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spk05: Good day and thanks for standing by. Welcome to the Silicon Motion Technology Corporation's first quarter of 2021 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. And to ask a question during the session, you'll need to press star 1 on your telephone. This conference call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21 of the Securities Exchange Act of 1934 as amended. Such forward-looking statements include, without limitation, statements regarding trends in the semiconductor industry and our future results of operations, financial condition, and business prospects. Although such statements are based on our own information and information from other sources, we believe to be reliable. You should not place undue reliance on them. These statements involve risk and uncertainties and actual market trends and our results may differ materially from those expressed or implied in these forward-looking statements for a variety of reasons. Potential risks and uncertainties include but are not limited to continued competitive pressure in the semiconductor industry and the effect of such pressure on prices, unpredictable changes in technology and consumer demand for multimedia consumer electronics, the state of and any change in our relationship with our major customers, and changes in political, economic, legal, and social conditions in Taiwan. For additional discussion of this risk and uncertainties and other factors, please see the documents we file from time to time with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements, which apply only as of the date of this conference call. And please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your first speaker for today, Mr. Chris Cheney, Director of Investor Relations and Strategy. Please go ahead.
spk13: Thank you, Annie. Good morning, everyone. and welcome to Silicon Motion's first quarter 2021 financial results conference call and webcast. As Annie mentioned, my name is Chris Cheney. I'm the Director of Investor Relations. Joining me today on this call are Wallace Kao, our President and CEO, and Riyadh Lai, our Chief Financial Officer. Following my comments, Wallace will provide a review of our key business developments, and then Riyadh will discuss our first quarter results and our outlook. We will then conclude with a question and answer period. Before we get started, I'd like to remind you of our state harbor policy, which was read at the start of this call. For a comprehensive overview of the risks and uncertainties involved in investing in our securities, please refer to the 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 6K after the close of the market yesterday. This webcast will be available for replay in the investor relations section of our website for a limited time. To enhance investors' understanding of our ongoing economic performance, we will discuss non-GAAP information during this call. We use non-GAAP financial measures internally to evaluate and manage our operations. We have therefore chosen to provide this information to enable you to perform comparisons of our operating results in a manner similar to how we analyze our own operating results. The reconciliation of our 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. And with that, I'd like to turn the call over to Wallace.
spk08: Thank you, Chris. Hello, everyone, and thank you for joining us today. In the first quarter, we delivered record sales and EPS. Sales grew 27% sequentially to a record $182 million, and earnings per ADS were a record $1.11. Our strong revenue growth was driven by strong sales of both our SSD controllers and EMSC plus UFS controllers. with both products achieving record quarterly heights. The outlook of upcoming quarter and the rest of the year continues to be very strong, and as we have secured additional wafers from our foundries, we are raising our full-year outlook. Our August book remains very strong and continues to exceed our ability to supply. Looking into next year, We expect solid growth based on continuous strong demand for our products and a variable foundry supply. We are excited about our trajectory this year. Applications that use SSD and EMC plus UFS are doing well. Adoption of these solutions is growing and furthermore, we are growing our market share. Let me discuss key factors driving our growth this year. First, our SSD controllers. While the PC market is experiencing modest growth, an SSD attach rate continues to rise, which are all beneficial for growth of our SSD controllers. The primary reason our controllers are growing rapidly is market share gains. Several of our customers have been gaining market share, and we have also been gaining share with our customers. Our customers have also been up-sizing their order to us as they consolidate their procurement. We have been gaining SD controller and market share and expect to continue this trend. We have resized the client SD market and now believe our market share last year was in the 25 to 30% range. Based on our strong controlled cell growth this year, which were primarily driven by PCIe Gen3 SED and OEM programs, we believe we should pick up 5 to 10 percentage points of market share. Our market share is increasing because our PCIe Gen3 PCoEM programs, which we had discussed extensively in the past, are scaling. We will be shipping our GN3 SD controller to six of seven NAND flash makers. We are also shipping our GN3 controller to several module makers with PCoEM programs. SSD using our GN3 controller will be used by all of our global PCOENs. Additionally, we are gaining market share because our small merchant competitors and the captive controller sources of NAND flash makers are both also facing foundry supply issues. Our momentum will