Silicon Motion Technology Corporation

Good day and thank you for standing by. Welcome to the Silicon Motion Technology Corporation's third quarter 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, at which time if you wish to ask a question, you will need to press star 1 1 on your telephone keyboard. 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 limitation, statements regarding trends in the operations, financial condition and business prospects. Although such statements are based on our own information and information from other sources we believe to be reliable, you should not place undue reliance on them. The statements involve risks and uncertainties, and actual market trends and our results may differ materially from those expressed or implied in these following statements for a variety of reasons. Potential risks and uncertainties include but are not limited to 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 and any change in our relationship with our major customers, and changes in political, economic, legal, and social conditions in Taiwan. For additional discussion of this risk and uncertainties and other factors, please see the documents we file from time to time with the Securities and Exchange Commission. We assume no obligation to update any following statements which apply only as of the date of this conference call. And with that, I'll now hand you over to Mr. Tom Sabances, Senior Director of IR and Strategy. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and welcome to Silicon Motion's third quarter presentation. 2025 Financial Results Conference Call and Webcast. Joining me today is Wallace Koh, our President and CEO, and Jason Tsai, our CFO. Wallace will 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 begin, 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.

Thank you, Tom. Hello, everyone, and thank you for joining us today. I'm pleased to report that we deliver another strong performance in the third quarter. Exceeding our revenue and operation margin guidance, we continue to benefit from the introduction of new controller existing in new markets and drive increased market share across our portfolio. We remain focused on delivering both top- and bottom-line growth and improving profitability while investing heavily in the next-generation controllers, increasing our engineering resources to support new products and markets, and further positioning Silicon Motion for long-term market share expansion. We expect strong revenue growth to continue as we introduce compelling new PCIe client-side controllers next generation EMC and UFS controllers that drive higher share benefit from strong growth in our multi-business and as our Mount Titan enterprise business begins to scale. I'm excited about the foundation for growth that we are building across each of our major markets and I believe we are well positioned to see sustained revenue and profitability growth in both the near and long term. Let me start by discussion and broader marketing environment, and then each of our major business in greater detail. AI remains a significant growth factor across memory and storage industry, driving strong demand for NAND and other technology, including DRAN and HDD. The growing AI demand has, for the first time, greatest supply shortages in HDD, NAND, and DRAN. Leading to price increases for the past three quarters, a trend we expect will continue at least through 2026. In the early stage of AI development, AI training drove strong demand for high-performance memory and storage using DRAM, HBM, and then for lower-capacity TLC-based compute SSD. As AI evolves, the focus is changing to inference, which relies more on high-performance high-capacity storage rather than raw computing power. The increasing demand from inference is putting a large strain in the HDD supply chain that traditionally served this market and is expected to continue well into next year as HDD makers struggle to quickly meet the growing demand. Inference is also increasing demand for high-capacity high-performance QLT-based S&D, and creating a significant trend for the NAND market supply and availability. As AI is still in its infancy, we expect that these demand drivers will continue to impact supply availability across all memory technology for quite some time as CAPAC spend increases to catch up with market demand over the next few years. Growing AI demand is also forcing a more disciplined CAPAC spending approach and is driving difficult resource allocation decisions by the memory and storage makers to prioritize engineering resources across multiple technologies, products, and markets. Increasingly, we are seeing a greater willingness by the NAND flash makers to rely on Flickr Motion to complete their product portfolio but they shift their internal resources to focus on DRAM, HBM, and future customized memory technology for high-performance AI environments. We are in an active discussion with all NAND makers about expanding our partnership and taking on a broader range of projects long-term to offset growing internal resource shortages. Looking ahead, we see continued NAND enterprise increases and shortages given the impact of AI on overall demand, which has been amplified by reduced new capacity investment as a flash maker over the past two years. Despite the challenges inherent with the NEM price increases, we believe our business will remain robust. Our module maker customers have been building NEM inventory ahead of anticipated price increases and are well positioned for next year. to meet expected market demands. Our direct business with NAND Maker continues to be strong, accounting for more than 50% of our revenue, and we expect to gain significant share over the next few years. Additionally, more than 70% of our business with NAND FlashMaker and MultiMaker customers goes directly to PC, smartphones, servers, and other device OEMs. that are not significantly impacted by high NAND markets. We