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spk10: Good day and thank you for standing by. Welcome to Silicon Motion Technology Corp 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, 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 recent uncertainties and other factors, please see the documents we filed 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.
spk05: 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 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 6K 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'll 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 MaxLinear for its willful and material breaches of the merger agreement that was signed on May 5, 2022. The company is seeking payment of the termination fee of $160 million, further substantial damages, interest, and cost. 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.
spk00: Thank you, Jason. Hello, everyone, and thank you for joining us today. It's good to be 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 N 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 NAND 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 excess 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 solution for ACD and embedded market that will drive sustainable long-term profitable growth for our business. QLC NAND is essential to further improve affordability of solid-state storage, but also poses greater challenging to overcome relating to worsen 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 Silicon Motion has more experience managing the 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 a new product with all NAND flash makers, as well as all the leading module makers. From an end-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 Gen4 SSD market, we just began shipping our Gen4 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 flat 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 PCSD 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 an edge, and will eventually become standard. We already secured design win with all the flash makers that are outsourcing controllers to merchant suppliers and expect to begin shipment in late 2024. Our first chain 5 controller is taping out in this quarter and will serve the high-performance market with an 8-channel solution using TSMC 6 nanometer technology. That will deliver unparalleled performance and low power consumption. PCoEM 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 new SSD 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 SSD into more mainstream PC in 2026. For the enterprise market, we will sample our Mount Titan PCIe Gen5 SD 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. Now 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 win 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 UFS 3.1. 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 multi-maker, targeting leading handset OEMs 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 NAND makers as well as module 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 solid-state 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 Ferra ACD, are making significant progress with the flash maker and the module makers. Targeting storage for central vehicle control units 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 Ferro 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 to 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.
spk05: Thank you, Wallace, and good morning, everyone. I will discuss additional details for 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 our earnings release issued yesterday. In the third quarter, we grew sales 23% sequentially to $172 million. SSD controller sales grew 5% to 10% sequentially. EMMC and UFS controller sales more than doubled sequentially as we benefited from ramping holiday season build and normalizing inventory levels. SSD solution sales decreased 5% to 10% sequentially. Gross margins in the third quarter were stable sequentially and remained at 42.5%. Operating expenses in the third quarter were $49.5 million, $1.5 million higher than the prior quarter, primarily from higher R&D expenses to support our technology leadership. Operating margin in the third quarter was 13.8%, an increase from 8.3% in the second quarter. Our effective tax rate in the third quarter was 22.8%, an increase from the 12.7% tax rate in the second quarter. Earnings for ADS were 63 cents, 67% higher sequentially. Stock-based compensation in our operating expense, which we exclude from non-GAAP results, was 3.8 million in the third quarter. We had $350.3 million of cash, cash equivalents, restricted stock, and short-term investments at the end of the third quarter compared to $305 million at the end of the second quarter. Inventory decreased again sequentially in the third quarter to $199 million from $251 in the second quarter. Earlier this week, our board declared a new annual dividend of $2 per ADS. The first $0.50 installment will be paid in November. Now let me turn to our fourth quarter guidance and forward-looking business trends. In the fourth quarter, we expect revenue to be up 10 to 15% sequentially to approximately 190 to 198 million. We expect SSD controller sales to be stable in the fourth quarter while EMMC and UFS controller sales will increase. Fourth quarter gross margins is expected to be stable and be in the range of 42 and a half to 43 and a half percent. Fourth quarter operating margins should be in the range of 13 and a half to 15 and a half percent. Fourth quarter effective tax rate to be approximately unchanged from third quarter And in the fourth quarter, we expect stock-based compensation in the range of $6.2 to $7.2 million. Let me provide some additional color to our fourth quarter expectations. Our business will continue to rebound in the fourth quarter, and sequential revenue growth is expected to be stronger than normal seasonality. Our gross margins are expected to be flat to up slightly. We expect our gross margins to improve gradually over the next few quarters as the financial health of the NAN makers and the memory market overall slowly improves. Most of our NAMM maker and module maker customers have been selling NAMM products below their costs since early this year, and even with the sharp increases in NAMM prices we've seen lately, it is still challenging, especially for NAMM makers. Our pricing is somewhat reflective of our customers' challenges, and as their financial conditions improve, we believe we can gradually improve our pricing and our margins, but it will take time. Our cost of goods, especially wafer prices, remain high, but we believe we can extract some additional manufacturing cost improvements over the next few quarters as well. Combined with an improving mix of new products, including our new PCIe Gen 4 and 5 controllers and UFS4 solutions, we believe we can gradually return to our historical gross margin levels. For operating expenses, as Wallace mentioned, we will be taping out three new 6 nanometer controllers, our 8-channel PCIe Gen 5 controller this quarter, our UFS4 controller in the first quarter, and our 4-channel PCIe Gen 5 controller in the second quarter. The total investments to get each of these products to market is more than $15 million. So we expect our operating expense to be elevated for these three quarters and then come down a bit in the second half of next year, driving additional operating margin leverage. As Wallace mentioned, our business is steadily improving as end market demand stabilizes and inventory levels normalize. We'll continue to invest to maintain our technology leadership with best-in-class next-generation storage controllers. Our broadening product portfolio and diversified customer base will further solidify a strong foundation for continuing revenue and profitability growth. We are optimistic that industry conditions will improve and believe we are well positioned to benefit from these improving market dynamics. This concludes our prepared remarks. We will now open the call to your questions. Operator?
