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spk11: Good day and thank you for standing by. Welcome to Silicon Motion Technology Corporation's Q4 2023 earnings conference call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 11 on your telephone. 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 limitations, statements regarding trends in the semiconductor industry and our future resource operations, financial conditions 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 follow-up 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 pressures on prices, unpredictable changes in technology and consumer demand for multimedia consumer electronics, the state of and any change in our relations 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 document we file from time to time with the Securities and Exchange Commission. We assume no obligations to update any forward-looking statements which apply only as of the date of this conference call. Please be advised that today's call is being recorded. I would now like to hand the call over to Mr. Jason Chai, Vice President of IR and Finance. Please go ahead.
spk14: Jason Chai, Vice President of IR and Finance Thank you, and good morning, everyone. Welcome to Silicon Motion's fourth quarter of 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 then I will discuss our fourth quarter results and outlook. Following our prepared remarks, we will conclude with Q&A session. 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 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 on 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 in our earnings release issued yesterday. We ask that you review it in conjunction with this call. As we have previously shared, Silicon Motion filed a notice of arbitration against MaxLinear for the 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, substantial damages, interest, and costs. The company filed its notice of arbitration claim against MaxLinear in the Singapore International Arbitration Center on October 5th, 2023. 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.
spk08: Thank you, Jason. Hello, everyone, and thank you for joining us today. We are pleased by the steady recovery across our business throughout 2023 with fourth quarter revenue and gross margin exceeding expectation. We benefited in the quarter from stronger demand from both our SAD and EMC plus UFS controllers and saw pricing and mix improve to try stronger gross margin improvement for our business than originally expected. More importantly, Our technology leadership in controller and our unvarying engagement with our customers, both flash makers and module makers, has laid the foundation for strong 2024 growth, despite only modest growth expecting the PC and smartphone device markets, driven largely by our ongoing shared gains with our customers. Over the past six months, we have been busy making organizational changes to better position Silicon Motion for the future. We instructed our business to better engage in a new opportunity in the market and spend a lot of time re-engaging with customers to win back their confidence in us as a long-term partner. As you saw, we formed two new business units, Client and Automotive Storage, CAS, and our Enterprise Storage and Display Interface Solution, ESDI, groups. Our new organizational structure allows us to be more focused on each segment. To have dedicated industry veterans as a leader enables our team to be more agile and responsive to the market. And to better engage with customers and anticipate their needs, we truly differentiated high-performance and cost-effective solutions. We are seeing the successes of this already as our cast group have been increasing share as our customer by winning significant new designs with both flash maker and module maker for the PC, smartphone, automotive, industrial, and other markets. Our ESDI group has also made incredible progress with some on Titan product in a short amount of time. securing more than a dozen sampling customers already. With these changes, we are better positioned than ever before and look forward to demonstrating the ongoing strengths of our business to our investors each quarter. Now let me move into our business and give you an update on the NAND market dynamic we are seeing today and what we are expecting for 2024. Pricing for NAND flash has been steadily increasing and expected to continue to improve throughout 2024 and into 2025. NAND makers are being disciplined in their production and limiting output, resulting in higher NAND flash prices. Demand is also expected to pick up this year as both the smartphone and PC markets will grow modestly after two years of meaningful decline in unit shipment, while higher pricing may limit the activity we typically see from our module maker customers. Many have pre-bought low-cost NAND in the second half of last year, and we have secured significant wins with them for upcoming products this year. We believe our business with module makers will grow this year despite the headwinds created by higher NAND flash prices. For flash makers, while higher flash prices over the past few months have improved their profitability, most are still facing negative or very low margin, and this is why we are seeing them increasingly focus on profitability. Flash makers need to prioritize their focus investment from developing new generation of NAND to developing storage solution to satisfy a wide range of end-market requirements. These solutions range from high-performance to value-oriented, using DRAND and DRANDless, as well as utilizing TLC or TLC to serve broad range of end-market needs in EMC for UFS, client SED, embedded, enterprise, and industrial applications. We are seeing Flashmakers focus on their own effort on leading-edge, high-performance solutions where margin and profitability tend to be highest. And they are turning to us as a partner of choice to help bolster their portfolio with high-performance, lower-cost solutions, utilizing their latest generation of high-performance, high-density NAND to serve a broader range of market requirements. Our progress with our fashion maker partner over the past year has resulted in strong backlog of new wins across all our product groups that will drive meaningfully higher share and faster growth this year and lay the foundation for strong long-term growth. We continue to grow our customer relationships and are on track to grow our business with every new and fresh customer we have this year. our revenue from FlashMaker expected to grow approximately 50% this year, a design win across our controller program ramped meaningfully throughout 2024. Turning to RSD's controllers, we taped our first PCIe Gen 5 8-channel controller last quarter and have already secured three FlashMaker wings and this product, as well as several module maker wings. This is the first time that Flashmakers adopt our controller for high-end notebook models. We expect sales of this high-performance controller to begin late this year. We are engaging with other Flashmakers as well as other multi-makers expect to win more designs through 2024. Our second PCIe Gen 5 controller will be taped out early in the third quarter this year, and we already have significant interest from both FlashMaker and MultiMaker for the mainstream Gen 5 solution that is expected to run in late 2025. While we are excited by our progress with PCIe Gen 5, it's important to point out that we continue to win significant new programs with several FlashMaker with older generation interface as well, including two new SATA SD programs, several PCIe Gen 4 SD, including one using next generation QLC flash on the value of PCoE and market, and several USB 3.2 portable SD projects. Our QLC controller with a proprietary 3D ray and more than LDPC for battery error correction and data protection and recovering offer no compromise solution that maintain high performance and reliability by utilizing the most cost-effective flash to further improve affordability. We are seeing strong traction of QLC controller with both our flash makers and module maker customer and more widespread adoption by PCOEM as well. Moving on to our EMC plus UFS controller solution. We are taping our UFS 4.0 solution this quarter and remain on track to ramp with the FlashMaker customer later this year, as well as several module makers targeting the smartphone market. UFS4 remained a flagship and a premium solution this year and expected to expand into high-end mainstream handset market in 2024 and after. Aligned with WAN, our solution with our FlashMaker and ModuleMaker customers expected to ramp. UFS 3.1 and 2.2 remain the primary solution for mainstream smartphones this year. And we are seeing continuing strong demand for our current UFS controller with additional flash makers and module makers. We see flash makers focusing on their own internal controller development on the latest flagship generation of UFS, where they get the highest premium for their higher performance solution. As each of your generation moved from flagship to mainstream, we are seeing FlashMaker turn to us to utilize our controller paired with their newest NAND that offer high performance at lower cost, ideal for the mainstream smartphone market. That is a symbolic relationship that has driven our strong partnership with FlashMaker and driving more win and long-term growth for our EMC by UFA controller business. Now, let me give you an update on the progress of our Mount Titan Enterprise State Development Platforms. We started sampling Mount Titan to customers at the end of last year, and we are excited to announce that more than a dozen customers, many of them Tier 1 and companies, ranging from NAND flash makers, hyperscaler, storage solution provider, enabler, as well as module makers are in the process of evaluating the solution. Mount Titan's highly differentiated storage solution provides support of both high-performance TLC-SD as well as high-capacity QLC-SD. We are finding that this idea of balance of performance and features is appearing to customers across all enterprises and data center makers stack market segment. Based on our ability to support a wide range of customer engagement model from the turnkey to layer firmware stack development, Mount Titan accelerates the asset to an extensive amount of data at Gen 5. Speed ideal for a variety of application including high performance edge computing and AI in interference, and machine learning. We are confident that we will continue to make an inroad during the Gen 5 transition into the AI era. Expect to secure a first design win in the next few months and generate clearly revenue by the end of this year. Overall, I'm excited by the opportunity ahead of us in 2024. Our team Dedicating to maintaining our technology leadership and our unvarying commitment to our customers has enabled us to continue to win socket after socket and position us strong share growth this year and beyond. Our position with our FlashMaker customers has never been stronger than the new design win I expected to ramp this year. Our module maker customers are coming into 2024 with strong inventory of low-cost NAND and choosing us to help them bring competitive SSD and embedded solution to the market. We are well positioned to continue to further strengthen our design pipeline in 2024 to drive growth in 2025. Now let me turn the call over to Jason to go over our financial results and outlook.
