Silicon Motion Technology Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2024

There are 8 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Silicon Motion Technology Corporation's 1st Quarter 2024 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. This conference call contains forward looking statements within the section 27A 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 this segment 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 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. Please be advised that today's conference is being recorded. It is now my pleasure to hand you over to the Interim Chief Financial Officer, Mr. Jason Tsai. Please go ahead.

Speaker 1

Thank you, and good morning, everyone, and welcome to Silicon Motion's Q1 2024 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 then I will discuss our Q1 results and outlook. Following our prepared remarks, we will conclude with a Q and A session. Before we get started, I'd 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 the market yesterday. The 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 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

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

Speaker 2

Thank you, Jason. Hi, everyone, and thank you for joining us today. We had a good start to 2024. We delivered sequential revenue growth ahead of expectations, achieved gross margin at the high end of our guidance range and exceeded our operational margin outlook. Our SSD controller business was better than expected, primarily driven by demand from 2 of our flash maker customers.

Speaker 2

We continue to improve our pricing in the quarter, which is driving the steady improvement in our gross margin and profitability. Our results quarter reinforce our leadership position in controller technology and our product continues to be the high demand as our customer recognize how important our technology innovation and service are to their business. While our broader macro environment remains uncertain, I'm pleased by our team's future in this quarter, we are taking the right steps to efficiently navigate market dynamics, remain steadfast in delivering the product and solution our customers need and focus on continuing growth, improving profitability across our platform. Let me start now with an overview of NAND market and dynamic we are seeing today. We have seen NAND flash prices continue to increase since the late last year and more recently have seen flash makers gradually increase utilization in their FAS, but more meaningful capacity increase from the build out next generation NAND fabs is unexpected until next year.

Speaker 2

Demand remained robust, especially with Chinese handset OEM as well as with enterprise and datacenter storage markets, while PC demand has been steadily increasing. All of this will continue to drive NAND flash prices higher throughout this year. We are seeing some near term pricing fluctuations in the channel SSD market that may cause some uncertainty with our customers that are more focused on the retail aftermarkets. But demand for our controller for PC OEM SD remained robust, especially with our flash mafers customers. Our leadership in controller technology continues to drive stronger demand across the board with our customers.

Speaker 2

It is becoming clearer each day that our appearance and expertise with the QLC NAND is a defining differentiator that has resulted in significant wins with the flash makers and other customer across all product categories. As the three d NAND layer continue to increase, managing KLC NAND become even more challenging and continue to require more sophisticated controller technology to ensure high data retention and reduce readwrite determent issues. Our advanced LDPC and the 3 d rate technology are the best in class to protect data during high speed data transfer between the controller and the NAND and operate under wide temperature range. We can deliver controllers that enable a no compromise high performance and low cost solid state storage solution incorporating the latest generation of KLC NAND, especially with the rapid adoption of AI, whether it's in edge devices like PC and smartphone or in the data center and enterprise storage, QLC storage devices are becoming increasingly central to AI application and growth going forward. OEM no longer need to choose between high performance or lower cost.

Speaker 2

With the QLC, especially the upcoming 2 terabyte monodiode QLC NAND, we are able to have high sequential read performance, high density and lower cost solution to meet their ever increasing AI compute and story requirement. Now, let me start with our SSD controllers. We are seeing strong traction with our new PCIe Gen5 8 channel controller we taped out last year. This is the first 6 nanometer 8 channel PCIe GM5 controller available in the market, and we are winning in virtually every top module maker in addition to our 3 flash maker customers. The result from our early testing have been very good.

Speaker 2

This is a premium product that will be ideally suited for high end notebook and desktop AI PC as well as for gaming and workstation PC that offer unparalleled performance with ultra low power consumption. In addition, we have a strong pipeline of design activity with several flash makers for PCIe Gen 4 SSD using their next generation TLC and QLC NAND. This delivered high performance, high density, low cost SSD, ideal for rapidly growing AI PC market. Beyond the PC market, we also have automotive grade PCI engine 4 controller win with 2 of our flash maker customers that will ramp with a leading electrical car platform next year. We also expect to tape out our dual port PCIe Gen 5 controller for the automotive market next year for several of our flash maker customers to further our leadership in the market.