spk10: Thank you. As a reminder, to ask a question, please press star 1 1 on your telephone and light for your name to be announced. To withdraw your question, please press star 11 again. Our first question comes from the line of Mehdi Hosseini from SIG. Please ask your question, Mehdi.
spk01: Yes, thanks for taking my question. Two for me. First, in terms of technology migration among the non-manufacturer, I want to better understand how increased adoption of QLC technology is helping you and how should we compare that to end market system unit trend? In other words, how a smartphone notebook unit would fare against migration to QLC. And my second question has to do with a strong cash and what would it take for the board and the company to become more aggressive in stock buyback?
spk00: So let me answer your first question at the beginning QLC. We see the trends. All NAND maker going to have a QLC NAND and product by late 2024. So we see QLC initially all transition to clients D and we believe in 2025 probably value line more than 80% of value line is D will all adopt QLC in 2025. And we've seen the QLC transition to mobile phone will take time. And I believe the leading smartphone maker, which will try to adopt QLC, but when it's going to be mass production, when we'll create a meaningful volume, we don't know yet. All the net maker is trying to explore the opportunity. But we also believe QLC will enter data center sometime in 2026 or 2027. That's why TLC becomes very, very important, and it becomes a major offer for the name maker after 2026 or 2027.
spk05: And, Matty, to answer your second question about the share repurchase, you know, as you know, our share repurchase program has been opportunistic in the past. We do not have a program in place today, but the board is always evaluating ways of returning cash to shareholders, and share repurchase is something that they will continue to look at.
spk01: If I may, just a quick follow-up to Wallace. Let me rephrase my first question. Let's say if units of a smartphone notebook were to go flattish next year, could the migration to QLC for client SSD drive growth? Is that something that could provide additional growth drivers?
spk00: I think that we believe our customers will gain market share in 2024, although the total unit for PC might not grow very much, maybe just a single digit, 2% to 3%, because our strong technology in QLC and supporting with our major controller for both Gen 4, Gen 5, are going to helping us to transition to take additional market share in 2024. Great. Thank you.
spk01: Thank you.
spk10: Our next question comes from the line of Clint Bolton from Needham and Company. Please ask your question, Clint.
spk08: Hey, guys. Congrats on the nice results and outlook. I guess maybe first, Wallace and Jason, can you just maybe expand on your outlook for gross margins? I know you're looking for sort of a gradual recovery as the market improves. But, you know, can you give a little bit of shape to that gradual? Is that sort of 50 basis points a quarter? Is it 100 basis points a quarter? What kind of trajectory would you see? And any thoughts on when you might get back to kind of a 48 to 50% gross margin would be helpful?
spk05: Yeah. Yeah. So, look, you know, obviously, as you know, there are still a lot of challenges in the NAM flash industry. NAM makers are still struggling economically. And our goal is obviously to continue to gradually improve our gross margins and get back to where historically we were. And as the industry's health improves, we believe our pricing, our gross margins will also improve. And as we roll out new products, you know, the new products that we talked about just a little while ago, right, some of the new PCIe Gen 4 and Gen 5 and UFS4 controllers, as those come out to market, that will also have an uplift to our gross margins. But we haven't provided specific guidance for next year, and certainly as we move into January and report our fourth quarter, we'll have a better view on what that longer-term gross margin profile looks like for next year.