spk14: Thank you, Wallace, and good morning, everyone. I will discuss additional details of our fourth 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. The reconciliation of our GAAP to non-GAAP data is included with the earnings release issued yesterday. In the fourth quarter, we grew sales 17% sequentially, $202 million. SSD controller sales grew 15% to 20% sequentially, EMMC and UFS controller sales grew 25% to 30% sequentially, and SSD solution sales decreased 5% to 10% sequentially. Gross margins in the fourth quarter increased to 44.1%, reflecting both better mix and higher ASPs. Operating expenses in the fourth quarter were $61.5 million, $12 million higher than the prior quarter due to higher R&D expenses to support our technology leadership. Operating margin in the fourth quarter is 13.8%, flat from the third quarter. Effective tax rate in the fourth quarter is 2.3%, a decrease from the 22.8% tax rate in the third quarter, primarily due to a tax reversal in the quarter. Excluding this, tax rate would have been 28%. Earnings per ADS were 93 cents, 48% higher sequentially. Stock-based compensation in our Operating expense, which we exclude from our non-GAAP results, was $5.7 million. And we had $369 million in cash, cash equivalents, restricted cash, and short-term investments at the end of the fourth quarter compared to $350.3 million at the end of the third quarter. Inventory increased sequentially in the fourth quarter to $217 million from $199 million in the third quarter. Now let me turn to our first quarter and full year 2024 guidance and forward-looking business trends. For the first quarter, we expect revenue to be down 10% to 15% sequentially to approximately $172 to $182 million. We expect SSD controller sales will decline slightly in the first quarter, and EMMC and UFS controller sales will decrease. First quarter gross margins is expected to be in the range of 44% to 45%. First quarter operating margin will be in the range of 10.5% to 11.5%. First quarter effective tax rate to be approximately 19%. And in the first quarter, we expect stock-based compensation and dispute-related expenses to be in the range of $6 million to $7 million. For the full year 2024, revenue will increase 20% to 25% to $765 million to $800 million. Gross margin is expected to be in the range of 45% to 47%. Operating margins should be in the range of 14.7% to 16.7%, and our effective tax rate for the year is expected to be approximately 19%. Full-year stock-based compensation, dispute, and related expenses will be in the range of $31 million to $33 million. Let me provide some additional color on our first quarter and full-year expectations. As Wallace mentioned, we are making strong progress with our Flashmaker customers. We have a strong pipeline of design wins and are positioned to gain meaningful share this year. We expect our revenue from all of our flash maker customers will grow in 2024 and to increase approximately 50% this year. In addition, we have high visibility that two additional flash makers will be ramping new projects with us this year in eMMC and UFS and in SSD controllers, and we will be able to grow revenue from each of these flash makers very meaningfully. We expect normal seasonality impact our business in the first quarter. but are confident that we are well positioned to grow sequentially throughout the rest of the year based upon our strong backlog of wins and project ramps. We expect to see consistent improvement in our gross margins this year, driven by better mix towards newer generation interfaces in our EMMC and UFS and SSD controller sales, a number of new projects ramping, and overall pricing starting to normalize and improve. For operating expenses, we'll continue to invest in maintaining our technology leadership in the market including the tape out of two 6-nanometer controllers, one in Q1 for UFS4 and one in Q3 for a second PCIe Gen 5 SSD controller. This will lead to elevated operating expenses in those quarters. This concludes our prepared remarks. We'll now open the call for your questions.
spk11: Thank you. We now begin the question and answer session. If you'd like to ask a question, please press star 11 and wait for a name to be announced. If you'd like to cancel your request, please press the power or hash key. One moment for the first question. The first question comes from the line of from Sasuke Hana International Group. Please ask your question.
spk05: Yes, thanks for taking my question. I have to, while I say, can you help me understand what you're seeing in SSD solution business segment. I understand your continued traction with Flashmakers and the new product ramps that are more focused on SSD controller and the smartphone, but if you could give us a feel for SSD solution and whether you would be able to actually slow down the decline of revenues here and have a follow-up.
spk08: I think our basic solution, FairEye, has been stable and we are seeing a strong pipeline of wing. I think for Q4 revenue decline due to some of our automotive customer see the inventory pile up. And we do see 2024 we have accumulate more design. But we see we have stronger growth in 2025 from automotive customer for our FairEye product.
spk05: OK, great. Your 2024 guide is very encouraging. You're also ramping a six nanometer take. I understand what's driving the OPEX increase. I also look at your cash. You have almost $10 of net cash per share. Your operation should help with additional cash generated You sound very confident. Why not revisit the capital return, especially with the buyback, especially with investors that have been patient? Any thoughts, any color here would be appreciated.
spk14: Yeah, thanks for the question, Mehdi. Look, it's a good question. You know, we look at our capital allocation program Constantly, right? That's something we review with our board regularly. We have the dividend policy that we've been paying for a very long number of years, with the exception of when we were in the acquisition process. Strategy behind the dividend, as you know, has been always to set it at a level that's comfortably affordable, and we'll continue to evaluate going forward whether to increase the dividend in a future time as business continues to scale and cash flow increases longer term. In terms of things like a share repurchase, as you know, our share repurchase program in the past has been opportunistic. 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 they'll continue to look at.
spk11: Okay, thank you. Thank you for the questions. One moment for the next question. Next question comes from the line of Quinn Bolton from New Ham. Please go ahead.
spk13: Hey, guys. Congratulations on the results and outlook. Thanks for taking my question. I wanted to follow up, Wallace, on your comments. Very encouraging to hear that you'll grow with every NAND manufacturer in 2024. But I think one of the concerns we've heard from investors is that as UFS 4.0 becomes mainstream, that one of your customers that's in-sourced UFS 4.0, that may be a headwind more in 2025 than 2024. And so I I'm not trying to get you to give guidance for 2025, but overall, would you expect your business in aggregate with NAND vendors to continue to grow in 2025 as UFS 4.0 becomes more mainstream? And then I got to follow up.
spk08: Yes, we believe we definitely can continue to grow for our mobile controller for both UFS and EMC. As you know very well, the UFS 4.0 still remains a high end for 2024 and 2025, and probably will go to mainstream up to second half of 2026. And we have a very strong UFS 3.1 and 2.2 today, not only for existing NAND partners, but also winning one to two additional NAND maker business and going to RAM in 2024 and 2025. In addition, and we also see NAND makers, they focus on the new development. So, when UFS 4.0 becomes the mainstream, their R&D focuses on the UFS 5.0 development and sometimes outsourcing the new UFS 4.0 project to Silicon Motion. because our new laser controller can capture the latest new generation, higher performing IO NAND with higher density NAND. So that will become much more attractive and that will add to our NAND partner extended product life cycle. So we see our position very well with NAND maker as well as growing module maker who moving from EMC to UFS.
spk14: And I think one thing to point out, also that it's becoming a much more diversified business. It's no longer really driven by one customer. We have a multitude of flash makers and module makers that address the smartphone market all very effectively. And so as we ramp up with these new flash makers and module makers, we're confident that we can continue to grow this business long term.
spk13: Great. My second question is more a clarification about the two new NAND vendors that ramped this year. Can you give us any color? Is that specifically on the EMMC UFS business? Is it across both mobile as well as the SSD business? Just any color. And then, Jason, just a quick, looks like OPEX for the full year probably comes in at about $240 or on average about $60 million a quarter. I know there's some tapeouts in Q1 and Q3 that will probably, you know, increase R&D in those quarters. But is that sort of 240 million about the right range to be thinking about for OpEx and calendar 24? Thank you.
