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spk05: 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.
spk03: 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.
spk07: 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.
spk04: Thank you Wallace and good morning everyone. I will discuss additional details of our second 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 the earnings release issued yesterday. In the second quarter, revenue reached a record $221 million, 21% higher sequentially and 62% higher year over year. Earnings per ADS were $1.50, 35% higher sequentially, and 84% higher year-over-year. Now I will walk through the performance of our three key products during the first quarter. SSD controller sales increased 30% to 35% sequentially and 105% to 110% year-over-year. Growth was driven entirely by our PCIe Gen 3 SSD controllers, which are primarily for OEMs. EMMC plus UFS controller sales also reached a record high, growing 10 to 15% sequentially and 25 to 30% year-over-year. Growth was driven by our UFS controllers. SSD solution sales increased 35 to 40% sequentially and we're down 15 to 20% year-over-year. Our FairEye products grew year-over-year, while our Shannon products declined sharply. Gross margin in the second quarter increased slightly to 51% from 50.7% in the prior quarter. As Wallace had discussed earlier, our better gross margin compared to guidance came from the execution of our four-pronged initiative of upselling a richer mix of products, optimizing product allocation, better pricing discipline, and the tuning of manufacturing processes. Operating expenses in the second quarter were $48.4 million, $4.5 million higher than the prior quarter, primarily from higher compensation accruals. Operating margin in the second quarter was 29.2%. an increase from 26.6% in the first quarter and up significantly from 22.2% a year ago. Our 29.2% operating margin this quarter is higher than the 26 to 28% guidance due to stronger revenue growth and better gross margin partially offset by higher operating expenses. We are delivering strong operating leverage and making good progress toward our 30% operating margin target. Our effective tax rate in the second quarter was 18.6%, slightly lower than our 20% tax rate guidance. Stock-based compensation in our operating expense, which we exclude from our non-GAAP results, was $2.4 million in the second quarter, within our guidance of $2 to $3 million. We had $412.3 million of cash, cash equivalents, restricted cash, and short-term investments at the end of the second quarter, compared to $371 million at the end of the first quarter. We paid $12.2 million in dividend to shareholders, the third quarterly installment of our $1.40 per ADS annual dividend that was announced last October. Now let me turn to our third quarter and four-year guidance and four-year looking business trends. For the third quarter, we expect revenue to increase 7.5% to 12.5% sequentially to approximately $238 to $249 million. We expect revenue growth from continued strong SSD controllers and eMMC plus UFS controller partially offset by declining S&D solution sales. Third quarter gross margin is expected to be in the range of 48.5% to 50.5%, which is significantly higher than our gross margin outlook three months ago and the result of the execution of our four-prong initiative, which Wallace discussed previously. Third quarter offering margin should be in the range of 27.5 to 29.5 percent. In the third quarter, we expect stock-based compensation in the range of 4.6 to 5.6 million dollars. For the full year 2021, we are now expecting the following. Revenue is now expected to grow in the range of 65 to 70 percent to 890 to $917 million. Our four-year gross margin is now expected to be in the range of 49.5 to 50.5 percent range. Again, much higher than our four-year gross margin previously provided three months ago and the successful result of the execution of our four-prong initiative which Wallace had previously discussed. Fourth quarter gross margin should be flat sequentially. Operating margin is expected to be in the range of 27.5 to 29.5%, up sharply from 21.8% last year, up further from our previous guidance and approaching our 30% target. For the full year, we expect stock-based compensation in the range of $18 to $20 million, more than the prior year. We expect our effective tax rate for the year to be about 20%, similar to our year-to-date rate. To conclude, this year we will be able to power ahead and pull in our strategic sales and profitability targets without additional incremental boundary wafer supply. Let me reiterate that by the fourth quarter of this year, we will likely meet on a run rate basis our $1 billion sales target. This $1 billion run rate is the foundation on top of which we expect to add Strong sales grows from committed incremental foundry wafer capacity next year and the continued upselling of a richer product mix. Already, our order book for next year is at least $1.5 billion, and our team is currently working to ensure we can deliver this. Next quarter, we will provide an update on our work, and at the start of next year, we will provide our official 2022 revenue guidance. Additionally, we continue to invest resources to expand our pipeline of R&D activities relating to our core SSD, eMMC, and UFS controllers, as well as expansion into new applications such as automotive. This concludes our prepared remarks, and we will now open the call to your questions.