spk08: Great. And then just looking forward to kind of the EMMC and UFS market, can you kind of give your thoughts on Market share, looking forward, I think one of your customers has tried to insource UFS4. Does that have a significant impact on your outlook, or do you think it's just there's some puts, some takes, but you still feel very confident about your overall market share position in UFS? Thanks.
spk00: We believe one of our major customer partners, Netmakers, they have their internal solution controller for UFS4 since four years ago that we know that. But as you know, we're working closely with this particular partner because for each of the NAND makers, their controller probably supports one to two generation NAND. So when you have a new generation NAND, and that's the opportunity we're taking. So we'll continue to discuss future opportunity with this customer and to expand even to the additional new legacy UFS 2.2, 3.1, as well as the potential newer generation, including UFS 5.0. In addition, we have engaged multiple name makers, not just one, for UFS. So we are targeting a new customer and in production from day Q1 or early Q2. And so I think because our technology expanded and because there are more NAND coming to the market, and we definitely benefit from more NAND makers which don't have internal resources, want to leverage third-party controllers like Silicon Motion to help engage with the smartphone market. Got it.
spk08: Thank you very much, Wallace.
spk10: Thank you. Our next question comes from the line of Anthony Stelz from Craig Holland. Please ask your question, Anthony.
spk06: Thank you. Wallace, you gave us some info on what you expect PC growth and that you expect to grow faster for taking share. I'm curious if you'd offer something kind of overall, including smartphones, auto, et cetera, where you think 2024 growth might be for Silicon Motion. Then I had a couple of follow-ups.
spk00: Well, I think it's a good question, but I think we will wait for our Q4 earning call. We'll give you guidance. But we're definitely looking forward to continue growing in 2024. And what is the scale? I think we will give our guidance for next earning call.
spk06: Okay. And then following up on the comment on, you know, large Korean dam maker now back in, I believe you said in Q3. Can you give us a sense of kind of design activity you have with that customer for 2024? What percentage of their share you think you'll have?
spk00: Well, we're not able to comment regarding particular customer, but overall we see significant growth opportunity with all flash makers. Although there's some potential consolidation, but we believe we'll continue to see opportunity open for Sync Motion to grow our share with all our customers.
spk06: Okay. And the last question for me, you know, over the last year or so with the MaxLinear proposed deal, do you felt that some of your customers were opting or thinking about moving to their own internal solutions or external? Seems like they're re-engaged. I guess I'm trying to figure out if you lost share in terms of designs maybe for, I don't know, 2024 or something just based on the MaxLinear deal and deposit that may have created.
spk00: Yeah, from our legal counselor's lab, we cannot comment on any of Mike's related questions. But I think, as you know very well, for any conventional MMA, it definitely has certain impact for the customer. If the customer, they do not understand the potential buyer, they have some fear and concern. I cannot give you what really impact for our business But definitely every company have some gain, have some loss. But overall, it looks like we will continue to gain market share and with more opportunity. And especially after July 26, we do see the momentum become stronger. Perfect. Thanks, Wallace.
spk10: Thank you. Our next question comes from the line of Suji DeSilver from Ross MKM. Please go ahead, Suji.
spk03: Hi, Wallace. Hi, Jason. So, congrats on the progress here. So, the EMMC UFS market smartphone, you had very strong results this quarter regarding for that. Just can you give a sense of the sustainability of the recovery in the end market and the demand perspective versus, you know, is the channel restocking? And are channel inventories typical levels now or are they actually leaner than typical?
spk00: Yeah, let me comment about the smartphone market based on my argument. The channel inventory has become normal and in a healthy position. We definitely see a growth rebound for both the EMSC and UFS products. And we also see we'll gain more share for the UFS in 2024. And although I think you imagine particular customers that have internal controller, but that's the UFS 4.0, for next year, primary is still the UFS 3.1 as well as the 2.2 for 4G smartphone. And we see we have more customers jumping into the market, and that's why we are able to gain market share. And in addition, we are working directly with the smartphone maker to tailor certain software and to specify for certain requirements that give us advantage compared with even Netmaker to provide the solution for a specific customer. So we're very happy for our position. I think in certain detail, if we are able to, we will release during the next quarter or two.