Speaker 2

We are confident that our broad based SSD controller solution will continue to scale this business meaningfully this year into 2025 as many of these new products and platforms begin to ramp. Moving to our eMMC plus UFS controllers. We are successfully tapered our 1st UFS 4.0 controller in the Q1 and are on track to start qualification with this new controller in second half of the year. We also continue to see stronger than average demand for our UFS 3.1 and 2.2 controllers, especially to support new generation of low cost NAND. In addition to several top module makers serving the smartphone market, we start ramping up a new flash maker customer for UFS 3.1 and 2.2 this quarter.

Speaker 2

And this customer is expected to ramp with our UFS 4.0 controller next year. While the smartphone market has a predominantly new TLC NAND, we are now seeing increasing interest of QLC NAND, especially in mainstream handsets where OEM can offer higher density without significant increase in cost. We are collaborating with 1 of the leading handset OEM directly for QLC UFS solution that is expected to come to market later this year for their mainstream smartphone. We expect the demand for KLC UFS product, especially in mainstream and entry level 5 gs smartphone, will continue to increase as this higher density low cost UFS solution will be required to drive adoption of AI beyond the premium segment of the smartphone market over the next few years. In addition, we are seeing significant traction with our eMMC and Yoga controller in the automotive market as well as in commercial, industrial and other connected and smart devices.

Speaker 2

These non smart applications account for more than 40% of the overall eMMC UFS market today. With the market for automotive application growing faster than smartphone market, we are working with several flash makers and building eMMC and user controller for these customers, especially for automotive market and expect this to scale meaningfully in the next years to come. Now let me turn to our monetizing platform. As we have talked about before, the enterprise and data center storage market are tremendous opportunity that we believe we now have a truly differentiated solution with Mount Titan to scale with the Flash Makers and Star solution enabler as well as directly with data center and enterprise customers. Based on market data from Gartner and IDC, as well as our own analysis, we anticipate the market for enterprise SSD for both enterprise storage and data center will grow by more than 50% to approximately 35,000,000 units by 2027.

Speaker 2

But more importantly, the market for BCI HN5D expected to increase more than 5x to more than 60,000,000 units in 2027. QRC Beta D are expected to account for nearly 30% of the total petabyte in 2027, up from less than 10% in 2023, representing a huge growth opportunity that we are uniquely positioned to lead. Our first one Titan PCIe Gen5 controller well managed TLC or KLC NAND on the single platform, enabling the seamless transition and adoption of QLC NAND with enterprise and data center storage application long term. I'm excited to announce that we have won 2 Tier 1 customers in the Q1 for the Mount Tizen PCIe Gen 5 controller, 1 in the United States and 1 in China that are expected to begin ramping later next year. We continue to sample with more than a dozen additional customers expected to secure more wins throughout this year.

Speaker 2

We are on track to begin mass production late this year and ramp more meaningfully next year. Our early success here has been our ability to differentiate with our high performance and power efficient controller that support more NAND, including TLC and KLC for high capacity SSD than any other platform in the market today. Building our patented performance and power shipping technology, we enable our customer to dynamically adjust for peak performance versus low power consumption depending on the various workload requirements to achieve the best result. We are seeing inbound interest from the world's leading data center providers because of our ability to deliver high density, high performance, low cost TLC and KLC SD was increasingly data hungry AI compute and storage needed. Given our proven track record of managing more KLC NAND than any one other vendor in the market over the past decade, we can leverage our unparalleled experience expertise with QLC into the Mount Titan controller platform to build SSD solution that can effectively display portion of a nearline HDD with high capacity nearline SSD.

Speaker 2

These solutions offer a lower TCO compared to legacy HDD due to their smaller form factor, higher storage densities, lower cost consumption and higher reliability and the resiliency. We see an incredible market opportunity here to differentiate with our monetization platform and deliver solutions that are critical to the further build out and adoption of AI in the enterprise and data center, driving a multiyear growth cycle for the company. Overall, I'm excited by a strong start to 2024 and the achievable opportunity on our horizon for the rest of the year. Beyond our strong result, our underlying business momentum continue to accelerate as we add more product and more wins to drive a sustainable long term growth of our business. We continue to see very strong traction across the board with controller.

