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.

Thank you, Wallace, and good morning to everyone joining us today. I will discuss additional details of our third quarter results and then provide our guidance for the fourth quarter. Please note that my comments today will focus primarily on our non-GAAP results unless otherwise specifically noted. A reconciliation of our GAAP to non-GAAP data is included with the earnings release issued yesterday. In the September quarter, sales increased 23% year-over-year to $212.4 million. SSD controller sales were approximately flat sequentially in 3Q24 as our continued share gains were offset by weakness in SSD aftermarket sales and lower than expected holiday ramps from the PCOEMs. The weakness was exacerbated by continued inflationary pressure, high NAND flash prices, and a modest slowdown ahead of next-generation Intel, AMD, and Qualcomm platforms that support PCIe 5. The MMC controller sales were up slightly in 3Q24 and up over 44% year-over-year as our diversification strategy continues to work, with NAND makers, module makers, and handset OEMs directly driving strong growth. Gross margin increased for the sixth consecutive quarter to 46.8% as we continue to benefit from improving product mix as we shift our customers to newer solutions. Operating expenses were $65.1 million in the September quarter, up from $62.1 million in the June quarter. The increase, as we discussed in our last call, was attributable to the expected tape-out expense for our new six-nanometer, four-channel client PCIe Gen 5 SSD controller, which is targeting introduction in early 2026. This ramp of this product timing is timed to coincide with PCIe 5 entering the mainstream PC market and can benefit from significant unit volume scaling. Operating margin was 16.1% in 3Q24, down slightly from 16.5% in the June quarter given the PCIe 5 four-channel tape-out, and earnings per ADS was 92 cents down 5% sequentially due to the tape-out, but up over 46% year-over-year. Total stock-based compensation, which we exclude from non-GAAP results, was $3.7 million in 3Q24. We had $368.6 million of cash, cash equivalents, restricted cash, and short-term investments at the end of the third quarter compared to $343.6 million at the end of the second quarter. Inventories decreased from $240.8 million at the end of second quarter to $214.6 million at the end of third quarter, a reduction of over 11%. Now let me turn to our outlook. As Wallace described earlier in the conference call, demand for retail aftermarket SSDs remains weak. Additionally, expected holiday PC and smartphone sales are muted, leading to lower than seasonal order patterns from OEMs and module makers in the current quarter. Despite near-term weakness, our increased OEM share gains will allow us to achieve our full-year 2024 guidance that we had raised earlier this year. We do expect current weakness to be short-lived as we are introducing a number of new products, including our new client PCIe 5 8-channel SSD controller and our MonTitan Enterprise SSD controller, both in the current quarter and our UFS 4.1 controller in the second half of next year. We have already secured significant wins in design momentum with these new products that will drive additional share gains in our existing markets and open up new greenfield growth opportunities in the enterprise storage market that will scale over the next few years. For the fourth quarter, we expect revenue to be down 5% to 10% sequentially to be in the range of $191 to $202 million, driven by weaker than seasonal smartphone and PC sales and continuing weakness in the SSD aftermarket. Gross margin is expected to be 46.5 to 47.5, driven by continuing improvement in our mix towards newer products. Operating margin is expected to be in the range of 15.6 to 16.6%, as operating expenses are expected to decline due to better expense control, as well as no additional 6 nanometer tape out this quarter. Fourth quarter effective tax rate should be approximately 18%. Fourth quarter stock-based compensation and dispute-related expenses in the range of $13.4 to $14.4 million. Despite the near-term weakness in the end markets, our increasing share of controller outsourcing is expected to drive significantly better than end market demand growth next year. As Wallace mentioned, we are in a better position for growth today than at any other time in our history. I am pleased with the progress our team has made this year in securing new opportunities that will be the foundation of strong growth for years to come. This concludes our prepared remarks. We will now open the call for your questions. Operator?

Thank you. As a reminder, to ask questions, please press star 1-1 and wait for a name to be announced. To cancel a request, you may also press star 1-1 again. One moment for the first question. Our first question comes from the line of Mandy Hosine from SIG. Please go ahead.