spk08: Yeah, the two netmakers, I think, really, one is for UFS, one is EMC. But we continue looking for engagement with the netmakers.
spk14: Yeah, and for OpEx, I think, yeah, I think it's in that range. 230 to 240 is probably the way to look at it.
spk11: Perfect. Thank you. Thank you for the questions. One moment for the next question. Next question comes from the line of Goku Hariharan from JPMorgan Chase. Please go ahead.
spk03: Hi, thanks for taking my question. First question is on enterprise. Given that you are getting pretty good traction with your new product and you also reorganized the organization to focus more on enterprise, Wallace, could you give us a little bit more color on how big is the enterprise addressable market for Silicon Motion? What is something that you can really achieve over the next maybe three, four years in terms of the enterprise fraction? And could you also give us a little bit of color in terms of what kind of design wins are you getting? Are you getting more design wins on core storage products or Is it like breaking OEMs and hyperscalers? Is there any mix in terms of where you're getting the findings? Maybe that will give us a little bit more color on the enterprise market.
spk08: So it's a very good question. I think that we are seeing very good traction today as we continue to sample and go through the qualification process with these tier one customers and about a dozen customers from from U.S. to Taiwan, China. I cannot give you the quantized number. I think by the end of 2024, we'll have meaningful revenue. We'll have much bigger revenue in 2025 and 2026. The reason we get the traction, not only the standard MB&E, we're gaining momentum because the high performance and all the number index exceed expectations. but also we get a traction due to the QLC acid coming into the data center. This is for two fold. One is FTP, standard for QLC, also zone and safe QLC in China. I think U.S. one customer also very interested for zone and space. So that make us a bit differentiate compared with conventional HSE solution. Due to the AI server demand and AI demand, I think Gen 5 HSE become much more attractive. So this is simulate all the demand and that's why many customer interested for qualify our Gen 5 solution.
spk03: Got it. Thank you very much. My next question is more near term. For 2024, you have a 20% to 25% revenue guidance. Could you give us some color on how you expect client SSD to grow and mobile to grow? And within mobile, recently we are hearing some concerns about the end of restocking for some of the Chinese customers. Are you seeing the China, the smartphone customers being a little bit more conservative in terms of procurement in the near term?
spk08: I think for Client SD, last year, our market share, global market share is around 25-26%. We believe this year we'll grow to 30-32% range. We got total overall SD number overall will grow another probably 10 to 20 million for global unit shipment. For mobile, we will grow faster and stronger because we have more customers in the pipeline, and not only the existing NAND makers that continue to grow compared with last year, but also we have two additional NAND makers will join the group to grow, and multi-maker we see they will grow even stronger And we also have a platform development with both Qualcomm and MediaTek. We also have a direct engagement with Smartphone Maker to strengthen our position in technology and pacing for 2025 growth. OK. Got it.
spk01: Thank you.
spk11: Thank you for the questions. One moment for the next questions. Our next question comes from the line of Anthony Storch from Crick Island. Please ask your question.
spk02: Thank you. Jason, I was trying to write as fast as I could. On the tape-out commentary, could you just break that out again by quarter and kind of the cost that you expect per quarter, and then add a follow-up for Wallace?
spk14: Yeah, so we're expecting to tape out our UFS-4 6-nanometer controller here in the first quarter. And then we'll tape out our second PCIe Gen 5 controller early in the third quarter. So that's going to result in more elevated OPEX, kind of similar to what you saw here in the fourth quarter for each of those two quarters. And then Q2 and Q4, that should revert back down to a more normalized level because those pairs don't have the tape outs. Those tape outs, as we have said in the past, are typically north of $15 million in terms of total development and investment cost for us.
spk02: during the quarter where they where they're taping out it's certainly a big step up on the opex okay got it and then wallace i'd love to hear a little bit more last uh quarterly conference kelly talked about a new korean nan maker coming on as a customer um i'm curious your view on how quickly they could wrap and could they be a let's say a top three customer in 2025
spk08: uh we cannot comment individual uh name maker customers about their revenue but we definitely looking forward to a stronger engagement and broader product line and the design design wing i think we without looking forward to embrace the name maker who really can outsource more project to silicon motion and we add a value to them i think that 2024-25 they are really good timing for us to show our technology and serve our NAND maker as selected their R&D extension and looking forward to a more exciting result. And we will definitely go up this year.
spk02: Okay. And if I could sneak in one more on your MonTitan. So you talked about having secured one design win. Can you give us any color on if it's a data center, hyperscaler, NAND maker, and then How quickly do you think you can secure additional out of those 12 that have sampled?
spk08: We cannot comment the customer and the type, but I think with Tier 1 customer, and with that, we believe we will secure the second one, the second half of 2024. So, I think we're confident to win at least two Tier 1 customers by end of 2024. Very good.
spk11: Thank you. Thank you for the questions. Next question comes from Craig Ellis from B. Riley Securities, please ask your question.
spk16: Yeah, thanks for taking the question. Wallace, I wanted to start with you and follow up on some of the outsourcing questions from the call, but also really continue the conversation that you and I have had over the last couple of years. So I think we both expected that there would be an increase in outsourcing from NAND customers. And the question is this, as you look across the increase in activity that you've observed over the last 12 months or so, can you characterize how extensive that is from OEMs that are maybe just doing one or two new products to much more wholesale changes, what's happening on the continuum a little bit to a lot, and how much of that is baked into the guidance that you and Jason have given for calendar 24, and then I had a couple follow-ups. Thank you.
spk08: I think the, as you can see, through the 2023, it was difficult year for all the NAM makers because the weak demand and oversupply. The NAM price declined sharply, and nobody really make any panic. Everybody margin negative. And we are able to gain shares because I think we are treated, viewed, recognized become the extension of a NAND maker's own R&D. So that's why we have been developed such relationship, recognition, trust, and respect for the past 15 years. And we're capable in handling. So NAND makers, their focus now is not focused on market share. They focus on profitability. So they are not eager to invest more K-PAC in the NAND capacity. They only invest the technology they want to deliver. So their focus on the development is treating the high-end, more value, and can maximize the profitability they can get. And the mainstream value line, they will try to also serve party, like Silicon Motion, which we can help them and diversify and bring a more portfolio offer to their end customer. So this is value we bring to the table, and we see more and more also an opportunity from NAND maker when they make a business decision, they kind of go to the third party like silicon motion.
spk16: Got it. And then the follow-up question is just a continuation. What are the things that you're looking at that will indicate that this is not only a trough cycle reaction from NAND OEMs, but through the sweet spot of the cycle and towards the peak of the cycle, they would sustain this level of outsourcing or perhaps even grow it. And then the follow-up is for Jason. Jason is Montyton, Bramson, calendar 24. How should we think of the gross margin implications relative to corporate average?
spk08: We say this cycle because now NAN is a well-being shortage. So Netmakers, they carefully to value all the priority inside the company. Every netmaker have different strategy and we cannot comment for that. But we believe the cycle will continue until middle of 2025 or late 2025 when supply-demand reach balance and netmakers start to invest more about their KPAS and to meet the higher demand.
spk14: And I also think that, I think, you know, to your question about how much of this outsourcing is temporary versus more of a structural shift, we have wins going into 2025 and further out. So I think this isn't something where they're just using us for a short-term stopgap. This is something where we're building much more substantial long-term relationships with them. In terms of the MonTitan revenue ramp and margin impact, that's not going to expect it to happen until late 2020. into Q4, late into 2024, excuse me, in Q4. So it's too early to say what impact it will have. More meaningful ramp in 2025, and certainly as we have better visibility around that, around timing of wins and scale of the wins, we'll be able to provide more color. But right now it's a little too early to talk about the impact of both revenue and margins at this point.
spk16: Got it. And the gross margin color in calendar 24's guide was quite helpful. Can you talk about the visibility that you have, Jason, to gross margins ultimately reattaining that more normalized 50% level?
