Silicon Motion Technology Corporation

Good day and thank you for standing by. Welcome to Silicon Motion Technology COP Third Quarter 2023 Earnings Conference Call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press dial 11 again. Please be advised that today's conference is being recorded. This conference call contains following 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 forelooking 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 following 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 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 forelooking statements which apply only as of the date of this conference call. And now I'd like to hand the conference over to Mr. Jason Tai, VP of Investor Relations and Finance. Please go ahead, sir.

Thank you. And good morning, everyone, and welcome to Silicon Motion's third quarter 2023 financial results conference call and webcast. Joining me today is Wallace Koh, our President and CEO. Wallace will first provide a review of our business, key business developments, and I will discuss our third quarter results and outlook. Following our prepared remarks, we will conclude with a Q&A session. Please note that Riyadh Lai, our CFO, will not be joining us on today's call. Riyadh worked intensively on the merger with MaxLinear over the last 15 months, while continuing to manage all the CFO responsibilities. He is now devoting his time to preparing for the arbitration against MaxLinear. As a result, I was asked to lead our investor-related activities. We will then conclude with Q&A. Before we get started, I would like to remind you of our safe harbor policy, which was right at the start of this call. For a comprehensive overview of the risk involved in investing in our securities, please refer to our filings with the U.S. Securities and Exchange Commission. For more details on our financial results, please refer to our press release, which was filed on Form 6-K after the close of 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 the GAAP to non-GAAP financial data can be found on our earnings release issued yesterday. We ask that you review it in conjunction with this call. As we have previously shared, Silicon Motion filed its Notice of Arbitration against Max Linear for its willful and material breaches of the merger agreement that was signed on May 5th, 2022. The company is seeking payment of the termination fee of $160 million, further substantial damages, interest, and costs. Please note that the arbitration process is confidential, and we will therefore not be commenting further on this matter today. With that, I will turn the call over to Wallace.

