Silicon Motion Technology Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 9 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to Silicon Motion Technology Corp Third Quarter 2023 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 Please be advised, today's conference is being recorded. 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.

Operator

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 Demands 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.

Operator

We assume no obligation to update Any forward looking statements, which apply only as of the date of this conference call. And now, I'd like to hand the conference over to Mr. Jason Tai, VP of Investor Relations and Finance. Please go ahead, sir.

Speaker 1

Thank you, Good morning, everyone, and welcome to Silicon Motion's Q3 2023 financial results conference call and webcast. Joining me today is Wallace Koh, our President and CEO. Wallace will first provide a review of our key business developments and I will discuss our Q3 results and outlook. Following our prepared remarks, we will conclude with a Q and A session. Please note that Riyadh Lai, our CFO, will not be joining us on today's call.

Speaker 1

Riyadh worked intensively on the merger with MaxLinear over the last 15 months, while continuing to manage all the CFO responsibilities. He is now devoting his time to prepare for the arbitration against MaxLinear. As a result, I was asked to lead our investor related activities. We will then conclude with Q and A. Before we get started, I would like to remind you of our Safe Harbor policy, which was right at the start of this call.

Speaker 1

For a comprehensive overview of the risks involved in investing in our securities, please refer to our filings with the U. S. Securities and Exchange Commission. For more details on our financial results, please refer to our press release, which was filed on Form 6 ks after the close of market yesterday. This webcast will be available for replay in the Investor Relations section of our website for a limited time.

Speaker 1

To enhance investors' understanding of our ongoing economic performance, We will discuss non GAAP information during this call. We use non GAAP financial measures internally to evaluate and manage our operations. We have therefore chosen to provide this information to enable you to perform comparisons of our operating results in a manner similar to how we analyze our own operating results. The reconciliation of the GAAP to non GAAP financial data can be found on our earnings release issued yesterday. We ask that you review it in conjunction with this call.

Speaker 1

As we have previously shared, Silicon Motion filed its notice of arbitration against MaxLinear for its willful and material breaches of the merger agreement that was signed on May 5, 2022. The company is seeking payment of the termination fee of $160,000,000 further substantial damages, interest and costs. Please note that the arbitration process is confidential and we will therefore not be commenting further on this matter today. With that, I will turn the call over to Wallace.

Speaker 2

Thank you, Jason. Hello, everyone, and thank you for joining us today. It's good to speaking with you again after such a long break To provide an update on the progress we have made over the past year and a half, since our founding nearly 3 decades ago, The strength of our business and the fundamental drivers of our growth have always been our technology leadership and the quality and depth of our customer partnership. Today, the statement has never been truer. Silicon Motion Technology leadership continues to enable us To win sockets and grow our share as NAND makers, at the same time, it drives them to rely on us more each day to outsource more in order to target a wider range of end markets that their own R and D does not have the bandwidth to support.

Speaker 2

Our relationship with our module maker customer continued to deepen to our broad portfolio of solutions, enable them to be The most competitive in their respective end markets. Our technology leadership also paves the way for us To expand into additional markets like enterprise and data center storage, automotive, Commercial, Industrial and IoT. And now that is clear that we will remain a standalone company. Our engagement with our customers have been steadily increasing as well. Our unwavering focus Home Technology leadership will be what continue to drive our growth longer term and ensure our partnership With both NAND maker and module maker alike, remain strong.

Speaker 2

With that, I will turn to our results for the Q3. Our business continues to gain momentum with revenue growing 23% sequentially to $132,000,000 And earning per ADS growing 67% sequentially to $0.63 We saw inventory level begin to normalize Across the majority of end markets and OEM audio activity picked up in the 3rd quarter, Leading to our strong revenue growth in the quarter, we expect these trends to continue and I'm confident they will lead to strong sequential growth in the Q4. While the first half of twenty twenty three was challenging Due to the global micro economy weakness and excess inventory in the channels, the inventory level across Our end markets are normalizing and OEM demand continue to improve. Today, I am pleased to say that We are shipping to more customers than ever before, working with all the major NAND makers on the multiple engagement across several end markets and expanding our footprint among market leading module makers with the innovative solution for the smartphone, PC, automotive, Industrial, Commercial and Enterprise Markets. We continue to invest in our technology leadership and in coming quarters Expect to introduce several industry leading solutions for SSD and embedded market that will drive sustainable long term Profitable growth for our business.