Yes, thanks for taking my question. I want to look into early 25, and what gives you confidence that this kind of a weakness that you're experiencing in Q4 is not going to sustain into early 25, especially since Q1 is typically a seasonally driven week period? And I have a follow-up.

I think in our today position, our design pipeline, we are definitely confident to grow 2025. But regarding the latest retail weak demand due to the inflation, due to high-end prices, and multiple reasons, we cannot guarantee whether Q1 will recover. However, we do see more meaningful progress from multi-customers, including industrial customers. who believe from late Q1 or early Q2, and customers start to do more booking. So I think it's more challenging. We also see the PC cycle refresh and demand of smartphone customers start to have multiple new programs coming. So this is more exciting. We believe the worst situation will be gone, and we should be looking for a more exciting 2025. Great.

And one follow-up for you, Wallace. You're very excited with the new product that you highlighted in the prepared remarks. But as it relates to capital return, I feel like we have been here before. The stock is near a two-time book. More than a third of your book is liquid cash. And I understand you may not be a fan of buyback. But why not step up and increase cash dividend to illustrate how confident you are with all of these new products that you highlighted?

I think as you know, our share repurchase program has always been an opportunity. And our board also always evaluates when we should do the share buyback and how we return cash to shareholders fairly. So this is very, very important. This strategy behind our dividend amount has always been to set it at a level that is comfortably affordable and will continue to evaluate going forward. As you know, we might have to have a legal expense to pay, and there's still a certain time to go. That's why we try to maintain the position and focus on the business to grow.

Thank you.

Thank you for the questions. One moment for the next question. Our next question comes from .

Yeah, thanks for taking the question, Wallace. Thank you very much for all the details in your prepared remarks around what you see next year. What I wanted to do is see if you could give us more of a high-level summary view of what it all adds up to as we look at PCIE Gen 5 coming in with its higher ASPs and higher margins, UFS 4.0 coming in in the back half of the year, MonTitan after initial shipments in the fourth quarter sounding like it's ramping up in the back half of the year, And then the strength you're seeing in the automotive market and EMMC, as you look at what's happening, one, do you feel like in the core PCSSD and UFS markets, you're tracking to another year of 500 basis points of share gain as we targeted for this year? And secondly, is there a way you could quantify the level of growth we could get next year Are we looking at a mid-single-digit year on your growth year, high single digits? Help us just understand what all this adds up to. Thank you.

Well, thank you, but I have a pretty big question. So let me just answer the product one by one, especially for PCIe 5A channel controller. We are in a very unique position today to launch the PCIe 5A channel high-end controller with DRAM. And we want four major NAND flash makers. We almost want every module maker today. So for PCIe 5 high-end, next year going to RAM aligned with Intel AMD, the CPU and chipset by late Q1 and early Q2 for notebook. And so this initially, I think, will take about 5% to 10%. I think the high-end will be overall 10% to 15% above the market. We believe when they reach the fully 10% to 15%, we should own minimum 50% to 60% of the high-end market share by 2026. So this is a very exciting revenue growth for us, and from top line and bottom line, because we never have a high-end PC market before. Second, go to UFS4. This is also a very unique product we launched. We are going to launch with one NAND maker in the middle of next year, and this will be the high-end. We're going to launch in early 2026 with another NAND maker at the high-end. As you can see, in late 2026, 2027, the market is going to launch UFS-V at the high-end. UFS-IV is a good transition to be mentioned. All the current NAND makers Their current UF4 is a four-channel legacy controller. So for the NAND interface, only go to 1.6 to 2 gigabit per second per NAND. So that is very limited. You can see most mainstream two-channel UF controller with 6 nanometer. We are much more compelling in position than the NAND maker today's solution. we believe majority will come back to SMI, even we only have two committed customers to rent in the next one year. So this is a very exciting product. We launched because we support all the way to 300 plus stack, a new name for TLC and QLC. So we're ready to grab the market and grow. In addition to go to Mount Titan, and because our current sale revenue forecast from 2026 to 2027 to pick up. 10% of our total revenue is just based on two Tier 1 customers. And we have that confidence to ramp, because the Tier 1 customers in China will have multiple end customers to grow. So this is a very, very exciting program. We see we're going to win two more Tier 1, and we have multiple Tier 2 customers and using for ecosystem for Mountain Titan. because our technology to provide high-density QLC base with FTB firmware, that will be unique and ideal solution for AI server, AI data center. So this is just so many customer approaches, and we are really short of a resource. We're not able to handle to serve their need, but we believe through the product maturity and firmware, we are all able to initial ramp this quarter I think from second half of 2025 will be meaningful revenue, and we have come then to reach 10% by 2026 or 2027 of total revenue.

