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spk01: good day and thank you for standing by welcome to the silicon motion technology corp q3 2021 earnings conference call at this time all participants are in a listen-only mode after the speaker's presentation there will be a question and answer session to ask a question during the session you will need to press star 1 on your telephone please be advised that today's conference is being recorded if you require any further assistance please press star 0. kindly note that 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, you should not place undue reliance on them. These statements involve risks and uncertainties, and actual market trends and our results may differ materially from those expressed or implied in 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 discussions of these risks 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. I would now like to hand the conference over to our first speaker today, Mr. Chris Cheney, Director of Investor Relations and Strategy. Please go ahead.
spk08: Thank you, Rohit. Good morning, everyone. and welcome to silicon motions third quarter 2021 financial results conference call and webcast as ro had mentioned my name is chris cheney i'm the director of investor relations at silicon motions joining me today on the call or wallace co our president and ceo and riad lai our chief financial officer following my comments wallace will provide a review of our key business developments and then riad will discuss our third quarter results and our outlook we'll then conclude with a question and answer period. Before we get started, I'd like to remind you of our safe harbor policy, which was read at the start of this call. For a comprehensive overview of the risks involved in investing in our securities, please refer to 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 our 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 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 turn the call over to Wallace.
spk03: Thank you, Chris. Hello, everyone, and thank you for joining us today. In the third quarter, sales and earnings reached another quarterly company record. Revenue grew 15% sequentially. and over 100% year-over-year to $254 million. Earning per ADS more than doubled from $0.76 a year ago to $1.70. Our sequential revenue growth last quarter and this quarter were driven by upselling of richer product mix, allocating more product to higher margin accounts, and repricing product to cover higher manufacturing costs. As previously communicated, we have not received any incremental foundry wafer supply since early this year. Since demand from our customers for our products continued to outstrip our ability to supply because of foundry wafer allocation limitations, our business has not been exposed to end-market seasonality patterns and The other changes in the market condition, for example, relating to smartphones or PCs. We expect this situation of demanding excess of supply to continue through next year, seeing the foundry capacity will likely only start improving in 2023. Our audit book remains strong and continues to be well in excess of $1.5 billion for next year. We have seen, however, some adjustment in our order book with the softening of order for channel market products and strengthening of product for OEM customers. For example, we are seeing demand for S&D by global PCOEN continue to strengthen, while client S&D for retail markets, especially in China, softening. Since we are supply constrained, we have been looking at our revenue round rate for annualized sales targeting. In the third quarter, we deliver $1 billion in revenue round rate a quarter ahead of when we had previously communicated and expect our revenue round rate to increase further in the fourth quarter as we focus on managing our product mix. customer allocation, and pricing. We have already received foundry wafer allocation for 2022. That is incremental to what we have this year, and we are confident we can grow ourselves next year toward our $1.5 billion order book. We believe demand will continue to exceed supply next year, but even under this scenario, our revenue growth next year will still be very strong. Now let me talk about our major pilot lines. SID controller sales were approximately flat sequentially in the third quarter as we have allocated more production toward EMC and UFS controllers for sales in the third quarter. This will reverse in the fourth quarter. as production and sales shift back toward S&D controllers. Here today, our S&D controller sales grew about 70% to 75% year-over-year, significantly faster than market growth, but we have been gaining share. In the third quarter, our S&D controller sales drove in more than double year-over-year. We are tracking toward gaining 