Silicon Motion Technology Corporation

Hello everyone, welcome to Silicon Motion Technology Corporation's Q4 2025 earnings conference call. At this time, all participants are in the listen-only mode. After this week's presentation, there will be a question and answer session. To ask a question, you will need to press star 1 1 and wait for a name to be announced. I must advise you that today's call is being recorded. 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 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 four working 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 and any change in our relationship with our major customers, and changes in political, economic, legal, and social conditions in Taiwan. For additional discussions on these issues, 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 follow-up statements which apply only as of the date of this conference call. With that, I would now like to attend the call over to your first speaker today, Mr. Tom Serpensis, Senior Director of IR and Strategy. Thank you. Please go ahead.

Good morning, everyone, and welcome to Silicon Motion's fourth quarter 2025 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 fourth 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 6-K 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 the call today. I'm pleased to report that we deliver another excellent performance in the fourth quarter, exceeding our revenue and near the high end of our margin guidance and positioning us for a record-breaking year in 2026. We benefit from strong demand across our market and through the introduction of compelling new controlling solutions. We increase market share in existing and new market and expect the momentum to continue throughout 2026. We remain focused on delivering long-term growth while investing heavily in next generation products, increasing our engineering resources to support new product in markets. and further positioning silicon motions for long-term market share expansion. While 2026 membrane and storage industry dynamics are challenging given the supply tightness of NAND and DRAND and rapidly increasing prices of these components, we believe our resilient operation strategy and our matched NAND and maker relationship will allow us to deliver strong growth across our business. Given our current backlog and shell plan, we believe that first quarter 26 revenue will be the lowest of 2026, thanks to our sequential growth throughout the remainder of the year. As we continue to introduce the skills compelling new EMC and UFA controller, PCI-E client-stake controller, Mount Titan enterprise-stake controllers, enterprise boot drive solution, and our expansion Ferris multi-portfolio, we expect to deliver broad-based growth and to deliver the highest annual revenue in the history of the company in 2026. But we capitalize on multiple new products and execute on our continuing diversification strategy. I would like to start by addressing the current market environment. The rapid adoption and growth of AI has introduced significant demand across all memory and storage technology, including HPN, DRAM, NAND flash, and even hard drives. The new and growing demand has led more recently to supply constraint, time market condition, and increasing pricing pressure across multiple markets, including AI and enterprise storage, boot drives, PC, smartphone, and most other markets that use NAND flash. AI CSPs have attempted to lock up all the DRAN and NAND supply through 2026, which has made it increasingly difficult for other market players to get a product, and is driving significant intra-quarter price increases. Given the growing supply constraint in DRAN and NAND, industry analysts are beginning to take a more cautious approach regarding smartphone, automotive, and PC uni growth in 2026. SiliconMotion, however, remains extremely well positioned in the consumer market, despite the tight conditions given our longstanding partnership with all the major flash vendors. Our expanding market share within our existing market and the introduction of the new higher ASP products. We are leveraging our strong relationship with dispatch makers, OEMs, and module makers to help secure NAND supply for our smartphone and PC OEM customers and ensure steady access to NAND even in the tight times. We are delivering greater value-add to both our NAND maker partners and OEM customers, driving stronger partnerships that will lead to sustainable long-term growth. As a result, Despite the expected market having, based on our existing backlog, we expect growth in our major product line in 2026, including automotive, mobile, PC, enterprise ID, and boot drive storage solution, giving a strong and growing market position and leading product portfolios. I would now like to discuss our highlight in EMC and UFS. Growing AI demand in focusing a more disciplined KPI approach by memory and storage market to prioritize resources across multiple technology, product, and market. Increasingly, we are seeing additional opportunity for Silicon Motion to supply controller and then make a shift in internal resources to focus on DRAM, HVN. and customized memory technology for high-performance AI requirements. The mobile market is a prime example of this trend, a landmaker actively exiting mobile in favor of DRAM and HBM, which has led our mobile business to outperform in 2025, as our EMC UFS business grew 25% for the full year, far outperforming the smartphone and embedded market. Module makers are seeing great asset success by using local NAND supply. Coupled with our controller, just as many of other NAND flash makers have looked into exit the mobile market in favor of the enterprise. We will continue to benefit given that we are the only meaningful merchant controller maker for the EMC and UFS. While the overall smartphone market is expected to decline this year due to higher DRAM and NAND component cost, we expect a continuing shift from NAND FlashMaker to ModuleMaker to continue in 2026 and further benefit our EMCU of the controller business. Leveraging our strong relationship with local NAND makers and helping to align supply with handset OEM, and module maker will lead to continuing output forms for our business. In addition, the market for EMC are vast and growing, with over 900 million units shipped annually. We are shipping EMC into automotive, industrial, commercial, IoT, smart device, streaming device, and many other markets, but FlashMaker has all but exited for EMC market, the competition has diminished significantly, and we are experiencing strong revenue contribution from this segment. Given our current backlog and customer outlook for 2026, we expect to significantly outpace the market and deliver another strong year of growth of our EMC and UFS business, despite the difficult market environment. I will now discuss our client-side business. 