Speaker 2

We are beginning bringing to the market and have a greater confidence that our strategy to diversify beyond DC and smartphone into new opportunity in the enterprise and automotive market will soon scale meaningfully with our Tier one customers. We are very proud of this, and it gave us good confidence in our pipeline, our ability to serve our current and new customer to drive built in growth. 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 Q1 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 Q1, sales increased excuse me, sales decreased 6% sequentially to 189,000,000 dollars SSD controller sales increased slightly by 0% to 5% sequentially.

Speaker 1

EMMC and UFS controllers declined 10% to 15% sequentially. SSD solutions sales decreased 5% to 10% sequentially. Gross margin in the Q1 increased to 45%, reflecting both better mix and higher ASPs. Operating expenses in the Q1 were $62,500,000 $1,000,000 higher than the prior quarter, primarily due to higher R and D expenses to support our technology leadership. Operating margins in the Q1 was 12%, down from 13.8% in the 4th quarter.

Speaker 1

Our effective tax rate in the Q1 was 16%, an increase from the 2.3% tax rate in the 4th quarter, primarily due to a tax reversal benefit we had in the 4th quarter. Earnings per ADS were $0.64 down from $0.93 we reported in the 4th quarter. Total stock based compensation, which we exclude from our non GAAP results was $3,200,000 in the Q1. We had $349,300,000 of cash, cash equivalents and restricted cash and short term investments at the end of the Q1 compared to 3 $69,000,000 at the end of the Q4. Inventory increased sequentially in the Q1 to $253,000,000 from $217,000,000 in the Q4 to support revenue growth in the Q2 and the rest of the year.

Speaker 1

Let me now turn to our outlook. As that Wallace mentioned, the continuing success we are seeing with flash makers and providing more clarity around the improving fundamentals of our business. We're seeing strong demand in smartphones and coupled with improving demand in PCs, our design wins for this year are well positioned to drive better growth than we had anticipated just 3 months ago. While the strength we are seeing with our current products as well as the increasing interest in Montaigne products, we are prudently increasing investments in R and D primarily through higher headcount to support increasing programs we are engaging with engaging in with our customers. Now let me turn to our 2nd quarter outlook.

Speaker 1

Revenue is expected to increase 5% to 10% sequentially to approximately $199,000,000 to $208,000,000 We expect eMMC and UFS sales to increase and SSD controller sales will be stable sequentially. 2nd quarter gross margins is expected to continue to improve and be in the range of 45% to 46%. 2nd quarter operating margins is expected to improve and to be in the range of 16.5% to 17.5%. 2nd quarter effective tax rate be approximately 19% and 2nd quarter stock based compensation and dispute related expenses in the range of 2,500,000 to 3,000,000 dollars For the full year of 2024, we are increasing our outlook given the strong momentum we are seeing from our customers. Revenue is now expected to increase 25% to 30% sequentially to approximately $800,000,000 to $830,000,000 Gross margin is expected to be in the range of 45% to 47%.

Speaker 1

Operating margins is expected to be in the range of 14.7% to 16.7% as we further invest in our technology leadership. 2024 tax rate to be approximately 19% and 2024 stock based compensation and dispute related expenses in the range of 30 $1,000,000 to $32,000,000 With the strong start to the year and the building momentum in our backlog, we expect to see sequential revenue growth and profitability improvements throughout the balance of the year. For operating expenses, we taped out our new 6 nanometer UFS 4.0 controller in the Q1 and expect to tape out our 6 nanometer PCIe Gen 5 4 channel SSD control in the Q3. We expect our operating expenses to decline sequentially, but to increase again in the Q3 to support the technology leadership investments we continue to make. We have accelerated some R D hiring, especially in our Mountain Enterprise Controller Group to support the opportunities we are seeing with our sampling customers as well as the increasing amount of inbound interest.

Speaker 1

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

Operator

Thank you. We will now begin the question and answer session. Our first question comes from the line of Mehdi Hosseini from SIG. Please ask your question Mehdi.

Speaker 3

Yes. Thank you for taking my question. Two follow ups. First, for Wallace, can you give us an update or review some of the key milestones determining your penetration into the enterprise segment with the PCIe Gen 5. I think in the past, you have talked about evaluation in the second half of 2020 by 2025, where are we with those milestones?

Speaker 3

And then for Jason, what are your thoughts on the longer term gross and operating margin targets?

