Silicon Motion Technology Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 7, 2024

There are 9 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to Silicon Motion Technology Corporation's Q4 2023 Earnings Conference Call. 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 limitations, statements regarding trends in the semiconductor industry and our future results operations, financial conditions 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.

Operator

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 not limited to, continued competitive pressure in the semiconductor the industry and the effect of such pressures on prices unpredictable changes in technology and consumer demand for multimedia consumer electronics the state of and any change in our relations with our major customers and changes in political, economic, Legal and Social Conditions in Taiwan. For additional discussions of these risks and uncertainties and other factors, please see the document We file from time to time with the Securities and Exchange Commission. We assume no obligations to update any forward looking statements, which apply only as Please be advised that today's call is being recorded. I would now like to hand the call over to Mr.

Operator

Jason Chai, Vice President of IR and Finance. Please go ahead.

Speaker 1

Thank you, and good morning, everyone. Welcome to Silicon Motion's 4th Quarter 2023 Financial Results Conference Call and Webcast. Joining me today is Wallace Koh, our President and CEO. Wallace will first provide a key a review of our key business developments and then I will discuss our Q4 results and outlook. Following our prepared remarks, we will conclude with Q and A session.

Speaker 1

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 U. S. Securities and Exchange Commission. This webcast will be available for replay on the Investor Relations section of our website for a limited time.

Speaker 1

To enhance investors' understanding of our ongoing economic performance, we will 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 in our earnings release issued yesterday. We ask that you review it in conjunction with this call.

Speaker 1

As we have previously shared, Silke Motion filed its notice of arbitration against MaxLinear for the willful 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 damages, interest and costs. The company filed this notice of arbitration claim against MaxLinear in the Singapore International arbitration center on October 5, 2023. The arbitration process is confidential and we will therefore not be commenting further on this matter today. That, I will turn the call over to Wallace.

Speaker 2

Thank you, Jason. Hello, everyone, and thank you for joining us today. We are pleased by the steady recovery across our business throughout 2023 with 4th quarter revenue and gross margin exceeding expectation. We benefited in the quarter from stronger demand from both our SSD and eMMC plus UFS controllers and saw pricing and mix improved to drive stronger gross margin improvement for our business than originally expected. More importantly, our technology leadership in controller and our unwavering engagement with our customers, both flash makers and module makers has laid the foundation for strong 2024 growth despite only modest growth expecting the PC and smartphone device markets.

Speaker 2

Driven largely by our ongoing share gains with our customers. Over the past 6 months, We have been busy making organizationally changes to better position Second Motion for the future. We Restructed our business to better engage in a new opportunity in the market and spend a lot of time reengaging with customers to win back their confidence in us as a long term partner. As you saw, we formed 2 new business units, Client and Automotive Storage, CAS, and our Enterprise Storage and Display Interface Solution, ESDI Groups. Our new organizationally structured allow us to be more focused on each segment To have a dedicated industry veterans as a leader enable our team to be more agile and responsive to the market and to better engage with customers and anticipate their need with truly differentiated high performance and calcium fatty solutions.

Speaker 2

We are seeing the successes of this already as our CAS group have been increasing share as our customers by winning significant new designs with both flash maker and module maker for the PC, smartphone, automotive, industrial and other markets. Our AESDI group has also made Incredible progress we saw on Titan product in a short amount of time, securing more than a dozen sampling customer already. With these changes, we are better positioned than ever before and look forward to demonstrating the ongoing strength of our business to our investor each quarter. Now let me move into our business and give you an update on the NAND market dynamic we are seeing today and what we are expecting for 2024. Pricing for NAND flash has been steadily increasing and expected to continue to improve throughout 2024 and into 2025.

Speaker 2

NAND makers are being disciplined in their production and limiting output, resulting in higher NAND flash prices. Demand is also expected to pick up this year as both the smartphone and PC markets will grow modestly after 2 years of meaningful decline in unit shipment. While higher pricing may limit activity we typically see from our module maker customers. Many have a pre bought low cost NAND in the second half of last year and we have secured significant wins with them for upcoming product this year. We believe our business with module maker will grow this year despite the headwinds created by higher NAND flash prices.