2025 market turning point of our client-side business, given the success of our new PCIe 5 controllers. We introduced our 8-channel PCIe 5 controller at the end of 2024, with four fashion makers on it and nearly all multi-maker makers, setting us a clear path to grow our client-side PC market share from 30% today to 40% over the next few years. We expect our new D-RANless 4-channel PI5 controller that we introduced last quarter to ramp significantly throughout 2026, targeting the mainstream market and driving higher adoption of PCIe 5 given that it is D-RANless, making it easier for our customer to create SSD despite D-RAN shortage. We have secured design wing with four NAND flash makers, including the two from South Korea for TMC and QLCSD. And then nearly all the for this controller. And then we expect to benefit from higher ASP and profitability as this new controller enters the mix. Until the memory and storage makers increase their big production capacity, to alleviate the current shortage, the PC market will likely experience some difficulty driven by both shortage and demand destruction from higher prices. Syncomotion, however, remains in excellent position to grow its PC business in the near to long term, given market share gains. ASP increases and growing decision by the NAND Flashmaker to walk away from the consumer business in favor of AI. And we expect continued growth from our Client-to-Dee business in 2026. I will now provide an update on our enterprise business. The opportunity of Silicon Motion in data centers and AI infrastructure expanding daily. are for data center and AI infrastructure investment to exceed $1 trillion by 2030, and the non-verification of NAND technology expanding rapidly to help store and process large volume of data quickly. The need for increased speed and lower latency is driven greater adoption of SD in the data center. And the industry is increasingly looking to adopt NAND solution in one storage, compute storage, and eventually near GPU storage as well. Interests in our growing portfolio of Mount Titan controllers increasing as they are ideally suited to address the involving requirement of AI workload for both compute and storage. In the December quarter, we began end-user qualification of TLC-based high-performance computer CD using Mount Titan with multiple customers. This qualification will progress throughout the first half of calendar 2026 and will begin to ramp commercially in second half of the year. High-capacity QRC-based storage CD represents the largest addressable market for Mount Titan, and we remain on track with multiple customers to begin qualification this year. Among Titan QLC one storage solution offers significant advantage over HDD for AI inferences including speed and power. Additionally, demand for QLC storage solution has accelerated in recent months given the current supply storage of HDD. Over the next few years, we expect the QLCSD will become a compelling alternative to HDD as they offer unmatched economies of scale, which will lead to lower prices over time, in addition to the inherent speed and power advantage. During 2026, we plan to take out our first 4-nanometer chip, a PCIe 6 version of Long Titan, that is targeting hyperscalers, nanoflash makers, storage system providers, CSP, and other Tier 1 customers. We have been developing the chip in association with multiple partner customers and expect this new controller to try additional success for Montyton beginning in the 2027-2028 timeframe. I'm pleased to announce that we have already secured design win with multiple Tier 1 customers for this new controller which is expected to ramp significantly in 2028. We remain confident that Mount Titan will ramp to represent at least 5 to 10% of revenue exiting 2026 and should experience further success in 2027 and beyond as our entry into enterprise market scale meaningfully in the near two meter. And finally, I would like to discuss our enterprise-grade boot drive storage business, which is rapidly evolving into a significant new era of growth for our company. We are collaborating with multiple customers to develop an enterprise boot drive solution that can work across multiple platforms. In the fourth quarter, we start volume shipment to the leading AI GPU maker for their current GPU product. We are currently working with this customer to qualify the next generation version of their GPU, as well as for several NVLink and Ethernet switches of their new GPU-CPU platform that are expected to launch in the second half of 2026. This next generation GPU and switch product require higher capacities with much higher ASP and unit volume, creating a significant new growth opportunity for SiliconMotion. We are also working with other potential customers, including a leader, leading search engine company, to develop enterprise-grade boot storage drive based on our leading controllers. But the enterprise boot drive complete S&D product, this business will face greater exposure to our NAND security and high pricing environment, placing greater emphasis on sourcing NAND to supply our customers. While this has become more difficult given the supply constraint and recent price increases, we remain confident that Our relationship with the NAND Flashmaker developed over the past 20 years will help us succeed with these significant new opportunities. For our Fairlight Star solution, we are seeing strong demand from our automotive and industrial customers. Especially in the tight NAND environment, our customers are relying more on us for steady and consistent supply. to ensure smooth supply chain dynamics. We will continue to play a more strategy, strategic role and partner to our Fairlight customer, but we'll also look to balance revenue growth with margin stability to drive profitability growth. In conclusion, the fourth quarter of 2025 delivered significant growth for our business and accelerated our full-drive storage business. In 2026, beginning in the first quarter, we expect to continue to reap the reward of our investment in Mount Titan, our signal meter client state controller, and our new portfolio of EMC and UFS product that are experiencing rapid growth and the ramp of automotive business to about 10% of total business by the end of this year. We have never been better positioned as a company given our expanding product portfolio and scaling in a large new market, including the AI and enterprise storage market. I'm increasingly confident that we will deliver strong, broad-based, sustainable, sequential growth throughout 2026 and beyond as we scale multiple existing and new opportunities. Now let me turn the call to Jason to go over our financial performance and outlook.