Speaker 2

Thank you, Manny. We see the very strong momentum for demand from Titan Q1. We had 2 Tier 1 customer design wins, 1 from United States, the other from China. We also have some ongoing module maker design. That's why we start to see some revenue by end of 2024, become meaningful in 2025.

Speaker 2

But the 2 Tier 1 customers will run by late 2024. But we had to we had announced our goal is to win minimum 2 Tier 1 U. S. And 2 Tier 1 in China is on track. We might have more than what we really can support, but we believe 2025 late 2026 will be much more meaningful sale revenue growth for our monetizing business for enterprise.

Speaker 1

And Mehdi, in terms of gross margin and profitability, certainly our goal is to continue to gradually improve our gross margins. We believe we can return back to our historical gross margins level by early next year. And then in terms of operating profitability, again, as we scale our revenue, as we see our gross margins further improve, we believe we can continue to improve long term operating profitability and get back to our historical range of 25% plus as well. We don't have a specific guidance around timing at this point, but certainly as we continue to execute and deliver, we expect to get closer and closer to that target each quarter.

Speaker 3

Thank you. Just a quick follow-up. Given the mix in your revenue, could you hit the 25% operating margin at a lower revenue run rate?

Speaker 1

Look, I think if you take a look at our products today, our revenue, our SSD controller business, those SSD controllers tend to be above corporate average gross margins, while our eMMC and UFS controllers are below corporate average gross margins. There is certainly a number of growth factors in both of these businesses, but typically what we've seen historically is that SSD controllers account for anywhere from half to 2 thirds of our business in any given period. And, EMMC and UFS account for about a quarter to a third in any given period. So we don't see that percentage changing much. And certainly, if we see automotive on Titan becoming a bigger portion of revenue, then that can skew our gross margins to be better than longer than what historical average has been.

Speaker 1

But it's too early to say what those long term targets are yet given that we have yet to scale those products meaningfully.

Speaker 3

Got it. Thank

Operator

you. Thank you, Mimi. Our next question comes from the line of Quinn Bolton from Needham and Company. Please go

Speaker 4

ahead. I didn't catch her. Is that Quinn from Needham?

Operator

Yes, it is. Please go ahead.

Speaker 4

Perfect. Okay. Sorry, you cut out there when you announced the name. Hey Wallace, hey Jason, congratulations on the nice results and particularly on the Montitan wins. Wallace, I'm wondering if you might try to size the opportunity for us for Montitan for Silicon Motion in 2025?

Speaker 4

Is this something that you see contributing tens of 1,000,000 of dollars as the 2 Tier 1s ramp next year? Could you try to help level set us on what's a reasonable expectation for Mondtitan revenue next year?

Speaker 2

Yes, we mean the 2 Tier 1 customers would ramp in late 2095. They were probably more meaningful in 20 96. But we believe the enterprise controller revenue will be around meaningful 2026 and 2027, meaningful meaning at least 5% to 10% of total revenue.

Speaker 4

Perfect. And then, I think you commented in the script, but also in the press release about increasing backlog and visibility. I guess I'm kind of wondering, I guess I would think the NAND controller space would typically be a pretty short sort of lead time business because it just the market can change pretty quickly. How far does your backlog extend? Do you have pretty good visibility now into the second half?

Speaker 4

Or is your backlog shorter term in nature really only covers say 90 or so days?

Speaker 1

Yes. So our backlog, we obviously have some long term customers, especially with our NAND makers where we have much better clarity on what their demand profile looks like over a longer term. These are rolling forecast and we do get updated on that pretty regularly. So it does vary point out that from an inventory management standpoint, it does take us about 3 months to get products in and out of our manufacturing partner stores. So we do need that advanced notice in order to build inventory to support those upcoming products, those upcoming sales, those upcoming ramps, especially going into the back half of the year where demand is typically stronger, we need to make sure that we've got adequate inventory to support that revenue growth.

Speaker 2

I may add a comment. If we are able to increase our annual sales guidance, which mean we have better visibility for second half of this year.

Speaker 4

Got it. And then lastly, Wallace, you mentioned the price, the NAND price, sort of fluctuations might cause some perturbations in the retail SSD market. Just wondering if you could sort of expand on those comments. Is it just the pricing is coming up pretty quickly and that could create sort of lower demand temporarily in the retail channel or were you trying to imply some other behavior? Thank you.

