Silicon Motion Technology Corporation

Good day and thank you for standing by. Welcome to the Silicon Motion Technology Corporation's Q2 2025 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. To ask a question during the session, you need to press star 1-1 on your telephone. You will then hear automated message advising your hand is raised. 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 limitation, statements regarding trends in the semiconductor industries and our future results of operations, financial 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 forward-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 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 discussions of these risks and uncertainties and other factors, please see the documents we file from time to time with the Securities Exchange Commission. We have some 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 call is being recorded. Now that we have the conference, over to Mr. Tom Sapenzis, Senior Director of IR and Strategy. Thank you. Please go ahead.

Good morning everyone and welcome to Silicon Motion's second quarter 2025 Financial Results Conference call and webcast. Joining me today is Wallace Coe, 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 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 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 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.

Mr. Thomas, hello everyone and thank you for joining us today. I am pleased to report that we exceeded our revenue and the operation margin guidance for the second quarter that we further benefited from the introduction of new controller that drive higher market share and our continuing expansion and growth into new markets. As we further scale and shift to high-end UFS PCIe controllers and grow automotive and mountain products in second half this year, we expect our revenue growth to remain strong and probability to further improve. We are excited by the progress and foundation of growth we are building and based on our backlog, diversification strategy and design win momentum, we are well positioned for strong second half and remain confident that we will exit the year is our target $1 billion revenue round rate. Let me start by discussing our view of a broader nanfash environment and how it is positively affecting our business today and opening new opportunities long term as well. The nan industry experience improvement in the second quarter with flash prices increasing at the inventory level in the PC and smartphone market decline further given a modestly better demand environment. Enterprise power demand remains strong in the quarter with AI expanding into nearly every industry. Nanfash makers have reduced capital expenditures for big growth and continue to increase prices as enterprise and AI growth are limiting nan supply. Our module maker partners continue to build inventory ahead with an expected increase in nan prices in the second half of 2025. We will remain flexible and as well positioned with both nanfash makers and module makers to fulfill their growing requirements. With nan prices expected to increase demand for more cost effective QLC nan expanding in clients D, smartphone and enterprise storage increasing QLC production is a lower cost way to rapidly growing big growth for flash makers while QLC based solution deliver high density storage at a significantly lower cost. We are the only controller company partners with all flash makers giving us significant advantage and insight into current and future nan technologies. We believe these partnerships and our unmatched experience in managing QLC nan will allow us to maintain our industry leadership and drive long term sustainable revenue and earning growth for many years. In addition the demand for memory and storage solution expanding to new end markets in consumer, commercial, industrial, automotive and enterprise. Memory makers are constraining where they can allocate RD resources and capital resource between nan HPN and DRAM. The demand from each of these markets continue to rise and new generation of nan involves the need for next generation controller for these different applications expanding. Our flash maker partners are turning to Sikamotion as their primary merchant supplier to help build comprehensive portfolios expanding our market share and building the foundation for strong multi-year growth with an increasingly diversified range of products in end markets. Now let me share some update for each of our business segment beginning with EMC and UFS. Our mobile business significantly outperformed our expectation in the second quarter as we benefited from several positive trends for our EMC and UFS controllers. We continue to see strong booking momentum from both flash maker and multi-maker customers entering the second half of the year. Multi-maker in particular are experiencing strong growth in mobile as they are benefiting from the trend toward discrete EMC and UFS solution driven by the increasing availability of low cost mobile DRAM. Flash maker have also adopted our controller as they continue to embrace outsourcing to stay competitive, improve their time to market and prioritize their own internal R&D resources for other technologies and end markets. Our modern mobile and IOT devices grew meaningfully in the quarter as demand from both our flash maker and multi-maker customers accelerated. Driven by strong end market demand, the increasing share of UFS in smartphone is driving stronger demand for our new high ASP UFS controller in mainstream and high end devices. In addition, our new engagement with handset OEM for KLC and UFS solution are also expanding and diversifying our market penetration. We expect this trend to continue in the second half of this year. For EMC, our increasing share and robust demand in the quarter also deliver strong sequential growth for our controllers. Demand is accelerating in multiple existing emerging markets including IOT, smart watches, smart TV, set up box and emerging consumer products such as AI glasses. The market for EMC account for over 800 million units per year and the now smartphone account for much of this market. We believe our EMC business will remain a strong contributor for many years to come for these additional markets for the scale. Now I would like to move on to our SDD business. The PC market appeared to be bottom out in the first quarter of 2025 and stabilized in the second quarter. We believe that market will grow in the low single digit in 2025 and we are fighting a stronger second half given typically seasonality which benefit from the back to school and holiday sales. This year we also see further benefit from some setting of window 10 in October and we are beginning to see more widespread adoption of AI as the edge in consumer and commercial PC which is increasing in demand of higher performance solution including SDD powered by our PCIe5 controllers. As we have