Speaker 2

For fresh makers, while higher fresh prices over the past few months have improved their profitability, Most are still facing negative or very low margin and this is why we are seeing them increasingly focus on profitability. Freshmaker need to prioritize their focus investment from developing new generation of NAND to developing storage solution to satisfy a wide range of end market requirement. These solutions range from high performance to value oriented using DRAM and DRAM less as well as utilizing TLC or KLC to serve broad range of end market need in eMMC for UFS, client SSD, embedded, enterprise and industrial applications. We are seeing flash makers focus on their own effort on leading edge high performance solution where margin and profitability tend to be highest And they are turning to us as a partner of choice to help bolster their portfolio with high performance, lower cost solution utilizing their latest generation of high performance, high density NAND to serve a broader range of market requirement. Our progress with our flash maker partner over the past year has resulted strong backlog of new wins across all our product groups that will drive meaningfully higher share and faster growth this year and lays the foundation for strong long term growth.

Speaker 2

We continue to grow our customer relationships and are on track to grow our business with every NAND Flash customer we have this year. Our revenue from FlashMaker expected to grow approximately 50% this year as design win across our controller program ramped meaningfully throughout 2024. Turning to our SSD controllers, we tape our 1st PCIe Gen 5 8 channel controller last quarter and have already secured 3 flash maker wings and this product as well as several module maker wings. This is the first time that flash maker adopt our controller for high end notebook models. We expect sale of this high performance controller To begin late this year, we are engaging with other flash makers as well as numerous other multi makers expect to win more designs through 2024.

Speaker 2

Our second PCIe Gen5 controller will be taped out early in Q3 this year And we already have significant interest from both flash makers and module makers for the mainstream Gen 5 solution that is expected to ramp in late 2025. While we are excited by our progress with PCI e GM5, It's important to point out that we continue to win significant new program with several flash makers with older generation interface as well, including 2 new SATA SSD programs, several PCIe Gen 4 SSD including 1 using next generation QLC flash on the value PC OEM market and several USB 3.2 portable SSD projects. Our QLC controller With our proprietary 3 d Ray and more advanced LDPC for better error correction and data protection and recovering offer No compromise solution that maintains high performance and reliability by utilizing the most cost effective flash to further improve affordability. We are seeing strong traction of QLC controller with both our flash makers and module maker customer and more widespread adoption by PC OEM as well. Moving on to our eMMC plus UFS controller solution.

Speaker 2

We are taking out our UFS 4.0 solution this quarter and remain on track to ramp with a flash maker customer later this year as well as several module maker targeting the smartphone market. UFS 4 remain a flagship and a premium solution this year and expected to expand into high end mainstream handset market in 2024 and after. Align with when our solution with our flash maker and module maker customer expected to ramp UFS 3.1 and 2.2 remains a primary solution mainstream smartphone this year and we are seeing continuing strong demand for our current UFS controller With additional flash makers and module makers, we see flash makers focusing on their own internal controller development on the latest flagship generation of UFS where they get the highest premium for their high performance solution. As each of UFS generation moved from flagship to mainstream, we are seeing flash maker turn to us to utilize our controller paired with their newest NAND that offer high performance and lower cost, ideal for the mainstream smartphone market. It is a symbolic relationship That has driven our strong partnership with FlashMaker and driving more win and long term growth for our eMMC for UFS controller business.

Speaker 2

Now let me give you an update on the progress of our monetization enterprise development platform. We started sampling monetization to customers at the end of last year We are excited to announce that more than a dozen customers, many of them Tier 1 end companies, ranging from NAND flash makers, hyperscaler storage solution provider, enabler as well as module makers are in the process of evaluating the solution. Mount Titan's highly differentiated storage solution provides support of both high performance TLC SSD as well as high capacity QLC SSD. We are finding that this ideal balance of performance and features is appearing to customer across all enterprise and datacenter makers back market segment. Based on our ability to support a wide range of customer engagement model from the turnkey to layer firmware stack development, Fantizen accelerates the asset to an extensive amount of data HN5.