Speaker 2

Well, I think the current solution like this, the NAND maker have pretty high confidence because demand from data center and enterprise is very, very strong. So that's why they definitely continue to see the supply shortage going to increase the wafer price and we see going to increase gradually for this throughout the whole year. However, for certain channel market for demand for SSD, the demand is not that strong as the wafer price increase. That's why some population. But overall, we see it stabilize and we see the demand for our controller is still strong and stable.

Speaker 2

So I think primarily because a lot of module customers have acquired quite many inventory last year, so they can balance for their spare cost.

Speaker 4

Got it. Thank you.

Operator

Thank you, Quinn. Our next question comes from Craig Groff with Lids from Credit Suisse Securities. Please ask your question, Craig.

Speaker 5

Yes. Thanks for taking the questions and congratulations on the very strong start to 2024. Wallace, I wanted to start with a higher level question for you that helps put into context what you're seeing with NAND OEM controller outsourcing. So if we take a look at where we are today and compare it to January early February, can you talk about the incremental design wins that you've seen with NAND OEMs that would ship in 2024? And it seemed from your prepared commentary that you're also being actively engaged with some 2025 projects.

Speaker 5

So the question is, what have you seen in the last 3 months that impacts this year's revenues and what are you seeing that kind of starts to give you at least project visibility for 2025?

Speaker 2

I think that the 3 years don't really have a major changes, but we really start to see the NAND maker, they're all focused on profitability. I mean, every NAND maker have their own strategy and how to really invest their CapEx for the agreement. But we definitely working even things on last year for several 2025 OEM project cover from client D for UFS, for the multi EMC, on multi Dxie, portable SSD, multiple projects with individual NAND makers. So they're quite busy and Armand Titan also working with quite a we have 2 major design wins for Tier 1 customer. We have several in the process in qualification and engagement.

Speaker 2

So we are quite busy this year, and we are pretty confident our design pipeline for 2025.

Speaker 5

And on that monetizing point to follow-up Mehdi and Quinn's questions, It seems like you were saying if we look in 2027 at market projections with TLC where you have just an amazing history with product development and performance that that part of the market would be about a third of the market or maybe 25,000,000 units. The question is, given your history with the technology, given the solution you've developed, what might be a reasonable share position that investors could look at even if it's a fairly wide range for 2027, Wallace?

Speaker 2

Yes, we cannot comment regarding our market share for 2027, but I can give you certain guidance regarding why monetizing lately get tremendous traction and interest from the Tier 1 customer. The main reason is because the AI cloud and AI server demand is very, very strong. And we see many Tier 1 customers from U. S. And China, they really try to explore the QLC based SSD for enterprise storage solution because QLC base is will be cheaper and can build a much bigger capacity.

Speaker 2

We see so many demand for 32 terabyte of higher density for future SSD. So that will be suitable for AI data process, especially sequential read and low latency. So because we have a very, very strong position and know how in QLC so that we get a tremendous interest from customer to engage with us for qualification and joint development. That's why we see that trigger the stronger demand than usually process. And we see especially for 2 terabit monodiode QLC, they become the main, main product to enable the future nearline SSD to replace portion of HDD.

Speaker 2

So we are very happy we can be part of it.

Speaker 5

That's really helpful color. And then Jason, if I could follow-up with one for you before hopping back in the queue. I appreciate the point on revenues rising sequentially through the year. And any color as we look at the year's progression on how mix between SSD controllers and eMMC, UFS and some of the other segments might play out even if high level? Thank you.

Speaker 1

Yes. I mean, look, I think we anticipate growth this year from both of those segments. Obviously, EMMC, I think, we obviously had a much was a much more difficult year for EMMC and UFS last year given where inventory levels were in the smartphone market. So I think you'll see certainly stronger year on year growth given that it was a bit more depressed last year. SSDs were a bit more stable.

Speaker 1

And so while it will still grow, it's not going to grow at the same growth rates as we saw with as we expect to see with the MMC UFS this year. But overall, again, the percentage of our business for SSDs and eMMC UFS kind of typically stay in those bands that we talked about earlier and we don't see that changing anytime in the near future.