And Craig, in terms of guidance for next year, it's a bit early. Obviously, we normally put that out on our next earnings call when we report our fourth quarter results, so stay tuned for that. But as Wallace pointed out, there's a number of new products, new opportunities. that we're scaling that we're really confident about for next year.

Sorry, we're going to automotive. Today, the total is about 5% of our total revenue, but we have confidence to grow to 10% by late 26th or early 2027. Because this year, it's pricing is very challenging, we're not aggressive to win any design because margin is very, very low. But we continue to develop new product and winning new name maker and also our favorite product line. And we believe next year we're going to launch with a Toyota global model that's going to bring meaningful revenue with company growth. And we have multiple new projects we're going to announce by second half next year. Wait and see.

And that sounds very encouraging, Wallace. So thank you very much for all that color. And I get the point on the specific guidance, Jason. I'm hoping that you could help us on a 2025 set of items related to gross margins without providing guidance. Can you just talk about some of the gives and takes with gross margins? Clearly, there's a lot happening with new products that should be a tailwind. Are there any pressures we need to be aware of? Help us level set with what we should expect with mass set cost intensity versus 2024 and And do you expect to increase R&D intensity in areas like enterprise, SSE, just given the demand you're seeing? Thank you.

Yeah, so we said that we expect our gross margins to get back to historical levels of 48% to 50% by early next year. We're still on track for that, so we don't expect that to change. We obviously have a good mix, PCIe 5 on the client side, higher R&D, higher ASPs, higher gross margins. At Montyton, on the enterprise, certainly, again, much higher ASPs and higher margins. So as those continue to become bigger and bigger portions of revenue, certainly longer term, we can see that being additive to our overall gross margin picture longer term. In terms of the OPEX, we are planning to have Two more advanced controller tape outs for next year. And so that'll, you know, we expect that to continue to be kind of steady state from where we are this year. We taped out two six nanometer controllers this year. We expect to tape out an equivalent number next year. So I think from an OpEx standpoint, you know, we do anticipate obviously some inflationary growth in terms of wages and headcount, et cetera, but also maintaining the same level of tape out activity for next year as well.

Thank you very much, guys. Good luck.

Thank you for the questions. Our next question comes from Suji De Silva from Brough Capital. Please go ahead.

Hi, Wallace. Hi, Jason. So on the client side, the PCIe 5 wins, and I have four flash makers. Are those ramps going to be staggered, or are they all hitting in a time frame where the new PC processes are available to support PCIe 5?

For PCOEN, they definitely align with the PCOEN requirement. But for retail, because two of them have a retail business, so they're going to start to rent by late this year and Q1 next year. So depending on the retail demand, I think, well, probably 2026, they're going to reach a maximum around 15% level. But we do see, with my opportunity to gain more, one more NAM maker opportunity, when the high end by late next year. So, um, hopefully we can really have the real home run with a signal meter, very, very great power efficiency and data efficiency to position to the mainstream notebook.

Okay. And then on the, um, the Mon Titan site, I'm curious, you know, the use of QLC is that, um, ballast by application workload or is it across the board opportunities? And are the customers initially going for their own firmware or more using SYMO's turnkey? I'm curious which of the directions they're going initially.

You have a very good question. I think one of the tier one is to develop the firmware themselves. One of the other tier one is the kind of joint development firmware. So this is trying to accelerate the time to market. And we do see certain OEN, they prefer to develop their own firmware. Certain prefer the turnkey, especially time to market. Because for the AI data space, as you know well, is a four major stages, right? Like ingest to collect all the data, and second stage go to preposition, which we call transformation. has to be tokenized and changing for become AI GPU, recognized language, and then the third state go to training and the third state go to inference. But during the process, because I'm on Titan, our data performance shaping and power shaping technology, that's the idea for the customer to adjust when you're going to reach the highest performance. when you can reduce the power, then reduce overall the power efficiency. So this is ideal case for our customer to utilize the Montyton technology and software to dynamically changing and help for the data center and for the server. So that's why this is very, very attractive to the end customer because it's very unique. we believe with FTB and QLC that can make the high density SAD drive become more interesting and more valuable.