spk14: Yeah, I think we're feeling pretty good about that, just given the mix of new products, new projects, new technologies that are coming to market that we already have strong design wind and pipeline for. As each day passes, we're also seeing these new engagements bring with healthier pricing levels at healthier margins. And we're certainly working on our own back end and production to also improve costs as well. So I think we're on a good track here. And the guidance that we provided, we believe that it's attainable.
spk16: Thanks, Wallace. Thanks, Jason.
spk11: Thank you for the questions. Our next question comes from Suji De Silva from Ralph MKM. Please go ahead.
spk12: Hi, Wallace. Hi, Jason. Congrats on the good guidance here. You talked about the module makers securing lower cost NAND in late 23 that they're selling through now. Can you just talk about the behavior you'd expect as that lower cost NAND gets worked through and how they'd respond? Would they then look to market conditions or just any thoughts there on how that might impact the financials after that gets worked through?
spk08: Most of our leading module makers, I think they have been in the market for a long time. So they understand NAND price trend. So they... procure a very large amount of NAN through last August to November. So that really is prepared for NAN price up. They understand NAN price, NAN will be in shortage, and NAN price will go up continually throughout the entire 24. So they procure in advance and to balance their cost. They will continue to buy some of NAN this year, but as soon as the product makes a NAN given pricing, make them to be more competitive to compete with other module makers. Okay.
spk12: All right. Thank you, Walsh. And then my other question is on the MonTitan as it ramps up. Is it the right way to think about that, that maybe some of the AI servers out there creates an opportunity for attach rates and content increases of MonTitan or
spk08: Is that not the right framework for what might be causing some... I cannot comment with that, but I think the current demand is in a very wide range from the hyperscalers and from AI server, from all-flash array, from conventional servers. So I think we're definitely looking forward to, but more important is the tier one customers who have a really good volume, and we believe we have a secure one. We're looking forward to see your second one by second half of 2024. Okay. That's very helpful, Wallace. Thanks.
spk11: Thank you for the questions. Once again, to ask questions, please press star 1-1 and wait for a name to be announced. We have a follow-up question from Mandy Hosani from Susquehanna International Group. Please go ahead.
spk05: Yes. Thanks for the follow-up, Jason. I understand the six nanometer tape out is going to keep your R&D in the 47 to 48 million a quarter this year. Should we expect additional tape outs next year? In other words, should R&D stay at these elevated levels into 2025, or would it taper off?
spk14: I think we'll continue to invest here. I think it's a little too early for us to comment about what 2025 OpEx looks like at this point. But, you know, obviously it's important for us to continue to invest, to continue to stay ahead. You know, we tape out at six nanometer because it's what we need to do. The technology requirements for performance and power, you can only get both of those to the right levels when you go down to this lower process geometry. I think there are options for us to look at ways of reducing tape out costs and foundry costs longer term that we're exploring. So stay tuned as we have more to share on that. We will, but certainly our goal here is to continue to invest, but invest responsibly and try to bring the cost down as much as we can, but still maintain our technology leadership.
spk05: That's fair. Ultimately, we're just trying to figure out if the company is still targeting mid to high 20% operating margin and OPEX is a factor here. So any thoughts on that longer term? operating margin target? Yeah, that hasn't changed.
spk14: I think if you take a look at our business in the past, we are typically a 48, 50 plus percent gross margin company and operating margins in that 25 to 30 percent. There's nothing fundamentally different about our business today that says that that's not an achievable target for us longer term.
spk04: Okay, very helpful. Thank you.
spk11: Thank you for the questions. One moment for the next question. We also have a follow-up question from Craig Ellis from B. Riley Securities. Please go ahead.
spk16: Thank you for taking the follow-up, Wallace. You mentioned the company has a collaboration with both MediaTek and Qualcomm, and I was hoping you could comment a little bit further on that, both on the duration of those two partnership engagements and to the nature of them. Are you a reference design partner for those solutions, and if so, to what extent, and to what extent have those been part of UFS revenues in the past, and are they expected to be in 24 and 25? Thank you.
spk08: It's important for our new product and to qualify on leading SOC provider like the Quarton MTK for the mobile platform. And normally, we have direct engagement also through our customer service joint qualifications so they help us to resolve some issues during the pre-production qualification. So this is a joint pre-qualification and they help us to gain confidence for our quality for firmware as well as ASIC. And we also, and what we serve Qualcomm for automotive platform qualification. So they extended our other product line like Fairlight and MediaTek and other and NXP. So this is the platform partner and platform engagement helping to help accelerate our product readiness, also help our customer to end production sooner.
spk16: And how material are those relative to the revenue that we've been seeing and that you would expect to see in 2024?
spk08: I cannot quantify the numbers, but I tell you it's very helpful, and our company put a big effort for platform qualification and team and dedicated help our product line.
spk06: Thanks, Wallace.
spk11: Thank you for the questions. Next up, we also have a follow-up question from Goku Hariharan from JPMorgan Chase. Please go ahead.
spk03: Yeah, hi. I had one question on AI. Thanks, Wallace. You did highlight the AI adoption on the enterprise side. Could you also talk broadly on what happens when you have more AI adoption on edge devices, especially most of your PC and smartphone customers are launching AI-enabled PCs and smartphones this year and probably more next year? What does it do to NAND flash content, and what does it do to your controller ASPs or controller specs?
spk08: So this is a very good question. Naturally, not only us, all the NAND makers, I think, have spent probably at least a half year looking forward to how the edge AI will impact for storage solution and what a controller maker needs to do to improve our value and to enhance the AI application. So there's a lot of exciting application for AI PC. You're looking from the Intel, AMD, the SOC. Also, Qualcomm and NVIDIA are coming, provide the solution. There are also third-party independent AI SOC for PC, but not for the notebook, but for desktop and for PC workstation. So we are involving for what are common is for enterprise AI, the ACD probably because the server AI is more important for compute. So its storage solution is really a system role. So the regular latency and sequential rewrite is very critical into supporting all the AI server requirements. But for the AI PC, that's a different story because you cannot use HPN for the PC, you cannot use a very, very high density or limited density for DRAM. So the LN swapping becomes very critical. So several technologies, several requirements, it's really needed as a controller and a solution to provide to allow to make the edge AI to be more meaningful and more practical. And I cannot go to detail to say this is all the area we are looking forward to add value and study. I think all NAND makers and leading control makers are looking forward to provide a solution and be part of the edge AI trend.
spk03: Okay. Thank you very much. And second, on PCIe Gen 5, could you talk a little bit about the pricing uplift you're expecting as you go from PCIe Gen 4 to PCIe Gen 5? I remember... I think you talked about significant premium in the last call. Could you talk a little bit about what you're seeing in the market for the flagship products and how that is likely to shape out as we get into more mainstream PCIe Gen 5 products towards next year as well?
spk08: I cannot give exact number, but our high-end PCIe Gen 5 8-channel controller It's about two times of PCIe Gen 4 controller today. We're very excited to see our high-end PCIe Gen 5 controller adopted by 3NAND maker. We believe there will be additional joining in later this year. So this is very important for us to expand our market share for notebook, for PCoEN, as well as we see the increase our cell revenue as well as the margin. And this is a very important milestone. And the PCIe Gen 5 and the high-end controller can also be adopted by the server for boot storage. And I think there's a trend we're seeing. And not just for notebook, but PC, for workstation, for gaming PC, they'll be all adopted high-end PCIe Gen 5 8-channel controller.
spk11: Thank you for the questions. With that, I'd like to hand the call back to the management for closing remarks.
spk08: Thank you, everyone, for joining us today. And for your continuing interest in Silicon Motion, we'll be attending several investor conferences over the next few months. The schedule of this event will be posted on the Investor Range section of our corporate website. Thank you, everyone, for joining us today. Goodbye for now.