are a robust design pipeline in EMC, UFS, Client SD, and Enterprise SD controllers, and our ferrite pipeline should benefit from the increased NAND price trend. Additionally, given increased NAND prices, we expect OEM to more rapidly adopt QLC technologies where we have a significant advantage over our competition. And finally, we are starting to scale our new enterprise products, including Mount Titan, which are less price sensitive than the consumer market. We expect AI demand to continue to put a greater demand on inference than it has. A more large learning model, rich maturity, putting more focus on the high performance high-capacity storage capability that a QLT-based SSD ideally suited to address. I will now discuss each of our business units in greater detail, starting with EMC and UFS. We've turned another exceptional quarter of growth in our EMC UFS business, with strength across the board in smartphones, automotive, industrial, and IoT. EMC and UFS revenue was up over 20% sequentially as we continue to increase our market share and capitalize our new product introduction. Market makers are benefiting as NAND makers have walked away from EMC and UFS2 due to lower ASP margins, which has helped market makers gain market share rapidly using our EMC and UFS controllers. Overall, and market demand in the third quarter was higher than expected and helped us deliver strong sequential growth with our NAND Flash partner as well. Smartphone EM continued to shift to our new UFS controller in mainstream and now value-aligned devices, driving better ASP and margin for our business. Additionally, we continue to have success with our direct OEM engagement with the QLC controller. Our first customer is introducing a second smartphone with our chip in the current quarter. We plan to introduce additional models next year. Given the current NAND environment, we expect that other smartphone manufacturers will increasingly look to QLC to deliver high-capacity storage at lower cost. which could lead to further customer engagement. UFS will continue to grow rapidly in the smartphone market as low-end smartphones continue migrating from EMC to UFS to deliver better performance cost effectively. While smartphones are rapidly shifting away from EMC to UFS, EMC remains an important revenue driver for SiliconMotion. As we mentioned, The market for EMC extends well beyond mobile phones and accounts for more than 900 million units annually. The market for EMC includes automotive, commercial, industrial, IoT, smart devices, data box, streaming devices, robotics, and many more, including the rapidly growing market for smart glasses championed by Meta, Apple, Google, Amazon, Xiaomi, and others. These solutions will likely continue to use EMC, providing a strong foundation for market growth for years to come. As the NAND Flashmaker increasingly concentrates on the enterprise market, the opportunity for second-motion EMC and UFS continues to grow. We expect to see further market share expansion as the Flashmaker outsources more and believes that our shared gain in EMC UFS will remain a strong contributor to our future growth, leading to expanding market opportunity and end market growth. I will now discuss our client-side business. Our client-side revenue was up more than 20% sequentially in the September quarter, after a slower start in the first half of the year. We are beginning to see greater PC demand driven by the sunsetting of Windows 10 this month, and the adoption of AI at the edge in commercial and consumer PCs, which require higher-performance SSD solutions. We are also benefiting from the positive impact of our 8-channel PCIe 5 controller that launched at the end of last year, with revenue growing 45% sequentially in the third quarter and which now represents more than 15% of our client fee revenue. This new controller has significantly higher ASP than our PCIe 4 offering, and it will help drive revenue growth as it scales. As we have discussed, we have four of six NAND batch makers and nearly all the module makers using this performance-leading controller for their high-end offerings. and that we expect to capture significant market share in the top tier for the PC market first time, which represents approximately 10% to 15% of the overall market. We have win with all the top PCOEN in many of the upcoming high-end models that are expected to ship later this year and scale through our next year. We are introducing our second six nanometer DCI-E5 controller during the four-channel version that's targeting the mass PC market. And that we will begin initial shipment this quarter. We have already secured design win with also four NAND flash makers and nearly all the module makers for this controller as well. This new controller targets the largest segment of PC and retail SD market. And we expect that it will help drive our clients' market share from approximately 30% today to 40% over the next few years. We expect the PCIe 5 will become the dominant technology in consumerization over the next few years. And we are in the best position to benefit given our strong customer partnership with both NAND flat makers and module makers. I will now provide an update about our automotive business. We continue to experience significant design win activity in our automotive segment across each of our product units, including EMSC, UFS, BCIE, and our ferrite embedded solution. While the overall market has experienced challenges in 2025, given the broader geopolitical and tariff issues. We continue to grow our product portfolio and market share. We are also benefiting from the super trend of increased vehicle capacity, which is driving the need for additional high-speed, high-performance storage. We recently won a significant design win with a Tier 1 Japanese auto manufacturer in their global model that could contribute to top-line growth moving forward. As I mentioned during our last call, we also recently won with a large