Silicon Motion Technology Corporation

Thank you for standing by. Welcome to the Silicon Motion Technology Corporation's Q3 2024 earnings conference call. At this time, all participants are in the listen-only mode. There will be a presentation followed by a question and answer session, at which time, if you wish to ask a question, you need to press star 11 on your telephone. You'll then hear an automatic message advising your hand is raised. Please be advised that today's conference is being recorded. 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 limitations, statements regarding trends in the semiconductor industry and our future results of 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 route looking 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 relationship 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 documents 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. With that, I'll now like to hand the call over to Tom Sabanzis, Senior Director of Industrial Relations and Strategy. Thank you. Please go ahead.

Thank you, and good morning, everyone, and welcome to Silicon Motion's third quarter 2024 financial results conference call and webcast. Joining me today is Wallace Koh, our president and CEO, and Jason Tsai, our CFO. Wallace will first provide a review of our key business developments, and then Jason will discuss our third 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 in investing in our securities, please refer to our filings with the US 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. 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. Hello, everyone, and thank you for joining us today. We deliver another quarter of sequential revenue growth and gross margin in the high end of our guided range, our sixth concerted quarter of gross margin expansion. Revenue trends were driven from our NAM Flashmaker customers as they continue to source controllers externally rather than develop them in-house, as they focus on long-term profitability and reduce their operating expense. Our strategy of deepening our partnership with the leading flash makers and investing in new technology and driving success across our business. We are winning more programs in mainstream PC, smartphones, automotive, industrial, and other markets, and we expect this effort to accelerate As we move into high-end PC, through the introduction of our first PCIe 5.0 controllers, SiliconMotion is in the best position to capture increasing share in the markets we serve, further strengthening our position as the leading merchant controller vendor in the world. In the third quarter, our NAND maker revenue grew more than 60% year-over-year. We continue to increase share gains through new product introduction and effective strategy. Both ACD and EMC USS controller strengths from our OEM programs more than offset of continuing weakness in the retail aftermarket for ACD. That has been impacted by high NAM prices and lower consumer spending driven by inflationary pressures. Despite these near-term macro-challengings, I'm pleased with our team's execution throughout the year and the building momentum as we continue to gain shares across the markets we serve. We believe that our ability to capture increasing shares through our NAND FetchMaker partners and OEM channel will continue to allow us to outpace the market. Our unequal technical and financial strengths to build next-generation controllers has in a well-continued in hand-off position. Through the introduction of multiple new products and through our continuing drive to provide world-class customer service, combined with the initial ramp of our new MonTitan Enterprise Class solution and our first PCIe 5 controller in the current quarter, and the expected introduction of our new UFS4 controller next year. SiliconMotion in the best position for long-term growth and share gain in our history. Our opportunities are growing significantly as we deliver product and solution that are matched by our competitions. And we remain focused on driving additional revenue and profitability across our platform of leading land controller solutions. I would now like to provide you with an overview of the current NAND market dynamics. Overall, consumer-grade NAND price increases have slowed, and in some cases are beginning to see modest declines. Despite the modest improvement in NAND prices, the PC and smartphone markets, as well as the aftermarket for clients with D, are all experiencing near-term weakness. Reflecting the industry-wide demand slowdown for consumer electronics this holiday season, enterprise-grade NAND pricing is stable, but the demand for AI storage solution remains strong. Looking into 2025, we are encouraged by growth drivers in the PC market, including an expected PC replacement cycle and an increase in storage density from AI at the edge and well being enabled by next generation processor from Intel, AMD, and Qualcomm for PCs. In the smartphone market, the introduction of more AI capable processors from Qualcomm, MediaTek, and others could drive an upgrade cycle in 2025. Given this tailwind and ongoing strength in the enterprise storage market, we continue to expect NAND supply to tighten by mid-2025, driven by storage demand and density growth. Gartner recently published his outlook on NAND, highlighting the growing importance of QLC. They expect QLC production to increase to more than 25% of total NAND output by 2028, up from less than 10% today. As a result, interest in QLC NAND is increasing as density demands are growing rapidly with the rise of artificial intelligence. SiliconMotion stands to be one of the biggest beneficiaries of the growth and adoption of QLC NAND over the next several years, given our unrivaled experience and