spk11: That concludes today's conference call. Thank you for your participation. You may now disconnect your lines. you Thank you. Thank you. Good day and thank you for standing by. Welcome to Silicon Motion Technology Corporation's Q4 2023 earnings conference call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 11 on your telephone. 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 limitations, statements regarding trends in the semiconductor industry and our future resource operations, financial conditions 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 follow-up 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 pressures on prices, unpredictable changes in technology and consumer demand for multimedia consumer electronics, the state of any change in our relations 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 document we file from time to time with the Securities and Exchange Commission. We assume no obligations to update any forward-looking statements which apply only as of the date of this conference call. Please be advised that today's call is being recorded. I would now like to hand the call over to Mr. Jason Chai, Vice President of IR and Finance. Please go ahead.
spk14: Jason Chai, Vice President of IR and Finance Thank you, and good morning, everyone. Welcome to Silicon Motion's fourth quarter of 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 then I will discuss our fourth quarter results and outlook. Following our prepared remarks, we will conclude with Q&A session. 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 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 on 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 in our earnings release issued yesterday. We ask that you review it in conjunction with this call. As we have previously shared, Silcomotion filed a notice of arbitration against MaxLinear for the 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, substantial damages, interest, and costs. The company filed its notice of arbitration claim against MaxLinear in the Singapore International Arbitration Center on October 5th, 2023. 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.
spk08: Thank you, Jason. Hello, everyone, and thank you for joining us today. We are pleased by the steady recovery across our business throughout 2023 with fourth quarter revenue and gross margin exceeding expectation. We benefited in the quarter from stronger demand from both our SAD and EMC plus UFS controllers and saw pricing and mix improve to try stronger gross margin improvement for our business than originally expected. More importantly, Our technology leadership in controller and our unvarying engagement with our customers, both flash makers and module makers, has laid the foundation for strong 2024 growth, despite only modest growth expecting the PC and smartphone device markets, driven largely by our ongoing shared gains with our customers. Over the past six months, we have been busy making organizational changes to better position Silicon Motion for the future. We instructed our business to better engage in a new opportunity in the market and spend a lot of time re-engaging with customers to win back their confidence in us as a long-term partner. As you saw, we formed two new business units, client and automotive storage, CAS, and our enterprise storage and display interface solution, ESDI Groups. Our new organizational structure allows us to be more focused on each segment. To have dedicated industry veterans as a leader enables our team to be more agile and responsive to the market. And to better engage with customers and anticipate their needs, we truly differentiated high-performance and cost-effective solutions. We are seeing the successes of this already as our cast group have been increasing share as our customer by winning significant new designs with both flash maker and module maker for the PC, smartphone, automotive, industrial, and other markets. Our ESDI group has also made incredible progress with some on Titan product in a short amount of time. securing more than a dozen sampling customers already. With these changes, we are better positioned than ever before and look forward to demonstrating the ongoing strengths of our business to our investors each quarter. Now let me move into our business and give you an update on the NAND market dynamic we are seeing today and what we are expecting for 2024. Pricing for NAND flash has been steadily increasing and expected to continue to improve throughout 2024 and into 2025. NAND makers are being disciplined in their production and limiting output, resulting in higher NAND flash prices. Demand is also expected to pick up this year as both the smartphone and PC markets will grow modestly after two years of meaningful decline in unit shipment. While higher pricing may limit the activity we typically see from our module maker customers, many have pre-bought low-cost NAND in the second half of last year, and we have secured significant wins with them for upcoming products this year. We believe our business with module makers will grow this year despite the headwinds created by higher NAND flash prices. For flash makers, while higher flash prices over the past few months have improved their profitability, most are still facing negative or very low margin, and this is why we are seeing them increasingly focus on profitability. Flash makers need to prioritize their focus investment from developing new generation of NAND to developing storage solution to satisfy a wide range of end-market requirements. These solutions range from high-performance to value-oriented, using DRAND and DRANDless, as well as utilizing TLC or TLC to serve broad range of end-market needs in EMC for UFS, client SED, embedded, enterprise, and industrial applications. We are seeing Flashmakers focus on their own effort on leading-edge, high-performance solutions where margin and profitability tend to be highest. And they are turning to us as a partner of choice to help bolster their portfolio with high-performance, lower-cost solutions, utilizing their latest generation of high-performance, high-density NAND to serve a broader range of market requirements. Our progress with our fashion maker partner over the past year has resulted in strong backlog of new wins across all our product groups that will drive meaningfully higher share and faster growth this year and lay the foundation for strong long-term growth. We continue to grow our customer relationships and are on track to grow our business with every new and fresh customer we have this year. Our revenue from FlashMaker expected to grow approximately 50% this year, as design wins across our controller program ramped meaningfully throughout 2024. Turning to RSD's controllers, we taped our first PCIe Gen 5 8-channel controller last quarter and have already secured three FlashMaker wins in this product, as well as several module maker wins. This is the first time that Flashmakers adopt our controller for high-end notebook models. We expect sales of this high-performance controller to begin late this year. We are engaging with other Flashmakers as well as other multi-makers expect to win more designs through 2024. Our second PCIe Gen 5 controller will be taped out early in the third quarter this year, and we already have significant interest from both FlashMaker and MultiMaker for the mainstream Gen5 solution that is expected to run in late 2025. While we are excited by our progress with PCIe Gen5, it is important to point out that we continue to win significant new programs with several FlashMaker with older generation interface as well, including two new SATA SD programs, several PCIe Gen4 SD, including one using next generation QLC flash on the value of PCoE and market, and several USB 3.2 portable SD projects. Our QLC controller with a proprietary 3D ray and more than LDPC for battery error correction and data protection and recovering offer no compromise solution that maintain high performance and reliability by utilizing the most cost-effective flash to further improve affordability. We are seeing strong traction of QLC controllers with both our flash makers and module maker customers, and more widespread adoption by PCOEM as well. Moving on to our EMC plus UFS controller solution. We are taping out our UFS 4.0 solution this quarter and remain on track to ramp with the FlashMaker customer later this year, as well as several module makers targeting the smartphone market. UFS4 remained a flagship and a premium solution this year and expected to expand into high-end mainstream handset market in 2024 and after. Aligned with WAN, our solution with our FlashMaker and ModuleMaker customers expected to ramp. UFS 3.1 and 2.2 remain the primary solution for mainstream smartphones this year. And we are seeing continuing strong demand for our current UFS controller with additional flash makers and module makers. We see flash makers focusing on their own internal controller development on the latest flagship generation of UFS, where they get the highest premium for their higher performance solution. As each of your generation moved from flagship to mainstream, we are seeing FlashMaker turn to us to utilize our controller paired with their newest NAND that offer high performance at lower cost, ideal for the mainstream smartphone market. That is a symbolic relationship that has driven our strong partnership with FlashMaker and driving moving and long-term growth for our EMC for UFA controller business. Now let me give you an update on the progress of our Montyton Enterprise State Development Platform. We started sampling Montyton to customers at the end of last year, and we are excited to announce that more than a dozen customers, many of them Tier 1 and companies, ranging from NAND flash makers, hyperscaler, storage solution provider, enabler, as well as module makers are in the process of evaluating the solution. Mount Titan's highly differentiated storage solution provides support of both high-performance TLC-SD as well as high-capacity QLC-SD. We are finding that this idea of balance of performance and features is appearing to customers across all enterprises and data center makers stack market segment. Based on our ability to support a wide range of customer engagement model from the turnkey to layer firmware stack development, Mount Titan accelerates the asset to an extensive amount of data at Gen 5. Speed ideal for a variety of application including high performance edge computing and AI in interference, and machine learning. We are confident that we will continue to make an enroll during the Gen 5 transition into the AI era. Expect to secure a first design win in the next few months and generate clearly revenue by the end of this year. Overall, I'm excited by the opportunity ahead of us in 2024. Our team Dedicating to maintaining our technology leadership and our unvarying commitment to our customer have enabled us to continue to win socket after socket and position us strong share growth this year and beyond. Our position with our FlashMaker customer has never been stronger than the new design win I expected to ramp this year. Our module maker customers are coming into 2024 with strong inventory of low-cost NAND and choosing us to help them bring competitive SSD and embedded solution to the market. We are well positioned to continue to further strengthen our design pipeline in 2024 to drive growth in 2025. Now let me turn the call over to Jason to go over our financial results and outlook.