pick up further when our PCIe Gen 4 SSD controller starts ramping. Our Gen 4 controller will start shipping in the middle of this year, initially with a few PC OEMs using Intel Tiger Lake platform. We expect our Gen 4 OEM program to scale quickly next year when Intel's Elder Lake platform becomes widely available. Based on the size of our current Gen 4 design wing for OEM programs, when fully ramped, We believe our controller will be used in about half of all PCOEN Gen 4 CDs. Let me add that we continue to outgun the competition. Last year, our client-side controller share in the merchant market was four times bigger than our closest competitor. And we expect our market share to grow further as more of our OEM SD program enter production and scale. Now turning to our EMC plus UFS controllers, which are primarily used in smartphone and IoT devices. For smartphones this year, we are benefiting from an industry recovery. Additionally, with smartphone embedded storage technology continuing to rapidly transition from legacy EMC to UFS. Our UFS controller sales will continue to scale rapidly as we further benefit from this trend. Furthermore, we expect our share gain to increase our customer gain UFS market share. We believe our UFS NAND flash partner using our highly competitive jointly developed UFS controller with their industry-leading NAND and mobile DRAM technology will continue to outperform. We are also seeing positive customer engagement by our Chinese module makers and other customers with their UFS programs. In the legacy EMC segment, we continue to be positively surprised by both the staying power of EMC and the expansion of our market opportunities. EMC remains the ideal storage solution for applications that do not require large data storage capacity and are price sensitive and will continue to be widely used for the foreseeable future by low-cost smartphones, as well as IoT and other non-smartphone applications such as smart TV, streaming dongos, Set-A-Box, Smart Speaker, and Mainstream Chromebooks. Our EMC controller opportunity has also grown significantly larger with NAND makers exiting from the EMC market, but their priority has been changed. We are becoming the primary supplier of EMC controllers. There are no other meaningful merchant suppliers of EMC controllers. A strong audit book is a result of solid end markets and growing demand of our controllers. Demand for our controller continues to exceed our ability to supply to our customers because of a very tight foundry industry capacity. We still do not have enough foundry capacity to manufacture all the products ordered by our customers. We have, however, secured additional foundry supply and, as a result, are able to meet more of our customers' needs and increase our full-year revenue guidance. We have also secured additional foundry supply that should enable us to deliver solid growth next year. But again, demand for our product will likely continue to exceed our ability to supply. We are thankful to TSMC and our customers for their support in securing additional foundry supply. And to our many customers with unfulfilled orders, we ask for their understanding on this matter. We continue to work on our securing incremental foundry supply, without which the many ecosystems such as PC and smartphones that depend on our controller for storage solution could be negatively affected. Last quarter, we announced our $1 billion cell target by 2023 in three years. With stronger cell growth this year and solid growth next year, it is likely we could reach our goals sooner than our general expectation. Let me conclude by providing an update of the enterprise-grade PCIe Gen5 SD controller. Active engineering work continues, and we have been marketing our unique Gen5 architecture to hyperscalers in both the U.S. and China with very positive feedback. We expect to start sampling this SD controller with customers in the second half of next year. Now I will turn the call over to Ria to discuss our financial results and our outlook.
spk10: Thank you, Wallace, and good morning, everyone. I will discuss additional details of our first quarter results and then provide our guidance. 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 earnings release issued yesterday. In the first quarter, revenue reached a record $182 million, 27% higher sequentially and 37% higher year-over-year. Earnings per ADS were $1.11, 29% higher sequentially and 38% higher year-over-year. Now I will walk through the performance of our three key products during the first quarter. SSD controller sales increased 25 to 30% sequentially and 45 to 50% year over year. Sequential strength of our first quarter SSD controller sales growth was primarily driven by our PCIe Gen 3 OEM programs. Channel market sales also grew sequentially, but more modestly. EMMC plus UFS controller sales also reached a record high, growing 30% to 35% sequentially and 50% to 55% year-over-year. Sequential strength of our EMMC plus UFS controller sales growth was primarily driven by our UFS controllers. EMMC controller sales also grew sequentially, but more modestly. SSD solution sales increased zero to 5% sequentially, and we're down 40% to 45% year over year. Gross margin in the first quarter increased from 49.3% in the prior quarter to 50.7%. Gross margin was higher than our guidance, primarily due to our focus on selling a better product mix for non-OEM programs. Offering expenses in the first quarter were $43.9 million, $4.4 million higher than the prior quarter, primarily due to higher compensation accruals. Operating margin in the first quarter was 26.6%, an increase from the 21.9% we generated in last year's fourth quarter. Our effective tax rate in the first quarter was 20.9%, above our 15 to 20% tax rate guidance due to more sales from higher