discussed previously we expect to drive significant market share gains in client's D over the next few years especially in the high end driven by our leading position in PCIe5. So overall 8 channel controller launching December of last year continue to grow quickly in the second quarter increasing by more than 75% sequentially and already account for more than 10% of our client's fee controller revenue driven by strong share gains and higher ASP. We felt additional momentum with our PCIe5 controllers throughout this year as OEM increased sales at the high end. Additionally we will start initial ramp of our 4 channel D-Rampless PCIe5 controller at the end of this year and have already won design with 4 of 6 fresh makers and nearly all the market makers. This new controller will target the broader segment of PC and aftermarket SDD sales and we believe that this introduction will help us achieve 40% of the SDD market by 2028 up from 30% today. I will now provide an update to our automotive and other business. As I mentioned earlier we continue to experience tremendous design win activity in our automotive segment. Vehicle capacity is increasing with the growing demand of high speed and low latency storage. We support the motor storage need across nearly our product line including PCIe, EMC, U.S. surface and increasingly. Our ferrite embedded solution. We were the first company to achieve A-Spec level 3 certification for our PCIe4 solution and we are on track to table our new automotive PCIe5 controller in 2026. Demand of more starry solution is increasing in conventional cars as well as with next generation electrical vehicle makers. Our controller power increased storage density, speed and reliability for diverse and including smart cockpit, data sensors, cameras, navigation and other applications. We are now seeing increased demand for starry integration to help automaker drive differentiation and customer loyalty. We are currently shipping to many of the largest and multi-brand in the business including Mercedes, Tesla, BYD, Xiaomi, Toyota, Honda and many others. As we enter the second half we are seeing greater demand from our partners in China. Our brands are successfully taking worldwide market share for low cost automobiles and leading electrical vehicles. Given the strength in China and increasing design win activity globally we are increasingly confident that automotive will account for at least 10% of our revenue by 2026 to 2027. During the second quarter we also experienced strong growth in our memory card business due to the highly successful launch of Nintendo Switch 2. We started ramping with the leading South Korea flash maker with direct attach to the 3-2 games as well as partnering with leading brands like ADATA and Lonesome for retail expandable storage with PCIe SD level performance in a micro capacity phone factory. For the first half of 2025 our memory card revenue more than double year over year and we expect to see continuous success in the second half of the year as the Switch 2 demand remain robust and as we enter the holiday season. The SM2708 delivers a high density, high speed required by modern portable gaming devices and we are pursuing other opportunities with this exceptional controller to drive diversified mountain growth. Finally, I would like to provide highlights on our enterprise business. Both memory and storage needs are evolving rapidly in the AI era and the opportunities for silicon motion are expanding. AI education requires success to data more quickly driving increased adoption of SD throughout the data center. The current infrastructure comprises high performance memory, near GPU storage, compute storage, warmth storage and cold storage. Our Muntitan platform is ideally suited to manage high density, high performance SD that are both cost effective and power efficient to serve the warmth storage market with our leading controller when paired with QLC. The warmth storage market has traditionally been served by HDD but storage performance requirements have increased due to AI application and the price disparity between HDD and QLC SD converge. We expect more hyperscalers and CSPs will adopt high capacity QLC SD for warmth storage while new light HDD move to support the growth and growing cold storage need. Recently, we have been receiving interest from customers to expand beyond warmth storage into compute storage market with our Muntitan. The new product will pair Muntitan with up to 16 terabytes of TLC NAND to target the high performance near CPU market and represent an exciting new opportunity for Muntitan. Longer term, we are also beginning to work with our industry and the flash maker partner to support the development of a new JEDA standard for new line flash that will likely come to market in the next three to five years to further drive adoption of HDD in warmth storage application, especially the need to access more data more quickly, grow with AI. The new line flash requirement will allow for more relaxed specification for QLC with lower cost driven by higher yield. This should drive even greater adoption of QLC NAND in warmth storage and by extension should create a bigger market opportunity for Muntitan. At the upcoming FMS conference next week, we will be co-hosting a demo with the vast data to demonstrate how our Muntitan SSD can deliver a compelling solution for the insatiable growth in AI application. The collaboration will showcase the vast data storage class memory or SCF for its new Cirrus V2 platform. Cirrus V2 leverage the NVIDIA Bluefield Street DPU platform for AI storage. The Cirrus intelligent storage platform is used by SysIngrader and Architext and deployed in hundreds of large enterprise around the world including banks, data centers, retailers, multinational conglomerate and other leading companies that are leveraging or are developing AI applications. We invite you to join us at FMS to see how our Muntitan solution will drive the next wave of AI solutions for the next several years. In conclusion, the second quarter of 2025 has delivered a significant rebound in our business and we are beginning to see return on the investment we have made over the past few years. This includes our leading signal meter product, our new UFS and PCIe5 controllers, our new Muntitan ESD and Boost storage solutions, our market leading automotive portfolio and our new microSD product for multiple applications including the Nintendo Switch 2. We are in a better position to expand our market share across each of our markets in 2025 than ever before but we continue to capture additional share with the Flashmaker across our product portfolio. Given the current customer demand in our legacy business and the growing success with our new product, I'm increasingly confident that we will achieve our goal of exiting 2025 at the $1 billion revenue round rate and grow further in 2026. Now let me turn the call over to Jason to go over our financial results and outlook.