Speaker 2

I think let me add some comments. With Daphne, both client ID and mobile eMMC UFS will gain market share this year. However, our mobile controller eMMC UFS last year, the base is smaller. So we have much bigger momentum to gain market share in mobile controller.

Speaker 5

Really helpful color guys. Thank you.

Operator

Thank you, Craig. Our next question will come from the line of Suji Desilva from ROTH. Please ask your question, Suji.

Speaker 6

Yes. Good morning, Wallace. Jason, congrats on the progress here and the strong start to the year. On the sticking on Mondtitan and the AI opportunity, if it is supporting AI, do you have a sense of whether it's supporting inference or whether it's supporting training or traditional cloud instances? Any specific color on those programs and where you're seeing traction?

Speaker 2

You asked a very good question, but naturally, we really don't know. But I think that SSD today is not helping any for compute, for AI, but are supporting it for storage. For storage, I think fundamentally, it's real data. I believe when you really see the upcoming flash memory summit in August in Santa Clara, you're going to see many NAND maker and enterprise SSD suppliers are going to tell you what exactly they see regarding supporting AI and associate. So that means it's related to inference, also related to training process, Also, it's really regarding the swapping between the ALM model and doing the different application running.

Speaker 2

So, I think the storage have a specific performance requirement and there are certain features we can add, especially for edge devices because they're limited D RAN density. SSD, mobile UFS, they have many, many technology we can help in the AI application.

Speaker 6

Okay. Thanks, Wallace. And then my other question is on the smartphone market. I heard you guys talk about an OEM that is trying to in source the controller effort versus using a merchant controller. I know some of the flagships have been doing that for years, but curious if that's a trend you're seeing or if that's an exception and what that impact might be for SIMO in terms of opportunity?

Speaker 2

So it's very, very good that we see the momentum from some smartphone maker. They are considering a data QLC into the mobile solution. I think as you can see, Samsung and what was one of the leading smartphone maker in the last 2 years and bring the solution to the market since Q4 production last year. And we're very happy to work with 1 major leading smartphone maker for QLC project, and we believe this will be in production by later this year. And this is going to bring a stream of momentum.

Speaker 2

I think a lot of the players in the smartphone segment, they are looking for how to bring the flagship model into the AI smartphone because everybody is looking for very high performance and how to maintain low power and to supporting different live Allen model. But in the other area, many, many smartphone makers also bring their mainstream smartphone into the AI arena. So this is why we see the leading smartphone maker try to increase the density, but without increase the cost. And that's why QLC becomes the best candidate. And so many smartphone makers we believe are going to try to export the potential opportunity to bring the UFS with the QLC solution and to try to market.

Speaker 2

And I think eventually, they will become the key to enable smartphone AI smartphone from the flagship to mainstream and beyond.

Speaker 6

All right, great. Very helpful color. Well, it sounds like the guys are well positioned. Thanks.

Operator

Thank you. Our next question comes from the line of Matt Bryson from Wedbush Securities. Please go ahead.

Speaker 7

Thanks for taking my question. I have a few. So on the enterprise SSD side, we've seen substantial demand for 32 and 64 terabyte SSDs recently. I guess it sounds like what you're doing with your technology is enabling QLC. So allowing other vendors beyond say Soladyne with their QLC solution to address this market with those capacities and higher capacities.

Speaker 7

Historically, there hasn't been a ton of success for 3rd party controller vendors in the enterprise market. I mean, do you see your advantage around QLC as enabling that opportunity for you, so you can get some success in this market. Is that correct? And have you seen more momentum over the last 3, 4 months when it appears like these high capacity SSDs have all of a sudden started to see incremental demand?

Speaker 2

I want to say, Silicon Motion will be the 1st in both KLC for enterprise D, but definitely we are the leader for clients with KLC. But because lately, we got tremendous demand, but also because all NAND makers are going to have a QLC variable in the market. And I believe all NAND maker is going to have a 2 terabit QLC in Molozai by late 2025. That's why that trigger the strong interest from hyperscaler, data center and server leader, we try to potentially adopt QLC for the upcoming strong demand for AI server, AI cloud services. So the because QLC Financial is beautiful, nearline SSD, it will be much more attractive for nearline HDD from data asset point of view.