Speaker 2

Speed ideal for variety of occasion including high performance edge computing and AI interference and machine learning. We are confident that we will continue to make an enroll during the Gen 5 transition into the AI era and expect to secure our 3rd design win in the next few months and generate clearly revenue by the end of this year. Overall, I'm excited by the opportunity ahead of us in 2024. Our team dedicating to maintaining our technology leadership and our varying commitment to our customers have enabled us to continue to win socket after socket and position us strong share growth this year and beyond. Our position with our flash maker customer has never been stronger The new design wins are expected to ramp since early this year.

Speaker 2

Our module maker customers are coming into 2024 with strong inventory of low cost NAND and choosing to help them bring competitive SSD and embedded solution to the market. We are well positioned to continue to further strengthen our design pipeline in 2024 to drive growth in 2025. Now, let me turn the call over to Jason to go over our financial results and outlook.

Speaker 1

Thank you, Wallace, and good morning, everyone. I will discuss additional details of our 4th 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. The reconciliation of our GAAP to non GAAP data is included with the earnings release issued yesterday. In the Q4, we grew sales 17% sequentially $202,000,000 SSD controller sales grew 15% to 20% sequentially.

Speaker 1

EMMC and UFS controller sales grew 25% to 30% sequentially and SSD solution sales decreased 5% to 10% sequentially. Gross margins in the 4th quarter increased to 44.1%, reflecting both better mix and higher ASPs. Operating expenses in the Q4 were $61,500,000 $12,000,000 higher than the prior quarter due to higher R and D expenses to support our technology leadership. Operating margin in the 4th quarter is 13.8 percent, flat from the 3rd quarter. Effective tax rate in the 4th quarter is 2.3%, a decrease from the 22 0.8% tax rate in the 3rd quarter primarily due to a tax reversal in the quarter.

Speaker 1

Excluding this, tax rate would have been 28%. Earnings per ADS were $0.93 48 percent higher sequentially. Stock based compensation and our Operating expense, which we exclude from our non GAAP results was $5,700,000 and we had $369,000,000 in cash, cash equivalents, restricted cash and short term equivalents short term investments at the end of the 4th quarter compared to $350,300,000 at the end of the 3rd quarter. Inventory increased sequentially in the 4th quarter to $217,000,000 from $199,000,000 in the 3rd quarter. Now let me turn to our Q1 and full year 2024 guidance and forward looking business trends.

Speaker 1

For the Q1, we expect revenue to be down 10% to 15% sequentially to approximately $172,000,000 to $182,000,000 We expect SSD controller sales will decline slightly in the 1st quarter and EMMC and UFS controlled shells will decrease. 1st quarter gross margins is expected to be in the range of 44% to 45%. 1st quarter operating margin will be in the range of 10.5% to 11.5%. 1st quarter effective tax rate to be approximately 19%. And in the Q1, we expect stock based compensation, dispute related expenses to be in the range of $6,000,000 to $7,000,000 For the full year 2024, revenue will increase 20% to 25% to $765,000,000 to $800,000,000 Gross margin is expected to be in the range of 45% to 47%.

Speaker 1

Operating margin should be in the range of 14.7% to 16.7% and our effective tax rate for the year is expected to be approximately 19%. Full year stock based compensation and dispute and related expenses will be in the range of $31,000,000 to $33,000,000 Let me provide some additional color on our Q1 and full year expectations. Wallace mentioned, we are making strong progress with our FlashMaker customers. We have a strong pipeline of design wins and are positioned to gain meaningful share this year. We expect our revenue from all of our FlashMaker customers will grow in 2024 and to increase approximately 50% this year.

Speaker 1

In addition, we have high visibility that 2 additional flash makers will be ramping new projects with us this year in eMMC and UFS and in SSD controllers and we will be able to grow revenue from each of these flash makers very meaningfully. We expect normal seasonality impact our business in the Q1, but are confident that we are well positioned to grow sequentially throughout the rest of the year based upon our strong backlog of wins and project ramps. We expect to see consistent improvement in our gross margins this year, driven by better mix towards Genuine generation interfaces in our eMMC and UFS and SSD controller sales, a number of new projects ramping and overall pricing just starting to normalize and improve. For operating expenses, we'll continue to invest in maintaining our technology leadership in the market, including the tape out of 2 6 nanometer controllers, 1 in Q1 for UFS 4 and 1 in Q3 for a second PCIe Gen 5 SSD controller. This will lead to elevated operating expenses in those quarters.