spk05: Thank you. As a reminder, to ask a question, you'll need to press power 1 on your telephone. To withdraw your questions, please press the pound or hash key. And please stand by while we compile the Q&A roster. Once again, please press power 1 for your questions. First question comes from the line of of Needham and Company. Line is open. Please go ahead.
spk02: Yes, thank you, and congratulations on the great momentum that you're seeing. When you're indicating that your order book now points to $1.5 billion, I was wondering if you could elaborate further on what you're seeing within that order book. What's driving the uptick in the growth? And then secondly, can you talk about your conversations with TSMC regarding capacity allocation next year. What have those conversations been like? How much capacity has been allocated to support those targets? Thank you.
spk07: I think regarding from our other book, $1.5 billion, majority come from OEM projects and some come from the Other, the backlog we cannot shift this year, but we have a solid $1.5 billion. By end of this year, we believe we should see even much higher in our backlog. Regarding the discussion with the TSMC, as everybody knows, TSMC probably has announced they see the waiver allocation will continue through the 2021, also to entire 2022. because all the new investments probably will not contribute, especially for mature technology, until 2023. With the incremental committed wafer supply, we have confidence to increase our cell revenue to grow in 2022 with a fair amount of percentage. However, we will continue to negotiate discovery TSMC and other boundary maker to increase the wafer supply in order to meet the very large amount of demand from our worldwide customers.
spk02: Thank you for that, Wallace. With respect to the up size in gross margins that you're seeing in the quarter, I'm wondering how sustainable that gross margin shift is. You mentioned in the press release the shift towards higher value products. You're now engaging in where you can actually increase the price. I think that's a change from what you talked about before where I believe the pricing was set in some of these contracts. So maybe you could talk a little bit about those two dynamics in terms of pricing and also in terms of a mix of higher, richer mix of products. Thank you.
spk04: Roger, we feel very good about our current situation. With the rollout of the initiatives that Wallace had pointed out earlier, focusing on upselling a richer mix of products, allocating more products to higher margin accounts, and where possible, repricing products to cover our higher manufacturing costs. These are all initiatives that we're already executing and will continue to execute throughout the rest of the year and into next year. So we feel very good about... about our gross margins at today's levels extending through this year and into next year. Possibly, if there are opportunities, we'd love to take up our gross margin even more than where we are indicating, but there's a lot of work to do. For what we're doing right now, the gross margin guidance that we just talked about, those are numbers that we feel fairly comfortable about.
spk05: Okay. Thank you. Next question is from the line of Anthony Sauce of Craig Hallam. Line is open. Please go ahead. Hello, Craig Hallam. Your line is open. Please go ahead.
spk11: Tony, are you on mute?
spk06: No, I'm not on mute. Can you hear me?
spk00: Yes.
spk06: Okay, great, finally. Riyadh, probably for you, can you give us a breakdown of your non-notebook business, what percent of revenues that might be, the IoT bucket, if you will, what kind of growth rates you're seeing, and then I had a follow-up after that.
spk04: Right, so for the non-Notebooks products, they're primarily related to our eMMC plus UFS, as our SSD controllers are very notebook PC-oriented. Now, for the eMMC plus UFS, they were about... 25 to 30 percent of sales last year and we expect this to inch up this year given the very strong growth and within that bucket a large part of it is smartphone but we also have a lot of eMMC going into non-smart applications. Wallace had mentioned a long list of those applications that are very popular with consumers including smart TVs and other applications, smart speakers. So these are products that are still growing, and we expect this part of the market to continue to grow modestly over the foreseeable future.