5% to 10% points of the market share this year. We believe it is important to maintain diversified exposure to different customers and end market, and have a good balance between our OEM and channel markets, and a diversified balance of NAND flash and module maker customers. Currently, we are seeing very strong sales to OEM through both our NAND flash and module maker customers. while the channel market has been soft. We have been shipping our PCIe Gen4 SD controllers since the third quarter of 2020 for SSD, so in the channel market. In this recent third quarter, we started ramping our Gen4 controller for PCoEM with two customers and are on track to expanding from two to eight customers beginning early next year. Much longer time is required to bring OEM project to production versus channel market products because of extensive OEM qualification and testing. When our PCIe 2 and 4 OEM projects are fully ramped toward the end of 2022 or in the first half of 2023, we expect to be in approximately half of all PCIe Gen4SD sockets unchanged from what we had previously communicated. Next year, we will likely pick up 5% to 10% additional points of market share on the top of this GAN this year. Engineering work on our upcoming flagship enterprise class PCIe Gen5SD controller remain on track. We continue to expect pilot production to begin in the second half of next year and volume production in second half of 2023. Now I will discuss our EMC plus UFS controllers. Our share quota EMC plus UFS controller sales grew 60% to 65% sequentially. As we focused production and sales of both our classic EMC and next-generation UFS controllers. Sales of EMC controller approximately doubled sequentially as our module maker customers continue expanding their opportunities with OEM in low-cost smartphones and the large but fragmented IoT and smart devices markets. Our EMC controllers are benefiting from NAND FlashMaker beginning to exit this low-density segment of storage market. Additionally, our primary UFS NAND flash customer continues to be very aggressive in the mobile storage market, and we are benefiting from their strong procurement momentum. We believe the mobile storage industry is about to enter another major technological shift. analogous to what we experienced almost a decade ago with the transition from 2B per cell MLC to lower cost, higher density, but much more difficult to manage 3B per cell TLC NAND flash technology. Today, we are working with both NAND flash makers and smartphone OEM to begin the transition from TLC to 4-bit per cell QLC NAND flash. The push to use QLC NAND stems from the ongoing focus of smartphone OEM to reduce cost and size and increase features, performance, and capacity. For the same small storage footprint inside a smartphone, gigabit capacity from the use of QLC can be much larger than TLC. Also, for that same footprint, the use of TLC is much cheaper than TLC on a dollar per gigabit basis. The trade-off is TLC technology is much harder to manage than TLC because of worse endurance, worse write and random rewrite speed, and worse data integrity issues. Much more sophisticated controller technology are necessary to overcome these issues and provide consumer with the same level of trust and user experience. We have a clear controller technology leadership and more experience in the managing QLC NAND technology than any other company in our industry. Several years ago, we developed a controller that enabled the first commercialized SSD using QLC NAND and today. We continue to supply all the controllers using PCoE and SSD built with QLC NAND. Because of our QLC controller leadership, we have also been working extensively with both NAND flash makers and smartphone OEM on UFS embedded storage that enable the use of lower cost high-density QLC NAND, and respect product introduction in the 2023 to 2024 time frame. Generally, the smartphone industry adoption of new NAND technology lags the PC industry by several years. The adoption of QLC technology in UFS solution using smartphone and other applications will further strengthen and expand our position in mobile storage controller market. To recap, we have already received our purchase order for 2022 sales and are busy working with TSMC and other suppliers to plan and schedule production for next year's sales. The emphasis of our business development and R&D efforts is now for beyond 2022. We are working to further expand our client-side market share, introduce and scale our innovative enterprise class PCIe 2.5 SD controller, solicit by our merchant market share leadership in class EMC, bring QLC technology to UFS mobile storage, and expand our growing presence in the automotive storage market, which I had discussed. last quarter. Now I will turn the call over to Ria to discuss our financial results and our outlook.