spk03: Okay, Wallace, thank you. That's helpful. And then my other question is on the operating expenses. Jason, I think you talked about the R&D being elevated for the next two to three quarters. Can you give a sense of what it comes back to after that in the second half of 24? Is it back to sort of the $40 million level in the second quarter? Just to understand what it reverts to after the elevated spend in the next three quarters.
spk05: Yeah, it's, you know, we'll obviously provide more color on that in the next earnings call, but it will temper back a little bit. As we said, you know, the total investment cost for each of these six nanometer products is, you know, north of $15 million. Obviously, not that entire cost is bared in one single quarter. It does get spread out over, you know, several quarters, depending on the timeframe of the investment process into that new controller. So, it will step back a little bit in Q3 and Q4 next year, but we'll provide more color on that in next earnings call.
spk00: So, I can give you additional, give you some reference. Six nanometer tape out, normally that probably is about 30 to 40, it will be two to three times more expensive than 12 nanometer tape out. And we believe after the three signal meter tape out, we won't have any signal meter tape out within a year. but we do have additional 12-nanometer, 28-nanometer tape out quarter by quarter. So definitely operation expense will go down, but it was a scale. It depends on how many products we're going to tape out. So I think we'll give you more color when we have the next quarter or next year guidance. Okay. Thank you, Wallace. Thank you, Jason.
spk10: Thank you. Our next question comes from the line of Gokul Hariharan from JP Morgan. Please ask your question, Gokul.
spk04: Yeah, hi. Thanks, Wallace and Jason. And congrats on the good rebound in the numbers. My first question is, could you give us a little bit of a kind of backdrop in terms of how your market share situation is right now for client-associated controllers? just to get an update after almost a year, more than a year in terms of their market share. Also, you did allude to some of the design wins in enterprise and data center. Could you give us a little bit of color on what is the size of the opportunity there and what is the nature of engagement you have? Is it still mostly the PCIe Gen 5 controllers for enterprise market or are there Previously, you had tried open channel controllers for certain segment of the market. I just wanted to understand what is the approach to tap into the enterprise market and the data from the market share.
spk00: All right. Thank you. It's great to talk to you again. Regarding our currency market share, we continue to maintain stable market share around 30%, maybe up and down, but I think we're gaining market share continually for 2024. Regarding the data center, I think the major enterprise product we're shipping, Mini 4, is still startup. And our PCIe, really, we focus on PCIe Gen 5 because Gen 4 controller, we're not able to show a meaningful financial result, and it's not cost-competitive. But PCIe Gen 5 on Titan, we are in a very good position. We believe we will show meaningful financial result by end of 2024 and more meaningful in 2025.
spk04: Thanks, Wallace. So could you give us a sense of how big this enterprise and data center market size is? I think I remember a few years back when you started talking about this, you indicated that it is similar size to the client-attached market in terms of controller revenue size. Any updates on how big the market is given data center demand has really grown since then?
spk05: Hey, Gokul, it's Jason here. Yeah, look, we're seeing the contraction today. We're working with a number of data center and enterprise customers around the world, but it's still early. We're going to start sampling this quarter. It's too early to say how big that opportunity is at this point. As we get closer to launch, as we have more concrete and better visibility, we'll be able to provide more additional details at that point, but right now it's just a little bit early.
spk04: Okay, got it. And one question on pricing. Could you talk a little bit about how pricing has evolved in the last 12 months or so? Clearly, pricing seems to have come off from the $4 to $5 kind of average client-assisted controller AST that you had. And do we need to wait for Gen 5 to really come through on the client-assisted controllers for you to start potentially seeing some price increases coming through. Do you need to wait for the next generation for the price increases to come through? Or do you think that you can adjust price as we go along once the market starts getting a little bit better?
