Silicon Motion Technology Corporation

Thank you for standing by. Welcome to the Silicon Motion Technology Corporation's second quarter 2021 earnings conference call. At this time, all participants are listen-only mode. And after the speaker's presentation, there will be a question and answer session. And to ask a question during the session, you need to press power 1 on your telephone and choose the address that today's conference is being recorded. If you require any further assistance, please press 601. And 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 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 should not place any reliance on them. These statements involve risks and uncertainties and actual market trends and our results may differ particularly from the expressed or implied in these forward-looking statements for a variety of reasons. Potential risks and uncertainties include but are not limited to continued competitive pressure in the semiconductor industry and the effect of such pressure on prices. unpredictable changes in technology and consumer demand for multimedia consumer electronics, the state of and any change in our relationship with our major customers, and changes in political, economic, legal, and social conditions in Taiwan. For additional discussion of these risks and uncertainties of other factors, please see the documents we file from time to time with the Utilities and Exchange Commission. We are given no obligation to update any follow-up business statements which apply only as of the date of this conference call. And I'd like to hand the conference over to your speaker today, Mr. Chris Cheney, Director of Investor Relations and Investor Strategy. Please go ahead.

Thank you, Annie. Good morning, everyone, and welcome to Silicon Motion's second quarter 2021 financial results conference call and webcast. As Annie mentioned, my name is Chris Cheney, and I'm the Director of Investor Relations. Joining me today on this call are Wallace Kao, our President and CEO, and Riyad Lai, our CFO. Following my comments, Wallace will provide a review of our key business development, and then Rianne will discuss our second quarter results and our outlook. And then we'll conclude with a question and answer period. Before we get started, I'd like to remind you of our safe harbor policy, which Annie just read as part of the call. For a comprehensive overview of the risk involved in investing in our securities, please refer to our filings with the US SEC. 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 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 now turn the call over to Wallace.