Thank you, Wallace, and good morning everyone for joining us today. I will discuss additional details of our second quarter results and then provide our outlook. Please note that my comments today will focus primarily on our non-GAAP results unless specifically noted. A reconciliation of our GAAP to non-GAAP data is included with the earnings release issued yesterday. In the June quarter sales increased .3% sequentially to 198.7 million, coming in well above the high end of our guidance range as we experienced a strong rebound in mobile demand and strong growth in our PCIe5 client SSD business. Gross margin was at the higher end of our guidance range and increased again in the quarter to .7% as we continue to capitalize on new product introductions and improving mix. Operating expenses increased sequentially to 69.3 million as we continue to invest in new enterprise storage products and as additional resources to support our significant pipeline of new projects. Higher operating expenses in the second quarter were also impacted by the stronger Taiwan dollar as most of our compensation expenses are paid in Taiwan dollar. Operating margin increased sequentially to .8% well above our guided range resulting from improved gross margins and higher than expected revenues during the Our earnings per ADS was 69 cents. Total stock based compensation which we exclude from non-GAAP results was 0.2 million in the second quarter. We had 282.3 million cash, cash equivalents and restricted cash at the end of the second quarter compared to 331.7 million at the end of the first quarter of 2025. Cash declined in the second quarter primarily from the combination of the revenue and payout of 16.7 million and an increase in inventory to support our expected strong business ramp. We did not repurchase any shares in the second quarter. Our team executed well and delivered significant outperformance despite ongoing global macro uncertainty and continuing investments in new advanced geometry products and our Montitin platform for the enterprise and AI markets. Now I'll discuss our third quarter outlook. Revenue is expected to increase 10 to 15% to 219 to 228 million driven by growth across all segments of our business as newer products continue to ramp in PCIe5, UFS, EMMC and the enterprise. Gross margins are expected to be in the range of 48 to 49% as we continue to transition customers to newer platforms and we return back to our historical range. Operating margin is expected to be in the range of 12.3 to .3% as we benefit from higher revenue and gross margins, partially offset by higher operating expenses from higher R&D development and headcount expense and the continuing strength of the Taiwan dollar. Our effective tax rate is expected to be approximately 18%. Stock-based compensation and dispute-related expenses are expected to be in the range of 6.5 to 7.5 million. For the full year, PC and smartphone growth targets remain in the low to -single-digit range with an above-average second half waiting. We believe that our business will reflect a broader industry with significant growth expected in the second half driven by the strong ramp of new products and project wins. We continue to target an annual revenue run rate of approximately 1 billion as we exit the year. We expect to continue to improve gross margins as new products scale and our enterprise business begins to ramp in the second half of the year. We remain confident that we can drive gross margins towards the higher end of the historical range of 48 to 50% by the end of this year. Our pipeline of new design wins continues to grow and we're committed to investing in next-generation advanced geometry products that allow us to enhance our market share and business long-term and help us diversify our product portfolio and enter new markets. We will also continue to add additional R&D resources to address the growing range of customer projects that will drive long-term growth. Despite these higher investments, we're confident that we can return to our historical operating margin range of 25% plus in the midterm as the investments we have made over the past 18 months begin to scale and drive stronger revenue growth, better gross profitability, and improve our operating profit. Our overall tax rate is expected to be approximately 15% for the full year and stock-based comp and dispute related expenses will be in the range of 32 to 34 million. As we enter the second half, our pipeline of new projects continues to build and position us for strong growth for the rest of this year and into 2026 and beyond. The investments we have made in client SSD and EMMC and UFS controllers are beginning to scale, driving better ASPs and higher margins. The momentum behind our enterprise business driven by strong progress in our Montite development and expanding opportunities in enterprise boot drives will deliver a new avenue of high margin growth for the company in the longer term. We're confident that our leading controller products pair with our unmatched customer relationships with all the flash makers and virtually every module maker will drive significant long-term revenue and profitability growth for the company. This concludes our prepared remarks. We will now open the call to questions from the investment community. Operator, please go ahead with the first question.