spk00: As you know very well, this year is very challenging for nanofresh makers as well as controller makers. Because before September, 90% of our customers are selling product below cost. and thanks to the price increase in the last two months, but still many NAND makers, their gross margin is still negative. And we definitely, as the leading controller maker, we have to share the pain. But we believe when the NAND price gradually recover to break even and become profitable, our certain controller segment, and we will also gradually increase the ASP. But I think the PCIe Gen 5 8-channel controller, as we state, the ASP is two times than Gen 4 8-channel controller. And this would be much more competitive and helping for both gross margin and also ASP. And we also believe the PCIe, the UFS 4.0 also gaining helpers and gaining mix regarding both gross margin as well as ASP. So we do have other new products coming and also create more positive regarding the product mix, helping RASP and goods margin.
spk04: OK. Thank you very much.
spk10: Thank you. Our next question comes from the line of Matt Bryson from WebBush Securities. Please ask your question, Matt.
spk09: Yes. Good morning, guys. Thanks for taking my question. First question is, I think in the prepared remarks, you mentioned that there's still some inventory getting worked down at your customers. I guess in Q4, is the expectation with that guide that inventory is fully worked down, or is there potential that there's still some incremental revenue that you'll see in forward quarters because inventories are normalized in future periods.
spk05: Hey, Matt, it's Jason here. I think we're very close to normalized inventory levels if not there already. There may be, I mean, it varies by product by product. It varies customer by customer and market. But by and large, we see inventory has normalized for the vast majority of the end markets and customers that we work with.
spk09: Thanks, and I guess my second question is around new products. So it sounds like both in terms of returning margins to more traditional historic levels, as well as potentially seeing some revenue growth tied to higher ASPs, that the new products are very important. I guess, is there any help you can give us in terms of thinking about how those parts roll out, either in terms of time after tape out, the revenues start to become meaningful, or if you could give us some color around when you think customers start shifting to either Gen 5 PCIe or UFS 4.0 solutions, that'd be really helpful. Thanks.
spk05: Yeah. So, you know, our first 8-channel Gen 5 controller is getting taped out right now. We'll start sampling that here shortly, and then we expect to start seeing the first shipment late 2024. UFS 4.0 is getting taped down in the first quarter. We'll start seeing shipments of that late 2024 into 2025, and then the four-channel Gen 5 SSD controller, that's really more of a mid to late 2025 into 2026 type event for us.
spk09: Thanks, that's all I got.
spk10: Thank you. Thank you. As a reminder, to ask a question, please press star one one on your telephone. Our next question comes from the line of Craig Ellis from B Riley Securities. Please go ahead, Craig.
spk07: Hi, this is Ethan Wydell calling in for Craig Ellis. Thanks for taking my questions. To start, You provide some good color on the near to intermediate term slope of OPEX as it focuses on strategic investments. I was wondering to what extent the timing of those investments is sensitive to the slope of recovery in the end market demand. Thanks.
spk05: I'm sorry. What's the slope of the OPEX and how is it tied to the end market recovery? Is that what you asked?
spk07: Right.
spk05: Yeah, so... We're seeing strength in the end markets. The guidance we've provided for Q4 is stronger than seasonal, and then certainly we expect to continue to grow in 2024 as well. The OPEX should stay at these levels for Q4, Q1, and Q2, and then that'll come down a little bit in the second half of next year, but that's depending on the number of additional tapeouts that we'll be doing. can vary a little bit. So we'll provide more color around that next earnings call.
spk07: All right. Thank you. And then given your cash position, I was hoping that you could just broadly speak to your cash deployment plans.
spk05: Yeah. So for cash deployment, as you may have saw earlier this week, we instigated our $2 per year They'll be paid quarterly. The first quarterly payment will start here in November. And with regards to a share repurchase, it's something that, you know, historically we've been opportunistic about. We don't have a program in place today, but the board is always looking at, you know, ways of returning cash to shareholders and it's something they'll continue to evaluate.
spk07: Thank you. That's all from me.
spk10: Thank you. Once again, to ask a question, please press star one one on your telephone.
spk05: Okay, I think all right.
spk00: I'm very happy to talk to you guys. I've been one half year. Thank you, everyone, for joining us today and for your continued interest in Second Motion. We'll be attending several investor conferences over the next few months. The schedule of this event will be posted on our investor relationship section of our corporate website. Thank you, everyone, for joining us today. Goodbye for now.
spk10: That concludes today's conference call. Thank you for participating. You may now disconnect.
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