Thank you, Chris. Hello everyone, and thank you for joining us today. In the second quarter, we delivered another quarter of record sales and earnings. Revenue grew 21% sequentially to a record $221 million, and earnings per ideas were a record $1.50. Sales of both SSD controllers and EMC plus UFS controllers grew in the second quarter, and both achieved record quarterly sales. We deliver better than expected growth and profitability primarily by upselling a richer mix of products, allocating more product to higher margin accounts, and where possible, repricing product to cover higher manufacture costs. Additionally, our version team has been actively working with our contract manufacturers to tune back-end processes to improve manufacturing yield. and lower costs. This four-pronged initiative of upselling of richer mix of products, optimizing product allocation, better pricing discipline, and tuning manufacturing processes is critical for creating continued value-add growth and profitability when all manufacturing capacity this year is capped and manufacturing costs remain elevated. Based on the fusion of the initiative, we are now also expecting better growth margin for the rest of this year. Earlier this year, we had communicated our 2023 $1 billion sales objective and growth roadmap. We will likely achieve this target much earlier. Based on our latest sales projection, Our annual round rate is expected to be already at least $1 billion by this year's fourth quarter. We expect sales to comfortably exceed $1 billion next year as we add meaningful incremental foundry capacity already committed to us and from continued execution of our four-pronged initiatives, which include of selling a richer mix of products. Sales next year will include a rapid scaling of a higher-value, high-volume PCIe Gen 4 SSD controllers. Our customers have also provided us with purchase orders for the next year, and the order book today already exceeds $1.5 billion. Our strong order book is a result of many years of hard work. Not all last-minute, opportunistic procurement orders of off-the-shelf parts by customers. We have been building our business pipeline for many years, leading to these purchase orders. Our OEM projects typically kick off one to three years before initial sales, depending on product complexity. Projects start with defining the OEM product features and customization requirements before hardware and firmware product development, and end with product compatibility, performance verification, analysis, quality assurance, and manufacturing support activity before we start the manufacture and sales of our controllers. What is clear from our design wings and audit book we have been gaining share of wallets in some of our NAND flash and tier one module maker customers. Several of our customers have been gaining market share in the SSD and UFS marketplace. SSD and UFS adoption continue to grow in PC and smartphones, and our customers are actively using our controller to develop a storage solution for new applications that include game consoles and automotive systems. Our audit book runs through full year 2022, and our pipeline of design wins include delivery beyond 2022. Now let me talk about our key products, starting first with RSD controllers. This quarter, RSD controller sales grew 30% to 35% sequentially. Year to date, our SSD controller cell grew 75% to 80% year-over-year, significantly faster than SSD market growth as we gained market share. Our growth continues to be driven by further scaling of our PCIe Gen3 SSD controller cells to a diversified set of NAND flash and Tier 1 module-maker customers. who are all primarily supplying ASD to leading PCOENs. Based on our audit book, we expect cell of our PCIe Gen3 ASD controller to grow modestly through next year. Our overall ASD controller cell growth momentum will continue as we introduce and ramp up our PCIe Gen4 ASD controllers. Our Gen4 controller OEN cells will start in the third quarter of this year. And we expect cell to run rapidly through 2022. Our PCIe Gen4 controller design wing with nanoflash makers and tier one module maker customer will ramp a three successive generation of annual performance upgrade, cost reduction, and higher layer count nanoflash support. three successive generations of PCIe Gen 4 controller solutions to be introduced annually from 2021 to 2023. We have timed our rapid introduction of first and second generation PCIe Gen 4 SSD controllers so OEN can align their product with Intel's notebook CPU platform refresh in the third quarter of this year. and introduction of their next generation much higher volume chipset platform next year. We will start the ramp of our first generation Gen 4 with two customers. We will then quickly expand our Gen 4 customer base from two to eight customers next year with our second generation solution. Our third generation will follow in 2023. We will then follow up with the upcoming series of PCIe Gen 5 SSD controllers. Of our eight customers next year, five are NAND flash makers. All eight customers are developing SSD for OEM projects. When all of our second generation projects are fully ramped towards the end of 2022 or in the first half of the following year, we expect to be in approximately half of our PCoEM PCIe Gen 4 SSD sockets. Separately, our enterprise-class SSD controller continues to make solid progress in data center application and we're ramping toward our first 1 million units milestone. Our unique hardware plus firmware turnkey enterprise-class PCIe Gen 4 SSD controller expected to start shipping to customers such as Alibaba, Baidu, and Kingston by end of this year, and lay the foundation for upcoming PCIe Gen 5 Enterprise SD controllers. With our upcoming flagship Enterprise Class PCIe Gen 5 SD controller, we continue to meet design milestones and track toward doubling in the second half of next year. and sales of following years. Feedback from potential U.S. and China hyperscale customers continues to be very positive. Next, I will discuss our EMC plus UFS controllers. Our EMC plus UFS sales grew 10% to 15% during the second quarter. Here today, our EMC plus UFS controller sales grew 35% to 40%. year-over-year. It gets significantly faster than the overall smartphone market growth as we and our customers gain market share. Our UFS NAND 5 customer with industry-leading NAND and DRAND technologies is very well positioned to gain further market share. Additionally, we continue to support a diversified set of module makers in China and now elsewhere, growing EMC and New Year's business activity in the low-cost smartphone, as well as the large but fragmented IoT and smart devices market. EMC is a JDAG standard embedded storage that is generally a low-capacity solution, usually at the most 64 gigabytes. Manufacture makers who are focusing on maximizing their sales of NAND density have communicated their intention to exit from this low density market next year, which will create a large incremental opportunity for our EMC controllers. Since we are effectively the sole merchant supplier of EMC controllers to this large and growing 1 billion plus unit EMC storage market, We also have a responsibility to work with our foundry and other supply chain partners to ensure product availability to OEMs. This large market for EMC controller range from low-cost smartphones to smart TV, smart speakers, Chromebooks, Set-A-Box, streaming TV dongles, smart watches, and other wearables, drones, portable game console, and many more applications popular with consumers. We are also seeing increasing design activity relating to the adoption of automotive ACQ100 and A-SPICE compliant EMC and UFS-embedded storage solution as electronic content in cars and other vehicle grows. And furthermore, we are seeing increasing design activity involving multiple EMC or UFS storage devices per vehicle. Automotive OEM are now designing vehicle with multiple EMC and UFS-based storage devices for central console infotainment system, navigation system, real-sea entertainment, dashboard instrumentation, and ADAS image recognition. route decision and data recording systems that enhance road use safety and parking. Since going public in 2005, we have seen the explosive proliferation of NAND-based storage solutions into more and more category of applications, from initially just memory cards and USB flash drives to embedded storage for smartphones, IoT, and smart devices, as well as SSD for PC and data center. And now we are seeing growing design activity in automotive applications. We are delighted to share with you our growing land controller design activity and our successful results so far from our 4Com initiative of optimizing resources to deliver higher value scales and enhance profitability. We believe current market condition favors the commotion in partnership with our customers in continuing market share gains in a broad range application due to our relatively large and favorable position in the supply chain and in managing OEM product availability. In comparison, smaller merchant suppliers and the CAPT program are disadvantaged. We believe current market conditions could remain unchanged for the next few years. Now I will turn the call over to Ria to discuss our financial results and our outlook.