Silicon Motion Technology Corporation

Good day, and thank you for standing by. Welcome to the Silicon Motion Technology Corporation's first quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session, at which time, if you wish to ask a question, you need to press dial 111 on your telephone keypad. This conference call contains the following statements within Section 27A of the Securities Act. of 1933 and Section 21E of the Securities Exchange Act of 1934 as amended. Such forward-looking statements include, without limitation, statements regarding trends in the semiconductor industry and our future results of operations, financial condition, and business prospects. Although such statements are based on our own information and information from other sources we believe to be reliable, you should not place undue reliance on them. These statements involve risks and uncertainties, and actual market trends and our results may differ materially from those expressed or implied in this 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 any change in our relationship with our major customers, and changes in political, economic, legal, and social conditions in Taiwan. For additional discussion of these risks and uncertainties and other factors, please see the documents we file from time to time with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements which apply only as of the date of this conference call. Please be advised that today's conference is being recorded. It is now my pleasure to hand you over to the Interim Chief Financial Officer, Mr. Jason Tsai. Please go ahead.

Thank you, and good morning, everyone, and welcome to Silicon Motion's first quarter of 2024 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 first quarter results and outlook. Following our prepared remarks, we will conclude with a 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 risks 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 the market yesterday. The webcast will be available for replay in the investor relations section of our website for a limited time. To enhance investors' understanding of our ongoing economic performance, we will discuss non-GAAP information during this call. We use non-GAAP financial measures internally to evaluate and manage our operations. We have therefore chosen to provide this information to enable you to perform comparisons of our operating results in a manner similar to how we analyze our own operating results. The reconciliation of GAAP to non-GAAP financial data can be found in our earnings release issued yesterday. We ask that you review it in conjunction with this call. With that, I will turn the call over to Wallace.