spk14: Thank you, Wallace, and good morning, everyone. I will discuss additional details of our fourth 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. The reconciliation of our GAAP to non-GAAP data is included with the earnings release issued yesterday. In the fourth quarter, we grew sales 17% sequentially, $202 million. SSD controller sales grew 15% to 20% sequentially, EMMC and UFS controller sales grew 25% to 30% sequentially, and SSD solution sales decreased 5% to 10% sequentially. Gross margins in the fourth quarter increased to 44.1%, reflecting both better mix and higher ASPs. Operating expenses in the fourth quarter were $61.5 million, $12 million higher than the prior quarter due to higher R&D expenses to support our technology leadership. Operating margin in the fourth quarter is 13.8%, flat from the third quarter. Effective tax rate in the fourth quarter is 2.3%, a decrease from the 22.8% tax rate in the third quarter, primarily due to a tax reversal in the quarter. Excluding this, tax rate would have been 28%. Earnings per ADS were 93 cents, 48% higher sequentially. Stock-based compensation in our Operating expense, which we exclude from our non-GAAP results, was $5.7 million. And we had $369 million in cash, cash equivalents, restricted cash, and short-term investments at the end of the fourth quarter compared to $350.3 million at the end of the third quarter. Inventory increased sequentially in the fourth quarter to $217 million from $199 million in the third quarter. Now, let me turn to our first quarter and full year 2024 guidance and forward-looking business trends. For the first quarter, we expect revenue to be down 10% to 15% sequentially to approximately $172 million to $182 million. We expect SSD controller sales will decline slightly in the first quarter, and EMMC and UFS controller sales will decrease. First quarter gross margins is expected to be in the range of 44% to 45%. First quarter operating margin will be in the range of 10.5% to 11.5%. First quarter effective tax rate to be approximately 19%. And in the first quarter, we expect stock-based compensation and dispute-related expenses to be in the range of $6 million to $7 million. For the full year 2024, revenue will increase 20% to 25% to $765 million to $800 million. Gross margin is expected to be in the range of 45% to 47%. Operating margins should be in the range of 14.7% to 16.7%, and our effective tax rate for the year is expected to be approximately 19%. Full-year stock-based compensation, dispute, and related expenses will be in the range of $31 million to $33 million. Let me provide some additional color on our first quarter and full-year expectations. As Wallace mentioned, we are making strong progress with our Flashmaker customers. We have a strong pipeline of design wins and are positioned to gain meaningful share this year. We expect our revenue from all of our flash maker customers will grow in 2024 and to increase approximately 50% this year. In addition, we have high visibility that two additional flash makers will be ramping new projects with us this year in eMMC and UFS and in SSD controllers, and we will be able to grow revenue from each of these flash makers very meaningfully. We expect normal seasonality impact our business in the first quarter. but are confident that we are well positioned to grow sequentially throughout the rest of the year based upon our strong backlog of wins and project ramps. We expect to see consistent improvement in our gross margins this year, driven by better mix towards newer generation interfaces in our EMMC and UFS and SSD controller sales, a number of new projects ramping, and overall pricing starting to normalize and improve. For operating expenses, we'll continue to invest in maintaining our technology leadership in the market including the tape out of two 6-nanometer controllers, one in Q1 for UFS4 and one in Q3 for a second PCIe Gen 5 SSD controller. This will lead to elevated operating expenses in those quarters. This concludes our prepared remarks. We'll now open the call for your questions.
spk11: Thank you. We now begin the question and answer session. If you'd like to ask a question, please press star 11 and wait for a name to be announced. If you'd like to cancel your request, please press the power or hash key. One moment for the first question. The first question comes from the line of from Sasuke Hana International Group. Please ask your question.
spk05: Yes, thanks for taking my question. I have to, while I say, can you help me understand what you're seeing in SSD solution business segment. I understand your continued traction with Flashmakers and the new product ramps that are more focused on SSD controller and the smartphone, but if you could give us a feel for SSD solution and whether you would be able to actually slow down the decline of revenues here and have a follow-up.
spk08: I think our basic solution, FairEye, has been stable, and we are seeing a strong pipeline of wing. I think for Q4 revenue decline due to some of our automotive customers see the inventory pile up. And we do see 2024 we have accumulate more design. But we see we have stronger growth in 2025 from automotive customer for our FairEye product.
spk05: OK, great. Your 2024 guide is very encouraging. You're also ramping a six nanometer take. I understand what's driving the OPEX increase. I also look at your cash. You have almost $10 of net cash per share. Your operation should help with additional cash generated You sound very confident. Why not revisit the capital return, especially with the buyback, especially with investors that have been patient? Any thoughts, any color here would be appreciated.
spk14: Yeah, thanks for the question, Mehdi. Look, it's a good question. You know, we look at our capital allocation program constantly, right? That's something we review with our board regularly. We have the dividend policy that we've been paying for a very long number of years, with the exception of when we were in the acquisition process. Strategy behind the dividend, as you know, has been always to set it at a level that's comfortably affordable, and we'll continue to evaluate going forward whether to increase the dividend in a future time as business continues to scale and cash flow increases longer term. In terms of things like a share repurchase, as you know, our share repurchase program in the past has been opportunistic. 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 they'll continue to look at.
spk11: Okay, thank you. Thank you for the questions. One moment for the next questions. Next question comes from the line of Quinn Bolton from New Ham. Please go ahead.
spk13: Hey, guys. Congratulations on the results and outlook. Thanks for taking my question. I wanted to follow up, Wallace, on your comments. Very encouraging to hear that you'll grow with every NAND manufacturer in 2024. But I think one of the concerns we've heard from investors is that as UFS 4.0 becomes mainstream, that one of your customers that's in-sourced UFS 4.0, that may be a headwind more in 2025 than 2024. And so I'm I'm not trying to get you to give guidance for 2025, but overall, would you expect your business in aggregate with NAND vendors to continue to grow in 2025 as UFS 4.0 becomes more mainstream? And then I got to follow up.
spk08: Yes, we believe we definitely can continue to grow for our mobile controller for both UFS and EMC. As you know very well, the UFS 4.0 still remains a high end for 2024 and 2025, and probably will go to mainstream up to second half of 2026. And we have a very strong UFS 3.1 and 2.2 today, not only for existing NAND partners, but also winning one to two additional NAND maker business and going to RAM in 2024 and 2025. In addition, and we also see NAND makers, they focus on the new development. So, when UFS 4.0 becomes the mainstream, their R&D focuses on the UFS 5.0 development and sometimes outsourcing the new UFS 4.0 project to Silicon Motion. because our new laser controller can capture the latest new generation, higher performing IO NAND with higher density NAND. So that will become much more attractive and that will add to our NAND partner extended product life cycle. So we see our position very well with NAND maker as well as growing module maker who are moving from EMC to UFS.
spk14: And I think something to point out, also that it's becoming a much more diversified business. It's no longer really driven by one customer. We have a multitude of flash makers and module makers that address the smartphone market all very effectively. And so as we ramp up with these new flash makers and module makers, we're confident that we can continue to grow this business long term.
spk13: Great. My second question is more a clarification about the two new NAND vendors that ramped this year. Can you give us any color? Is that specifically on the EMMC UFS business? Is it across both mobile as well as the SSD business? Just any color. And then, Jason, just a quick, looks like OPEX for the full year probably comes in at about $240 or on average about $60 million a quarter. I know there's some tapeouts in Q1 and Q3 that will probably, you know, increase R&D in those quarters. But is that sort of 240 million about the right range to be thinking about for OpEx and calendar 24? Thank you.