Speaker 2

QLC NAND is essential to further improve affordability of solid state storage, but also posted greater challenging to overcome relating to worsen endurance reliability, data integrity and performance. As flash makers continue to roll out next generation, higher density 3 d KLC NAND With 200 to 300 plus layers, controller technology requirements are scaling up significantly, Requiring the use of more sophisticated LDPC as well as our proprietary 3 d Ray technology For better error correction and recovery, data protection and reliability, these next generation controllers We'll require finer design and manufacturing processes to deliver a much higher performance while maintaining the same low power consumption for the previous generation solutions. We invest early in supporting KLC NAND and Sika Motion have more experience Managing the technology than any other company in our industry. Our leadership in these areas are second to none, especially in the merchant market. We expect to continue to maintain our leadership in the market With these next generation solutions and weighing meaningful share of new products with all NAND flash makers as well as all the leading module makers.

Speaker 2

From an end market standpoint, excellent inventory in the PC and smartphone markets have plagued The industry since late 2022 when the global economy weakened and demand slowed. It has taken nearly a year We believe the inventory level in both the PC and smartphone market are normalizing. We are seeing more consistent audio pattern Our customers and better visibility that are more closely aligned with end market demand. We are optimistic that This trend will continue and that the industry is well positioned to return to growth in 2024. Now let me now discuss our SSD controller business.

Speaker 2

Our SSD controller business grew 5% to 10% sequentially In the Q3, we are beginning to see the PC market rebound and believe that the replacement cycle of corporate For the current PCIe Gen 4 SSD market, we just began shipping our Gen 4 controller to our newest Korean NAND maker customer for their PC OEM customers and we're now supplying our SSD controller to all Our strong share with all the leading module maker continue to position us well in the PC OEM and channel market for SSD. We expect Gen 4 SSD to continue to be the majority of the PCSD market through 2025 and PC OEM will begin This PCIe Gen 5 SSD will enable much higher data bandwidth and performance That will be critical for next generation PC and will also enable new capability such as AI It's edge and will eventually become standard. We already secured design wins with other flash makers That our outsourcing controller to merchant suppliers and expect to begin shipment in late 2024. Our first gen PHY controller is taping out in this quarter and well served a high performance market with an 8 channel solution Using TSMC's 6 nanometer technology that will deliver unparalleled performance and low power consumption, PC OEM expects significantly higher performance with Gen 5 SSD, but at the same time power consumption of Gen 4 SSD requiring us to move signal meter processor technology to achieve both high performance as well as low power consumption requirement.

Speaker 2

This new SSD controller ASP will be nearly double that of our comparable 8 channel Gen 4S controllers. We expect to tape out our 2nd PCIe Gen5 controller, a 4 channel solution in the Q2 of next year and begin sampling in the second half of next year. We expect this solution to help expand the adoption of Gen 5D into more Mainstream PC in 2026. For the enterprise market, we will sample our Mt. Titan PCIe Gen 5 This quarter, we are working with several enterprise and data center customers around the world We expect to generate initial revenue in late 2024 with more meaningful revenue in 2025 and beyond.

Speaker 2

Now moving to our eMMC and UFS business. Revenue from these products rebounded strongly in the 3rd quarter And more than double as demand ramp ahead of the holiday season and inventory level in the channel and smartphone OEM are normalizing. Our diversified customer base of NAND flash makers and module maker have expanded our share with the leading handset OEMs. UFS 3.1 as well as the UFS 2.2 solution remain the dominant interface for smartphones And we continue to win new programs with both flash makers and module makers. UFS 4 is only adopted by Factory smartphone today and we do not expect to see adoption of UFS 4 into mainstream smartphone until 2025.