spk06: Okay. Just as a follow-up, the question that I get asked most from investors in increasing amounts recently is a share buyback. You have incredible visibility. You're talking about a order book of over $1.5 billion heading into next year, three years' worth of visibility. You've got a stock trading at an 8 PEX cash. It just astounds me and investors that you guys haven't initiated a share buyback. So I'm hoping your board has listened to this call, and I'd love to hear your thoughts on why you haven't initiated a share buyback. Thanks.
spk04: Tony, our primary means of returning capital to shareholders is from our dividend payment. Historically, we paid up to half of our free cash flow. Given our very strong operating performance and good visibility into 2022, it is likely that our board, during the next dividend declaration in October, they could consider something, a dividend higher than what we paid last year.
spk06: All right, thanks, Red.
spk05: Thank you. Next question is from the line of Craig A. Ellis of VRID Securities. Please go ahead.
spk09: Yeah, thanks for taking the question, and guys, congratulations on the very strong performance in the business. I wanted to start with a question for Wallace, and Wallace, what I want to do is kind of pick up where I left off on the last quarter's call where I inquired about really the trends you were seeing as more of your customers look to outsource EMMC controllers and you wind up with a dominant share of the market like you talked about, again, today. And the question is a little bit different, and it focuses on the SSD controller opportunity. Given the very robust outlook you have for PCIe Gen 4, do you get the sense that more of the NAND OEMs are starting to outsource more of their controller work And to the extent that they are, to what extent do you think you're going to benefit or benefit disproportionately from such a move?
spk07: That is a very good question. In general, we see NAND makers, they all want to maximize their NAND-based solution profitability. For EMC, it's very natural. With EMC, the average density is small. Maximum is 64 gigabyte. It's very few in 128 gigabyte. We see a lot of even 32 gigabyte application. So NAND maker, they also see the wafer supply constraint. So they move all the wafer, variable wafer, move to higher density storage product. That's why we see a tremendous demand from EMC controller to our company. A direct matter from NAND maker, leading module maker, we have much more than we can supply and support. But we will continue the effort and try to another industrial breakdown for EMC solution to many, many consumer electronic devices. For ACD, that's another story because we do see land makers, they have a tendency to start to outsource mainstream and value line project to serve parties like Silicon Motion because we have a strong track record with a long history with all name makers that we become the default standard candidate to take the opportunity. Frankly speaking, today we have more project opportunities than we are resorting to support. So this is a very, very important moment. We'll continue to grow and recruit talent R&D to join us and continue work on our really new project to make it successful. It's very, very important because the new generation of the technology for NAND beyond 1.36 layer or even beyond 200 layer stack is very critical for controller maker have a deep knowledge, work closely with the NAND maker. so we can provide sufficient compensation for NAND endurance and the retention. This is very, very important. We can work closely with NAND makers to deliver a very profound solution to the OEM customer as well as the consumer. So this is a great opportunity. We see the trend will continue and we are in a very favorable position to take the opportunity from all sorts of NAND makers.
spk09: That's really helpful, Color. Thank you. And then for my follow-up question, I wanted to flip it over to Riyadh. Very helpful framework that you've provided and that Wallace has provided on the factors that are leading to higher gross margin. And Riyadh, my question is, for the change in gross margin in the back half of the year that we're seeing very significant improvement from prior expectations, what's the relative contribution from each of the four factors that were mentioned, and as we look to calendar 22, which of those factors has the greatest potential and how significant would that be for further gross margin improvement? Thank you.
spk04: Greg, the largest piece relates to our product mix, which also includes our allocation of products towards higher accounts. The initiatives relating to these moves have been the biggest driver in terms of contributing to higher gross margin. But that said, where possible, we'd also seek to reprice our products to better reflect the higher cost of our products that we're seeing going into what we need to do to deliver.
spk11: Got it. Thanks, guys. Good luck.
spk05: Thank you. Our next question is from the line of Carl Ackerman of Cowan & Company. Line is open. Please go ahead.
spk11: Hey, hello, guys. This is Eddie for Carl Ackerman. I have a couple of questions. There have been reports that your largest foundry partner will increase 28 nanometer capacity from 40 to 100,000 workmen per month by the end of this year. While that should enable you to control existing customer orders, have you seen any indication from NAND OEMs reversing earlier decisions to outsource to you next year? as incremental capacity comes online?
