Silicon Motion Technology Corporation

Good day, and thank you for standing by. Welcome to the Silicon Motion Technology Corporation's second quarter 2024 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, at which time, if you wish to ask a question, you will need to press star 11 on your telephone keypad. This conference call contains forelooking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 as amended. Such forelooking statements include, without limitation, statements regarding trends in the semiconductor industry and all future results of operations, financial condition, and business prospects. Although such statements are based on our own information and information from other sources we believe to be reliable, you should not place undue reliance on them. These statements involve risks and uncertainties, and actual market trends and our results may differ materially from those expressed or implied in these following statements for a variety of reasons. Potential risks and uncertainties include, but are not limited to, competitive pressure in the semiconductor industry and the effect of such pressure on prices, unpredictable changes in technology and consumer demand for multimedia consumer electronics, the state of and any change in our relationship with our major customers, and changes in political, economic, legal, and social conditions in Taiwan. For additional discussion of this risk 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 further 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 Mr. Tom Sabances, Senior Director of IR and Strategy of the company. Please go ahead, sir.

Good morning, everyone, and welcome to Silicon Motion's second quarter 2024 financial results conference call and webcast. Joining me today is Wallace Koh, our president and CEO, and Jason Tsai, our interim CFO. Wallace will first provide a review of our key business developments, and then Jason will discuss our second quarter results and outlook. Following our prepared remarks, we will conclude with a Q&A session. Before we get started, I would 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 with investing in our securities, please refer to our filings with the U.S. Securities and Exchange Commission. For more details on our financial results, please refer to our press release, which was filed on Form 6-K after the close of the market yesterday. This webcast will be available for replay in the Investor Relations section of our website for a limited time. To enhance investors' understanding of our ongoing economic performance, we will discuss non-GAAP information during this call. We use non-GAAP financial measures internally to evaluate and manage our operations. We have therefore chosen to provide this information to enable you to perform comparisons of our operating results in a manner consistent with 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. With that, I will turn the call over to Wallace.