Thank you. As a reminder to ask questions, please press star 1-1 on your telephone. The first questions come from Craig Ellis from B. Riley Securities. Please go ahead.

Yeah, thanks for taking the question and congratulations on a very strong quarter of execution and the momentum you have here. I wanted to start with a clarification question on some of your operating expense comments, Jason. So we've all seen that there's been exchange rate fluctuations at unusual degrees as we've gone through the last three months and where we stand here early in the third quarter. I'm wondering if you can quantify what the new Taiwan dollar exchange impact was to 2Q and 3Q expenses versus the impact of some of the growth related R&D expenses that you also talked about just to help us calibrate the currency dynamic in the middle of the income statement.

Yeah, the $50 strengthens meaningfully and quickly in the second quarter and it was up by over 10% sequentially. So while our revenue cost of goods sold and most of our development costs are all denominated in U.S. dollars, our compensation is primarily denominated in Taiwan dollars given that the majority of our employees are based here in Taiwan. Had the Taiwan dollar and the U.S. dollar exchange rates stayed stable, assuming we state similar exchange rates to what we saw in Q1, our operating margin in the second quarter and for our outlook would have been about one plus percentage points higher than what we had reported for the second quarter of what we're guiding to in the third quarter.

That's really helpful. Thank you. Yeah, absolutely. The second question is for Wallace. Wallace, you're clearly seeing robust engagement on the enterprise side of the business and I'm hoping what you can do is talk about this year's exit momentum along three parameters with respect to enterprise one. What's happening with the initial customer ramps with Montitin 2? Can you update us on the status of the NVIDIA Bluefield DPU program and what you'd expect there exiting the fourth quarter? And then we've just seen great engagement from the supply chain pulling in your PCIe Gen 5 controllers into lower end, more efficient, AI related, scale up, scale out, configurations. Just help us understand what you see there and what all that means as we look to 2026. Thank you.