spk05: Thank you, Wallace, and good morning, everyone. I will discuss additional details of our third quarter results and then provide our guidance. Please note that my comments today will focus primarily on our non-GAAP results unless otherwise specifically noted. A reconciliation of our GAAP to non-GAAP data is included with the earnings release issued yesterday. In the third quarter, we grew sales 15% sequentially to $254 million. SSD controller sales were approximately flat sequentially as we temporarily allocated more wafer supply towards eMMC plus UFS controllers for third quarter sales. In the fourth quarter, this will change as more wafer supply will be directed towards SSD controller sales. EMMC plus UFS controller sales grew 60% to 65% sequentially because of temporary quarter-by-quarter supply planning decisions. SSD solution sales increased 0% to 5% sequentially. Growth margin in the third quarter declined slightly to 50.2% from 51%. This slight sequential decline is primarily caused by a significant decline in the gross margins of our SSD solutions. Operating expenses in the third quarter were $53 million, $4.5 million higher than the prior quarter, primarily from higher R&D expenses. Operating margin in the third quarter was 29.4%, a slight increase from 29.2% in the second quarter, and up significantly from 23% a year ago. Our effective tax rate in the third quarter was 19.6%, in line with our 20% tax rate guidance. Earnings per ADS were $1.70, 13% higher sequentially, and 124% higher year over year. Stock-based compensation in our operating expenses, which we exclude from our non-GAAP results, was $5.1 million in the third quarter, within our guidance of $4.5 to $5.5 million. We had $419.5 million of cash, cash equivalents, restricted cash, and short-term investments at the end of the third quarter, compared to $412.3 million at the end of the second quarter. We paid $12.2 million in dividends to shareholders, the fourth and final quarterly installment of our $1.40 per ADS annual dividend that was declared last October. Earlier this week, our board declared a new annual dividend of $2 per ADS, 43% higher than the prior one. The first $0.50 quarterly installment will be paid in November. Now, let me turn to our fourth quarter guidance and four looking business trends. For the fourth quarter, we expect revenue to be flat to up 5% sequentially to approximately $254 to $267 million. Due to production scheduling, SSD controller sales will increase in the fourth quarter, while EMMC plus UFS controller sales will decline. Fourth quarter gross margin is expected to be in the range of 48.5 to 50.5%. Fourth quarter operating margins should be in the range of 28.5 to 30.5%. In the fourth quarter, we expect stock-based compensation in the range of $9.2 to $10.2 million. In summary, we are quickly approaching the close of the best year in our corporate history from a revenue growth, profit, and cash flow perspective. We expect to gain 5 to 10 percentage points of market share gain in client SSDs this year, which should continue to expand next year as we ramp PCIe Gen 4 shipments to more NAND and module maker customers for OEMs. By improving our product sales and customer mix, we have reached our goal of $1 billion in revenue run rate earlier than planned without any incremental wafers from our foundry partners. And next year, with healthy storage market demand and continued market share gains by us and our customers, we expect to continue our growth. We have already secured incremental wafers for 2022, necessary for us to deliver higher volume across our three key product lines, SSD controllers, eMMC plus UFS controllers, and SSD solutions. We will continue to add R&D resources to develop high-value control technology for the computing, mobile, data center, and automotive markets, maintain stable gross margin, and deliver operating leverage. While we already have our foundry wafer supply allocation for next year, which is materially more than this year, and have already received customer purchase orders for next year, we are unable to provide 2022 revenue guidance at this time because we still need to perform product mix, customer allocation, and prices confirm product mix customer allocation and prices, and plan in detail the scheduling of our product fabrication. Based on current estimates, we believe demand for our products will continue to exceed our ability to supply through 2022. This concludes our prepared remarks. We will now open the call to your questions.
spk01: Once again, as a reminder, it is start followed by one on your telephone keypads to ask a question. We have a question from the line of Rajvendra Gill. If you don't need him, please go ahead.
spk10: Yes, thank you, and congratulations on great momentum and success this year. Wallace Riad, a question on the capacity that you're being allocated for 2022 and the purchase orders. I wanted to talk about those negotiations that you're having with TSMC in terms of getting the capacity and how secure that is. And the $1.5 billion kind of purchase orders that you have in hand, could you maybe elaborate a little bit further on kind of the makeup of those purchase orders next year relative to this year? How is it different? How is it the same? What are the customers asking in terms of product lines? Any color there in terms of the makeup of the demand funnel and also some additional details on the supply funnel?