Thank you, Wallace, and good morning to everyone joining us today. I will discuss additional details of our fourth 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 yesterday. In the December quarter, sales increased 15% sequentially and over 45% year-on-year to $278.5 million. coming in well above the high end of our guided range and surpassing our $1 billion target run rate set at the start of the year as we experienced continued strength in mobile demand and strong growth in our PCIe 5 client SSD business. Gross margins was at the higher end of our guidance range and increased again in the quarter to 49.2% as we capitalized on new product introductions and benefited from mixed shift towards client PC products. Operating expenses increased sequentially to $83.2 million given increased investments in our emerging AI and enterprise SSD and boot drive storage businesses. Operating margin increased sequentially to 19.3% within our guided range, driven by the higher than expected revenue and gross margin during the December quarter. Our earnings per ADS was $1.26. Total stock compensation, which we excluded from non-GAAP results, was $15.8 million. in the fourth quarter. We had $277.1 million cash, cash equivalents, and restricted cash at the end of the fourth quarter compared to $272.4 million at the end of the third quarter of 2025. Cash increase in the fourth quarter from improved operational performance offset by a combination of dividend payments of $16.7 million and an increase in inventories to support expected strong business ramp. Our team is executing well. despite the difficult NAND and DRAM pricing environment. During the fourth quarter of 2025, we continue to invest in new advanced geometry products for our existing markets and for our emerging enterprise markets, including Montain SSD and Enterprise Boot Drive solutions. These investments will be ongoing in 2026 as we support new growing interests for our new enterprise portfolio. For the first quarter of 2026, we now expect revenue to grow 5% to 10% to $292 million to $306 million, up sequentially and counter to typical seasonality. We expect continued strength across nearly all our product segments, with a particular emphasis on mobile, where we expect significant outperformance due to continued market share gains. Gross margins are expected to be slightly lower sequentially at 46% to 47% in the March quarter, given the product mix. But we expect overall margins to recover back to our target range of 48% to 50% throughout the year, as a mix of newer products increases, including our PCI-5 controllers and our enterprise SSD solutions. Operating margin is expected to be in the range of 16% to 18%. Our effective tax rate is expected to be 19%. Stock-based compensation and dispute-related expenses is expected to be in the range of $10.8 to $11.8 million. We're well positioned for growth this year and expect 2026 to be a record revenue year for Silicon Motion with sequential revenue growth each quarter. We anticipate additional tape-out and development costs, especially from our upcoming four nanometer tape-out in the second quarter will drive higher operating expenses in the second and third quarters of the year. Our focus has always been growing profitably and 2026 is no exception. We anticipate full year 2026 operating margins to improve as compared to 2025, despite our higher investments this year. While current supply shortages and resulting component increases are creating headwinds, our pipeline for growth in 2026 and beyond remains stronger than it has ever been in the history of our company. We remain focused on our market and product diversification strategy, which has already begun to deliver results. We have successfully entered the enterprise market with our boot drive storage solutions and are currently in the end customer qualifications with our Montain Enterprise SSD products, which are expected to scale in the second half of 2026. Our leading position in the merchant control market and unmatched NAND maker partnerships will drive higher share in EMMC and UFS, client SSDs, enterprise, automotive, boot drives, storage, high performance and high capacity enterprise and data center storage markets, and I look forward to sharing our progress in greater detail when we report again in three months. This concludes our prepared remarks. I'd like to open the questions, open it up to questions now. Operator?