Speaker 1

This concludes our prepared remarks. We'll now open the call for your questions.

Operator

Thank you. We'll now begin the question and answer session. The first comes from the line of Mehdi Hosseini from Susquehanna International Group. Please ask your question.

Speaker 3

Yes, thanks for taking my question. I have Wallace, can you help me understand what you're seeing in SSD Solutions business segment? I understand Your continued traction with flash makers and a new product ramps that are more focused on SSD controller and response phone, but If you could give us a feel for SSD solution and whether you would be able to actually slow down the decline in revenues here? And I have a follow-up.

Speaker 2

I think our basic solution ferrite has been stable and we are seeing a strong pipeline of win. I think for Q4 revenue declined due to some of our automotive customers see the inventory pile up and we do see 2024, we have accumulated more design, but we see we have stronger growth in 2025 on the automotive customer

Speaker 3

Okay, great. And your 2024 guide is very encouraging. You also ramping a 6 nanometer tape. I understand What's driving the OpEx increase? I also look at your cash.

Speaker 3

You have almost $10 of net cash per share. Your just operations should help with additional cash generated. You sound very confident. Why not revisit the capital return, especially with the buyback, especially with investors that have been patient. Any thoughts, any color here will be appreciated.

Speaker 1

Yes. Thanks for the question Mehdi. Look, it's a good question. We look at our capital allocation program constantly, right? That's something we review with our board regularly.

Speaker 1

We have the dividend policy that we've been paying for a very long number of years with exception of when we were in the acquisition process. The strategy behind the dividend as you know has been always to set it at a level that's comfortably affordable we'll continue to evaluate going forward whether to increase the dividend in a future time as business continues to scale and cash flow increases longer term. In terms of things like a share repurchase, as you know, our share repurchase program in the past has been opportunistic. We do not have a program in place today, but the Board is always evaluating ways of returning cash to shareholders and share repurchase is something they'll continue to look at.

Speaker 3

Okay. Thank you.

Speaker 2

Thank you

Operator

for the questions. One moment for the next questions. Next question comes from the line of Quinn Bolton from Needham. Please go ahead.

Speaker 4

Hey guys, congratulations on the results and outlook. Thanks for I wanted to follow-up, Wallace, on your comments. Very encouraging to hear that you'll grow with every NAND manufacturer in 2024. But I think one of the concerns we've heard from investors is that as UFS 4.0 becomes main stream that one of your customers that's in sourced UFS 4.0, that may be a headwind more in 2025 than 2024. And I'm not trying to get you to give guidance for 2025, but overall, would you expect your business in aggregate with NAND vendors to grow in 2025 as UFS 4.0 becomes more mainstream?

Speaker 4

And then I got a follow-up.

Speaker 2

Yes, we believe we definitely we can continue growth for our mobile controller for both UFS and eMMC. As you know very well, the UFS 4.0 still remains high end for 2024 2025 and probably will go to mainstream after second half of twenty twenty six. And we have a very strong UFS 3.1, 2.2 today, not only for existing NAND partner, but also winning 1 to 2 additional NAND maker business and going to ramp in 2024 2025. In addition, and we also see NAND maker, they focus on the new development. So when UFS 4.0 become the mainstream, There is R and D focused on the UFS 5.0 development and sometimes outsourcing the new UFS 4.0 project to Silicon Motion because our new native controller can capture the latest new generation higher performing IO NAND with higher density NAND.

Speaker 2

So that will become much more attractive and that will add to our NAND partner extended product life cycle. So we see our position very well with NAND maker as well as growing margin maker who are moving from eMMC to UFS.

Speaker 1

And I think I think to point out also that it's becoming a much more diversified business. It's no longer really driven by one customer. We have A multitude of flash makers and module makers that address the smartphone market all very effectively. And so as we ramp up with these new flash makers and module makers, we're confident that we can continue to grow this business long term.

Speaker 4

Great. My second question is more a clarification about the 2 new NAND vendors that ramp this year. Can you give us any color? Is that specifically on the EMMC UFS business, is it across both mobile as well as The SSD business, just any color? And then, Jason, just a quick, looks like OpEx for the full year probably comes in at about $240,000,000 or On average about $60,000,000 a quarter.