spk03: I think based on the third-quarter revenue and fourth-quarter guidance, we are already at a $1 billion sell revenue rate with our current wafer supply. We have already received foundry wafer allocation for 2022 as we state. That's incremental to what we have this year, and we are confident we can grow our sales next year toward our $1.5 billion. We believe the demand will continue to exceed supply next year, but I think we definitely will continue to negotiate with TSMC to gain more wafer supply. Regarding the $1.5 billion backlog, I think our backlog remains very solid. with the purchase order of 2022 continue to be well in excess of $1.5 billion. Most of the backlog consists of SAD and EMC per US controller order for OEMs. And OEM order is strong because our customers have been gaining share, and we have been gaining share of wallet as these customers. We believe we have secured about 50% of all PCOEM PCI chain 4 socket for next year. But we have seen, however, some adjustment in our order book with the softening of order for channel market product and strengthening of product for OEM customer. For example, we're seeing demand for SSD by global PCOE and continue to strengthen. Our current client SSD for retail market, especially in China, softening.
spk10: Got it. So given those dynamics that are happening in the PC market, the retail versus the OEM, could you remind us kind of your split as it stands this quarter between OEM and retail slash module maker? And how are you adjusting your order book and your capacity to reflect this dynamic next year? I think that's one of the main concerns that folks have just broadly is is that more capacity comes online next year, but growth rates start to decelerate, order patterns start to decelerate, and we get into kind of a potential overbuild situation. I'm not saying it's going to happen, but that's the concern. So I'm wondering how you're adjusting to these changes in your order book as some aspects of the business start to soften a bit.
spk05: Let me start with the numbers, and then I'll hand it over to Wallace for the more qualitative stuff. In terms of our split between our sales of SSD controllers to the channel market versus the OEM market, last year it was roughly a third for OEMs and the rest for the channel markets. By next year, we're going to be well in excess of 50%. More than half of our products are going to be going into OEM. And so we're right now in the process of crossing over more to OEMs. With that, let me hand over to Wallace for more color.
spk03: Yeah, I think we also discovered GSMC and our customers constantly. I think TSMC also recognize there's also overbooking from the end customer, but they just don't know where there's overbooking in the semiconductor supply chain. But prevent overbooking, we not only check with our customer, also check with the customer's end customer. We want to make sure the product used in the application specific end customer and the market sector. That's why we handle allocation carefully. We want to make sure all the product will sell through. Because our really demand in PO is much larger than wave allocation to us, so really I think there will be a room for us to make the better judgment, and we really feel very comfortable for our next year backlog and the sell revenue target.
spk05: Let me also add that right now we have very lean X extremely lean inventory on our hands. And on our customer side, our customers are also operating at very lean inventory levels. And so from perspective of what we see, at least on our side of the business, our customer side of the business, there doesn't seem to be overbuilding as far as we can see.
spk10: Got it. That's great to hear. And last question for me, in terms of the gross margins. You mentioned kind of holding steady. They're around 50 and a half, 50% in Q4. How are you thinking about the gross margins next year? I know you're still determining the allocation and the mix of business, but how are you thinking about the gross margins at a high level, given the purchase orders that you have in hand and your backlog? Should we be expecting a similar kind of range Is there a potential upside to that number if we get more of a mix shift to a higher margin PCIE Gen 4 products? Any color on the gross margins would be helpful. Thank you.
spk05: Right now, based on what we see with our business going into next year, we're very confident we should be able to maintain our gross margin around 50%.
spk03: Yeah, I think it's a very complicated question because, as you all know, TSMC has increased wafer price 20% in all technology nodes. UMC and SMIC also increased wafer price twice so far for this year. And we definitely have to manage how to pass through the manufacturer card to the end customers. It's pretty complicated and challenging work, but we are confident to manage to achieve an average of about 50% gross margin next year.
spk10: Got it. Helpful. Thank you.