Thank you. As a reminder, to ask questions, please press star 1-1 and wait for a name to be announced. First question comes from the line of Mandy Hossaini from SIG.

Yes, thanks for taking my question. Two for me. How should I think about the mix of EM&C, UFS revenue, especially in the back half of the year, as of this year? And I'm asking you that because I'm under the impression that there is a diversification in market. It used to be a smartphone-driven, and now there's auto. And I want to better understand how that diversification is going to play out towards the end of this year. And I have a follow-up.

Our UFS controller majority is smartphone. EMC controller majority is in IOD devices, smart device, streaming device, and and all automotive. So the combination, I think the around probably 40% controller probably is similar, 50% for smartphone, 30% for non-smartphone area.

Okay. And then on the blue field, how will – revenue contribution play out. I think your commentary implied that there could be some revenue contribution later this year. And how would it impact your gross margin? I'm under the impression that for Bluefield, the COGS is going to change. You actually have to go procure NAND. And if you could just comment on it and let me know if it's the wrong assumption, if it's correct, and how procuring NAND would actually impact the overall gross margin.

Yes, Bluefield, our BlueDry is a solution for Bluefield and also several other switches platform. We need to procure the NAM, and NAM price is a market price, so we have to work out with the customer. We can pass through the cost increase to the end customer. So it's a challenging but ongoing process. quarter by quarter. It definitely will impact some of our gross margin, but we manage the margin pass through. So I think because even the customers, they have at least two to three suppliers, so they're based on the price and based on the supply and depends the percentage. We believe Bufield Thrill Bluefield 3 is for primary for this year, but Bluefield 4 and the MVLink and the Ethernet switches is for second half and really more volume in 2027. Okay, thank you.

One moment for the next question. Next question comes from the line of Neil Young of VN&Co. Please go ahead.

Hi, thanks for taking my question. My first question is I wanted to understand how you're segmenting revenue from the boot drive opportunity. And same question for MonTitan. Are they both in SSD solutions or is just a boot drive? Are you placing that in SSD solutions? And then, you know, at what point, I think you sort of just answered this, but just for clarification, what point do you anticipate revenue from the next-gen boot drive and those other switch opportunities that you talk about, the leading GPU maker, when you expect revenue for those to begin to ramp? Thanks.

Yeah, so you're right. For the boot drives, that's going to be part of our S&P solutions that we talk about each quarter. Enterprise controllers, Mount Titan, is part of our controller business. We will give you guys more color as it's appropriate.

I think when we talk about 5% to 10% for our company revenue does not include the boot drive solution. So currently that's the only kind of Mount Titan controller. But boot drive solution is part of our enterprise business. See, we cannot comment regarding what percent about the boot drive. I think this year is relatively still small, but I think next year will be much bigger. But number one is we're trying to secure the NAND supply. Currently, we have two NAND suppliers. One is secure, but the other is not. So we're working with our NAND partner continually to support the major project.

We expect the next generation DPU revenue to begin for us sometime in the back half of the year.

Okay, thanks. That's helpful. And then the second question I just wanted to ask about the smartphone strength in OneQ. Maybe if you could just provide a little more details, you know, sort of what's driving that. I think it's predominantly market share gains, but if there's anything, you know, different customer behavior or anything that you guys are seeing, that would be great. Thanks.

So first of all, as you know, probably two netmakers walked away from the mobile storage. And we see, but they also still selling the wafer to multi-maker. And I think we benefit from majority multi-maker using silicon motion controller. They not only use netmaker from U.S. and Japan, but also use local netmaker China. That's why we continue to gain market share. And we see we gain market share from mainstream and value line, and we expect to start to ramp the high end by end of the 2026.