Speaker 2

We are working on our own UFS solution also using 6 nanometer process technology to deliver higher performance While maintaining the same power consumption for the UFS 3.1, we expect to tape out the product in early January and start sampling in the first half of twenty twenty four. With mass production expected in early 2025, We are already engaged with the flash makers as well as module maker targeting leading handset OEM and on track to meet their expected ramp for UFS 4 in 2025. We are also seeing expanding Use case of eMMC and UFS beyond smartphones and have significant wins already in the automotive, IoT, commercial, industrial market with NAND makers as well as multi makers. We believe we are well positioned to continue to see our eMMC and UFS business to continue to grow in 2024 and beyond. We have talked a lot about expanding use case of solid state storage and I would like to highlight a particular end market As an example of our success in diversifying our business, in the automotive market, our embedded and SSD controller As well as our Ferro SSD are making significant progress with the flash makers and the module makers, We are shipping our controller to 2 flash makers already and in development with 2 additional flash makers For solutions targeting this market, our Fera ISD are already shipping to several top car makers, including 2 of the largest Japanese automakers.

Speaker 2

As we said, we see significant opportunity Beyond just smartphone and PC to continue to grow our business and the success we are seeing in the automotive market across all our product groups is a good example of the traction we have been making. Overall, we are pleased by the progress we are making despite micro economy high winds for the industry this year. Our focus on our technology leadership has yielded strong customer traction, strong share in the market we serve and diversify the end market our products are using. Combined, we expect all of this to drive growth in 2024 As the end market and the NAND flash industry economy improve, now I will turn the call over to Jason to discuss our financial results and our outlook.

Speaker 1

Thank you, Wallace, and good morning, everyone. I will discuss additional details of our 3rd quarter results and then provide our guidance. Please note that my 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 our earnings release issued yesterday. In the Q3, we grew sales 23 percent sequentially to $172,000,000 SSD controller sales grew 5% to 10% sequentially.

Speaker 1

EMMC and UFS controller sales more than doubled sequentially as we benefited from ramping holiday season build and normalizing inventory levels. SSD Solutions sales decreased 5% to 10% sequentially. Gross margins in the 3rd quarter were stable sequentially and remained at 42.5%. Operating In the Q3, we're $49,500,000 $1,500,000 higher than the prior quarter, primarily from higher R and D expenses to support our technology leadership. Operating margin in the 3rd quarter was 13.8 percent, an increase from 8.3% in the 2nd quarter.

Speaker 1

Our effective tax rate in the 3rd quarter was 22.8 an increase from the 12.7 percent tax rate in the 2nd quarter. Earnings per ADS were $0.63 67% higher sequentially. Stock based compensation and our operating expense, which we exclude from non GAAP results was $3,800,000 in the 3rd quarter. We had $350,300,000 of cash, cash equivalents, restricted stock and short term investments at the end of the 3rd quarter compared to $305,000,000 at the end of the 2nd quarter. Inventory decreased again sequentially in the Q3 to $199,000,000 from $251,000,000 in the 2nd quarter.

Speaker 1

Earlier this week, our Board declared a new annual dividend of $2 per ADS. The first $0.50 installment will be paid in November. Now let me turn to our Q4 guidance and forward looking business trends. In the Q4, we expect revenue to be up 10% to 15% sequentially to approximately $190,000,000 to $198,000,000 We expect SSD controller sales to be stable in the 4th quarter, while eMMC and UFS controller sales will increase. 4th quarter gross margins is expected to be stable and be in the range of 42.5% to 43.5%.

Speaker 1

4th quarter operating margin should be in the range of 13.5% to 15.5%. 4th quarter effective tax rate to be approximately unchanged from the 3rd quarter. And in the Q4, we expect stock based compensation in the range of $6,200,000 to $7,200,000 Let me provide some additional color to our 4th quarter expectations. Our business will continue to rebound in the 4th quarter and sequential revenue growth is expected to be stronger than normal seasonality. Our gross margins are expected to be flat to up slightly.

Speaker 1

We expect our gross margins to improve gradually over the next few quarters as the financial health of the NAND makers and the memory market overall slowly improves. Most of our NAND maker and module maker customers have been selling NAND products below their costs since early this year. And even With the sharp increases in NAND prices we've seen lately, it is still challenging, especially for NAND makers. Our pricing is somewhat reflective of our customers' challenges and as their financial conditions improve, we believe we can gradually improve our pricing and our margins, but it will take time. Our cost of goods, especially wafer prices remain high, but we believe we can extract some additional manufacturing cost improvements over the next few quarters as well.