Speaker 4

I know there are some tape outs in Q1 and Q3 that will probably increase R and D in that in those quarters, but is that sort of $240,000,000 about the right range to be thinking about for OpEx in calendar 2024? Thank you.

Speaker 2

The 2 NAND makers I think really is one is for UFS, one is EMC, but we continue looking for engagement with the NAND makers.

Speaker 1

Yes. And for OpEx, I think, yes, I think it's in that range, 230 to 240 is probably the way to look at it.

Speaker 4

Perfect. Thank you.

Operator

Thank you for the questions. One moment for the next question. Next question comes from the line of Gokul Hariharan from JPMorgan Chase. Please go ahead.

Speaker 5

Hi, thanks for taking my question. First question is on enterprise, Given that you have you are getting pretty good traction with your new product and you also Reorganize the organization to focus more on enterprise. Wallace, could you give us a little bit more Color on how big is the enterprise addressable market for Silicon Motion? What is something that you can really achieve over the next maybe 3, 4 years in terms of the enterprise traction? And could you also give us a little bit of color in terms of what kind of design wins are you getting?

Speaker 5

Are you getting more design wins on like core storage products? Or is it like backing OEMs and hyperscalers? Is there any mix in terms of Where you're getting the time wins? Maybe give us a little bit more color on the enterprise at the full market.

Speaker 2

So it's a very good question. I think that we are seeing very good traction today as we continue to sample and go through the qualification process with These are Tier 1 customers and it's about a dozen customers from US and to Taiwan, China. And I cannot give you the quantized number. I think by end of 2024, we'll have meaningful revenue. We'll have much Big revenue in 2025 and 2026, the reason we get the traction not only the standard NVMe, We're gaining momentum because the high performance and all the number index exceed expectation, but also we get traction due to the QLC SAT coming into the data center.

Speaker 2

And this is for 2 fold. 1 It's FDP standard for QLC, also ZONEN and safe for QLC in China. I think US1 customer is also very interested for the ZONN space. So that makes us a bit differentiating compared with conventional SSD solution Due to the AI server demand and AI demand, I think Gen 5 SSD become much more attractive. So this is a similar order demand and that's why many customer engineers will qualify our Gen 5 solution.

Speaker 5

Got it. Thank you very much. My next question is more near term. For 2024, you have 20% to 25% revenue guidance. Could you give us some color on how you expect client SSD to grow and mobile to grow?

Speaker 5

And within mobile, recently we're hearing some concerns about the end of restocking for some of the Chinese customers. Are you seeing the China smartphone customers being a little bit more conservative in terms of procurement in the near term?

Speaker 2

I think for Class D, last year, our market share global market share is around 25%, 26%. We believe this year will grow to 30% to 32% range, because total overall SSD number overall will grow another probably 10,000,000 to 20,000,000 for global unit shipment. For mobile, we will grow faster and stronger because we have more customers in the pipeline and not only the existing NAND maker that continue to grow compared with last year, Also we have 2 additional NAND maker will join the group to grow and module maker we see they will grow even stronger And we also have a platform development with both Qualcomm and MediaTek. We also have a direct engagement with smartphone maker to strengthen our position in technology and pacing for 2025 growth.

Speaker 5

Okay, got it. Thank you.

Operator

Thank you for the questions. One moment for the next questions. Our next question comes from the line of Anthony Stoss from Craig Hallum. Please ask your question.

Speaker 6

Thank you. Jason, I was trying to write as fast as I could on the tape out commentary. Could you just break that out again by quarter and kind of the cost you expect per quarter? And then I had a follow-up for Wallace.

Speaker 1

Yes. So we're expecting to tape out our UFS 4 6 nanometer controller here in the Q1. And then we'll tape out our 2nd PCI Gen 5 controller early in Q3. So that's going to result in more elevated OpEx kind of similar to what you saw here in the Q4 for each of those two quarters and then Q2 and Q4 that should revert back down to a more normalized level because of those because those periods don't have the tape outs. Those tape outs, as we have said in the past, are typically north of $15,000,000 in terms of total development and investment costs for us.

Speaker 1

So during the quarter where they're taping out is certainly a big step up on the OpEx.