tax operating entities. Stock-based compensation in our operating expense, which we excluded from our non-GAAP results, was $3.0 million in the first quarter, slightly below our guidance of $3.1 to $3.3 million. We had 371 million of cash, cash equivalents, restricted cash, and short-term investments at the end of the first quarter, compared to $369.2 million at the end of the fourth quarter last year. We paid $12.2 million in dividends to shareholders, the second quarterly installment of our $1.40 per ADS annual dividend that was announced last October. Now, let me turn to our second quarter and four-year guidance and forward-looking business trends. For the second quarter, we expect revenue to increase 5 to 10 percent sequentially to approximately 192 to 201 million dollars. We expect all three of our key products, SSD controllers, eMMC plus UFS controllers, and SSD solutions to all grow in the second quarter. As well as had discussed, our growth remains capped by foundry supply limitations. Second quarter gross margin should be in the range of 48 to 50%. Second quarter operating margin should be in the range of 26 to 28%. In the second quarter, we expect stock-based compensation in the range of $2 to $3 million. For full year 2021, we are now expecting the following. With additional foundry supply allocation, we now expect revenue to grow in the range of 45 to 55 percent to $782 to $836 million. Our ability to meet customer demand, however, will remain capped by foundry supply availability. Our four-year gross margin expectations remains in the range of 47 to 49 percent. We expect growth margin in the second half of the year to be less favorable as our backend and substrate costs have increased while our prices to customers for OEM programs are bound by contractual terms. Furthermore, our OEM programs are driving our growth and despite foundry capacity limitations, scaling faster than expectations and subject to volume discounts. We believe our short-term investment in slightly lower gross margin will pay off in the years to come as we pull further ahead of both merchant and captive competitors and secure our position as the tech industry's primary supplier of NAND controllers. Operating margin is expected to be in the range of 26 to 28 percent, up sharply from 21.8 percent last year and approaching our 30 percent target. For the full year, we expect stock-based compensation in the range of $16 to $18 million, more than the prior year. We expect our effective tax rate for the year to be about 20%, similar to the first quarter. On February 24th, we broke ground on the construction of our Shenzhou office building. Construction is budgeted to cost $77 million, with $5 million spent this year and $33 million next year. We expect to complete construction in 2024. Upon completion, we plan on a sale and lease back of the building. Separately, on February 18th, we want to bid with a third party to build an office building in Taipei, paid $1 million bid bond, and expect to execute a property development agreement in the next few weeks. at which time we will pay a $5 million performance bond and other fees. We expect to spend approximately $75 to $85 million in complete construction in about six years. This concludes our prepared remarks. We will now open the call to your questions.
spk12: Andy, please go ahead and give instructions for the Q&A session.
spk05: Thank you. As a reminder, to ask a question, you need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Once again, please press star 1 on your telephone. Our first question is from the line of Anthony Stoss of Craig Harlem. Your line is open. Please go ahead.
spk02: Good morning, everybody. Congrats on just the unbelievable results for you guys. A couple of questions. Riyad or Wallace, maybe if you could give us your sense right now, when do you think the wafer shortages really start to ease up? You know, TSM and others are talking about in Q3 things that start to loosen up a little bit. So I'm curious what your view is on that. And then also, either one of you two guys, you're talking about bookings being sharply above your ability to get wafers. Can you quantify that? Is it 30%? percent higher, 50 percent higher, or maybe just if you wouldn't mind sharing kind of your view on where your bookings are for this year. Thanks.
spk08: Yeah, I believe TSMC said they expect current foundry shortage to continue throughout this year and maybe extend into 2022. As many of you know, foundry supply shortage especially acute with mature technology nodes. which significantly affect our ability to have a product fabricated. None of our products today are manufactured using 5 or 7 nanometer. We do not know when the foundry supply will improve.
spk10: Tony, let me add to Wallace for your other question about our booking, what you think, your question about how much our bookings could be in excess of our wafer supply. One way to put a framework around that is if we do not have that constraint, we will be significantly on our way towards the $1 billion sales target that we had outlined last quarter and we believe will be delivering faster than expected because of our stronger growth this year.
spk02: Thanks for that. And then as a follow-up, your comments or Wallace's comments about solid growth for 2022, do you think you could grow faster than the overall, let's say, PC market in 2022 over 2021 revenues?
spk08: I think from the demand, yes. But from the waiver supply perspective, We are not sure, but we already secured additional wafer to support our growth, but the demand is much bigger than the supply we can secure today.
spk02: Okay, great. Thank you. Appreciate it, guys.
spk05: Thank you. Our next question is from the line of Craig A. Ellis of B. Riley Securities. Your line is open. Please go ahead.