Thank you, Jason. Hello, everyone, and thank you for joining us today. It's good to speaking with you again after such a long break to provide an update on the program we have made over the past year and a half. Since our founding nearly three decades ago, the strength of our business and the fundamental drivers of our growth have always been our technology leadership and the quality and depth of our customer partnership. Today, this statement has never been truer. SiliconMotion technology leadership continues to enable us to win sockets and grow our share as NAND makers. At the same time, it drives them to rely on us more each day, to outsource more in order to target a wider range of NAND markets that their own R&D does not have the bandwidth to support. Our relationship with our module maker customers continues to deepen to our broad portfolio of solutions. enable them to be the most competitive in their respect and markets. Our technology leadership also paves the way for us to expand into additional markets like enterprise and data center storage, automotive, commercial, industrial, and IoT. And now that it's clear that we will remain a standalone company, our engagement with our customers have been steadily increasing as well. Our unwavering focus on technology leadership will be what continues to drive our growth longer term and ensure our partnership with both land makers and module makers alike remains strong. With that, I will turn to our results for the third quarter. Our business continues to gain momentum with the revenue growing 23% sequentially to $172 million and earning per idea is growing 67% sequentially to 63 cents. We saw inventory level begin to normalize across the majority of end markets and OEM order activity pick up in the third quarter leading to our strong revenue growth in the quarter. We expect these trends to continue and are confident they will lead to strong sequential growth in the fourth quarter. While the first half of 2023 was challenging due to the global microeconomy weakness and excellent inventory in the channels, the inventory level across our end market are normalizing and OEM demand continue to improve. Today, I'm pleased to say that we are shipping to more customers than ever before. working with all the major name makers on the multiple engagement across several end markets and expanding our footprint among market leading module makers with the innovative solution for the smartphone, PC, automotive, industrial, commercial, and enterprise markets. We continue to invest in our technology leadership and in coming quarter expect to introduce several industry leading solutions for S&D and embedded market that will drive sustainable long-term profitable growth for our business. QLC land is essential to further improve affordability of Southeast state storage, but also poses greater challenging to overcome relating to worsened endurance, reliability, data integrity, and performance. As flash makers continue to roll out next generation higher density 3D QLC NAND with 200 to 300 plus layers, controller technology requirements are scaling up significantly, requiring the use of more sophisticated LDPC as well as our proprietary 3D ray technology for better aero correction and recovery, data protection and reliability. These next generation controllers will require finer design and manufacturing processes. to deliver much higher performance while maintaining the same low power consumption as previous generation solutions. We invest early in supporting KLC land, and SiliconMotion have more experience managing this technology than any other company in our industry. Our leadership in these areas are second to none, especially in the merchant market. We expect to continue to maintain our leadership in the market with these next-generation solutions and win meaningful share of the new product with all NAND flash makers as well as all the leading module makers. From NAND market standpoint, extra inventory in the PC and smartphone markets have plagued the industry since late 2022 when the global economy weakened and demand slowed. It has taken nearly a year but we believe the inventory level in both the PC and smartphone market are normalizing. We are seeing more consistent audit pattern for our customer and better visibility that are more closely aligned with end market demand. We are optimistic that this trend will continue and that the industry is well positioned to return to growth in 2024. Now, let me now discuss our ASD controller business. Our SSD controller business grew 5% to 10% sequentially in the third quarter. We are beginning to see the PC market rebound and believe that the replacement cycle of corporate that purchased Noble in the early days of COVID are beginning. This should lead to stronger PC demand in the coming months. For the current PCIe Gen 4 SSD market, we just began shipping our Gen 4 controller to our newest Korean NAND maker customer for their PCoEN customers. And we're now supplying our SD controller to all but one of the major NAND makers. Our large expanding NAND 5 customer base and our strong share with all the leading module makers continue to position us well in the PCoEN and channel market for SAD. We expect Gen 4 SAD to continue to be the majority of the PCSK market through 2025. And PCoEN will begin adoption of PCIe Gen5 SD for high-performance PC in 2025 when Intel and AMD adopt standard in notebooks. This PCIe Gen5 SD will enable much higher data bandwidth and performance that will be critical for next-generation PC. and will also enable new capability such as AI as edge and will eventually become standard. We already secured design wing with all the flash makers that are outsourcing controller to merchant supplier and expect to begin shipment in late 2024. Our first chain five controller is taping out in this quarter and will serve the high-performance market with an eight-channel solution using TSMC 6 nanometer technology. That will deliver unparalleled performance and low power consumption. PCOM expects significantly higher performance with Gen 5 SID. But at the same time, power consumption is Gen 4 SID requiring us to move 6 nanometer process technology to achieve both high performance as well as low power consumption requirements. This newest controller, ASP, will be nearly double that of our comparable 8-channel Gen 4 controllers. We expect to take out our second PCIe Gen 5 controller, a 4-channel solution, in the second quarter of next year and begin sampling in the second half of next year. We expect this solution to help expand the adoption of Gen 5 SD into more mainstream PC in 2026. For the enterprise market, we will sample our non-Titan PCIe Gen5 SSD controller this quarter. We are working with several enterprise and data center customers around the world and expect to generate initial revenue in late 2024 with more meaningful revenue in 2025 and beyond. Moving to our EMC and UFS business. Revenue from these products rebounded strongly in the third quarter and more than double as demand ramped ahead of the holiday season, and inventory level in the channel and smartphone OEM are normalizing. Our diversified customer base of NAND flash makers and module makers have expanded our share with the leading handset OEMs. UFS 3.1 as well as the UFS 2.2 solution remain the dominant interface for smartphones, and we continue to bring new programs with both flash market makers and module makers. UFS4 is only adopted by flagship smartphone today, and we do not expect to see adoption of UFS4 into mainstream smartphone until 2025. We are working on our own UFS solution, also using 6 nanometer process technology to deliver a higher performance while maintaining the same power consumption as UFS3.1. We expect to take out the product in early January and start sampling in the first half of 2024, with mass production expected in early 2025. We are already engaged with the flash makers, as well as the module maker, targeting leading handset OEM and on track to meet their expected ramp for US4 in 2025. We are also seeing expanding use case of EMC and UFS beyond smartphones and have significant wins already in the automotive, IoT, commercial, industrial market with name makers as well as market makers. We believe we are well positioned to continue to see our EMC and UFS business to continue to grow in 2024 and beyond. We have talked a lot about expanding use case of Southeast Asia storage, and I would like to highlight a particular end market as an example of our success in diversifying our business. In the automotive market, our embedded and ACDS controller, as well as our federal ACDS, are making significant progress with the flash maker and the module makers. Parking storage for central vehicle control unit infotainment dashboard, and ADAS functions. We are shipping our controller to two flash makers already and in development with two additional flash makers for solution targeting this market. Our fair ISD are already shipping to several top car makers, including two of the largest Japanese automakers. As we said, we see significant opportunity beyond just smartphone and PC to continue to grow our business. And the success we are seeing in the automotive market across all our product groups is a good example of the traction we have been making. Overall, we are pleased by the progress we are making to supply microeconomy high winds for the industry this year. Our focus on our technology leadership has yielded strong customer traction. strong share in the market we serve and diversify the end market our products are using. Combined, we expect all of this to drive growth in 2024 as the end market and the non-flash industry economies improve. Now, I will turn the call over to Jason to give our financial results and our outlook.