spk01: Thank you. We have the next question. This is coming from the line of Craig A. Ellis from V. Riley Securities. Please go ahead.
spk06: Yeah, thanks for taking the questions and Guys, congratulations on the strong execution in the business. Wallace, I wanted to start off with a question that goes back to your prepared remarks on QLC versus TLC. These transitions, whether from 2-bit per cell to TLC or now TLC to QLC, have been significant for industry. And so the question is, as you look at what's playing out in the smartphone market as it gets ready to go to QLC for all its increased density advantages and the advantages you can bring with a much more sophisticated controller. Is the proper analogy for us as observers and investors something like the transition from PCIe Gen 3 to Gen 4 where the QLC transition should lead to higher ASPs for CMO? And if that's so, can you give us some color on how that might play out as we look for this QLC transition in your UFS and EMC business.
spk03: Okay. I cannot share more detail, but I can give you a pretty clear example, understand where's the trigger point. I think when iPhone 13 Pro announced the one terabyte QLC, integrated NAND density model, I think that really drives quite a lot of the players to looking for how to provide similar density model, as well as how to reduce the cost. As you know, as everybody knows, for one terabyte density into the one BGA package, you need around 16 512 gigabit monodai stacked together. And that is very expensive and with a lower yield. And so that's much better if you can stack eight 1 terabit QLC monodai, which gives you better yield and also much lower cost. This was started for almost a couple of months in the past because we believe some leading smartphone player and start to survey and driving the momentum and for all different solution. Since we are the leading in the market for QLC development in the industry. We work with a couple of NAND vendors and smartphone makers to explore all kinds of different approach solutions. It's not just by controller maker, also need a smartphone maker, certain software's enhancement. But this will become a very exciting approach in technology because it's going to reduce storage solution costs dramatically and also increase the capacity for consumers to use, to embrace all different new applications for the 5G. So this is very important for us, also expand our opportunity, not just one terabyte. It could even go lower to 512 gigabytes. So this is a very, very important project for us, and we put a pretty decent R&D team to work together and looking forward to see a future transition from 2023 to 2024 timeframe, we're going to see the solution in the market.
spk06: That's really helpful, Wallace. The second question I had is related to the EM&C market, and it seems that there's some very encouraging supply-side dynamics taking place as silicon motion really takes advantage of a situation where Samsung and Hynix are exiting the market. So the question is this, if the company is able to provide us with market share data on the SSD controller side and 5 to 10 percentage points of gains this year and expected next year, is there some similar color that you can provide on the EM&C market so we can get a better grasp of the magnitude of share that you're picking up there as the supply side consolidates to your favor?
spk03: Okay, let me just put some color so you understand where we are and our position is in EMC controller. For 2021 this year, unfortunately, we have a wafer allocation. Our EMC backlog is much bigger allocated wafer we can supply. Because in the past, EMC controllers are designed with a legacy technology node, primarily with a 55-nm and 40-nm. These mature technology nodes, we have much less replication from TSMC and other foundry suppliers. So this year, we're busy to porting a new product into 28-nm, so to expand our EMC criteria because our backlog, frankly speaking, for EMC is even higher than 500 million units today. But through the wafer allocation to us, we can probably only support 60% of the backlog. And we do see an increasing demand from the multiple customers, not just China, Taiwan, or Korea, but also from the U.S. and Europe. And really very, very strong demand a multi-market application, not just a low-end smartphone, but also in all the smart families, like smart TV, smart speakers, smart watch, all the IoT devices, automotive, and Chromebook. So this is very, very strong demand, even some net maker, because they exit from EMC, but they still want to provide solution. All these people come to SMI. So we really have obligation and to expand our wafer supply to support to these customers to avoid any potential market segment breakdown. So this is our obligation and try to really increase all the available technology wafer to us to make it more cost effective, also prepare for upcoming new TLC NAND and as well as the legacy NAND support. I just really cannot say what market share we have, definitely more than 30%. But just if we can have a sufficient way for support, we can easily achieve more than 50% of market share next year.