Speaker 2

So with silicon motion, we got our controller can work with all NAND maker TLC. So we are in a very unique position for the customer directly what we see commotion and to use as a different NAND supplier. So I cannot say we are better in NAND maker, but we think we are in a very unique position to enable the trend adopt QLC into enterprise SSD.

Speaker 7

Got it. And Wallace, it sounds like you're working with all of the different customers out there in the sense you've talked about hyperscalers, OEMs, module makers. And I guess my question is, can you characterize what those first two customers of Selective Solution, which bucket they fit into in the OEM?

Speaker 2

We cannot comment customers until they really announce the name, but the 1 Tier 1 U. S, 1 Tier 1 China, we believe by end of the year, we have 2 more to add on the list.

Speaker 7

Awesome. And then I guess my last question is, I know this has kind of been asked, but just in terms of the TAM on either on both that with that enterprise product, but also in the automotive market, Can you characterize what you see those 2 TAMs as being versus your more traditional markets in UFS CMMC and SSD controllers?

Speaker 1

In terms of the enterprise, Tim, obviously from a unit volume perspective, it's not going to be anywhere near as big as the PC market or the smartphone market, right? But however, ASPs for our Montyme product are certainly several multiples higher than our client SSD controllers margin certainly better than corporate average. So it is a big opportunity even though the unit volumes are much smaller compared to PCs and smartphones. On the automotive side, again, total number of cars shipped today is a lot smaller than either of those other markets. But what we're seeing now is multiple storage requirements, multiple storage devices required per car to run things like not just the infotainment system, but the ADAS, the sensors, the cameras, all those things require individual independent storage solutions that significantly balloon the size of the number of units.

Speaker 1

I don't have that number handy. We can get back to you on that one, Matt. But it's these are certainly much higher, more sticky engagements that we would be going into as opposed to the PC and smartphone.

Speaker 2

Let me add a comment regarding automotive. As you know, SMI have a 2 different approach to expand our automotive visibility. 1 is a direct controller, the other are very product line. For controller, we have engaged 3 NAND makers and for PCIe also as well as UFS eMMC development. I think some are in production today.

Speaker 2

We have 2 makers going to production with PCIe Gen 4 and we also have new eMMC with a NAND maker. For Feride, we're already based on our own solution and engage with automotive customer. And we already win, which we have set with the Toyota and Honda, also including China BYD. So we have a multiple design win in the pipeline. We believe we will grow our automotive business very, very strongly from 2025.

Speaker 7

Thanks for all the color and congrats on the good quarter.

Operator

Thank you, Matt. Thank you. I'm showing no further questions. I'll now turn the conference back to the President and CEO, Mr. Wallaceko for closing comments.

Speaker 2

Thank you everyone for joining us today and for your continued interest in Second Motion. We will be attending several investor conferences over the next few months as well as the COMPUTEX conference in Taiwan in June. The schedule of this event will be posted on the Investor Relationships section of our corporate website and look forward to speaking with you at this event. Thank you everyone for joining us today. Goodbye for now.

Operator

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

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Key Takeaways

  • Strong Q1 2024 performance: delivered sequential revenue growth ahead of expectations, achieved gross margin at the high end of guidance and exceeded operational margin forecasts, driven by robust SSD controller demand from two flash-maker customers.
  • Raised full-year outlook: 2024 revenue is now projected to grow 25%–30% to $800–830 million, with gross margins of 45%–47% and operating margins of 14.7%–16.7%, reflecting stronger smartphone, PC and enterprise design wins.
  • Leadership in QLC NAND: advanced LDPC and 3D NAND rate technology secured significant wins with flash makers, positioning QLC-based SSDs as a high-performance, low-cost solution for AI PCs, data centers and enterprise storage.
  • New controller wins: taped out a 6 nm PCIe Gen5 8-channel SSD controller with early wins at top module and flash makers, secured automotive-grade PCIe Gen4 design wins and on track for UFS 4.0 and eMMC ramps.
  • Expanding enterprise footprint with Mount Titan: won two Tier-1 customers in the US and China for the PCIe Gen5 enterprise SSD controller, sampling with 12+ prospects and planning mass production late 2024 for a meaningful 2025 ramp.
A.I. generated. May contain errors.
Earnings Conference Call
Silicon Motion Technology Q1 2024
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