spk07: Thank you. I cannot comment for TSMC because they have their really capacity-gathered guidance and because some factory expansion also relate to some political issue and we really have no insight, sorry. However, we do know the We do have many opportunity come from NAND maker all directly from major OEM customer including the very large scale customer from automotive as well as other sectors. It's really how we really can manage so many opportunity under the supply shortage condition. It has to be very careful to make a decision because when we come meet, we have put all the resource development, IP, software development, quality people, everything and count. And we have to make sure to use our RD resources wisely in order to get a sufficient financial return. It's very, very important. We don't really worry about the business today. We just are constrained as a way for supply. So that's the most important thing we should focus on and to secure more supply in order to meet customers' demand for next year and 2023.
spk04: Eddie, let me also add, with the investments that TSMC has been announcing, we do not believe it's going to change the direction of our NAN partners outsourcing supplies. to us, the reasons Wallace had talked about earlier.
spk11: No, that's great. Thanks. Thanks for the call. And another question is, NAND demand appears to further outstrip supply, and our fieldwork indicates NAND OEMs are prioritizing high-capacity SSDs. Now, in the past, as NAND capacity has silenced, OEMs prioritized enterprise SSDs, and that became a growth challenge for you. May you address why that reasoning may not make sense in the current environment? And thank you and congrats on the results.
spk04: This year, it's the underlying condition that we're facing for our business is more about the supply picture. demand that is significantly outstripping our ability to deliver. So the underlying conditions on the NAND flash dynamic side of industry conditions, whether their allocation is more towards enterprise or into other applications, those divisions have no real material impact to our business as it relates to the shifting of of the demand picture. Right now, the key focus for us is about the supply side, how we can drive more products given the supply capacity that we have on hand.
spk11: Thank you.
spk05: Thank you. Next question is from the line of Suji De Silva of Ross Capital. The line is open. Please go ahead.
spk10: Hello, Wallace. Congratulations on the momentum here. So given the man-to-fly-to-man situation, I'm wondering if the mix of OEM versus module maker is higher historically if you're leaning your shipments toward OEM, and if that's one of the factors in the gross margin tailwind that might correct back if module makers get allocation again in the future.
spk07: I think it's a very good question. I think every company has to make a wise choice, but keep a balance. Definitely OEM project is more important because we have to allocate sufficient wafer and to supply the OEM project because that's what we can't meet. But at the same time, we also want to balance the market maker. We don't want the majority market maker to die because many of them have been with us for 16 or 18 years. I think we really have to look at the product itself and the importance for the supply chain. If the customer If an existing customer, they have a multiple source, sometimes we will try to reduce the weight. But really, we are sole supplier. We have to make sure we can meet to fulfill the supply. It's a pretty complicated decision question. But through that, we also will review all the gross margin among all the product and put it as a priority. So this is the thing we feel very comfortable because it doesn't matter Every customer, I think they all face small percentage or large percentage shortage from silicon motion. We feel very sorry for that situation. That's why we work very hard to try to secure more wafer to meet the customer demand.
spk04: Suji, let me also add. Some of our module makers are now very large and very sophisticated and are already engaged in taking projects with OEMs like the PC OEMs. And so for these large sophisticated module makers, we don't treat them any differently than the NAND flash makers. And the level of profitability really depends on the projects. It doesn't necessarily mean that the profitability is better with one class of customers or the other. It really is the value asset that we're bringing that matters.
spk10: Okay, so it's a good margin operator for us, so that's helpful to know. And then the S&P Solutions business, trying to understand where the Shannon revenue level is now. Is that going to have a further step down as you kind of manage away from that and what the margin implications there are? I imagine that's also a lower margin business that you'd be moving away from.
spk07: Regarding Shannon business, our really main goal this year and next transition is really maintain the relationship with the customer. Because it's also Shannon, some NAND procurement also is challenging. We do not want to grow Shannon business due to lower margin to dilute overall growth margin. However, we have maintained certain important projects with Alibaba, Baidu, and our major customers. Make sure that our development technology will continue waiting for our really Gen 5 major controller coming and to shine the market. But I think it's also due to because we have a wafer constraint, a wafer allocation, that's why we have to allocate carefully because so many OEN demand from NAND makers as well as PCOEN and smartphone customers.