spk06: That's really helpful, Wallace. And then I'll follow up with one to Riyadh so that I don't ignore you, and then I'll hand it off to others. So the question is this, Riyadh. given that the company year-to-date has talked about four drivers to executing on gross margin, richer mix, allocations to more profitable accounts, recovering manufacturing costs, and then doing things on the back end. And with things like a transition from much more mature nodes to 28 nanometer for EM and C, it seems there would be significant momentum to keep the the trajectory on gross margin moving higher next year. So why would we not see gross margin moving up next year versus something that's at 50%? Admittedly, a good point relative to the target range, but it seems there's momentum in the business for something that would be higher.
spk03: Well, unfortunately, because TSMC increased wafer price for 20%. So I think the As you know, EMC really should be a lower cost product because of the lower density for consumer electronic and automotive devices. So we carefully try to transition the manufacture cost from wafer and test to the end customers. I think we state we are confident to reach a 50% gross margin. We cannot have upside. But just the 50% is our target in commitment for 2022.
spk05: Craig, we're just leaving ourselves in cushion. While we are targeting 50%, we'd love to do more.
spk06: Yeah, I understand. And just given the sector's broader trailing 10-year trajectory, I think if the company did more, it would be very meaningful for the stock. And with that, I'll hand it off to others. Thanks for all the help, guys.
spk03: Thank you.
spk01: We have the next question. This is coming from the line of Mehdi Husseini from Susquehanna International. Please go ahead.
spk00: Yes, thanks for taking my question. A couple of follow-ups. Based on your guide for December quarter, it seems to me that 2021 revenues are on target to increase by 70%. Can you help me have a feel for how blended pricing has changed, 21 versus 20, and how unit shipment is tracking. I think it's very important for us to understand the mix and improving ASP and any color you can provide would be great. And just to extend that into 22, how do you see a better mix improving your blended pricing without even raising prices on your customer? And I have a follow-up.
spk05: Well, our prices this year, our blended prices have been going up this year, which is quite a good momentum that we have this year, which is a little bit different. I mean, generally in the past, we would keep our blended ASPs versus this year, our blended ASPs have been going up. And this is coming from the factors that we had previously talked about. Everything from selling a richer mix of products, focusing, since our wafers are limited, we're focusing on manufacturing products allocating to higher ASP, higher margin products. And it's also giving us an opportunity to be more focused about how we allocate products to customers. And where possible, we're also readjusting our prices and being more disciplined. The cost side, for example, wafer costs and substrate costs, those have been going up, and so we need to recover those costs in order to preserve them. So all these three factors, as well as focusing on improving our manufacturing operations, that's the fourth leg. All of these are leading to strong gross margins, but obviously the first three factors are what's keeping our blended ASPs going up, and we expect this trend likely to continue into next year since wafer supply will still be very tight next year.
spk00: That's right. So of all those four legs or four drivers for 70% revenue growth, which has the highest impact?
spk05: The impact is coming from all three elements, from product mix, from customer allocation, and also from increasing our prices to recover our costs.
spk03: Let me add a point. I think mathematically, If we want to achieve higher cell revenue growth, we should shift everything as a component with the packaging, right? That is each wafer we can maximize cell revenue. They may have the best gross margin, but they have the best cell revenue and best profit. However, we cannot do that because we have obligation to support for UFS, for micro SD, and some automotive business. just for ourselves to allow certain market segments to break down. So we have obligation because we are largest controller supplier. So we have to be very cautiously to balance while we can achieve the sell revenue and maximize profit, also avoid the market sector breakdown.
spk00: Got it. Thank you. Thanks for all the detail. And just to look forward, could MIX continue to improve richer MIX So even with a weak channel, a richer mix, and therefore higher blended ASP would help with another year of double-digit revenue growth. Is that richer mix sustainable in 2022?