South Korea customer that has started to sample our EMC controller-based solution to multiple automotive OEMs, which we expect to drive perfect growth in our automotive business in 2026 and beyond. We are also on track to extend our lead in ACE-5 certification which we achieved this year with a Level 3 certification for our PCE4 controller. We plan to take our next generation automotive PCE5 controller next year. The increased demand for advanced storage solutions in automotive is being driven by AI, multiple screen integration, ADAS sensors, cameras, navigation, and authentication. We are shipping to many of the leading automotive manufacturers in the world, including Tesla, BYD, Xiaomi, Mercedes, Toyota, Honda, and many others. Entering the second half of 2025, we experienced greater than expected demand from our partners in China, as our strong design pipeline has led to market share gains with leading car makers like BYD and Didi. Chinese automotive brands are rapidly taking market share worldwide, given their leadership in electric low-cost vehicles. As we continue to introduce compelling new automotive controllers, and as we expand our customer relationship, we remain confident that automotive will represent at least 10% of our revenue by 2026-2027. Finally, I will now provide an update to our enterprise business. The requirement of AI computation, training, and inference are rapidly evolving and driving new requirements on storage and memory solutions that deliver performance, capacity, power, and affordability. These growing opportunities are expanding their prospects. The prospect for second motion Mount Titan family of enterprise-grade controllers. The need for increased speed and lower latency is driving greater adoption of AZ in the data center, and the industry is increasingly looking to adopt that solution in long storage, few storage, and eventually near GPU storage as well. Our Mount Titan solution ideally suited to address the increasing requirement of AI workflow for both compute SD using TLC to high capacity one storage SD using TLC. The opportunity for compute SD represent most of the enterprise SD market today, while high capacity SD are just beginning ramp, but are expected to be much larger market opportunity longer term. Initially in Montyton, for compute storage TLC-SD application is increasing. This quarter, our customers are beginning qualifications with end-customers DSP, enterprise, and data center with TLC-based high-performance TLC-SD using our Montyland controller, targeting the high-performance requirements of AI in the data center. We expect these qualifications to progress into first half of next year and begin to run commercially in the second half of next year. For high-performance, high-capacity QLCSD, our Mount Titan-based solution helps deliver significant advantage over HDD for the AI inference in for CSP, hyperscalers, and enterprise by elevating the speed and power bottleneck inherent in HDD technology for warm storage. The 3-2 NAND technology for warm storage is being accelerated by the current supply shortage in the major HDD manufacturers. Making HDD more expensive and high-capacity QLCD is a cost-effective, better performance option. Longer term, One-star requirements offer a much bigger market opportunity when compared to the opportunity for compute SSD, and we see increasing interest in our industry-leading Mount Titan QLC solution. We are on track to begin end-customer qualifications for QLC-based high-capacity SSD late this year or early next year. We are increasingly confident in Mount Titan as a significant new growth opportunity given our successes and win today in both the compute and high-capacity wall storage market. We remain confident that Mount Titan will deliver 5% to 10% of our revenue by the late 2026 or 2027 time frame. As these new opportunities and customers scale, in the near and the mid-term. And finally, we continue to collaborate with customers to deliver compelling enterprise boot drive solutions that can work across multiple platforms, engaging directly with the world's leading AI GPU makers, as well as hyperscalers and CSPs. We began volume shipment of a boot drive to the leading AI GPU makers this quarter. for their current TPU product, and start in qualification of their next generation TPU for following products. Working on expanding our relationship with the customer, we are also in the qualification process of our boot drive solution for a variety of switch product also as well, including NV-Lite, AMN-Link based design, as well as Ethernet switch design. both of which are expected to run later next year. We expect the boot drive solution will add an additional long-term sustainable growth driver for Silicon Motion as we expand our storage technology and business partnership with this leading GPU, GPU maker. In conclusion, the third quarter of 2025 delivers significant growth for our business, but we ask you on our diversification strategy with new products into new markets. We continue to see the reward of investments that have made over the past few years. These investments include our market-leading signal meter products, our new UFS DCI-E5 controllers, our new Mount Titan and BoostArch Enterprise Cloud solution, our growing automotive portfolio, and our new microSD products for multiple applications, including Nintendo 3.2. We have never been a better position than our market share, given our leading product portfolio and the growing need for flash makers to shift their focus from consumer to enterprise applications. Given the growing demand in our legacy business and our new automotive and enterprise products, I'm increasingly confident that we will deliver strong, attainable top and bottom line growth. Given our current backlog, I'm very confident in our ability to exceed our target annual revenue run rate of more than $1 billion this quarter. Now let me turn the call to Jason to go over our financial performance outlook.