Thank you, Tom. Hi, everyone, and thank you for joining us today. We had a strong start to 2024, building on the momentum that began in the second half of calendar 2023. We delivered sequential revenue growth ahead of expectation and achieved gross margin at the high end of our guidance range. as better mix and pricing continue to steadily improve our profitability. The revenue upside was driven by our continued strength as our NAND Flash customer, as demand from PC and smartphone OEM increased in anticipation of seasonally stronger second half demand. Additionally, we benefited from increased market share as the top NAND Flash makers as they continue to source controller externally rather than develop them in-house. Over the past few quarters, our team have been working hard toward deepening our partnership with our NAND FlashMaker customers. We are winning more and more sockets, from mainstream to high-end SD and EMC and UFS controllers for PC, smartphones, automotive, and other markets. Our success with our Flash maker partners has helped improve our visibility and crucial to our strong growth this year, despite market uncertainty, especially in the retail aftermarket. This quarter, our revenue from NAM flash makers grew nearly 15% sequentially, accounting for more than 60% of our total revenue. Both SAD and EMC UF controller strengths found new programs more than upside emerging softness in the retail market. These are our module maker customers. Demand for our product is rising, and now fashion makers increasingly outsource controller solutions, and we are in the best position to benefit from this growing trend. We have unmatched technical and financial resources to build next-generation controllers, and we intend to enhance our position through the introduction of multiple new products in the coming year, including our enterprise-class Montyton family, new PCIe 5.0 and UFS 4.0 controllers. I am pleased with our team's execution in the first half of the year and the momentum going into the second half of this year. We have significant opportunities ahead of us as we deliver products and solutions our customers need and remain focused on driving additional revenue growth and improving profitability across our platform of leading NAND controller solutions. I would now like to provide you with an overview of the NAND market dynamics. NAND pricing is increasing and expected to move higher throughout the remainder of the year and early 2025. primarily driven by demand from data centers and enterprise storage applications. As pricing continues to increase from the lowest experience last year, NAND makers are beginning to bring some capacity back online and invest in new generation NAND productions. But we do not expect NAND supply and demand to come back into balance until mid-2025. Higher NAM pricing and the weaker global economy environment caused by higher inflation has softened retail demand for our module-maker customers. With continuing inflationary pressures and expected NAM price increase for the remainder of the year, we expect muted back-to-school and holiday sales of retail aftermarket S&D. Despite the headwind, the overall PC demand appears stable And we also continue to see incremental improvement in the smartphone market, with the unit sales expected to grow modestly year over year. OEM entry in QLC NAND continue to increase in both the data center and the edge in PC, smartphone, and other devices. This is being driven by device OEM, anticipating the need to support AI and other applications that require higher performance and higher-density solid-state storage solutions. It becomes clear each day that our experience and expertise with QLC NAND is a defining differentiator that has resulted in significant wins with FlashMaker and other customers across major product categories. As 3D NAND layers continue to increase, managing QLC NAND becomes even more challenging They require more sophisticated controller technology, such as our proprietary advanced LDPC and 3D ray technology and advanced firmware algorithm to ensure data retention and reduce rewrite deterrent issue. We expect QRCNN will increasingly be deployed across all major market category that we serve given its ability to deliver high density at low cost. and we believe we are best positioned to balance it from the trend in the coming years. Now I would like to discuss each of our major product segments, beginning with our SSD controllers. We experienced strong demand in June quarter from our FlashMaker customer driven by PCOEMs. PCOEM's controller sales represent approximately 80% of our client's controller sales. is a high end of our historical range, as high end prices are putting pressure on channel and module makers. We continue to generate strong interest in our new PCIe Gen 5 eight channel controller that we tape out last year. This is a premium product that will be ideally suited for high end notebook and desktop AI PC, as well as for gaming and workstation PC. that offer unparalleled performance with ultra-low power consumption. The controller offers best-in-class power-to-performance, offers 20% to 30% lower power consumption than competing controllers, including those internally developed by NAND makers. This is the first 6nm 8-channel PCIe 5 controller available in the market, which has led to significant wins including our fourth NAND maker, which I'm pleased to announce we won this quarter, in addition to nearly every major model makers. We remain on track to run initial units of the new PCIe 5 controller with our customers later this year. Additionally, we have a strong pipeline of design activity with several flash makers of PCIe 4 SSD using next generation TLC and QLC NAND. This new SSD delivers high performance and high density at a lower cost, ideal for rapidly growing AI PC market that is searching for lower cost solutions. While the PC market remains a top priority and will continue to drive significant growth in revenue, we are seeing emerging opportunity with our automotive commercial, industrial-grade CD controllers. This includes our automotive-grade PCIe 4 controller, as well as multiple controller targeting industrial and commercial applications. We intend to expand our leadership through the introduction of our upcoming dual-port PCIe 5 controller for the automotive market next year, and we expect to continue adding meaningful growth opportunity in 2025 and beyond with a more diversified customer and end market base. Now I would like to move to our EMC and UFS business. We continue to benefit from the improving smartphone market during the June quarter, as well as with strengths with our two EMC and UFS NAND customers. We successfully taper our first UFS 4.0 controller early this year, and the response has been positive. We are beginning qualification, and we are targeting production ramp in the second half of calendar 2025. UFS 3.1 and 2.2 continue to account for most of the smartphone market volume today, and I expect it to stay relevant in the coming years. While FlashMaker allocate more resources to next generation UFS products in support of new generation NAMP, we are seeing greater opportunity in high volume application as FlashMaker look to outsource mainstream controller so that they can more effectively compete at leading edge. As with our leading PCIe product, we are generating strong inbound activity in our QLC controller technology in UFS and EMC. With a growing interest in edge AI, smartphone OEMs are looking for cost-effective way to increase own device memory density. Our leadership in QLC NAND controller technology plays the commotion as a forefront of QLC adoption a smartphone manufacturer looking to deploy QLC with UFS for mid- to high-end devices and QLC with EMC in low-end handsets for AI and other storage intensification over the next few years. Our first handset OEM partner that will deploy QLC on UFS expected to ramp later this year. What is more, I am pleased to report to you today that this customer expects to expand production of this new KLC-UFS solution into additional smartphone models next year. Looking beyond the smartphone market, OEMs are interested in adopting UFS-EMC for smart connected devices and other consumer applications. Our growing list of wins and customers in this additional area will further diversify our end-market growth opportunity. Given the increasing opportunity to capture shares with our flash-maker partners and show the introduction of new EMC and user QRC solutions, we believe we are well positioned for continued growth. Now let me turn to our Mount Titan platform. As we have mentioned before, Enterprise and data center storage offers SiliconMotion a tremendous new revenue opportunity combined with a meaningfully high ASP and margin profile over the median to long term. We continue to see more inbound interest in our Montyton solution. Given our unique differentiation, we believe we are well positioned to scale with the FlashMaker and storage solution enabler, as well as directly with data center and enterprise customers in the coming years. Our first Montyton PCIe 5 controller managed TLC and QLC NAND on a single platform, enabling the seamless transition and adoption of QLC NAND with enterprise and data center storage applications. As we announced last quarter, we have won two Tier 1 customers for our new Montyton PCIe 5 controller, one in the US, and wine in China expect to secure two additional tier one win later this year. We are on track to begin early mass production later this year and run more meaningfully next year. Our early success has been driven through differentiation with our controller offering high performance and greater power efficiency. We support for more NAND than any other platform in the market today. Pantitan delivered two key technologies, zone and space, and flexible data placement with QLC, which is combined to improve latency and throughput speed while lowering overall cost to reduce DRAM demand. Additionally, our proprietary power and performance shaping technology enable our customers to dynamically adjust their storage to meet rapidly changing data center performance requirements. This includes, in the upcoming 2 terabit monodic QLC NAND, the ability to deliver 128 terabyte SSD. These high-capacity SSD have the highest sequential read performance and lower cost to meet ever-increasing AI compute and star requirements. It is becoming increasingly clear for our customers that our MonTitan solutions will be essential for the next generation data center and storage build our plan, especially for delivering faster and more accurate AI capability to the market. We have mentioned on previous calls, given our record of managing our QLC NAND than anyone over the past decade. We believe that this new product platform will drive multiple year growth cycle for SiliconMotion. as we enter a greenfield market opportunity for our company with leading technology. Given the early MonTitan performance and widespread interest in our products, we expect the platform to grow to 5% to 10% of our total revenue in the 2026 to 2027 time trends. Overall, I'm excited by our strong start to 2024 and our outlook For the remainder of the year, I'm especially pleased that we continue to target year-over-year revenue growth of 25% to 30%, despite the challenges in the near term from increased non-fresh prices in the sum of our customers. Looking ahead, we are confident that our technology leadership and diversified portfolio of our controllers across a wide range of the market and application will accelerate and drive the substantial long-term growth of our business. We continue to push beyond PC and smartphone into new opportunity, including the enterprise, automotive, industrial, commercial, and consumer markets. I'm especially excited about emerging long-time opportunity, and what I expect will be a significantly positive impact on our revenue, growth, and operation margins over the next few years. As we capture share in the enterprise market, I look forward to detailing more about our progress in the area in the future update. Now let me turn the call over to Jason to go over our financial results and outlook.