of my questions. Thank you.

Operator

There are no further questions at this time. I would like to hand the conference back to Wallace Kou for closing remarks.

Wallace C. Kou -- President, Chief Executive Officer

Thank you everyone for joining us today, and for your continuing interest in Silicon Motion. In the second quarter, we will be attending virtual investor conferences hosted by several banks. The schedule of our attendance will be posted in our website. Until we next meet, stay safe. Goodbye for now.

Operator

[Operator Closing Remarks]

Duration: 65 minutes

Call participants:

Chris Chaney -- Director of Investor Relations & Strategy

Wallace C. Kou -- President, Chief Executive Officer

Riyadh Lai -- Chief Financial Officer

Anthony J. Stoss -- Craig Hallum -- Analyst

Mehdi Hosseini -- SIG -- Analyst

Craig A. Ellis -- B.Riley FBR -- Analyst

Karl Ackerman -- Cowen -- Analyst

Suji Desilva -- ROTH Capital -- Analyst

Gokul Hariharan -- JPMorgan -- Analyst

Ari Shusterman -- Needham & Company -- Analyst

Donnie Teng -- Nomura -- Analyst

Jeff Hsu – Morgan Stanley -- Analyst

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