Speaker 1

Combined with an improving mix of new products including the new our new Gen PCIe Gen 4 and 5 controllers and UFS 4 solutions, We believe we can gradually return to our historical gross margin levels. For operating expenses, as Wallace mentioned, we will be taping out 3 new 6 nanometer controllers, Our 8 channel PCIe Gen 5 controller this quarter, our UFS 4 controller in the Q1 and our 4 channel PCIe Gen 5 controller in the 2nd quarter. The total investments to get each of these products to market is more than $15,000,000 So we expect our operating expense to be elevated for these three quarters and then come down a bit in the second Next year, driving additional operating margin leverage. As Wallace mentioned, our business is steadily improving as end market demand stabilizes and inventory levels normalize. We'll continue to invest to maintain our technology leadership with best in class next generation storage controllers.

Speaker 1

Our broadening Product portfolio and diversified customer base will further solidify our strong foundation for continuing revenue and profitability growth. We are optimistic that industry conditions will improve and believe we are well positioned to benefit from these improving market dynamics. This concludes our prepared remarks. We will now open the call to your questions. Operator?

Operator

Thank you. Our first question comes from the line of Mehdi Hosseini from SIG. Please ask your question Mehdi.

Speaker 3

Yes. Thanks for taking my question. 2 for me. First, in terms of technology migration Among the DAN manufacturer, I wanted to better understand how increased adoption of QLC is helping you and how should we compare that to end market system unit trend? In other words, how smartphone notebook unit would fare against migration to QLC?

Speaker 3

And my second question has to do with A strong cash and what would it take for company to or for the Board and the company to become more aggressive in a stock buyback?

Speaker 2

So let me answer your first question, Patty. Regarding QLC, we see the trends. All NAND maker going to have a QLC NAND and product by late 2024. So we see QRC initially all transition to clients D and we believe in 2025 probably value line More than 80% of value line SSD will all adopt QLC in 2025. And we've seen the QLC trended into Mobile phone will take time and I believe the leading smartphone maker, which will try to adopt QLC, But when it's going to be mass production, when will create a meaningful volume, we don't know yet.

Speaker 2

All the NAND maker is trying to explore opportunity. But we also believe QLC will enter data center sometime in 2026 or 2027. That's why QLC become very, very important And it become the major output for the NAND maker after 2026 or 2027.

Speaker 1

Mehdi, to answer your second question about the share repurchase, as you know, our share repurchase program has been opportunistic in the past. We do not have a program in place today, The Board is always evaluating ways of returning cash to shareholders and share repurchase is something that they will continue to look at.

Speaker 3

If I may, just a quick follow-up to Wallace. Let me rephrase my first question. Let's say, if Units, units of a smartphone notebook were to go flattish next year. Could the migration to QLC for client SSD drive growth? Is that something that could provide additional growth drivers?

Speaker 2

I think we believe our customers will gain market share In 2024, although the total unit for PC might not grow very much, maybe just a single digit, 2% to 3%, because our strong technology in QLC and supporting with our major controller for both Gen 4, Gen 5 They're going to helping us to transition to take additional market share in 2024.

Speaker 3

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Quinn Bolton from Needham and Company. Please ask your question, sir.

Speaker 4

Hey, guys. Congrats on the nice results and outlook. I guess maybe first, Wallace and Jason, can you just maybe expand on your outlook for gross margins? I know you're looking for sort of a gradual recovery as the market improves. But can you give a little bit of shape to that gradual?

Speaker 4

Is that sort of 50 basis points a quarter? Is it 100 basis points a quarter? What kind of trajectory would you see? And any thoughts on when you might get back to kind of a 48% to 50% gross margin would be helpful.

Speaker 1

Yes. So look, obviously, as you know, there are still a lot of challenges in the NAND flash industry. NAND makers are still struggling economically and our goal is obviously to continue to gradually improve our gross margins and get back to where historically we were. And as the industry's health improves, we believe our pricing, our gross margins will also improve. And as we roll out new products, the new products that we talked about Just a little while ago, right, some of the new PCI Gen 4 and Gen 5 and UFS 4 controllers as those come out to market that will also have an up Lift to our gross margins.

Speaker 1

But we haven't provided specific guidance for next year. And certainly as we Moving to January and report our Q4, we'll have a better view on what that longer term gross margin profile looks like for next year.