spk10: Okay. Once again, congrats, guys.
spk05: Thank you. Next question is from the line of Mehdi Hosseini of SIG. The line is open. Let's go ahead.
spk01: Mehdi Hosseini Yes, thanks for taking my question. A couple of follow-ups. And also thanks for providing visibility into 2022 with minimum revenue of $1.5 billion. And the question I have here is what are the key growth assumptions for different sectors And if you don't want to elaborate, how should I think about the fastest growth versus the relatively lower growth segment?
spk07: I would say our clients will continue to grow. Although PCIe Gen 3 next year growth rate will be moderate, but PCIe Gen 4 will grow very strong. to carry because we have a very large design share in PCOEN. We stated that almost 50% or higher by end of the next year so that we have eight different customers, five from NAMM maker with our TREASURE HM4 controller and ramping next year. For EMC plus UFS, we also will grow very, very strongly. It also depends how many wafer we can we can secure. We say it's good enough to grow for certain level we guarantee is exceed $1 billion cell revenue next year, but we think the backlog will continue to pile up by end of this year, but we'll continue to work very hard to secure more vapor, especially in mature technology, because many EMC are in 55, 40 nanometer, and 28 nanometer. material technology wafer are in severe allocation to all boundary makers. So it is very critical how fast we can port in, work with TSMC as well as other boundary makers that can grow overall the EMC plus UFS business.
spk01: Wallace, PCIe 4.0 is used for commercial segment of the notebook. Is that correct?
spk07: It's used both commercial and consumer. We have a two-generation dimension PGI Gen 4 controller. One is 28-millimeter. One is 12-millimeter. This year, we're ramping. More is 28-millimeter next year. Majority will be transitioning to 12-millimeter.
spk01: Sure. I think what I was trying to highlight is there is a concern that a consumer notebook like Chromebook may roll over. It can't grow 20-some percent plus per year in perpetuity. But I think commercial segment, which has been relatively quiet or muted, could turn on, and that's a significant positive catalyst for silicon motion. Am I thinking about this the right way?
spk07: Let me just try to get it straight. Chromebook this year... The total volume just around 40 to 50 million units. It's really small. And majority use an eMMC, not ASD. They're using embedded ASD. And we are in a very small portion in the Chromebook today. And the Chromebook going up and going down have relatively no impact to our business. And for ASD, we talk about really for mainstream notebook, and for both commercial, for corporate account, or for consumer notebook. So that is to use the M.2 SAD. And that portion, I think, will grow very strongly and consistently with all the top five PCOEMs.
spk01: Sure. Got it. And then I want to follow up for Riyaz. Is it a product mix that is going to put a lid on the gross margin in the back half of the year despite sequential revenue growth, it seems like margins are going to calm down. And I'm just trying to better understand, is it because of a higher base? Is it because of the mix? Or is it just your year-end gross margin, operating margin guide is conservative?
spk04: Mehdi, our gross margin expectations for the second half of the year is going to be significantly higher than what we had originally guided. But obviously, we still have a lot of work to do. We'd love to take our gross margin even higher than what we've just talked about. And so this is going to be coming from the continued execution of the four-prong initiative that Wallace had talked about relating to upselling our product mix, to enrich our product mix, relating to how we allocate towards higher margin accounts, more profitable accounts, relating to the ability to reprice our products where possible to reflect the higher cost that we have in our products. Furthermore, we're also working, our operations team are also working very hard to see how we can better de-bottleneck our processes with our contract manufacturer for back-end services. All four of these are still in execution. And the more we are able to work our initiatives, the better our gross margin could be. But as a baseline, the gross margins we talked about are what we're guiding. And if we can execute even better, we'd love to take up our gross margin higher than what we just guided.