spk03: Yep, thanks very much for taking the question, and congratulations on the real robust execution, guys. Great to see the growth and the margin performance has come through in the first and second quarter. So the first question is just on the new $1 billion target, and it's really a clarification. So the clarification is this. Can you just identify what the prior and what the new embedded underlying PC growth is in the in the calendar 21 revenue target, which at a midpoint I think is $809 million. And is there any benefit from some of the improved product mix and pricing that you're seeing in channel markets in the increase from initial to $809 million now?
spk10: Okay, let me start with your first question. The one big target, the underlying assumptions that we had baked in, Our growth will be driven primarily from our SSD controllers and also from our eMMC plus UFS controllers. The growth from these two products will get us to a billion dollars. Additionally, we also expect our FairEye SSDs to contribute, and we are not expecting our enterprise SSDs to be part of this. Our enterprise SSD we're building as growth driver beyond the billion dollars. In terms of PC growth, we are obviously expecting modest PC growth this year in line with expectations from third-party industry analysts. And within the PC profile, we are expecting notebooks to grow while desktops to decline. And so that is a favorable tailwind to our overall business. But clearly, as Wallace had talked about, The key driver is not the PC growth or the transition from hard disk drives to SSD, but rather because of our investments that we had put in place over the last few years in winning design wins with our big customers for OEM programs. These are now going into production and scaling very nicely, leading to very solid market share gains.
spk03: Yep, good to see those gains. And we had a follow-up just on the full year 21 guide implications for some things in the back half. So on revenue, just given your optics into increased supply and the share gain programs you have in Gen 4, would you expect revenues to rise sequentially through the back half of the year, or do you get supply early enough that we would see revenues peak in the third quarter and then On the gross margin side, the full year gross margin guidance on average would imply 46.5% gross margin in the back half of the year. But as you've noted, gross margin is very mixed dependent. And so what does the order book pretend for the way gross margin can play out in the back half? Thank you very much.
spk10: For the first part of your question, our revenue, we are expecting very modest sequential revenue growth for the rest of the year, quarter after quarter, very modest growth. This is going to be in line with additional wafers made available to us, but clearly ability to grow is capped by wafer limitations from our foundry suppliers. In terms of our gross margin, our gross margin profile is going to be less favorable in the second half of the year as our big OEM programs continue to scale. As these OEM programs continue to scale, our gross margin will be affected. For a lot of our OEM programs, the pricing has already been predetermined and baked in contractually, so our ability to change prices are fairly limited. Furthermore, There are also volume incentive plans, and as these programs get larger and larger, they will impact our gross margin negatively in the second half of the year. So let me comment.
spk08: I think all wafer are available right now. We won't gain any additional wafer. That's why we make a full year guidance based on all the variable wafer to us. Now it's a question about manufacturer back end, all the assembly, testing, everything. And we know exactly the yield, the price, all fixed. That's why I think the guidance will fulfill the full year. It depends on just the rest of the operation execution.
spk03: Okay, that's fair, guys. Would it be fair to think that your OEM customer mix would rise from the third to the fourth quarter, and therefore we would see a commensurate gross margin impact to the business sequentially?
spk08: That's correct.
spk03: All right. Thank you very much. I'll hop back in the queue.
spk05: Thank you. Next question is from the line of Raj Vindra Gill of Needham & Company. Please go ahead. Your line is open.
spk06: Yeah, thank you and congratulations as well on excellent results. Wallace, you talked about that your market share picture is improving fairly significantly, expecting to pick up 5 to 10 points of market share. I wanted to get a sense of, maybe if you could elaborate a little bit further, on kind of what's driving that market share gains How sustainable is it going into next year, and is that a major part of the underlying growth in SSDs and kind of your confidence of achieving that billion-dollar target?
spk08: Okay, that's a very good question. I think we have very high confidence to grow 5 to 10 percent market gain, because through our current PCOEM program, from NAND makers as well as module makers. And we are ramping very quickly with a variable wafer to us. And due to, as we mentioned, our PCI-E 2004 controller design wing is very widely aligned with Intel Elder Lake next year. So we believe when PCIe chain 4 SAD adopted wisely by PCOEN. We were about 50% of the OEM project. That's why we have very high confidence our mark, we will have a continued mark again for our client SAD continuing to next year and even beyond.