Speaker 4

Great. And then just looking forward to the kind of the EMMC and UFS market, can you kind of give your thoughts on Market share looking forward, I think one of your customers has tried to in source UFS Does that have a significant impact on your outlook? Or do you think it's just there's some puts, some takes, but you still feel very confident about your overall Market share position in UFS. Thanks.

Speaker 2

Yes. We believe one of our major customer partners For NAND makers, they have their internal solution controller for UFS4 since 4 years ago that we know that. As you know, we're working closely with this particular partner because For each of the NAND maker, their controller probably support 1 to 2 generation NAND. So they have when you have new generation NAND And that is the opportunity we've taken. So we'll continue to discuss future opportunity with this customer and to expand even to the Additional new legacy UFS 2.2, 3.1 as well as the potential Newer generation including UFS 5.0.

Speaker 2

In addition, we have engaged multiple NAND maker, not just one for UFS. So we are targeting New customer and in production from late Q1 or early Q2. And so I think because our technology expanded And because there are more NAND coming to the market and we definitely benefit for more NAND maker, which don't have internal resource On to leverage 3rd party controller like Sigma Motion to help engage with the smartphone market.

Speaker 4

Got it. Thank you very much, Wallace.

Operator

Thank you. Our next question comes from the line of Anthony Stoss from Craig Hallum. Please ask your question, Anthony.

Speaker 5

Thank you. Wallace, you gave us some info on What you expect PC growth and that you expect to grow faster for taking share. I'm curious if you'd offer something kind of overall, including smartphones, auto, etcetera, Where you think 2024 growth might be for Silicon Motion? Then I had a couple of follow ups.

Speaker 2

Well, I think it's a good question, but I think we will wait for our Q4 earnings call, we gave you guidance. But we definitely are looking forward to continue growing in 2024 And what is the scale? I think we will give our guidance for next earning call.

Speaker 5

Okay. And then following up on the comment on large Korean NAND maker now back in I believe you said in Q3. Can you give us a sense of kind of design activity you have with that customer for 2024? What percentage of their share you think you'll have?

Speaker 2

We're not able to comment regarding particular customer, but overall we see significant growth opportunity With all flash makers, although there is some potential consolidation, we believe we'll continue to see opportunity open for SyncMotion To grow our share with our customer.

Speaker 5

Okay. And then last question for me. Over the last year or so with the MaxLinear proposed deal, you felt that some of your customers We're opting or thinking about moving to their own internal solutions or external. It seems like they're reengaged. I guess I'm trying to figure out if you Lost share in terms of designs maybe for, I don't know, 2024 or something just based on the MaxLinear deal and the pause that, that may have created?

Speaker 2

Yes. From the legal counsel, Vlad, we cannot comment any of my senior related questions. But I think that as you know very well for any Conventional MMA, it definitely has certain impact for the customer. If the customer do not understand the potential buyer, So they have some fear and concern. I cannot give you how what really impact for our business.

Speaker 2

But definitely every company have some gain, have some loss. Overall, it looks like we will continue to gain market share and with more opportunity. And especially after July 26, we do see the momentum become stronger.

Speaker 5

Perfect. Thanks Wallace.

Operator

Thank you. Our next question comes from the line of Suji Desilva from ROTH MKM. Please go ahead, Suji.

Speaker 6

Hi, Wallace. Hi, Jason. So congrats on the progress here. So The eMMC UFS market smartphone you had very strong results this quarter you're guiding for that. Just can you give a sense of the sustainability of the recovery in the end market and Demand perspective versus is the channel restocking?

Speaker 6

And are channel inventories typical levels now or are they actually leaner than typical?

Speaker 2

Yes. Let me comment about the smartphone market based on my We definitely see growth rebound for both eMMC and UFS product. And we also see we'll gain more share for the UFS in 2024. And although I think you mentioned particular The customers have internal controller, but that's the UFS 4.0 for next year, primary is still the UFS 3.1 as well as the 2.2 for 4 gs smartphone. And we see we have more customers jumping into the market and that's why we are able to gain market share.

Speaker 2

And in addition, We are working directly with the smartphone maker to tailor certain software and to specify for certain requirement That gives us advantage compared with even NAND maker to provide the solution for specific customers. So we're very happy for our position. I think in certain detail, if we are able to, we'll release during the next quarter or 2.