Thank you, Wallace, and good morning to everyone joining us today. I'll discuss additional details of our third quarter results and then provide our outlook. 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 in the earnings release issued today. In the September quarter, sales increased 22% to $242 million, coming in well above the high end of our guided range to experience a strong rebound mobile demand, and strong growth in our PCIe 5 climate. Gross margins was at the higher end of our guidance range and increased again in the quarter to 48.7% as we continue to capitalize on new product productions. Operating expenses increased sequentially to $79.5 million as we continue to invest in new projects and expand our customer engagements to further grow and support our significant pipeline of new opportunities. Operating margins increased sequentially to 15.8%, well above our guided range, resulting from improved gross margins, higher than expected revenues during the quarter. Our earnings for ADS was $1. Total stock compensation, which we excluded from non-GAAP results, was $5.5 million in the third quarter. And we had $272.4 million cash equivalents, restricted cash at the end of the third quarter, compared to $282.3 million at the end of the second quarter of 2025. Cash declined in the third quarter primarily from a combination of dividend payment of $16.7 million and an increase in inventory to support our expected strong business frame. Our team executed well, and our operational discipline delivered significant outperformance despite continuing investments in new advanced geometry products and our emerging MonTitan platform for their enterprise and AI markets. Now we'll discuss our fourth quarter outlook. Revenue is expected to increase 5% to 10% to $254,266 million, above our initial target of $250 million we had set at the start of this year. We expect fourth quarter strength to be driven primarily from our client SSD controllers and SSD solutions. Gross margins are expected to be in the range of 48.5% to 49.5%, and operating margin is expected to be in the range of 19% to 20%. approaching our historical operating profitability levels as we plan to benefit from higher revenue, higher gross margins, and lower operating expenses sequentially. Our effective tax rate is expected to be approximately 18%. Stock-based compensation and dispute-related expenses is expected to be in the range of 18.1 to 19.1 million. Despite the uncertainty this year given rapid geopolitical changes and tariff impacts, our team has remained focused on execution and building an incredibly strong pipeline for long-term growth. We have successfully scaled new products, engaged with new customers, and expanded into new markets that will lead to higher market share and greenfield growth opportunities in enterprise storage. And we're just getting started. We expect to continue to invest to further expand our position as a leading merchant controller maker in the world for EMMC and UFS, client SSDs, automotive applications, high-performance, and high-capacity enterprise and data center storage. As we look ahead, our pipeline for growth in 2026 and beyond has never been stronger, and we look forward to discussing it in greater detail when we report again in three months. This concludes our prepared comments. I'd like to open up for questions now. Operator?