Thank you, Jason. Hi, everyone, and thank you for joining us today. We had a good start to 2024. We delivered sequential revenue growth ahead of expectations. achieved gross margin at a high end of our guidance range, and exceeded our operation margin outlook. Our ASD-controlled business was better than expected, primarily driven by demand from two of our fashion maker customers. We continued to improve our pricing in the quarter, which is driving the steady improvement in our gross margin and profitability. Our results quarter reinforce our leadership position in controlling technology and our products continue to be the high demand as our customers recognize how important our technology, innovation, and service are to their business. While the market environment remains uncertain, I am pleased by our team's execution this quarter. We are taking the right steps to efficiently navigate market dynamics, remain steadfast in delivering the products and solutions our customers need, and focus on continuing growth and improving profitability across our platform. Let me start now with an overview of NAND market and dynamics we are seeing today. We have seen NAND flash prices continue to increase since late last year, and more recently, have seen flash makers gradually increase utilization in their FAPs, but more meaningful capacity increase from the built-out next-generation NAND FAPs isn't expected until next year. Demand remains robust, especially with Chinese handset OEM, as well as with enterprise and data center storage markets, while PC demand has been steadily increasing. All of this will continue to try and amplify prices higher throughout this year. We are seeing some near-term pricing fluctuations in the channel 3D market. That may cause some uncertainty with our customers that are more focused on the retail after markets. But demand for our controller for PCOE and SD remain robust, especially with our fast maker customers. Our leadership and controller technology continues to drive stronger demand across the board with our customers. It is becoming clearer each day that our appearance and expertise with QLC NAND is a defining differentiator that has resulted in significant wins with the fashion makers and other customers across our product categories. As the 3D NAND layers continue to increase, managing chaos NAND becomes even more challenging and continues to require more sophisticated controller technology to ensure high data retention and reduce rewrite disturbance issues. Our advanced LDPC and the 3D ray technology are the best in class to protect data during high-speed data transfer between the controller and the NAND and operate under wide temperature range. We can deliver controllers that enable a no-compromise, high-performance, and low-cost solid-state storage solution incorporating the latest generation of QLC NAND Especially with the rapid adoption of AI, whether it's in S devices like PC and smartphone, or in the data center and enterprise storage, QLC storage devices are becoming increasingly central to AI application and growth going forward. OEM no longer need to choose between high performance or lower cost. With QLC, especially the upcoming 2TB mono-di QLC NAND, they are able to have high sequential read performance, high density, and low cost solution to meet their ever-increasing AI compute and storage requirements. Now let me start with our ACD controllers. We are seeing strong traction with our new PCIe TM5 8-channel controller we taped out last year. This is the first 6nm 8-channel PCIe TM5 controller available in the market, and we are winning at virtually every top multi-maker in addition to our three flash maker customers. The results from our early testing have been very good. This is a premium product that will be ideally suited for high-end notebook and desktop AIPC, as well as for gaming and workstation PC that offer unparalleled performance with ultra-low power consumption. In addition, we have a strong pipeline of design activity with several flash makers for PCIe 10.4 SSD using their next-generation TLC and QLC NAND. This delivers high-performance, high-density, low-cost SD, ideal for a rapidly growing AIPC market. Beyond the PC market, we also have automotive-grade PCIe Gen 4 controller, WING, with two of our FlashMaker customers that will ramp with the leading electrical card platform next year. We also expect to take out our dual-port PCIe Gen5 controller for the automotive market next year for several of our Flashmaker customers to further our leadership in the market. We are confident that our broad-based ACD controller solution will continue to scale this business meaningfully this year and into 2025 as many of these new products and platforms begin to ramp. Moving to our EMC plus UFS controllers. We are successfully taping our first UFS 4.0 controller in the first quarter and are on track to start qualification with this new controller in second half of the year. We also continue to see stronger than ever demand for our UFS 3.1 and 2.2 controllers, especially to support new generation of low cost NAND. In addition to several top module makers serving the smartphone market, we started ramping up a new fast maker customer for UFS 3.1 and 2.2 this quarter. And this customer is expected to ramp with our UFS 4.0 controller next year. While the smartphone market has predominantly used TLC NAND, We are now seeing increasing interest of QLC NAND, especially in mainstream handset, where OEM can offer higher density without significant increase in cost. We are collaborating with one of the leading handset OEM directly for QLC UI-based solution that is expected to come to market later this year for the mainstream smartphone. We expect the demand for TLC UFS products, especially in mainstream and entry-level 5G smartphones, will continue to increase as this high-density, low-cost UFS solution will be required to drive adoption of AI beyond the premium segment of the smartphone market over the next few years. In addition, we are seeing significant traction with our EMSC and UFS controllers in the automotive market, as well as in commercial, industrial, and other connected and smart devices. These non-smartphone applications account for more than 40% of the overall EMSC plus UFS market today. With the market for automotive applications growing faster than smartphone markets, We are working with several flash makers and building EMC and USB controllers for these customers, especially for automotive market, and expect this to scale meaningfully in the next years to come. Now let me turn to our Montyton platform. As we have talked about before, the enterprise and data center storage market are tremendous opportunity that we believe we now have a truly differentiated solution with Mount Titan to scale with the Flashmakers and storage solution enabler, as well as directly with data center and enterprise customers. Based on market data from Gartner and IDC, as well as our own analysis, We anticipate the market for enterprise SSD for both enterprise storage and data center will grow by more than 50% to approximately 35 million units by 2027. But more importantly, the market for PCIe Gen 5 SSD is expected to increase more than five times to more than 60 million units in 2027. QLC-based AD are expected to account for nearly 30% of the total petabyte in 2027, up from less than 10% in 2023, representing a huge growth opportunity that we are uniquely positioned to lead. Our first-man Titan PCIe Gen5 controller will manage TLC or QLC NAND on a single platform. enabling the seamless transition and adoption of QoS Inland with enterprise and data center storage applications long-term. I'm excited to announce that we have one, two Tier 1 customers in the first quarter for the Mount Titan BCIE Gen 5 controller. One is in the United States and one is in China that are expected to begin ramping later next year. We continue to sample with more than a dozen additional customers expected to secure more wins throughout this year. We are on track to begin mass production late this year and run more meaningfully next year. Our early success here has been our ability to differentiate with our high-performance and power-efficient controllers that support more NAND, including TLC and QLC, for high-capacity ACD than any other platform in the market today. Using our patented performance and power-shaping technology, we enable our customers to dynamically adjust for peak performance versus low power consumption, depending on the various workload requirements to achieve the best result. We are seeing inbound interest from the world leading data center providers because of our ability to deliver high density, high performance, low cost TLC and QLCSD for the increasingly data hungry AI compute and storage needed. Given our proven track record, of managing more QLC NAND than any other vendor in the market over the past decade, we can leverage our unparalleled experience and expertise with QLC into the Mount Titan controller platform to build SSD solutions that can effectively display portions of near-line HDD with high-capacity near-line SSD. These solutions offer a lower TCO compared to legacy HDD due to their smaller form factor, higher storage densities, lower power consumption, and higher reliability and resiliency. We see an incredible market opportunity here to differentiate with our Montitan platform and deliver solutions that are critical to the further build-out and adoption of AI in the enterprise and data center, driving a multi-year growth cycle for the company. Overall, I'm excited by a strong start to 2024. and achievable opportunities on our horizon for the rest of the year. Beyond our strong results, our underlying business momentum continues to accelerate as we add more products and more wings to drive a sustainable long-term growth of our business. We continue to see very strong traction across the board with controllers we are beginning bringing to the market and have a greater confidence that our strategy to diversify beyond PC and smartphone into new opportunities in the enterprise and automotive market will soon scale meaningfully with our T1 customers. We are very proud of this and it gives us good confidence in our pipeline, our ability to serve our current and new customers to drive long-term growth. Now let me turn the call over to Jason to go over our financial results and outlook.