Anything else, Neil? Next question.

Questions? The next question comes from Craig Ellis from

Yeah, thanks for taking the question and congratulations on the great execution, guys. I wanted to start out by going back to the comments on sequential growth through the year and just better understand some of the product level gives and takes as we go through the year. I think from what I've heard, it sounds like we'll see some real strength starting the year from EMMC and UFS and the Color On. Mon Titan transition from sampling to revenue ramp up would suggest more of a back half of the year orientation towards SSD solutions. And I think that would lead SSD controllers plugging along. Along with that, if we have sequential growth in the 3% to 5% range, Exit the year annualizing at a 1.3 to 1.4 billion run rate. Is that the right level of growth we should be thinking about? Are you thinking about growth higher than that? Thanks for all the colors of that.

Yeah, so I think you're right on some of these things. I think, you know, certainly strength in the first half of the year is coming primarily from EMMC and UFS. We'll see client SSD controllers ramp throughout the year, but first quarter should be seasonally weaker. And then we'll see the MonTitan products begin to scale in the back half of the year. We do anticipate quarter-on-quarter sequential growth this year. We are not providing full-year guidance specifically beyond just, you know, sequential growth. And we expect this year to be a record year.

So let me ask some comment. I think we have very strong backlog, and we have a very strong momentum for our product line. But because some of the product, like automotive fair ride and the boot ride, we require to procure the NAM. So the case by case, some business we probably just bypass. Some business we, because we're going to take. So even potentially we have a much higher growth rate, but we might skip some of the business if the margin didn't meet our company target. So that's why we balance. But just from the backlog in the business we decide to engage, we have a sequential growth quarter by quarter.

That's helpful. And then the follow-up question is really a longer-term question for you, Wallace. You and I have known each other a long time. I've seen you transition the business previously from a USB and memory card business to one that's more oriented to smartphones and PCs. And it seems like you're doing it again, transitioning the business to include a very significant enterprise quotient. The question, do you see a point in the 2027, 2028 time period where that enterprise quotient is actually bigger than the consumer business? Would love to get your views on that and how you see the longer term arc of the company playing out.

I think enterprise segment definitely is a target one to grow. But when we can, the enterprise portion exceed the consumer version, we cannot really relate to you. We target try to accelerate the momentum. But I think the boot drive is a really pretty strong business for us. We also have a multiple customer, not just one of the GPU customer. And in addition, automotive storage also very strategic, and we believe If we can procure NAND stably, we can grow even much faster. So we have a multiple weapon to grow, but enterprise is a stronger portion, and we do have some new product coming in the next two years. So we're very excited about the opportunity to grow, but just be patient with us, and hopefully we can grow much faster even in 2027.

Will do. Thanks, guys.

One moment for the next question. Our next question comes from Suji De Silva of Roth Capital. Please go ahead.

Hi, Wallace. Hi, Jason. Congratulations on the progress here. Maybe stepping back on calendar year 26, you talk about it being a growth year. You talk about five segments, auto, mobile, PC, enterprise, boot drive. Maybe you can talk about which ones would have the highest percent or dollar contribution to the growth in 26, given some of the moving parts around NAND supply and so forth. Thanks.

Percentage, I think the enterprise controller definitely grow much faster. also is new to us. The growth is much bigger. But I found dollar-wise, I think the mobile controller, EMC, UFS, is a bigger one, and it will exceed probably about 35, 40% of our total company revenue. So I think that these are all strong momentum growth, but we also see we have more balance to grow continually and move into 2027. Okay.

All right, thanks. And then specifically on the notebook SSD controllers, can you talk about the puts and takes of how the year-over-year would trend given there's obviously NAND tightness and PC, you know, demand impact because of the cost of the inputs going up versus your share or your mix shift to premium, how that would all

net together into into a year to year over year trend for notebook sd controller so this is a very good question i think the as you know very well um d-ran and the nan supply is really very tight to pcoen customers so some can are able to secure the supply some don't so it gives a tremendous opportunity to silicon motion because the name maker they move all the resource allocation to CSP. So the last is not enough for all the PC makers to meet their demand. So the, because we have four net makers using PCIe 5 8-channel controller, four net makers also use a 4-channel controller, that balance about the internal allocation to fulfill the demand for net maker. In addition, because there's a shortage from land supply to PCOEN, mulch makers start to take the opportunity. So because we have majority mulch maker design wing, that's why we fill the other gap. So even the total unit shipment for 2026 PCOEN will decline, but I think for 5 to 10%, but we still have a pretty strong confidence to grow continually in 2026.