spk06: And thank you for that. And your commentary that based on the sales growth this year and what you see next year that you could achieve the billion-dollar target sooner rather than later. You talked about fiscal year 23 achieving the billion-dollar target, and you're basically implying that could happen in 2022. I'm just trying to kind of reconcile that with your commentary about the supply constraints kind of continuing at TSMC, you know, for the remainder of the year and going into possibly 2022. Is it that you have, you're expecting to get additional wafer supply in 2022 that will kind of help you, give you more confidence about achieving the billion? Is it that the Gen 4 programs are going to ramp and you have those purchase orders in hand as giving you some of the confidence that you could get to that number sooner? I'm just curious that you feel that you could get to that number sooner. However, the capacity constraints are still fairly significant.
spk08: So maybe we can make it very clear to you guys. Our backlog with billing today is over $1 billion. If we have sufficient supply, this year we can achieve over $1 billion sale target. However, we are not able to due to wafer supply. shortage. Now, we secure additional wafer supply, which will support us to continue growth for next year. It's too early to comment 2022 guidance, but we believe we'll continue growth for 2022. And we can continue negotiate with TSMC to support major critical program because if we cannot get sufficient supply, that will impact the ecosystem negatively. So this is very important for us and also for our customer and for the whole industry. So we believe we current secure additional wafer will support our growth for 2022, but we cannot comment what the eventually sell revenue will be. But we believe we'll be probably earlier than 2023. It's likely.
spk06: And thank you for that. That's very helpful. And just my follow-up, I'll step back in the queue. Rad, you know, the gross margin is kind of dipping to, you know, 46.5 range in the second half. You talked about that the pricing is committed or predetermined. And at the same time, you know, there's back ends of substrate costs that are increasing. That clearly is transitory. But I'm I'm curious in terms of, you know, when do you expect the back end of the substrate cost starting to subside? Is that still going to be dependent on the capacity constraint environment? And how do you think about that, balancing that with, say, the pricing commitments going into 2022, kind of looking past the second half? How are you balancing kind of the pricing dynamic with the back end and substrate costs that have been increasing? Thank you.
spk10: That's a very good question, Rajeev. This is also tied in with when do we think foundry supply will ease up. Related to this topic is when do we expect substrate and back end tightness to also ease up. Frankly, it's not that clear right now. We are seeing improvements on the back end and substrates. But when will this lead to a better cost structure in terms of pricing of back end and substrates to us? We're still not quite sure. We are keeping a very close eye on this and continue to see if we can negotiate better terms. And this is something we will be updating everyone in the following quarters. Thank you.
spk05: Thank you. Next question is from the line of Carl Ackerman of Calvin. Your line is open.
spk11: Yes. Thank you, gentlemen. Two questions, please. I guess, Riyadh, how sustainable are these OEM programs? You know, you've indicated contractual agreements with NAND OEMs, but I'm curious if you could discuss the volume commitments you have with the OEMs that extend into the second half and into 2022, in the event capacity constraints ease, and how that may increase the risk that those OEMs move back toward internal controller solutions?
spk08: Carl, I'll let Wallace answer this question. Yeah, I think these OEM programs are not easy to be replaced by either third-party controller or internal controller. because it's need to pre-design and have to be put a lot of effort in the design qualification and the customer verification. And I think we already have a full year forecast from 2022, so we know exactly what is going to last. And this is not just a solution, it's an industrial standard. and will continue. It's going to stay for more than three or four years, in the next three to four years. So I think we have a contract price, and it's being discussed two years ago. Nobody can predict the COVID-19 and the wafer shortage on all of these manufacturers, same kind of related issue. So I think we respect the commitment regarding our customer. We've been working together for a long time, and we committed for the agreement and contract. So we think this program is going to impact our overall gross margin. However, this is going to drive to further growth and for net profit to the company. So I think it's a very important project, and it's going to be a very unique, outstanding, high-growth project for the industry. We really try to follow our previous contract and agreement and moving forward.
spk10: Carl, let me also add a little bit more to what Wallace said. As Wallace mentioned, these programs took a lot of effort, a long time to put into execution. Our Gen 3 projects, our PCIe Gen 3 projects, we've been working on these for over two years and they're now finally going to production and beginning to scale. But as a result of the work that we've been doing with our customers for these OEM programs, we're building a lot of traction, a lot of stickiness, and this is now leading to the Gen 4 programs that we have. And so this gives you a sense of what we're working on, working on solidifying our position as a leading supplier of controllers to the tech industry.