Thank you. We will now begin the question-and-answer session. To ask a question, please press star one one on your telephone keypad and wait for your name to be announced. To withdraw your question, please press star one one again. A moment for our first question. We will now take our first question from the line of Neil Young from Needham and Company. Please ask your question, Neil.

Hey, everybody. Thanks for letting me ask your question. Can you dive a little deeper in your comment in the press release about white box AI server makers continuing to leverage mainstream hardware components? I believe your SSD controller sales are typically the PC slash other consumer applications. So can you just give us a sense of how much of the SSD controller revenue in this quarter came from the white box AI server makers you referenced and where you expect that to trend going forward? And then I have a follow-up. Thanks.

The mansion with a white box is an AI all-in-one server, and primarily they come from China and Taiwan. Some are deep-seq all-in-one server white box, and some are founded with other training models. I think our 2508 8-channel PCIe 5 controller is well-positioned in the market. We cannot comment. We don't know exactly the volume, but it's growing momentum for all of the AIO in one server. It's similar like NVIDIA announced that MJX, DGX, GPU for this kind of market.

Okay, thanks. And then looking at the gross margin guide midpoint coming in at 49%, I was wondering if you could maybe walk through the moving pieces of the gross margin in 4Q. And then, you know, if possible, could you share sort of where you expect gross margin to trend next year? You know, if not, at least what the main drivers of the gross margin improvement should be in 2026. Thanks.

Yeah, so certainly as we continue into the fourth quarter, scaling new products like PCI-5, new generation products tend to have better gross margins that offset the declining gross margins of older products. We do expect to see, as Montitan continues to scale, to have some incremental benefits, but certainly that remains a relatively small portion of our business today. We're not guiding for 2026 at this point. We'll talk more about that in three months' time. So stay tuned for that. But certainly we are excited that we're back to kind of the normalized range that we historically have been. Historical range has been 48% to 50%, and we're guiding smack in the middle of that. So we're pretty happy that we've been able to recover off of obviously some tough times a couple years ago, but we're back to where we historically have been.

Do you have any follow-up question, Neil?

That's all for me. Thank you.

Thank you. We will now take our next question from the line of Craig Ellis from B Riley Securities. Please go ahead, Craig.

Yeah, thanks for taking the question, and team, congratulations on real good execution. I wanted to start with a question that takes off from Jason's comments that the company is just getting started and in enterprise storage and ask a question that's fairly broad and has a couple of parts to it. So if we look at what our ambition is over the next year plus with Montyton and enterprise storage classically defined and think about what's going on currently with boot drive controllers and full solutions already starting to ship and picking up and maybe diversifying our customer base next year and then And this part would be for you, Wallace, as we think about some of the news that's coming out of Korea and other countries about the development of high bandwidth flash. And while some could be skeptical that that may just be like storage class memory, which went nowhere for 15 years, but with some leading OEMs behind it, it's very likely we could. How do we think about the arc of those drivers as we go forward? from 25 through 26 and 27, and what can enterprise broadly defined be for the company longer term?

Thank you for your question. Please remain on the line.

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Craig, you may want to repeat your question.

Sorry, Craig.

Yeah, okay. Yeah, the question is this. If we look at enterprise storage broadly, including Montyton as traditional enterprise storage, but also include the boot drive business with one customer shipping now, but maybe diversifying and think longer term about what's possible from high bandwidth flash if that were to be an opportunity, because certainly that's going to be QLC where you're particularly strong.