Speaker 6

Okay, got it. Then Wallace, I'd love to hear a little bit more. Last quarterly conference call you talked about a new Korean NAND maker coming on as a customer. I'm curious your view on how quickly they could wrap and could they be a, let's say, a top 3 customer in 2025?

Speaker 2

We cannot comment individual NAND maker customers about their revenue, but we definitely look forward to Stronger engagement and broader product line and design win. I think we're looking forward to embrace The NAND maker who really can outsource more project to Slick and Motion and we add value to them. I think that 2024, 2025, they are really A good timing for us to show our technology and serve our NAND maker as selected their R and D extension and looking forward to and more exciting results. And we will definitely get it all up this year.

Speaker 6

Okay. And if I could sneak in one more on your Mondtitan, talked about having secured one design win. Can you give us any color on if it's a data center, hyperscaler, NAND maker? And then How quickly do you think you can secure additional out of those 12 that have sampled?

Speaker 2

We cannot comment the customer and the type, But I think with Tier 1 customer and we believe we will secure the second one in the second half of twenty twenty four. So I think we're confident to win at least 2 1 customer by end of 2024.

Speaker 6

Very good. Thank you.

Operator

Thank you for the questions. Next question comes from Craig Ellis from B. Riley Securities. Please ask your question.

Speaker 7

Yes. Thanks for taking the question. Wallace, I wanted to start with you and follow-up on some of the Outsourcing questions from the call, but also really continued the conversation that you and I have had over the last couple of years. So I think we both expected that there would be an increase in outsourcing from NAND customers. And the question is this, as you look across the increase in activity that you've observed over the last 12 months or so.

Speaker 7

Can you characterize how extensive that is from OEMs that are maybe just doing 1 or 2 new products to much more wholesale changes. What's happening on the continuum a little bit to a lot? And how much of that is baked into The guidance that you and Jason have given for calendar 2024? And then I had a couple of follow ups. Thank you.

Speaker 2

I think the as you can see through the 2023, it was difficult year for all the NAND makers Because the weak demand and oversupply, the NAND price declined sharply and nobody really make any panic, everybody margin negative. And we are able to gain share because I think We are treated with you to recognize the kind of thing extension of a NAND maker's own R and D. So That's why we have been developed such relationship recognition, trust and respect for the past 15 years. And we're capable and handling. So NAND makers, their focus now is not focused on market share, They focus on profitability.

Speaker 2

So they are not eager to invest more K Pak in the NAND capacity. They only invest the technology they want to deliver. So their focus on the development is through the high end, more value and can maximize the profitability they can get. And the Mainstream value line, they will try to also to 3rd party like the locomotion, which we can help them and diversify and bring a more portfolio offer to the very end customer. So this is value we bring to the table And we see more and more also an opportunity from NAND maker when they make a business decision, they kind of go to the 3rd party like silicon motion.

Speaker 7

Got it. And then the follow-up question is just a continuation. What are the things that you're looking at that will indicate that this is not only a trough cycle reaction from NAND OEMs, but Through the sweet spot of the cycle and towards the peak of the cycle, they would sustain this level of outsourcing or perhaps even Grow It and then the follow-up is for Jason. Jason is Mondtitan ramps in calendar 2024, How should we think of the gross margin implications relative to corporate average?

Speaker 2

We're through this cycle because now NAND will be in So NAND maker, they carefully to value all the priority inside the company, every NAND maker have different strategy and we cannot comment for that, but we believe this cycle will continue Until mid of 2025 or late 2025 when supply demand reach balance and NAND maker start to invest more about the K PAV and to meet the higher demand.

Speaker 1

And I also think that I think to your question about how much of this Outsourcing is temporary versus more of a structural shift. We have wins going into 2025 and further out. So I think this isn't something where They're just using us for a short term stopgap. This is something where we're building much more substantial long term relationships with them. In terms of the Montitin revenue ramp and margin impact, that's not going to be expected to happen until late into Q4 late into 2024 excuse me, in Q4.

Speaker 1

So it's too early to say what impact it will have. More meaningful ramp in 2025 and certainly as we have better visibility around that, around timing of wins and scale of the wins. We'll be able to provide more color, but right now it's a little too early to talk about the impact of both revenue and margins at this point.