spk01: Sure. Thank you. And on the execution side, you're executing flawlessly on managing working capital. your free cash flow margin for the June quarter was 25%. You have grown cash. And if I just take your base assumption for 22 off of $1.5 billion of revenue, your cash could go towards mid-teen, $15 net cash per share. And I know the question came up earlier, but I'm going to ask it again. Is there something you can offer us, why not become more aggressive with buyback? Why not consider strategic options? Because the cash is going up, valuation not changing, and I'm just trying to think how the management team is thinking about reconciling execution, free cash flow margin, with the valuation on share price.
spk07: I think, let me just answer the question. I think you're looking for in Silicon Motion today, our outstanding share, total dilution, 35 million shares. So really, it's not really very meaningful for us to do share buyback. We, as Ria said, we definitely as a board, When we have more free cash, we either do more investment for certain MMA or we will have a potential increase of dividend. That is a board to try to provide to the shareholder. I think this is a direction we think in next quarter is likely to happen, but wait for the next quarter after a board meeting. Okay.
spk04: And, Mehdi, let me add, historically, we've been pretty good about returning capital to shareholders. We typically return up to half of our free cash flow, and we've been doing that, returning half of our free cash flow to shareholders over the last few years, and we expect to continue that. And for us, the primary means of returning capital to shareholders is through our dividend payments, and so with our our upcoming we just paid our third installment of our quarterly dividend the last one will be coming soon so by October of this year we'll have to decide on our dividend for the upcoming four quarters and at that time in October given the strong performance of our business and good visibility into next year the likelihood of a higher dividend being declared is a good one and so back to your question about what do we do with our cash and the answer to you is we will continue to return to our shareholders and for us the primary means is through our dividend payments.
spk01: Thank you. Thanks for taking all my questions.
spk05: Thank you. Our next question is from the line of Gokul Hariharan of JP Morgan. Please go ahead.
spk08: Yeah, hi. Congrats on the great results. Thanks for taking my questions. First of all, could you talk a little bit about the SSD controller market? You're growing at almost 100% in first half. Looks like the growth rate is still going to continue around the same pace. How much of that is the volume growth? How much of that is pricing, roughly? Are we still looking at average ASP per SSD controller in the $4.50 to $5 range? And could you also give us a bit of context in terms of how much market share you have of your addressable market and SSD controllers, especially in consumer SSD controllers?
spk07: So we will continue to grow our client-side controller business. We will all perform in the market grows. But we cannot comment regarding ASP dollars, but we can assure you The PCIe Gen 3 is higher than SATA controller. The PCIe Gen 4 is also higher than PCIe Gen 3. So we definitely expect next year, because of strong growth for PCIe Gen 4, so every ASP for client controller should go higher. Regarding the market share, we believe for last year, we are around between 25% to 30% market share. This year, we'll grow 5% to 10%. So roughly, it's around 35% to 40% range. We have ambition to grow beyond 40% and just depend. It's really not depend on the business. It depends how quickly we can build a more R&D team and to serve more demand, especially all sorts of landmakers.
spk08: Okay, so is it fair to assume that most of the growth this year is coming from units and a little bit of it is coming from mixed improvement, not really price improvement?
spk07: Also from the mixed price improvement.
spk08: Okay. Maybe move on to the second question. I think you talked about M&A. It seems like one of the problems I think that the market has in terms of evaluating Silicon Motion is that addressable market is still primarily SSD controller, which I think at least is a limited time in terms of units, but obviously there is ASP upgrades. Could you talk about any of the initiatives that Silicon Motion is doing to potentially address some newer addressable market? either an adjacency or something else that you have in mind, given that you've executed extremely well in the current SSD controller and eMMC market?