Okay, let me address the Montitin status. I think the Montitin's design momentum is very strong. Now we believe we're going to start to initial ramp in the fourth quarter and will be more for the strong momentum in 2026. So we have four two tier one customers, four other designs. Actually we have more coming but we just don't have enough resource to supply. The most important is the number of customers because each customer needs some custom made tailored firmware to fit certain category and workload. So we are focused on delivering the robust finalized firmware and expected production in late this year. So I think the momentum is coming but also with both QLC high capacity and TLSD as well as the TLC base for compute storage. Now let me address to the NVIDIA Bluefield. The NVIDIA qualification in the final stage we believe will enter production in the Q4. Actually frankly the solution we are controlling and the firmware we have been with NVIDIA in the past two years with other NAND maker which is we cannot we cannot say. So this is a transition naturally winning with our own solution with a different NAND type to supply for the long term. But we believe that helping us to grow in 2026 and 2027. In addition they also opened the door for us in getting with NVIDIA in other BU and other product lines. So very grateful to be in the media supply chain and hopefully that will expand the much more opportunity in the future.

And then

Wallace. I beg your pardon if you would like to ask questions again please press star 1 1. Allow me to move on to the next questions from Mehdi Hosseini from SIG.

Please Thank you for taking my question. The first one for Wallace. Congrats on increasing the annual revenue run rate. I see there's about a 55 million of incremental revenue increase from Q4-24 to Q4-25. And I'm assuming the majority of these is driven by the new PCIe projects. As I look into next year let's say Q4-26. This is where I think Bluefin is going to kick in and add incremental revenue. So you have a baseline of Q4-24 and then you overlay 55 million of the new products especially driven by storage. And then the Bluefin would drive or sustain that growth into Q4-26. Am I thinking about this transition the right way and feel free to modify and improve that thought process?

Yeah I think Mehdi is Jason here. In terms of your comparison between Q4-24 and Q4-25 that incremental revenue that we're talking about here is a result of really strength across the board. Increasing share in new products in EMMC and UFS. Increasing share in new products in PCI 5 for SSDs. And then the initial ramp of the Montitan products as well as the initial ramp of Bluefield. Now we haven't got it into 2026 so you know you'll have to bear with us for a little bit so I'm not going to comment on kind of how this goes into 2026. But certainly you know we still expect to be achieving that 5 to 10 percent revenue run rate with Montitan in that 2026-27 time frame. Nothing's changed there and certainly the strength that we're building, the designs we've done, the pipeline that we have to support growth longer term continues to get stronger and stronger each day.

So I think let me add a comment. We have very strong backlog in the second half of 2025. That's why we have confidence to reach our financial goal.

Okay and then moving on to OPEX. There's a significant step up in 2025 as Jason highlighted investment for future. Should I expect OPEX intensity to decline into 2026 as the new product ramp and this is going to give you some OPEX leverage?

We certainly expect to see operating margin leverage as our gross margins improve and our revenue scales. We do continue, we will continue to invest as Wallace pointed out. We have a number of new projects that we actually don't even have enough resources today to support that we have to turn away. So we will continue to invest, we will continue to hire. We have a number of new projects that we're going to be taping out next year especially in the enterprise and some of the more advanced geometry. So these are things that we'll continue to invest in longer term but we believe you'll see operating margin leverage. A lot of the investments that we have made over last two years are now just starting to come to market and they haven't scaled. That should drive a significant amount of operating margin leverage going into the next

year. Thank you for the question. One moment for the next question. Our next question comes from Sujitha Silva from Roth Capital. Please go ahead.

Hi Wallace, hi Jason. Curious with the trends you have in the revenues whether the gross margin would continue to potentially expand maybe above the target range given the auto coming in at a some of these areas or do we think about there being offsets to that keeping it in the range intermediate term?