Speaker 6

Okay, Wallace. Thank you. That's helpful. And then my other question is on the operating expenses. Jason, I think you talked about the R and D being elevated for The next 2 to 3 quarters, can you give a sense of what it comes back to after that in the second half of 'twenty four?

Speaker 6

Is it back to sort of the $40,000,000 level in the second quarter? Or Just to understand what it reverts to after the elevated spend in the next three quarters?

Speaker 1

Yes. We'll obviously provide more color on that in the next earnings call, but it will temper back a little bit. As we said, the total investment cost for Each of these 6 nanometer products is north of $15,000,000 Obviously, all of that not that entire cost is buried in 1 single quarter. It does get Spread out over several quarters depending on the timeframe of the investment process into that new controller. So it will Step back a little bit in Q3 and Q4 next year, but we'll provide more color on that in next quarter next earnings call.

Speaker 2

So I can give you additional, give you some reference. 6 nanometer tape out, normally that probably is about 30 to 40. It will be 2 to 3 times more expensive than 12 nanometer tapeout. And we believe after the 3 signal meter tapeout, We won't have any significant amount of tape out within a year, but we do have additional 12 nanometer, 28 nanometer tape out quarter by quarter. So Daphne operation expense will go down, but what the scale is it depends on product, how many products we're going to take out.

Speaker 2

So I think we'll give you more color when we have the next quarter or next year guidance.

Speaker 6

Okay. Thank you, Wallace. Thank you, Jason.

Operator

Thank you. Our next question comes from the line of Gokul Hariharan from JPMorgan. Please ask your question, Gokul.

Speaker 7

Yes. Hi. Thanks, Wallace and Jason, and congrats on the good rebound in the numbers. My first question is, could you give us a little bit of a kind of backdrop in terms of how your market share Situation is right now for client SoC controllers, just to get an update after almost a year, More than a year in terms of where market share is. And also you did allude to some of the design wins in Enterprise and Data Center.

Speaker 7

Could you give us a little bit of color on what is the size of the opportunity there? And what is the nature of engagement you have? Is it still mostly the PCIe Gen 5 controllers for enterprise market or are there previously you tried open channel controllers for certain segment So just wanted to understand what is the approach to kind of tap into the enterprise market and the data from the market here?

Speaker 2

All right, Gus. Thank you. It's great to talk to you again. Regarding our clients and market share, we continue to maintain stable market share Around 30%, maybe up and down a little bit, but I think we're gaining market share continuing for 2024. Regarding the data center, I think the major enterprise product we're shipping meaningful is still SATA And our PCIe really we focus on PCIe Gen 5 because the Gen 4 controller we are not able to show meaningful financial result It's not cost competitive, but it's Visa Agent 5 on Titan.

Speaker 2

We are in a very good position. We believe we will show meaningful financial results By end of 2024 and more meaningful in 2025.

Speaker 7

Thanks, Wallace. So could you give us a sense of how big this enterprise and data center market size is? I think I remember a few years back when you started talking About this, you indicated that it is similar size to the client that is in market in terms of controller revenue size. Any updates on how big the market is given data center demand has really grown since then?

Speaker 1

Hey, Gokul, it's Jason here. Look, we're seeing good traction today. We're working with a number of data center and enterprise customers around the world, But it's still early. We're going to start sampling this quarter. It's too early to say how big that opportunity is at this Point, as we get closer to launch, as we have more concrete and better visibility, we'll be able provide more additional details at that point, but right now it's just a little bit early.

Speaker 7

Okay, got it. And one question on pricing. Could you talk a little bit about how pricing has evolved in the last 12 months or so? Clearly, pricing seems to have come off from the $4 to $5 kind of average client SSD controller ASP that you had. And do we need to wait for Gen 5 to really come through on the client SSD controllers for you to start potentially seeing some price increases Coming through, do you need to wait for the next generation for like pricing business to come through?

Speaker 7

Or do you think that you can adjust price as we go along once the market starts getting a little bit better?