expertise in the technology. We are currently engaged in discussions with all the major flash makers and module maker for the development of QLC NAND across multiple markets, including enterprise AI, PC, smartphone, IoT, and others. Gartner is projecting significant adoption of QLC across all markets over the next five years. QLC adoption in PC is expected to increase from about 20% today to over 55% in 2028. For smartphone, QLC will be especially important in mainstream and low-end device. And adoption will grow to about 15% from virtually zero today. And in the enterprise, QLC expect to account for nearly 35% for server storage market and nearly 65% of the enterprise storage SD market by 2028. QRC-NAND, while providing low-cost storage density, is significantly more challenging than its predecessors to manage and require more sophisticated technology in controller and firmware. Our QRC-NAND experience has become a key differentiator in the market, resulting in multiple wins with the flash makers and module makers across all our product categories. Our proprietary advanced LDPC, 3D ray technology, and leading firmware algorithms have replaced the commotion in the best position to benefit from the emerging push to deliver KLC-based storage solutions. And we expect to be one of the primary winners in the growth of the new technology. Now I would like to discuss each of our major product segments. beginning with our SID controllers. Demand remained robust for our Flashmaker customer in September quarter, driven by PCOEMs. We represented approximately 75% of our clients' decontroller sales, significantly higher than normal third quarter seasonality. As the high NAM prices and the weaker consumer demand continues, to pressure the retail aftermarket for ACD. Despite the near-term challenging, this is an exciting quarter of Silicon Motion as we introduce our new PCIe Gen 5 eight-channel controllers. This is a premium product, ideally suited for high-end AI notebook, desktop, gaming, and workstation PC that offer unparalleled performance and best in cloud power consumption. Our controller is the first 6nm 8-channel PCIe Gen5 controller in the market and has led to four flash maker design wins and multiple engagement with nearly all of the module makers. The controller delivered 20% to 30% lower power consumption than competing controllers, including internally developed controller from the major name makers. This new PCIe Gen 5 product is extremely important for SiliconMotion as it marked our entry into the high-end PC market for the first time. High-end PC account for approximately 10% to 15% of the overall PC market, representing a significant opportunity for market share gain and top and bottom line growth for our company. The high-end of the market delivers the added benefit of high ASP and accreted margin, and we are entering the market with an incredibly strong position. With our four-name Freshmaker partners and a growing number of module maker customers, we believe we can grow our share of high-end PC market rapidly. I would also like to share another significant achievement by our team involving the automotive market. Our new PCIe Gen 4 automotive grade controller has recently received ASPICE Level 2 certifications. This is the first PCIe Gen 4 controller in the market to achieve this level of certification, and we are engaged with multiple customers and designed into several new automotive platforms. Level 2 is the most critical step in ASPICE certification. as it validates the development is complete and fully managed and ready for release. We expect to achieve ASPI Level 3 certification with the same controller in 2025. And we remain on track to deliver our new PCIe Gen 5 auto multi-grade controller in the second half of calendar 2025. While the multi-market has experienced a challenging year. We are continuing to experience growth. Automobiles already account for approximately 5% of our revenue today, and we expect to reach 10% of our total revenue by late 2026 or early 2027. Our pipeline of design activity for next-generation PCIe Gen 4 controllers using both TLC and QLC names remains strong. These new SSDs deliver high performance and high density at a lower cost than PCIe Gen 5 platforms, and are increasingly ideal for multiple applications that require a low-cost solution. We are growing our SD market share in the PC, game console, automotive, industrial, IoT, and other markets, and will continue to diversify our customer base and market moving forward. Now I would like to discuss our EMC and UFS business. Our EMC and UFS business continue to be strong growth area for us as we continue to capture more share. We have a significant new product ramp in UFS and EMC next year as we capture more opportunity in low end to mainstream handset and through continuing expansion in automotive, IoT, and other growing markets. Our complete family of UFS EMC controllers, in conjunction with our strategy of customer diversification, through the working with name makers, module makers, and hands-on OEM directly, is enabling us to become the preferred controller maker across multiple markets. This includes an important market in China where our multi-maker customers can deliver solutions that comply with increasing localization standards. Our ability to support the broadest range of NAM, including QLC, gave our customers the greatest amount of flexibility to support a wide range of performance features and sourcing requirements. UFS 2.2 and 3.1 remain the largest portion of the smartphone market, and we expect this will continue through 2026. As UFS 4 expands from the high end to more mainstream handsets, our new signal meter UFS 4 controller is well positioned to benefit from this growing adoption. We