Yeah I think it really depends on the product mix and depends on which quarter. For certain products because it's a high volume I think the margin is a little below our corporate average. For some high end products that means the margin is better. So but I think we cannot just I cannot comment right now we were above the upside of our guidance margin but definitely we'll meet our gross margin and I think we should have a better result in 2026.

Okay that's helpful thanks. And then on the on the Montitin firmware efforts and the customer efforts in the R&D you're investing. Jason is there a point in time where you think you get on top of that or is that going to be a persistent challenge of sort of having to turn away programs or is there some kind of leverage after you do a few of these that you can kind of pull that forward?

Look I think after we do a few that's your point once we do a few of these once we get a bunch of a few of our customers up and running you know we'll have a wide range of firmware capabilities that we can bring to market right. Some folks are going to want SDKs hardware only where they're building their own firmware and that's pretty easy to support but you know some folks that require you know full turnkey will require more resources etc.

Okay all right thanks guys.

Thank you for the questions. Please hold for the next questions. Our next question comes from Goku Hariharan from JP Morgan. Please go ahead.

Hi thanks for taking my question. Wallace the first question is you seem to be sounding a lot more optimistic about the automotive engagement compared to maybe two quarters back. Could you talk a little bit about what is the incremental margin profile when it comes to automotive both for gross margins as well as operating margins given a lot of the R&D is fairly similar to what you do for client-accessibility controllers or client eMMC controllers right. So is there a meaningful operating leverage that we should expect as automotive starts to scale given it kind of just expands the scope of your revenue base on similar R&D. Second question is on enterprise. Could you talk a little bit more about the roadmap for Montitin. I think what are we thinking about for future engagement like the next generation of Montitin. What are you planning in terms of the roadmap.

All right good let me try to address automotive business. We feel more positive about our automotive business from second quarter and moving to second half 2025 because it's through our design win pipeline and we also had a significant breakthrough in China automotive market. You know very well China automotive is very bloody and price very competitive. I think we find a very special way to position our value proposition to the leading customers like BYD and Xiaomi and several others. That's why we built a tremendous new pipeline and moving to production from late 2025 to 2026 and our major program in Toyota global model also start to ramp by late 2025. That's why we have a very very strong momentum in automotive business. We have confidence we'll be above 10 percent of total revenue from 26 to 27. Now let me comment about enterprise and regarding the plan and roadmap. Our Montitin today is 16 channel CPT-HTM 5 controller with performance shaping technology. We also developed tape out a six or eight channel Montitin it's called 8388 and the product will be available by end of this year and as you I don't know whether you know very well the U.S. have demand high capacity of enterprise D from 128 terabyte and some even ask for 256 terabyte but China also start a new momentum asking for 64 terabyte from latest year to 2026. So our eight channel lower cost Montitin which is perfectly fitting the demand and provide decent performance as well as a high capacity up to 128 terabyte and we also what develop a PCIe chain six Montitin family with TSMC four nanometers will tape out next year and this will engage with at least two nanmakers in this program. So this is a very very exciting we're very busy we're building design pipeline we believe Montitin will continue around and driving much bigger momentum beyond 26 27.

Got it maybe one follow-up Wallace there I think you talked about potentially seeing some demand for the the cold storage market as well for some of the AI data centers is there anything that you need to really change in your portfolio or the controller itself to address this market or is it kind of like an adjacency that you can address without too much change in the product?

No the data storage today primarily really one storage and some of the compute storage conventional server I think for cold storage really is the conventional near-line GDD and but I think the same sound that is the association with the near-line flash and to share that standard that's a very very interesting to drive a lower cost QRC based enterprise D to to expand one data storage for SAD. I think we last definitely willing to see that and we absolutely will put a good effort to engage with that trend because that's a huge potential for the nan maker and data center for enterprise D opportunity.

Do you have any timing on when this could open up in the next couple of years that you think it will open up or will take longer than that?