spk05: Absolutely, Mehdi. Our wafer capacity is still going to be very tight next year. We don't expect... foundry wafer supply to loosen up until 2023. And so with wafer capacity being limited, we're going to be working to optimize our scarce resources where we can deliver the strongest revenue and profitability.
spk00: Okay. And one last item. Is the enterprise contribution still more of a 23 target or is there a chance that you can actually pull that in and benefit earlier?
spk03: For enterprise controller, we already started to have a sale revenue Although the volumes here are very small, but we will continue to grow. But for our really flagship product is our PCIe Gen 5 controller, which will be commercialized in second half of next year, but moved to mass production in second half of 2023. Thank you.
spk01: We have the next question. This is coming from the line of Carl Ackerman from Cohen. Please go ahead. Yes, thank you.
spk09: Thank you. A few questions for me as well. Maybe first off, Riyadh, you indicated that orders for client SSDs at retail, you know, across retail markets are softening in China. But my understanding was that business is more opportunistic versus... NAND OEMs and was incremental to your $1.5 billion order backlog. And so my question is, you know, for NAND OEMs, do you have quarterly commitments from them that would limit risk from order moderation or push outs?
spk05: Well, we're talking more about the current situation right now, you know, looking at our current sales in Q3 as well as in Q4. What we're seeing is on our client SSD business, the strengthening of sales to OEMs, into the OEM market versus softening of demand in the China market, specifically the retail market in China.
spk03: So the demand we have from PCIe and NAND maker, the program really is a rock solid because we get a full year PO from the major OEM customer.
spk09: Understood. That's helpful. I guess in your prepared comments, I'm not sure I heard much update on the progress you're seeing for PCIe Gen 4 enterprise controllers. sold into your China hyperscale providers. And so I'm wondering what sort of market adoption are you seeing from them today? You know, I realize and I'm cognizant that Gen 5 appears to be the primary product opportunity for you for enterprise controllers. But if you could just kind of bridge that timeline with what you're seeing with PCE Gen 4 enterprise controllers today, that would be very helpful. Thank you.
spk03: Okay. Regarding the PCIe 10.4 controller, we are sampling and developing really the solution through the Shannon product solution as well as through the Kingston. Now, because we have a wafer allocation and our enterprise D solution, the gross margin is lower, much lower than our corporate average, so we only focus on two to three major customer demand. And we do not want the Shannon PCI-1000-4 SD solution really dilute our corporate growth margin. But we focus on the quality, forward development, make sure our forward capability and performance meet the industry customer expectation. The reason we put a focus on PCIe Gen 5 is our PCIe Gen 4 controller was late compared with other leading NAND makers such as from Samsung and Intel. But our PCIe Gen 5 will be ahead of many NAND makers' solution. And we believe our PCIe Gen 5 will be a flagship in the industry. So that's why we will put more focus and prepare from Gen 4, transition to Gen 5, and we can really ramp with a better position and with a better selling price because we can charge premium in 2023. Understood.
spk09: Thank you. I'll hop back in queue.
spk01: We have the next question. This is coming from Anthony Stoss from CH. Please go ahead.
spk07: Good morning, guys. Riyad, I wanted to follow up just so I'm crystal clear on your comments as well as Wallace's. So if you have, call it a billion five in order book, and I think Wallace alluded to this, but again, I want to be clear. Based on your materially more wafers that TSMC has committed, could you get close to generating $1.5 billion in revenues in 2022? And then I had to follow up.
spk05: We are working to get towards that goal. We continue to negotiate for more wafers, but based on the wafer supply commitment that we have today, it's very likely that supply demand will continue to be in excess of of supply, demand excess of supply. But even with that scenario, we're still going to be generating very strong growth for 2022.