spk11: Yeah, no, that's very helpful. For my follow-up, how would you characterize the level of channel inventory of controllers today? I ask because I think there have been perhaps some news flow that module makers have been stockpiling PCIe controllers as an afterthought or as an, I guess, perhaps view that Client SSD demand remains strong given this recent uptick in cryptocurrency demand. So any thoughts there in terms of the level of channel inventory of controllers today and your ability to service that demand? Thank you.
spk08: So let me comment. It's a good question. I believe the current channel controller inventory is very, very low, probably almost near zero because everybody is in shortage today. So the NAND component, NAND supply is not in shortage. So no customer will try to buy additional NAND inventory or solution put into inventory. I think every product, every wafer, every component we make is shipped directly to the end customer. See, and our agent, our distributor even cannot even keep it in their stock. So we see the inventory is very, very low. Demand depends on product. Some product really high demand, some just moderate. But in average, I believe there's almost no inventory or inventory very, very low for controller in the channel.
spk11: Thank you.
spk05: Thank you. Next question is from the line of Donnie Tang of Nomura. Please go ahead.
spk07: Good evening, Wallace and Rial. Thank you for taking my question and congrats on the good result. The first question is also related to gross margin. So for 2022, Do you think there is a chance that we can renegotiate the price with the OEM customers to revise up the price? As you have said, the foundry supply could be pretty tight all the way into 2022. Could you kind of clarify the so-called OEM project includes both SSD controller as well as UFS controller or mainly SSD controller? Thank you.
spk08: I think that everything is negotiable, but for a very large program with a contract, it's difficult. It's challenging because especially I think for some additional wafer also held by our major OEM customer to negotiate together. We respect the contract. We engage with the customer. But I think to 2022, we will definitely try the best for the company and we also need to see what the price trend for the wafer. If wafer price increase dramatically, we have to negotiate the price with the customer. By the way, this OEM program is involved for both PCIE as well as UFS.
spk10: Donnie, let me also add, there are two other variables that we also look at. The first is we're constantly you know, winning new designs, right? So new designs, new contracts, new OEM programs. And so with new OEM programs, the terms could be more favorable, more reflective of current circumstances, right? And another factor is, you know, while back-end substrates are very tight right now, the industry is always cyclical. Our semiconductor industry is always cyclical. And so sometime down the road, there will be more supply, more back-end, more substrates, and prices will change, and our gross margin circumstances will also become more favorable. So these are two other factors to keep in mind.
spk07: Yeah, just thank you, Riali. I think it's very helpful. Just to follow up, when you mentioned about back-end capacity as well as substrate supply, if we compare with the foundry capacity constraint, when do you think I mean, which one would you think that the supply tightness will be easing first? And also, I think Samsung's Austin Fab previously suffered from the difficult weather. So I think they have resumed some production in terms of controllers as well. Have you seen any kind of supply demand change after they resumed the production?
spk08: My personal opinion, the back end, the substrate supply and the assembly capacity, they will be released earlier than wafer supply. I think when we talk about wafer shortage, we need to separate advanced technology node and mature technology node. Currently, I believe 90% of IT design companies are in mature technology node. And these technology node wafer is very hard to increase capacity because it doesn't matter for TSMC, Global Foundry, Samsung, UMC, SMIC. They want to invest in a mature technology node. It takes a minimum of two years. to get in land, to build a clean room, bath, and to get a new equipment to install to fine-tune. It really takes time. So it won't result, it won't increase capacity within just one to two years. So the tide weaver supply solution will continue But it also depends if it really is related to overbooking or related to other factors. And maybe that can result certain of the tight supply. However, I think, according to GSMC, they don't see there will be a solution this year. Probably the tight capacity will extend to 2022.
spk07: Thank you, Wallace. Very helpful. And the last question is regarding to operating margins. It looks like the gross margin, of course, in the second half, there could be some pressure, but for operating margin, it looks like pretty strong. So, Riyad, just wondering, besides the operating efficiency, are there any other reasons behind improving operating margin? Thank you.
spk10: Donnie, it's a big tradeoff that we have, right? With these OEM programs, they're very large, and when they... the ramp, the tradeoff is we have these volume incentive programs that result in slightly lower gross margin, but the offset is we're getting very significant operating leverage, so it helps our bottom line significantly.
spk04: Thank you.
spk05: Thank you. Next question is from the line of Tyler Sain of SIG. Please go ahead. Your line is open.
spk00: Yes, it's actually Mehdi Hosseini. I have a couple of follow-ups. And by the way, congrats for gaining market share. Wallace, how are you seeing new cryptocurrency technologies, specifically Shai? There has been a lot of headlines over the past month as to how the new cryptocurrency is going to consume low-end SSDs. And it appears that maybe some of the channel inventory of low-end SSDs have been completely depleted. And I'm just wondering if you have any thoughts you can share with us. And I have a follow-up.