Speaker 7

Got it. And the gross margin color in calendar 24s guide was quite helpful. Can you talk about the visibility that you have, Jason, to gross margins ultimately reattaining that more normalized 50% level?

Speaker 1

Yes, I think we're feeling pretty good about that just given the mix of new products, new projects, new technologies that are coming to market that we already have strong design win and pipeline for. As each day passes, we're also seeing these new engagements bring with healthier pricing levels at healthier margins and we're certainly working on our own back end and production to also improve costs as well. So I think we're on a good track here and the guidance we provided, we believe that it's attainable.

Speaker 7

Thanks, Wallace. Thanks, Jason.

Operator

Thank you for the questions. Our next question comes from Suji Desilva from Roth, MKM. Please go ahead.

Speaker 8

Hi, Wallace. Hi, Jason. Congrats on the good guidance here. You talked about the module makers securing lower cost NAND in late 2023 that they're selling through now. Can you just talk about the behavior you'd expect as that lower cost NAND gets work through and how they'd respond, would they then look to market conditions or just any thoughts there on how that might impact the financials after that gets worked through?

Speaker 2

Most of our leading module makers, I think they have been in the market for a long time. So they understand NAND price trend. So they procure very large amount of NAND through last August to November. So that's really is prepared for NAND price up. They understand NAND price, NAND will be in shortage and NAND price will go up continually throughout the entire 24.

Speaker 2

So they're procuring advance and to balance their cost, they will continue to buy some of NAND this year, but as Shu's product mix and NAND different pricing makes them to be more competitive to compete with other module makers.

Speaker 8

Okay. All right. Thank you, Walt. And then my other question is on the Mondtitan as it ramps up. Is it the right way to think about that that maybe some of the AI servers out there creates opportunity for attach rates and content increases in Mondtitan or is that not the right framework for what might be causing

Speaker 2

some I cannot comment on that, but I think the Current demand is in the very wide range from the hyperscalers and from AI server, from All flash array from conventional servers. So, I think we're definitely looking forward to, But the most important is the Tier one customer who have a really good volume and we believe we can we have a secure one. We're looking forward to see your second one by second half of twenty twenty four.

Speaker 3

Okay. That's

Speaker 8

very helpful, Wallace. Thanks.

Operator

Thank you for the questions. We have a follow-up question from Mandy Hosseini from Susquehanna International Group.

Speaker 3

Jason, I understand the 6 nanometer tape out is going to keep your R and D in the 40 $7,000,000 to $48,000,000 a quarter this year. Should we expect additional tape outs Next year, in other words, should R and D stay at these elevated levels into 2025 or would it taper off?

Speaker 1

I think we'll continue to invest here. I think it's a little too early for us to comment about what 2025 OpEx looks like at this point. But obviously, it's important for us to continue to invest, to continue to stay ahead. We tape out at 6 nanometer because it's what we need do. The technology requirements for performance and power, you can only get both of those to the right levels when you go down to this lower process geometry.

Speaker 1

I think there are options for us to look at ways of reducing tape out costs and foundry costs longer term that we're exploring. So stay tuned as we have more to share on that. We will, but certainly our goal here is to continue to invest, but invest responsibly and try to bring the cost down as much as we can, but still maintain our technology leadership.

Speaker 3

Sure. That's fair. Ultimately, we're just trying to figure out if The company is still targeting mid to high 20 percent operating margin and OpEx is a factor here. So any thoughts on that longer term operating margin target since we're not Yes, that hasn't changed. I think

Speaker 1

if you take a look at our business in the past, we are typically 48%, 50% plus gross margin company and operating margins in that 25% to 30%. There's nothing fundamentally different about our business today that says that that's not an achievable target for us longer term.

Speaker 3

Okay, very helpful. Thank you.

Operator

Thank you for the questions. One moment for the next question. We also have a follow-up question from Craig Ellis from B. Riley Securities. Please go ahead.

Speaker 7

Thank you for taking the follow-up. Wallace, you mentioned the company has a collaboration with both MediaTek and Qualcomm. And I was hoping you could comment a little bit further on that, both on the duration of those two partnership engagements and to the nature of them, are you a reference design partner for those solutions? And if so, to what And to what extent have those been part of UFS revenues in the past and are they expected to be in 2024 and 2025? Thank you.