continue to receive positive feedback from our partners and in qualification with multiple handset OEM, flash maker, and module maker ahead of the expected product ramp in May 2025. Our highly differential two-channel solution supports the latest generation 3.6 gigabit per second IO speed, or 3DNAM, offering higher performance and lower cost solution that will be in increasingly high demand of the US4 adoption move to mainstream smartphones. As compared to the current US4 four-channel controller in the market today that only support 1.6 and 2 gigabit per second IO speed LAN, our solution has less complicated substrate need, lower power usage, better performance, higher signal integrity, and a lower overall bump cost. One of the most important growth areas for our EMC UFS business involves QLC. So I would like to update you on our project with our first customer. As we have discussed previously, we have been working directly with a handset customer to develop a QLC NAND memory solution for mobile smartphone. I'm pleased to report that our customer has already begun shipping handsets with our QLC UFS controller and will run more meaningfully next year as they expand QLC into additional models. We are in early discussion with additional Tier 1 handset OEM for QLC solution for mainstream to low-end smartphone to effectively increase density without significantly increasing cost. Flashmakers continue to be resource constrained, but we are seeing them move their existing UFS controller development toward next generation UFS 5.0 and opening new opportunity to outsourcing for mainstream solution. We are confident that we can continue to grow our share in this market as our product roadmap and strategy is aligned with our customer's own internal plan. As adoption of EMC UFS controller to grow, We believe our opportunity to gain share will accelerate it. And with our complete family of solutions and growing customer base, we are well positioned for continued growth. Now I would like to turn to our Montyton platform. Montyton represents a significant opportunity for SiliconMotion. Given the large addressable market and expected growth in QLC NAND, within the enterprise storage and AI server market in the coming years. While we are a newcomer in the enterprise market, our experience in QLC and TLC NAND, coupled with our dominant position as a leading merchant controller maker, have driven strong interest in Mount Titan. We continue to see more inbound interest in our enterprise class 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 the data center and enterprise customer in the coming years. As we announced earlier this year, we have secured two initial tier one customers that will receive initial order this quarter. And we expect to announce two additional design wins by end of this year. Montana has several advantages that we believe put us in an excellent position to grow things and share in this market and allow us to achieve our target of generating 5% to 10% of our overall revenue from this business by calendar 2026 to 2027. Some of these advantages include our unmatched experience managing QLC land, a flexible ramp-up approach, our unique architecture, high capacity capability, and leading performance. With Mount Titan, customers can choose either our turnkey firmware solution, or they can develop their own firmware using our SDK. Most of our competitors only offer one or the other option, but not both. We also offer unique capability, including performance shape, which allow on-the-fly adjustment targeting either battery performance, ride performance, or lower power. Wireless competitors require one-time setup without the ability to change dynamically. Mount Titan also includes in the upcoming 2TB mono-die QLC NAND, the ability to deliver 128TB SSD that will be ideally suited for AI server and application. And finally, Mount Titan also delivered best-in-class random read of 3.5 million IOPS, significantly better than most other options that are limited to 2.8 to 3.0 million IOPS. This performance delivered faster training in AI application, save power, and lower the total cost of ownership. We continue to achieve both our internal milestone and our customer milestone regarding the introduction of Mount Titan. And we are on track to begin early production in the current quarter and remember more meaningfully in the second half of calendar 2025. It is becoming increasingly clear from customer feedback that our Mount Titan solution will be a key addition to next generation data center and storage build out plan, especially for delivering faster and more accurate AI capability to the market. As we have mentioned on previous call, given our record of meaning of managing more KLC NAND than anyone over the past decade, we believe that this new product platform will drive multiple year growth cycle for Silicon Motion. Overall, despite the near-term headwind in the retail S&D aftermarket, and the expectation of a muted holiday sale this year. I'm pleased with our strong execution in 2024 and meaningful wins and pipeline our team has delivered. Looking forward to 2025, we have much to be excited about the new product transition, including PCIe Gen 5, UFS 4, and our new enterprise class, Mount Titan, open multiple new advantage for growth for Silicon Motion. Additionally, we continue to diversify our end market beyond the PC and smartphone, with many new exciting growth opportunities in the automotive, industrial, commercial, IoT, game console, and other markets. I believe this new product and the DesignWin pipeline will help Silicon Motion grow in 2025. and I look forward to sharing more about our progress in future update. Now, let me turn the call over to Jason to go over our financial results and outlook.