spk08: Yeah, I think the new crypto technology and Chia, the preferred storage really is for capacity drive. And really, it's really either for HDD or high-density storage. enterprise CD, not client CD. So this is really not related to our business. We didn't pay really actual attention. I think even our Shannon would focus on the real Saudi customer to grow our business in technology. But we just know this relates to the high density HDD enterprise CD. I apologize.
spk10: I appreciate if you could repeat your second question.
spk00: Yes. I was going to get into it. two-part second question, one for Wallace. You have historically had pretty good assessment of NAND supply and demand. You just told us that there is absolutely no channel inventory of controllers. Does that apply to NAND, especially looking into the second half? And the second part of the second question is for Riyaz. Would it be fair to assume that perhaps OPEX are going to be in the range of 40 to 42 million on a quarterly basis for a foreseeable future.
spk08: I think, let me comment regarding the channel for controller in the NAND. As I said, we believe there's no inventory for controller because every controller we have in hand, it will be sold out. We have a huge backlog in hand and we cannot fulfill the order. And regarding the NAND, NAND makers also observe there's a severe controller shortage. So NAND makers move their storage product to higher density product. That's going to consume more NAND. As you can see from PCOEN before, the lower density is 128 gigabytes, SAD. Not anymore. So value lines start from 256 gigabytes. So that is a way how you see NAND maker, they manage to move all the product to a higher density. And that can consume the NAND quickly. That's why we don't see that many even NAND inventory in the market. From Q2, we start to see NAND price going up. And I see the price will continue gradually going up, but within single digits. we really don't see the high inventory either controller or storage solution in the channel.
spk10: Eddie, to your other question about our OPEX in the second half of the year, we are expecting our OPEX to be fairly stable sequentially in the following quarters. We are expecting our top line to inch up significantly. a little bit quarter after quarter. We're expecting our gross margins to drift down a little bit, but we are expecting our operating margins to be fairly stable. So this is going to be coming from fairly stable, allowing fairly stable operating expense in each one of the quarters in second half.
spk00: Great. Thank you, and thanks for all the details.
spk05: Thank you. We have Suji De Silva of Ross Capital for the next question.
spk09: Hi, Wallace. Hi, Riyadh. Congratulations on the results here. As you approach that $1 billion revenue, can you give us a sense of what kind of mix of SSD and smartphone, eMMC, UFS controller we should expect, roughly?
spk08: We cannot really tell the detailed percentage. We just both see ClientSD and eMMC plus UFS are very strong, and we also see our ferret product is going strong in the second half of this year.
spk09: Okay, that's helpful. And then for UFS, can you talk about the number of NAND customers that are now ramping? Is it still maybe two major ones, or is it more at this point? And how many do you expect, six to 12 months out?
spk08: So for this year, the momentum is really driven by one major U.S. NAND makers, But we're going to have five more customers to grow UFS products in 2022.
spk09: So all five of those will be starting while it's in 2022, or some come on this year?
spk08: This year will be very small, very light. But all five will grow really in 2022.
spk09: Okay, great. Thanks for that. Congrats again, guys.
spk05: Thank you. And we have Matt Bryson from Redbush for the next question. Please go ahead.
spk04: Thanks. Good evening, guys. I think Wallace talked to shipping in the six of the seven NAMFABs. Can you remind us where that was a year ago? Also, can you characterize which markets you're getting more traction with your Gen 3, Gen 4 solutions? Is it primarily product ending up in retail? Is it low-end retail? OEM, is it across the gamut? And I have one follow-up. Thank you.
spk08: As we said before, for module maker, we already have around 70% market share. But last year, I think our OEM program was just about below 30%. So we are starting to grow PCOE program from this year. And the major driver for this year is PCIe Gen 3 controller. So we see the very strong demand from PCOEN as well as customer gain market share and we gain market share. And we see the going carry momentum through from Gen 3 to Gen 4 next year because we have roughly around 50% design winning socket from all PCOEN Gen 4 programs. to 2022 aligned with Intel Elder Lake platform. So we see the momentum will continue, and we will continue to gain market share. Our PCOEN percentage also will gain from 2021 to 2022.
spk10: Matt, the line was a bit choppy. I appreciate if you could repeat your first question again.