I think our nan makers working together and looking for how to define the right SPAC and definitely the purpose is that the performance has to be a little better than near-line GDD and so they can relax the SPAC and make sure the performance is as good as possible. But time frame as I said about three to five years range.

Okay thank you.

Thank you for the questions. Our next question comes from Matt Bryson from WebBush. Please go ahead.

Thanks for asking questions this morning. I just have one. So if I look at your target of 25% plus operating margins and I work off kind of current OPEX levels even if I see gross margins move up to the -51% range.

So as historical a little bit of a new run rate of 300 million and that goes higher if OPEX continues to increase which I think you're suggesting it will because... Hey Matt you're breaking up. We can't hear you.

Oh. Let me... Is this better?

No.

I will jump out and try dialing in again. Thank you.

Okay let me answer your previous first question. I think that definitely we have a higher operation expense because we increase R&D and also we have a signal and we take about next year we also have a four me tableau with the signal major tableau. So I bring expense probably will increase slightly but when we grow strongly in the top line of our revenue you will there will help much faster for operation margin and so we definitely looking forward to move back to -25% margin in 2020 May 26 and you will see even better margin moving to 27.

Thanks

Walsh. I'm sorry for the

technical difficulties on my end. Thank you for the questions. One moment for the next question.

Our next question comes from the line of Nick Dyer from Nick Ham and Co. Please go ahead.

Thanks for taking my questions. Just trying to think about the mobile strength and figuring out how sustainable that is. You mentioned the strength coming from units and share gains. Is the bulk of that related to this Chinese domestic market dynamic you've discussed and you mentioned it again. Just how should we be thinking about that growth into next year if it's sustainable?

Okay I think that it's a very good question. We have a very specific strategy to grow our mobile controllers for both EMC and UFS. So of course the China market and because the affordable low cost mobile variant available that's why most of us smart phone makers they like to adopt discrete EMC or UFS. They help the market maker customer to expand quickly and that's why when they expand quickly I think that also will impact some NAND maker for the value line. So NAND maker also turn to second motion controller because they do not want to develop in-house that will utilize our solution quickly to market and you can either sell the wafer to multi-maker or make a low cost solution to come in the market. That's why we grow very quickly for the value line and the mainstream for both EMC and UFS. In addition we see the NAND maker also looking for next generation. For example UFS 4.1 is in high-end but UFS 5.0 we're moving to the high-end by late 26 and 27. So the 4.1 becomes mainstream so the NAND maker they don't have enough resource to develop a new firmware to port into the new NAND so they come to also into third party and it's the right position to capture the outsourcing opportunity. So all this pipeline together continue you see so many opportunities actually we have so many projects in hand we don't have a resource to take. This is we're growing the market share in the mobile and hopefully we can reach 30% within two years.

Okay thanks and if I understand correctly it sounds a bit like this transition to the 4.1 in the mainstream could help the sustainability into next year. Maybe also asking a bit of a different way I mean you talked about the module maker inventory and you know how they're pulling orders in almost fear of price hikes later in the year. I mean how do their inventories compared to historical does that make you nervous at all in terms of the future mobile business? Thanks.

We really don't see I think our customer in early Q2 some are worried about the tariff but later it's stabilized really we don't see many customers pulling the demand as you know and the customer if they don't buy that many NAND they won't buy controller for inventory. So really they will see the balance most of them really plan ahead and make sure they also can prepare the NAND price increase and I think that's why we see the very stable pipeline because we can see six months backlog right now that's why we're very confident about we can achieve the end of the round rate by year end.

Thank you for

the questions

as

a reminder to ask question please dial star 11 and wait for our name to be announced. At this time we appear to have no more further questions I'd like to hand the call back to the management for closing.

Thank you everyone for joining today and for your continued interest in SICKMOTION. We will be attending FMS conference in Santa Clara next week as well as several investor conferences over the next few months. The schedule of this event will be posted in our investor relationship section of our corporate website and we look forward to speaking with you at the event. Thank you everyone for joining us today.

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