spk07: Okay, let me ask it a different way. Do you think you'll get at least 50% more wafers in 2022 over 2021? This is impossible because you can see
spk03: TSMCs all technically know are overbooking. We definitely got a confirmation we have incremental wafer increase compared with 2021, but it is impossible for anyone to get a 50% increase. The really increased sale revenue is not just by wafer numbers, but by how you properly manage the product mix. And especially, we have a new product, PCIe Gen 4, and the UFS 3.1 ramping sharply. And so we can transition this portion of high-end product and to driving the better profit and better sale revenue. So it's not exactly mathematically you need a 50% wafer to create a 50% sale revenue. Got it.
spk07: Then shifting gears, and I don't know if you guys will have this at your fingertips, but what percentage of your total revenue right now is in, call it consumer IoT and or auto, and how quickly is this new market growing for you guys?
spk03: Well, I think we really cannot count on customers, but I think we own a pretty large VMC controller business. So customers are everywhere. We have a pretty decent smartwatch, smart speaker, and smart TV, and cellar box, even cable modem in the U.S. So it's a very, very fragmented market sector with a very large potential. As long as we can continue to increase the wafer supply for our boundary makers, I think we can continue to gain the market share.
spk05: Tony, let me also add that what I said earlier, talked about that we already have about 500 million units of backlog relating to EMMC for our module maker customers, 500 million units. Right now, we are not able to deliver all that. We're delivering maybe 60% of that because of... you know, wafer limitations. But if we can deliver 500, that's equivalent to about half of the market.
spk07: Got it. Thanks, guys. Nice job on the quarter.
spk01: Thank you. We have the next question from the line of Suji De Silva from Roth Capital. Please go ahead.
spk04: Hi, Wallace. Hi, Riyad. I'd like to make congratulations on what's looking like a strong year Question on the transition to QLC from TLC. Are there any, which end markets are QLC most important for? And is there a share implication in terms of share gain opportunity as we transition to QLC in terms of technology advantage that might garner you that?
spk03: I think for TLC, Davening Enterprise, Enterprise ACD today, this year's Primary preferred TLC, it probably takes a couple years to adopt the QLC-SD into enterprise SD. But for client, it's moving quickly, especially for second half next year in 2023. We believe probably all value line SD will transition to QLC-SD. For the consumer product, I think that because QLC is much more attractive because of cost advantage. Now, many, many consumers and customers, they are used to adopt and comfortable to use QLC-based product. For the mobile, as I said, we see the really trigger point is the higher density UFS product, which needs to compete with the iPhone and 13 Pro. However, I think the technology is very challenging because the controller needs a much more better unique algorithm and also meet the performance, endurance, data retention, integrity, everything, you need to be similar like TLC. A user feels the same user experience as a TLC-based solution. So probably take two to three years to see the solution happening. So we see the potential launch market sector will be around second half 2023 to 2024, and we're going to see QRC-based USAID product in the market.
spk04: Okay, thank you. It's very helpful. And then, as you look at the calendar 22, I'm curious, are there any additional new NAND flash customers that you'll be ramping, either in SSD or EMC UFS? And if there are, in light of a tight wafer environment, how would you support additional customers coming online?
spk03: Yeah, that's a very good question. I think we have a fine NAND customer today, 4CD. Our target is to try... probably get one more in late next year or early 2023, but we cannot, we cannot, it's our target, and we cannot comment too much right now.
spk04: Okay. Congrats again, guys.
spk01: Pardon me. We do not have any further questions at this moment. I would like to hand the conference back to Mr. Wallace, go for any remarks.
spk03: Thank you, everyone, for joining us today and for your continuing interest in Silicon Motion. Next week, we will be featuring our leading-edge technology and comprehensive enterprise solution in person at the OCP Global Summit in San Jose. In addition, we will be attending several investor conferences over the next few months, The schedule of these events will be posted on the investor relationship section of our corporate website. Thank you, everyone, for joining today again. Goodbye for now.
spk01: Thank you. That concludes our conference call for today. Thank you all for your participation. You may disconnect now.
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