Can you talk about... Just a moment, sir. The conference will resume shortly. Just a moment.

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We have the speakers back.

Hi there. Sorry about that. We're back. Okay.

Should I give the question a third shot?

Yeah. One more time.

Sorry about that. All right. Yeah. Thank you. Yeah. So looking at enterprise storage broadly from MonTitan classic enterprise storage that's starting to ramp with qualifications and then shipments next year, but But boot drive controllers and storage getting going now, and with the potential for high bandwidth flash to come in as a much needed AI-based solution a few years down the road, how do we think about the longer-term arc of storage as we just get started with boot drives this year, pickup, MonTitan, and then ramp those over the ensuing few years? And what could high bandwidth flash do for the business as a third driver longer term? Thank you.

So first of all, I want to clarify. The 5% to 10% of our total revenue, 26% to 27%, does not include our boot drive for the current DPU design and also for the additional switch boot drive solution. But we do see moving to 2026 is the best and challenging year for storage industry. There's so many new opportunity coming, not the conventional compute storage, but also warm storage SSD, high capacity QLC SSD. And then moving forward, there'll be near GPU storage. So there's so many new opportunity for mountain Titan controller to fit in. And we also preparing So we're in a growing market. We just need to want more R&D resources to meet the demand. And in parallel, I think this is a great opportunity. We see Mountain Titan go scale up. Our boot drive solution also go scale up quickly in 2026 and move into some CSV design too.

And Wallace, what's your view on the potential for high bandwidth flash to be a third driver of enterprise broadly defined long-term.

The high HPF, I think this is a very interesting product. And this is, as you know, this is all designed for AI inference near GPU. We see there's a 3D SLC technology moving to meet a certain near GPU leader's requirements. But HB is also very interesting. The packaging technology uses a conventional standard 3D NAND. But this requires a new controller and packaging technology. We will monitor it carefully because we believe initially this belongs to all the NAND makers' development. And we are also invited to join the business. But I think we are out of a resource. We want to monitor when the market becomes more mature, more stable. and where we'll participate.

Thank you. And then the second question is a question regarding the comments from you and Jason around NAN sufficiency and the implications for shipments next year. So you have an advantage. You're levered with all NAN suppliers. What messaging are they giving you with regard to how they're going to prioritize their output and capacity allocations across enterprise versus PC versus smartphone, and then consumer applications, and what does that mean for the various growth drivers of the business in 2026? Thank you.

I think you ask a very good question. We're facing a never-happened-before, the Iran, HBM, NAND, all in severe shortage in 2026. Most of our capacity are sold out. And I think I did talk to many of the major makers, but I really cannot comment what kind of allocation policy going to do. However, the leading maker, they will keep a discipline and they will consider balancing for the industry They're not just favor AI and server of AI data center. They will consider certain percent for smartphone, certain percentage for PC, and certain percent for automotive. Of course, the majority will go to the AI and the AI server. But balancing is very important so we can keep the whole industry moving forward.

Thank you, Wallace.

Thank you. We will now take the next question from the line of Suji DeSilver from Roth Capital. Please go ahead, Suji.

Hi, Wallace. Hi, Jason. Congratulations on the progress here. For Monti, you talked about two lead customers initially, now more. I know one of them was an OEM who was, I think, in turn trying to themselves secure hyperscaler customers. Has that happened with that lead customer? And if so, what's the start of ramp timing for that customer?

I cannot comment the ramping. I think they're very close to the, as you know, tier one customers, some was developed the firmware themselves. Some of the joint development result together. We cannot comment the ramping, getting very close, but because Montana getting a tremendous demand from multiple customers, the tier two, so we're busy to provide solution for both TLC and QLC. Hopefully we can start a small ramp in the Q4 and then we see the more meaningful ramp in the 2026.