spk04: Gokul, we're doing really well in the client device market, right, so this part of the SSDs already account for 60%, 65% last year. We're probably up to 75%. But clearly, you know, there is a cap in terms of what's addressable. Same thing with UFS and smartphones. There's still a lot of upside opportunity there, but, again, there is a natural cap. The opportunities that are coming incremental to the client device and to the smartphone for us, includes a couple pieces. The first piece is our enterprise SSD controller market. Here today, we're just getting to our first million milestone. We have our upcoming Gen 5. We're still executing with our enterprise class Gen 4. So this is a huge blue sky opportunity for us that will be a big piece of how we continue to grow rapidly. beyond when our client-based devices start plateauing. But additionally, in addition to the enterprise class of SSD controllers, we also have our eMMC products, where with the nanoflash makers beginning to exit the low density applications, this creates opportunity for us to step in. And we're talking about a one billion unit plus opportunity with EMMC and so this is another interesting area for us to step into. Additionally, Wallace also talked extensively about automotive applications relating to what we can play in and this is still at a pretty early stage but already we're seeing a lot of design activities by the automotive ODMs and their partners and we've been involved in a lot of these projects.
spk07: Let me just add some comment. As you see from the business model, traditionally, when a storage product becomes mature, and the NAND maker moving to the new generation, and they're moving to higher density, higher performance. But if you're looking for the EMC, for example, this is one of the great examples today, because EMC, the maximum density probably 120 gigabytes, majority around 64, 32, or even 16 gigabytes. And there's less interest for the NAND maker become manufacturer cost similar. But as a financial return, this is very limited. However, that is a huge, because it's JDA standard, that's a huge demand for all consumer electronics and growing IoT devices. And we become the sower from merchant controller maker provide solution. Our really backlog is two times than what we can supply today. So there's quite a lot of things because we continue to develop a new controller supporting upcoming new 3D NAND. So that makes us a unique position. NAND makers probably won't use their R&D resources for this kind of a trend because this product is mature. Same thing for clients in the future. And we also have some other projects. Important product to do because really sell revenue is very, very small. We really do not want to talk about it. When it becomes very mature, we will try to talk with the investor analysts because I think SiliconMotion, we are not coming on just a few controllers. We have a much bigger ambition than where we are today.
spk11: Understood. Thank you very much.
spk05: Thank you. My last question is from the line of Matt Bryson of Redbush Securities. The line is open. Please go ahead.
spk12: Good morning. Thanks for taking my question. So the predominant pushback or concern I hear from investors around SMI is tied to the cyclicality of end markets for NAND, so whether it's PCs, handsets, what have you. Walt, I think what you've described is a number of secular growth opportunities that are very company-specific, whether it's new Gen 4 PTA customer wins, opportunities you were just talking about in IoT with EM&C, new UFS customers. Is there any way you look at that order book of $1.5 billion for 2022 and But you can talk to how much of that incremental, how much of those incremental orders are tied to new business versus either existing designs or follow-on designs to existing designs, like any characterization you could provide that would be very helpful. Thanks.
spk07: So I think in the past couple years, it looks like our business really not showed growth consistency. That's why a lot of the investors have a concern regarding how stable and how fast the commotion can grow. Now I think we are moving to the more healthy business model. All our sales revenue this year is going from last year or two years ago. And what we are working on today is working for next year and beyond next year in 2024. So that's why the book we have is very, very stable. That really doesn't need any new design. It already happened today. And that's why the audit book is very rock solid. And I'm pretty sure they'll pile up to an even higher number by the end of this year. And our really main goal is to secure more wafer and such we can fulfill the demand from many, many customers. Some are very, very important projects, very, very critical, not just for PC, not just for smartphone, not just for consumer electronic devices. I'll see some new innovation. We do have quite a lot for automotive sector. We haven't really speak for it. But I think we have a very diversified product portfolio. We have very strong, very broad customer base. We have many, many opportunities. Now we really want to leverage our base, our technology product, and try to have a more manufacturable capacity and to fill the demand. And we think our growth is very, very solid and consistent, and the market trend favors the commotion. And our customers gain market share. That's a fact.
spk12: That's all. That's all for me.
spk05: Thank you. I'd like to hand the conference back to Mr. Rowless for closing remarks. Please go ahead, sir.
spk07: Thank you, everyone, for joining us today and for your continuing interest in locomotion. We'll be attending several investor conferences over the next few months, all of which we believe remain virtual events. The schedule of these events will be posted on the Investor Relations section of our corporate website. Thank you, everyone, for joining us today. Goodbye for now.
spk05: Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You now all disconnect.
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