spk08: Yeah, the two netmakers, I think, really, one is for UFS, one is EMC. But we continue looking for engagement with the netmakers.
spk14: Yeah, and for OpEx, I think, yeah, I think it's in that range. 230 to 240 is probably the way to look at it.
spk11: Perfect. Thank you. Thank you for the questions. One moment for the next question. Next question comes from the line of Goku Hariharan from JPMorgan Chase. Please go ahead.
spk03: Hi, thanks for taking my question. First question is on enterprise. Given that you are getting pretty good traction with your new product and you also reorganized the organization to focus more on enterprise, Wallace, could you give us a little bit more color on how big is the enterprise addressable market for Silicon Motion? What is something that you can really achieve over the next maybe three, four years in terms of the enterprise fraction? And could you also give us a little bit of color in terms of what kind of design wins are you getting? Are you getting more design wins on core storage products or Is it like breaking OEMs and hyperscalers? Is there any mix in terms of where you're getting the assignments? Maybe that will give us a little bit more color on the enterprise at the full market.
spk08: So it's a very good question. I think that we are seeing very good traction today as we continue to sample and go through the qualification process with these tier one customers and about a dozen customers from from U.S. to Taiwan, China. I cannot give you the quantized number. I think by the end of 2024, we'll have meaningful revenue. We'll have much bigger revenue in 2025 and 2026. The reason we get the traction, not only the standard MB&E, we're gaining momentum because the high performance and all the number index exceed expectations. but also we get a traction due to the QLC SAD coming into the data center. This is for two fold. One is FTP, standard for QLC, also zone and safe QLC in China. I think U.S. one customer also very interested for zone and space. So that make us a bit differentiate compared with conventional HSE solution. Due to the AI server demand and AI demand, I think Gen 5 HSE become much more attractive. So this is simulate all the demand and that's why many customer interested for qualify our Gen 5 solution.
spk03: Got it. Thank you very much. My next question is more near term. For 2024, you have a 20% to 25% revenue guidance. Could you give us some color on how you expect client SSD to grow and mobile to grow? And within mobile, recently we are hearing some concerns about the end of restocking for some of the Chinese customers. Are you seeing the China, the smartphone customers being a little bit more conservative in terms of procurement in the near term?
spk08: I think for Client SD, last year our market share, the global market share is around 25-26%. We believe this year we'll grow to 32% range. We got total overall SD number overall will grow another probably 10 to 20 million for global unit shipment. For mobile, we will grow faster and stronger because we have more customers in the pipeline, and not only the existing NAND makers that continue to grow compared with last year, but also we have two additional NAND makers will join the group to grow, and multi-maker we see they will grow even stronger And we also have a platform development with both Qualcomm and MediaTek. We also have a direct engagement with Smartphone Maker to strengthen our position in technology and pacing for 2025 growth. OK, got it.
spk01: Thank you.
spk11: Thank you for the questions. One moment for the next questions. Our next question comes from the line of Anthony Storch from Crick Island. Please ask your question.
spk02: Thank you. Jason, I was trying to write as fast as I could. On the tape-out commentary, could you just break that out again by quarter and kind of the cost that you expect per quarter, and then add a follow-up for Wallace?
spk14: Yeah, so we're expecting to tape out our UFS-4 6-nanometer controller here in the first quarter. And then we'll tape out our second PCIe Gen 5 controller early in the third quarter. So that's going to result in more elevated OpEx, kind of similar to what you saw here in the fourth quarter for each of those two quarters. And then Q2 and Q4, that should revert back down to a more normalized level because those pairs don't have the tape outs. Those tape outs, as we have said in the past, are typically north of $15 million in terms of total development and investment cost for us.
spk02: during the quarter where they where they're taping out it's certainly a big step up on the opex okay got it and then wallace i'd love to hear a little bit more last uh quarterly conference kelly talked about a new korean nan maker coming on as a customer um i'm curious your view on how quickly they could wrap and could they be a let's say a top three customer in 2025
spk08: uh we cannot comment individual uh name maker customers about their revenue but we definitely looking forward to a stronger engagement and broader our product line and the design design wing i think we without looking forward to embrace the name maker who really can outsource more project to silicon motion and we add a value to them i think the 2024-25 they are really good timing for us to show our technology and serve our NAND maker as selected their R&D extension and looking forward to a more exciting result. And we will definitely go up this year.
spk02: Okay. And if I could sneak in one more on your MonTitan. So you talked about having secured one design win. Can you give us any color on if it's a data center, hyperscaler, NAND maker, and then How quickly do you think you can secure additional out of those 12 that have sampled?
spk08: We cannot comment the customer and the type, but I think with Tier 1 customer, and with that, we believe we will secure the second one, the second half of 2024. So, I think we're confident to win at least two Tier 1 customers by end of 2024. Very good.
spk11: Thank you. Thank you for the questions. Next question comes from Craig Ellis from B. Riley Securities, please ask your question.
spk16: Yeah, thanks for taking the question. Wallace, I wanted to start with you and follow up on some of the outsourcing questions from the call, but also really continue the conversation that you and I have had over the last couple of years. So I think we both expected that there would be an increase in outsourcing from NAND customers. And the question is this, as you look across the increase in activity that you've observed over the last 12 months or so, can you characterize how extensive that is from OEMs that are maybe just doing one or two new products to much more wholesale changes, what's happening on the continuum a little bit to a lot, and how much of that is baked into the guidance that you and Jason have given for calendar 24, and then I had a couple follow-ups. Thank you.
spk08: I think the, as you can see, it's true that 2023 is a difficult year for all the netmakers because of the weak demand and oversupply. The net price declined sharply, and nobody really make any money. Everybody margin negative. And we are able to gain shares because I think we are treated, viewed, recognized become the extension of a NAND maker's own R&D. So that's why we have been developed such relationship, recognition, trust, and respect for the past 15 years. And we're capable in handling. So NAND makers, their focus now is not focused on market share. They focus on profitability. So they are not eager to invest more K-PAC in the NAND capacity. They only invest the technology they want to deliver. So their focus on the development is treating the high-end, more value, and can maximize the profitability they can get. And the mainstream value line, they will try to also serve party, like Silicon Motion, which we can help them and diversify and bring a more portfolio offer to their end customer. So this is value we bring to the table, and we see more and more also an opportunity from NAND maker when they make a business decision, they kind of go to the third party like silicon motion.
spk16: Got it. And then the follow-up question is just a continuation. What are the things that you're looking at that will indicate that this is not only a trough cycle reaction from NAND OEMs, but through the sweet spot of the cycle and towards the peak of the cycle, they would sustain this level of outsourcing or perhaps even grow it. And then the follow-up is for Jason. Jason is Montyton, Bramson, calendar 24. How should we think of the gross margin implications relative to corporate average?
spk08: We say this cycle because now NAN is a well-being shortage. So Netmakers, they carefully to value all the priority inside the company. Every netmaker have different strategy and we cannot comment for that. But we believe the cycle will continue until middle of 2025 or late 2025 when supply-demand reach balance and netmakers start to invest more about their KPAS and to meet the higher demand.
spk14: And I also think that, I think, you know, to your question about how much of this outsourcing is temporary versus more of a structural shift, we have wins going into 2025 and further out. So I think this isn't something where they're just using us for a short-term stopgap. This is something where we're building much more substantial long-term relationships with them. In terms of the Montitan revenue ramp and margin impact, that's not going to expect it to happen until late 2020. into Q4, late into 2024, excuse me, in Q4. So it's too early to say what impact it will have. More meaningful ramp in 2025, and certainly as we have better visibility around that, around timing of wins and scale of the wins, we'll be able to provide more color. But right now it's a little too early to talk about the impact of both revenue and margins at this point.
spk16: Got it. And the gross margin color in calendar 24's guide was quite helpful. Can you talk about the visibility that you have, Jason, to gross margins ultimately reattaining that more normalized 50% level?