Okay, thanks. Well, it's very helpful. And my other question is on the arbitration. I'm wondering if there's any update there. Thanks.

Yeah, thanks, Suji. Yeah, the arbitration, you know, we had the arbitration had begun. The hearing was held and scheduled earlier this month. The tribunal has scheduled oral closing arguments to be in March of 2026 and is expected that a decision by the tribunal will be available sometime after that.

Okay. Thanks, Jason. Thanks, everyone.

Thank you. We will now take our next question from the line of Tiffany Yeh from Morgan Stanley. Please go ahead, Tiffany.

Yeah, thank you. So good morning and good evening, gentlemen. Thanks a lot for taking my questions and congrats on the great result and guidance. So my first question is that it seems your inventory value rose around 62% in third quarter. May we know the reason behind due to the inventory preparation for the BT substrate shortage? And I have a follow up. Thank you.

Yeah, so inventory did come up. Inventory increases to support the growing backlog of new business and orders that we have already received, and that's expected to ship over the next few quarters. And the increase in inventory is across really all of our product categories, including some low-cost NAN that we had procured earlier, as well as controllers for SSDs, as well as EMMC and UFS. So it's a pretty broad-based demand that we're seeing, and we're preparing ahead of that.

Okay, got it.

So it seems that the BD substrate shortage has kept some of our fabulous peers outside in person next year. So do we see any impact from that, or because as what you just indicated, we're fully loaded now, so not worry about that impact?

I think the substrate and the PCB shortage are a lonely time. the non-empowered business, we have prepared in advance. But we do need to prepare the production ramp for more controller as well as the ferrite power line. That's why increase our inventory right now.

Got it, got it. I have one more question. So as we head into 2026, We see both our foundry partner and OSEP partners all initiating price high to reflect the elevated material costs. So how shall we think about the impact to our profitability? And do you think we can further pass through all these elevated costs to our customers? That's all.

Thank you. I think what I can say that TSMC will increase wafer price from 5, 4, 3, 2 nanometer Let's start from 2025. Our PCIe Gen 6 TSMC 4 nanometer, but it won't be production until late 27 or 28. So there's no cost impact boundary weight for impact for our cost in our controller in the next two to three years.

And Tiffany, most of our products are on more trailing edge process geometry. So availability and pricing is certainly better. at those trailing edges. You know, the more advanced ones we have today are at 6 nano, but a lot of our other products are at 12 and 20 or even higher process geometries.

Okay. So maybe the impact from foundry is quite nearly limited in 2096, but how about OSTATs? Thank you.

OSTAT, I think because we have a preliminary agreement So the offset cost impact will be very limited to us, almost irrelevant.

Got it.

Thank you. Thank you. Our next question comes from Gokul Hariharan from JPMorgan. Please ask your question, Gokul.

Yeah, hi, Wallace and Jason. First question, given this very rapid increase in NAND flash pricing and it seems like we're going to be in a reasonably short supply situation all through 2026, what are the business dynamics that you're seeing from your customers? Historically, Philippine Motion used to be a little bit more affected when NAND flash is very tight given OEMs try to allocate to certain customers. At the same time, QLC NAND is clearly rising. Could you talk a little bit about anything more that you see in terms of either engagement, any reason why you're not kind of getting more bullish about your 5% to 10% kind of enterprise SSD exposure, given a lot of the activities happening in QLC NAND right now?

I think, first of all, more than 50% of our business engage with NAND OEM business. we are really well protected in the NAM maker. Second is most of our module maker, they have prepared the potential NAM price increase and shortage in advance. So they all have at least eight to 12 months inventory. And I think they also, although they do have a certain contract with the NAM supplier, but definitely it will be some impact. But I think that most of our customer when we discussed in the last couple weeks, they all have the confidence they should walk through in the 2026. So we did not see impact of our business as the coming quarter or even the first half of 2026. We feel very strong for our backlog, and we see we will benefit from the supply shortage and become a stronger player in the industry. Understood.