spk04: I think Riyad, the Wallace got most of what I was asking for. It sounds like it's predominantly PCOEMs. But my follow-up is, is there any color you can give us around how much the newest NAND maker's growth is contributing to your strong results and better outlook moving – or strong outlook moving forward?
spk08: The new land makers OEM program will contribute from 2022.
spk04: Okay, thank you so much.
spk05: Thank you. Next question is from the line of Craig A. Ellis of B Riley Securities. Please go ahead.
spk03: Yeah, thanks for taking the follow-up question. Guys, I wanted to go back to the EMMC market, and it's typically not a focus, but there were two notable things in the commentary. I wanted to follow up on one. There is an instance where it appears one OEM, due to some of the recent dynamics that we're seeing in the marketplace and with their manufacturing, may be moving away from doing eMMC internally. And you mentioned that you're the only merchant eMMC supplier. So the twofold question is this one. Is it possible that the decision around eMMC could be the tip of the iceberg for For more controller work, which would actually go merchant, not just EMMC, but SSD controllers, and two, given industry structure with merchant EMMC now, how would you characterize the pricing dynamics? Is it more possible to price for functional value and the value you create given the industry landscape? Thank you very much.
spk08: Okay, let me try to answer your three questions. First, regarding EMC, it's a very good question. I'd like to answer it. I think the market trend favors CMO in the next few years. First is because the market really demands more low-density storage solutions. EMC is the best solution which can fit in low-density. Low-density means it's 120 gigabytes or lower or smaller. It's low-density and price-sensitive. So EMC is adopted by not just a low-end smartphone, but also from , from smart TV, smart watch, smart speaker, IoT, and Chromebook, and many, many even cable box, many, many electronic devices. This has become the standard, because just standard, that's why it's well accepted by many, many consumer electronic makers. But because of controller shortage, wafer shortage, because of controller shortage, NAND makers try to utilize their variable controller to make a higher density solution. That's why NAND makers are moving away from EMC controller. They move to UFS or higher density SD or enterprise SD or other storage solution. This gave us tremendous opportunity. That's why we see that the huge demand PO come to our company, but we cannot even fulfill 50% of the demand because demand is large. And even there are more NAND makers come to us to play PO, but we have to apologize because we don't have a wafer to support the trend. So this is a really market trend. You see NAND maker even try outsourcing for the third party. and we are the only one merchant company have the capability and skill and technology to support them. So this is really a favor for Silicon Motion. Second is, we also see for mainstream Client-to-D, this trend will happen and will continue to happen because NAND makers finally realize they don't have to develop the Client-to-D controller for mainstream or value line. They will focus on high-end clients to be or enterprise to be. That adds more value to their own benefit because our turnkey solution is more cost-effective and time-to-market and serve with the customer with a very integrated technology good solution. This is much better than their internal development. So when controller wait for a shortage, the market trend is moving to the direction. That's why we gain almost majority of the land makers business for client SD. That's why we see our PCIe 2004 design wing going to occupy minimum almost half of PCIe 2004 SD in next year, ramping 2022. Regarding the third question, it's related to the the price I think I think the when we wait for anything shortage the price will become more stable and it was favoring our controller side so we were based on the product to do certain adjustment if certain product in the past is below a corporate average would do a little adjustment and But if there's a contract base for major OEM, we will respect for the contract. So I think the price will become more stable as long as our foundry supplier and our back end service provider, the price, their adjustment is reasonable. We were not changing the price dramatically. we will really try to monitor the market trend carefully, make sure we can keep a very stable gross margin to our product mix.
spk10: Furthermore, as Wallace talked about more and more new businesses coming in our door, to the extent that we can take on new projects, the terms of new projects will be reset at today's conditions, so the margins are for new projects will be more favorable than projects that we took on, say, two years ago and facing higher costs today.
spk03: That's very helpful, ColorGuys. Thank you very much.
spk05: Thank you. And if there are no further questions, thank you. I'd like to hand the conference back to our President and CEO, Mr. Wallace Kao.
spk08: Thank you, everyone, for joining us today. and for your continuing interest in Silicon Motion, I would like to leave you with some final thoughts. I'm extremely proud of our execution over the past several quarters and want to thank our team for their hard work and dedication. As the largest merchant controller supplier, we play an increasingly critical role in both the NAND supply chain and many critical technology ecosystems. Technology today is built on data, and data needs to be stored to be used. And Southeast Asia storage-required controllers, our competitive position in the storage controller market has never been stronger, and I remain confident that our growth will continue. Thank you for continuing interest and listening to our call. Goodbye for now.
spk05: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
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