spk14: Yeah, I think we're feeling pretty good about that, just given the mix of new products, new projects, new technologies that are coming to market that we already have strong design wind and pipeline for. As each day passes, we're also seeing these new engagements bring with healthier pricing levels at healthier margins. And we're certainly working on our own back end and production to also improve costs as well. So I think we're on a good track here. And the guidance that we provided, we believe that it's attainable.
spk16: Thanks, Wallace. Thanks, Jason.
spk11: Thank you for the questions. Our next question comes from Suji De Silva from Ralph MKM. Please go ahead.
spk12: Hi, Wallace. Hi, Jason. Congrats on the good guidance here. You talked about the module makers securing lower cost NAND in late 23 that they're selling through now. Can you just talk about the behavior you'd expect as that lower cost NAND gets worked through and how they'd respond? Would they then look to market conditions or just any thoughts there on how that might impact the financials after that gets worked through?
spk08: Most of our leading module makers, I think they have been in the market for a long time. So they understand NAND price trend. So they... procure a very large amount of NAN through last August to November. So that really is prepared for NAN price up. They understand NAN price, NAN will be in shortage, and NAN price will go up continually throughout the entire 24. So they procure in advance and to balance their cost. They will continue to buy some of NAN this year, but as soon as the product makes a NAN given pricing, make them to be more competitive to compete with other module makers. Okay.
spk12: All right. Thank you, Wells. And then my other question is on the MonTitan as it ramps up. Is it the right way to think about that, that maybe some of the AI servers out there creates an opportunity for attach rates and content increases on MonTitan or Is that not the right framework for what might be causing some?
spk08: I cannot comment on that, but I think the current demand is in a very wide range from the hyperscalers and from AI server, from all-fash array, from conventional servers. So I think we're definitely looking forward to, but more important is the tier one customers who have a really good volume, and we believe we have a secure one. We're looking forward to see your second one by second half of 2024. Okay. That's very helpful, Wallace. Thanks.
spk11: Thank you for the questions. Once again, to ask questions, please press star 1-1 and wait for a name to be announced. We have a follow-up question from Mandy Hosani from Susquehanna International Group. Please go ahead.
spk05: Yes. Thanks for the follow-up, Jason. I understand the six nanometer tape out is going to keep your R&D in the 47 to 48 million a quarter this year. Should we expect additional tape outs next year? In other words, should R&D stay at these elevated levels into 2025, or would it taper off?
spk14: I think we'll continue to invest here. I think it's a little too early for us to comment about what 2025 OpEx looks like at this point. But, you know, obviously it's important for us to continue to invest, to continue to stay ahead. You know, we tape out at six nanometer because it's what we need to do. The technology requirements for performance and power, you can only get both of those to the right levels when you go down to this lower process geometry. I think there are options for us to look at ways of reducing tape out costs and foundry costs longer term that we're exploring. So stay tuned as we have more to share on that. We will, but certainly our goal here is to continue to invest, but invest responsibly and try to bring the cost down as much as we can, but still maintain our technology leadership.
spk05: That's fair. Ultimately, we're just trying to figure out if the company is still targeting mid to high 20% operating margin and OPEX is a factor here. So any thoughts on that longer term? operating margin target? Yeah, that hasn't changed.
spk14: I think if you take a look at our business in the past, we are typically a 48, 50 plus percent gross margin company and operating margins in that 25 to 30 percent. There's nothing fundamentally different about our business today that says that that's not an achievable target for us longer term.
spk04: Okay, very helpful. Thank you.
spk11: Thank you for the questions. One moment for the next question. We also have a follow-up question from Craig Ellis from B. Riley Securities. Please go ahead.
spk16: Thank you for taking the follow-up, Wallace. You mentioned the company has a collaboration with both MediaTek and Qualcomm, and I was hoping you could comment a little bit further on that, both on the duration of those two partnership engagements and to the nature of them. Are you a reference design partner for those solutions? And if so, to what extent? And to what extent have those been part of UFS revenues in the past? And are they expected to be in 24 and 25? Thank you.
spk08: It's important for our new product and to qualify on leading SOC provider like the Quarton MTK for the mobile platform. And normally, we have direct engagement also through our customer joint qualifications so they help us to resolve some issues during the pre-production qualification. So this is a joint pre-qualification and it helps us to gain confidence for our quality for firmware as well as ASIC. And we also, and what we serve Qualcomm for automotive platform qualification. So they extended our other product line like Fairlight and MediaTek and other and NXP. So this is the platform partner and platform engagement helping to help accelerate our product readiness, also help our customer to end production sooner.
spk16: And how material are those relative to the revenue that we've been seeing and that you would expect to see in 2024?
spk08: I cannot quantify the numbers, but I tell you it's very helpful, and our company put a big effort for platform qualification and team and dedicated help our product line.
spk06: Thanks, Wallace.
spk11: Thank you for the questions. Next up, we also have a follow-up question from Goku Hariharan from JPMorgan Chase. Please go ahead.
spk03: Yeah, hi. I had one question on AI. Thanks, Wallace. You did highlight the AI adoption on the enterprise side. Could you also talk broadly on what happens when you have more AI adoption on edge devices, especially most of your PC and smartphone customers are launching AI-enabled PCs and smartphones this year and probably more next year? What does it do to NAND flash content, and what does it do to your controller ASPs or controller specs?
spk08: So this is a very good question. Naturally, not only us, all the NAND makers, I think, have spent probably at least a half year looking forward to how the edge AI will impact for storage solution and what a controller maker needs to do to improve our value and to enhance AI applications. So there's a lot of exciting application for AI PC. You're looking from the Intel, AMD, the SOC. Also, Qualcomm and NVIDIA are coming, provide the solution. There are also third-party independent AI SOC for PC, but not for the notebook, but for desktop and for PC workstation. So we are involving for what are common is for enterprise AI, the ACD probably because the server AI is more important for compute. So its storage solution is really a system role. So the regular latency and sequential rewrite is very critical into supporting all the AI server requirements. But for the AI PC, that's a different story because you cannot use HPN for the PC, you cannot use a very, very high density or limited density for DRAM. So the LN swapping becomes very critical. So several technologies, several requirements, really need an SAD controller and a solution to provide to allow to make the edge AI to be more meaningful and more practical. And I cannot go to detail to say this is all the area we are looking forward to add a value and study. I think all NAND makers and leading control makers are looking forward to provide a solution and be part of an edge AI trend.
spk03: Okay. Thank you very much. And second, on PCIe Gen 5, could you talk a little bit about the pricing uplift you're expecting as you go from PCIe Gen 4 to PCIe Gen 5? I remember... I think you talked about significant premium in the last call. Could you talk a little bit about what you're seeing in the market for the flagship products and how that is likely to shape out as we get into more mainstream PCIe Gen 5 products towards next year as well?
spk08: As you can see, I cannot give you exact number, but our high-end PCIe Gen 5 8-channel controller It's about two tons of PCIe Gen 4 controller today. We're very excited to see our high-end PCIe Gen 5 controller adopted by 3NAND maker. We believe there will be additional joining in later this year. So this is very important for us to expand our market share for notebook, for PCoEN, as well as we see the increase our cell revenue as well as the margin. And this is a very important milestone. And the PCIe Gen 5 and the high-end controller can also be adopted by the server for boot storage. And I think there's a trend we're seeing. And not just for notebook, but PC, for workstation, for gaming PC, they'll be all adopted high-end PCIe Gen 5 8-channel controller.
spk11: Thank you for the questions. With that, I'd like to hand the call back to the management for closing remarks.
spk08: Thank you, everyone, for joining us today. And for your continuing interest in Slica Motion, we'll be attending several investor conferences over the next few months. The schedule of this event will be posted on the investor agency section of our corporate website. Thank you, everyone, for joining today. Goodbye for now.
spk11: That concludes today's conference call. Thank you for your participation. You may now disconnect your lines.
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