Speaker 2

As you know very well, this year is very challenging for NAND flash makers as well as controller makers, because before September 90% of our customers are selling product below cost And thanks to the price increase in the last 2 months, but still many NAND makers, The gross margin is still negative. And we definitely as a leading controller maker, we have to share the pain. But we believe when the NAND price Gradually recover to breakeven and become profitable are certain controller segment and we will also Gradually increase the ASP, but I think the PCIe Gen 5 8 channel controller as we state, The ASP is 2 times and Gen 4A channel controller and this would be much more competitive and helping for both gross margin And also, ASP. And we also believe the PCIe, the UFS 4.5.0 Also, gaining help us in gaining mix regarding both gross margin as well as ASP. So we do have other new product coming And also create more positive regarding the product mix, helping our ASP and gross margin.

Speaker 7

Okay. Thank you very much.

Operator

Thank you. Our next question comes from the line of Matt Berson from Wedbush Securities. Please ask your question, Matt.

Speaker 8

Yes. Good morning, guys. Thanks for taking my question. First question is, I think in the prepared remarks, you mentioned that there's still some inventory getting worked down At your customers. I guess in Q4, is the expectation with that guide that inventory is fully worked down Or is there potential that there's still some incremental revenue that you'll see in 4th quarters Because inventories are normalized in future periods.

Speaker 7

Hey, Matt.

Speaker 1

It's Jason here. I think we're very close to normalize inventory levels if not there already. There may be I mean, it varies by product by product. It varies Customer by customer end market, but by and large, we see inventory has Normalized for the vast majority of end markets and customers that we work with.

Speaker 8

Thanks. And I guess my 2nd question is around new products. So it sounds like both in terms of returning pricing and margins to or returning margins to More traditional historic levels, as well as potentially seeing some revenue growth tied to higher ASPs, The new products are very important. I guess, is there any help you can give us In terms of thinking about how those parts roll out, either in terms of time after tape out, the revenue start to become meaningful Or if you could give us some color around when you think customers start shifting to either Gen 5 PCIe or UFS 4.0 solution, That would be really helpful. Thanks.

Speaker 1

Yes. So our first 8 channel Gen 5 controller is getting taped out right now. We'll start sampling that here shortly and then we expect to start seeing the first shipment in Late 2024. UFS 4.0 is getting taped down in the Q1. We'll start seeing shipments of that Late 2024 into 2025 and then the 4 channel Gen 5 SSD controller that's really more of a late-twenty By mid to late 'twenty five into 'twenty six type event for us.

Speaker 8

Thanks. That's all I got.

Operator

Thank you. Thank you. Our Our next question comes from the line of Craig Ellis from B. Riley Securities. Please go ahead, Craig.

Speaker 4

Hi. This is Ethan Waddell calling in for Craig Ellis. Thanks for taking my questions. To start,

Speaker 1

I'm sorry, what's the slope of the OpEx and how is it tied to the end market recovery? Is that what you asked?

Speaker 6

Right.

Speaker 1

Yes. So obviously, we're seeing strength in the end markets. The guidance we provided for Q4 is stronger than seasonal. And then certainly, we Expect to grow continue to grow into in 2024 as well. The OpEx should stay at these levels for Q4, Q1 and Q2 and then that will come down a little bit in the second half of next year, but that's depending on the number of additional tape outs that we'll be doing Can vary a little bit.

Speaker 1

So we'll provide more color around that next earnings call.

Speaker 4

All right. Thank you. And then Given your cash position, I was hoping that you could just broadly speak to your cash deployment plans.

Speaker 1

Yes. So for cash deployment, as you may have saw earlier this week, we instigated our $2 per year Dividend, that will be paid quarterly. The 1st quarterly payment will start here in November. And with Regards to share repurchase, it's something that historically we've been opportunistic about. We don't have a program in place today, but the Board is always Looking at ways of returning cash to shareholders and it's something that we'll continue to evaluate.

Speaker 1

Okay. I think, Orest?

Speaker 2

So I'm very happy to talk to you guys. It's been one half year. Thank you everyone for joining us today and for your continued interest in Second Motion. We will be attending several investor conference over the next few months. The schedule of this event will be posted on our Investor Relationships section of our corporate website.

Speaker 2

Thank you, everyone, for joining us today. Goodbye for now.

Operator

That concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Silicon Motion Technology Q3 2023
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