Okay. Very interesting, Wallace. Thanks for the call.

Thank you for the questions. One moment for the next questions. Next question comes from Matt Bryson from WETBUSH Securities. Please go ahead.

Thanks for taking my question and Jason congrats on, uh, formalizing the role as CFO. Um, I guess my, my, my first question is just, um, looking at the QLC solution that you're shipping to a handset vendor, it's a slightly different, uh, path to market. And we typically seen where normally you are, you've worked with fabs and module makers. Is that something that you see becoming more common going forward where you're working with OEMs directly?

I think, as you know, smartphones have predominantly been using TLC NAND for memory solution. But AI's edge is driving higher density demand for low to high-end smartphone platform. I think because QLC is much more attractive because it can provide you higher density, but the cost can be managed meaningfully. So that's why I attract many, many sloth makers who like to provide higher density storage but without increasing the cost significantly. This is the motivation for them. And the reason to work with the controller directly and not go to the NAND maker, I didn't say no NAND maker work for Smartphone Maker, but particularly this is a top five Smartphone Maker children's locomotion because they want to collaborate with us and do all the field tasks and figure out all the issues overcome and to maintain the know-how remaining in the company. So that's why they do not want to share the know-how with the NAND maker. They prefer initially, want to keep the know-how, and they're able to decide what they want to expand next year. So that's why we are very, very happy to have the opportunity to engage with this smartphone maker. And we believe we're going to have a second smartphone maker to engage in 2025. So this is to help us to really gain much more knowledge how to transition from QLC moving to smartphone storage and primary storage and increase the density and also add value to smartphone makers.

Thanks for all the color walls. Just following up on Mehdi's question around Q1 seasonality, I mean, if you're not seeing the typical pickup into the holiday season, then I mean, shouldn't we expect The downtick in Q1 would also be muted simply because you're coming off a higher comp. And then just with inventories being worked down within the client OEMs, I mean, shouldn't we also expect that you'll see a bump back up in terms of demand when that process is completed sometime in the first half, I think you said?

I think what I can only say is today the viewing about the retail consumer electronic product is really weak and the visibility is very, very low because we are going to launch several new products, especially PCIe Gen 5, and it could change certain color in both retail and the PCIe. So that's why I think it's too early to comment about Q1 outlook, but I think we're focused on Q4, but we are more optimistic about Q1, whether it will be like the conventional seasonality with Q1. We might have a more broader opportunity to sustain the growth.

Awesome. And just one more for me. In terms of gross margins, you're still running a little bit below what had been normal gross margins. Should we still expect that you get back to the roughly 50% or just below 50% range in 2025? And I guess structurally, it sounds like you have a lot of opportunities to move into higher gross margin areas. I mean, do you foresee in the future potentially being able to be above that kind of historic norm given those opportunities?

Yeah, Matt. Our historic norm is 48% to 50%, and so we do anticipate getting back there in early next year. In terms of going above and beyond that, it's obviously with more enterprise and more higher-end products ramping, there's an opportunity for that longer term, but it's too early to say how that shapes up.

I think our goal is definitely to reach back to 50% by before end of 2025. But I think because there's a certainality and also there's the business strategy consideration become low end and high end. But overall, I think the direction and the goal won't change.

Awesome. Thank you so much. Thank you for the questions. As a reminder, to ask questions, please press star 1-1. We appear to have no further questions at this time. I'd like to hand the call back to Wallace for our closing remarks.

Thank you, everyone, for joining us today and for your continuing interest in SICA Motion. We'll be attending several investor conferences over the next few months. The schedule of this event will be posted on the investor relationship section of our corporate website and look forward to speaking with you at this event. Thank you everyone for joining us today. Goodbye for now.

That does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.