Speaker 2

It's important for our new product and to qualify on leading SoC provider like a Qualcomm MTK for the mobile platform. And normally we have direct engagement also through our customer, join qualification. So they help us to resolve some issue during the pre production qualification. So this is a joint pre qualification and help us to gain confidence for our quality for firmware as well as ASIC. And we also and what we serve Qualcomm For automotive platform qualification, so they extended our other product line like Ferri and MediaTek and other NXP.

Speaker 2

So this is a platform partner and platform engagement helping to accelerate our product readiness, also help our customer to end the production sooner.

Speaker 7

And how material are those relative to the revenue that we've been seeing and that you would expect to see in 2024?

Speaker 2

I cannot quantize the numbers, but I tell you it's very helpful and our company put a big effort for platform qualification and team and dedicated help our product line.

Speaker 3

Thanks Wallace.

Operator

Thank you for the questions. Next up, we also have a follow-up question from Gokul Hariharan from JPMorgan Chase. Please go ahead.

Speaker 5

Yes, hi. I had one question on AI. Thanks Wallace. You did highlight the AI adoption on the enterprise side. Could you also talk broadly on What happens when you have more AI adoption on edge devices, especially most of your PC and smartphone customers are launching AI enabled PCs and smartphones this year and probably more next year, what does it do to NAND flash content?

Speaker 5

And what does it do to your controller ASPs or controller specs?

Speaker 2

So this is a very good question. Naturally, not only us, all the NAND maker I've seen has spent probably at least half year looking forward to how The edge AI will impact for storage solution and what a controller maker need to do to improve our value and enhance AI application. So there's a lot of exciting application for AI PC. You're looking from the Intel, AMD, the SoC, also Qualcomm and NVIDIA coming provide the solution. There are also 3rd party independent AI SoC for PC, but not for the notebook, but for desktop and for PC workstation.

Speaker 2

So we are involving for what our common is for enterprise AI, the ACD probably because the enterprise The server AI is more important for compute. So, its storage solution is really a system role. So the regular latency and sequential rewrite is very critical and to supporting and see all the AI server requirement. But for the AI PC, that's a different story because you cannot use HPN for the PC, you cannot use a very, very high density, unlimited density for DRAM. So the LN swapping become very critical.

Speaker 2

So several technologies, several requirement is really needed as a controller and a solution to provide to allow to make us the edge AI to be more meaningful and more practical. And I cannot go to detail to say This is all the area we are looking forward to add value and study. I think all NAND maker and leading control maker are looking forward to provide solution and be part of AI at AI Trend.

Speaker 5

Okay. Alain, thank you very much. And second, on PCIe Gen 5, could you talk a little bit about The pricing uplift you're expecting as you go from PCI Gen 4 to PCI Gen 5, I remember, I think you talked about significant premium in the last call. Could talk a little bit about what you're seeing in the market for the flagship products and how that is likely to shape out as we get into more mainstream PCI Gen 5 products towards next year as well?

Speaker 2

I cannot give you exactly number, but our high end PCIe Gen 5A channel controller It's about 2 times of PCIe Gen 4 controller today. We're very exciting to see our high end PCIe Gen 5 controller adopted by 3 NAND maker, we believe there will be additional joining in later this year. So this is very important for us to expand our market share for notebook for PC OEM as well as we see the increase our cell revenue as well as margin. And this is very important milestone and The PCIe Gen5 and the high end controller can also be adopt by the server for boot storage And I think there is a trend we've seen and not just for notebook, but PC for workstation, for gaming PC, will be all about the high end PCIe Gen5 8 channel controller.

Operator

Thank you for the questions. With that, I'd like to hand the call back to the management for closing remarks.

Speaker 2

Thank you everyone for joining us today and for your continued interest in Second Motion. We'll be attending several investor conference over the next few months. The schedule of this event will be posted on the Investor Relations section of our corporate website. Thank you everyone for joining today. Goodbye for now.

Operator

And that concludes today's conference call. Thank you for your

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Earnings Conference Call
Silicon Motion Technology Q4 2023
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