Any updates on the QLC NAND pipeline, design pipeline and revenue pipeline? I was thinking maybe you would be sounding a little bit more bullish about enterprise SSB given a lot of the activity on QLC NAND recently.

That's exactly true. We are very excited about the high demand for QLC high capacity enterprise AD. We just need to have a deliver the result. I think, as you can see, even it's not just the AI inferences really require high-capacity enterprise SD, because the HDD shortage also trigger higher demand for an urgent demand for the high-capacity SSD. That's why we are very busy. I cannot comment about the potential outcome, but we have to deliver result ASAP.

And, Gokul, we're not changing our expectations at this point yet, you know, in spite of the strong demand. We're still targeting 5% to 10% of our revenue in that 26-27 timeframe.

Okay. Are your existing customers, because new designs will obviously take time to kind of cascade in, but are your existing customers upsizing meaningfully compared to what you saw maybe six months back?

Well, I mean, I think across the board, we're certainly doing better, right? We're coming in ahead of where we were anticipating exiting the year at, so we're going to be above the billion-dollar run rate. We are seeing strength in EMMC and UFS as we gain share there. We're seeing strength with our PCI-5 as we gain share there. So across the board, we are. And so our business today is certainly stronger than what we had anticipated at the start of the year.

So, yeah, I think this is more to do with enterprise. I think consumers are very clear, I think, but this is more to do with enterprise.

Yeah, I mean, look, our target still remains at 5% to 10% in 26, 27. Obviously, if we can do that faster, we certainly will, but we are resource constrained. We are working as fast as we can. Our products are... beginning to sample with end customers. So as they get ready to ramp up, we're going to be ready to support them. So there are a number of processes in place that right now we're working through.

Got it. Just back to client accessories. How are you thinking about the next couple of quarters? I think we have probably seen a lot of the benefits of the Windows 10 platform. sunsetting and demand pull-in for PC as a result of that. As we kind of start to lap that in the next couple of quarters, how do you see this pan out? Do you see a little bit of moderation in growth there or the spec migration to PCIe 5 is good enough to kind of offset any of that volume growth tail-offs?

I think you are correct. We balance it on PCIe 5 market share again. As we said, our PCIe 5 8-channel have a 4-net maker, nearly all the multi-maker design wing. So when PCOE start to ramp from late this quarter, I think we're balancing from revenue growth as well as market share again. Our 4-channel mainstream dealer is PCIe 5. Also, it's near production, I think, we'll start to see initial production by late this quarter and start to ramping up by mid-Overn next year through the another combination for NAND maker as well as the market maker. So when PCIe 5 become mainstream in the PC market, Silicon Motion will benefit from the market trend because we will move toward 40% of the global market share.

And I said in the comments that we do anticipate our SSD controller business to grow again sequentially in the fourth quarter.

Okay. So just a clarification. So for PCOE Gen 5, let's say for next year, what percentage of the PCOE market do you expect it to be? Is it like 15%, 20% once you have your four-channel controller also ready, or is it even higher than that?

We cannot comment for PCOE and what they plan to ramp. We just know when they ramp more model, we benefit from market share again.

Got it. Thank you. Thank you. As a reminder, before we take our next question, if you wish to ask a question, please press star 1 1 on your telephone keypad now. Our next question comes from Matt Bryson from Wedbush.

Please ask your question, Matt. Matt, please unmute your line. Your line is open. All right. We are not getting a response from Matt.

So I'm not showing any further questions. I'll now turn the conference back to Mr. Wallisco for closing comments.

Thank you, everyone, for joining us today and for your continuing interest in sickle motion. We will be attending several investor conferences over the next few months. The schedule of these events will be posted on the investor leadership section of our corporate website, and we look forward to speaking with you at these events. Thank you, everyone, for joining us today.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect your lines.