And also, Suji, keep in mind it's a combination of higher share, higher ASP products as we transition to PCIe 5, even with the four-channel PCIe 5 controller, it's still a much higher ASP than a comparable PCIe 4. So we're going to get the benefit of both higher share and higher ASPs this year in spite of any sort of macro issues around PC unit volumes.

Okay. Thanks, Wallace. Thanks, Jason.

Our next question comes from from JP Morgan. Please ask your question.

Yeah, hi. Thanks for taking my question. So I just wanted to understand, again, on the client-assisted controller, what are the conversations you're having from the PCOEMs, given many of them are already sounding a little bit more skeptical about overall demand? Is there any indication that the spec migration is slowing down because of the cost inflation from PCI Gen 4 to PCI Gen 5? Because the general commentary in the industry seems to be about some degree of despecking of certain specs. I just wanted to understand if you can give some indication of what does the baseline like PC market expectations that you have and then how are you building on top of that both for market share and units and AFP to kind of get to growth in the client-assisted business. Yeah, that's my first question.

Yeah, I think, Gogo, you have a very good question. We cannot comment for each individual PCOEN, but overall, I think the 2026 PC unit shipment would decline 5% to 10%, and each OEN performed differently. Now, regarding the the shop name price and DEM price increase. So, PCOEN, I'll pay the price increase quickly. So, I think from that line, and many would dispatch the storage product. So, to do with the gigabyte, you're down to 120 gigabyte. But for high end, they need to increase the price. So, from dispatch portion, I think they will lose the demand and interest from, So that is a fact. So I think the impact for each PCOEN are different, and we see this is a current challenging situation for all the PCOEN. And we work with our module makers and work with the NAND maker because we also depend on their internal allocation for the NAND, quarter by quarter. So it's very challenging, but because we have a much better position, So we have a much stronger opportunity to grow continually in 2026. Got it.

And any comments about, like, the PCIe Gen 5 penetration? I think last year I remember it was, like, 5% to 8% or 5% to 6%. Are we expecting that this goes to, like, high teens, 20% by end of this year?

Yeah. So PCIe Gen 5 is supposed to ramp much stronger in 2026. But for 8-channel high-end, because of D-RAN shortage, that's why 8-channel increase will slow down dramatically in 2026. However, the PCIe 5 4-channel D-RAN list, because no D-RAN, has much more to build to shift. So, we see the much stronger demand for D-RAN list PCIe 5 controller, especially on second half, to ramp more meaningfully.

Okay. Understood. Second question on the boot drive storage. Could you help us understand how big this business could be? Because you've got the biggest CPU customer and looks like for the next platform, this is going to be mandatory. And I think you just mentioned you're also getting the biggest APIC program out there as well. So you're kind of locking up probably 80% or 90% of the market share of the market already from the market. How sizable is boot drive storage business going to be, and are you still going to stick with the NAND bundle kind of model here, or is it going to be eventually like NAND pass-through at higher margin?

Yeah, first of all, let me talk about the TAM. I think, first of all, the DPU, the boot drive business, it depends on the several factors, right, including the success of the DPU. But so far, we see the volume is very meaningful in 2026. And the, all the leading CPU and GPU maker, they use a multiple supplier, two out of three supplier. So, we're not the sole supplier for the DPU program. We see this year revenue relatively around $50 million. But I think next year will be much higher. So it all depends the NAND procurement from us. So it's a case-by-case because we have multiple programs, not just one GPU customer. We have a multiple customer, and also some will ramp up from Q4, the new program. So it depends how successful we secure the NAND. Also, whether we can pass through the incremental cost to the customer with a meaningful margin. So this is all the negotiations. So it's, some is a dynamic. And we just make a reasonable meaningful forecast for this year. But it is a very strategic business for us for long term. So we work closely and build a partnership with our GPU partner. Hopefully this will become a much larger business in 27 and 28.

Thank you. A reminder to ask question, please press star 11. Our next question comes from Matt Bryson from Flatbush. Please go ahead.

Mr. Bryson, your line is open. You may unmute locally.

And if you'd like to ask questions, please dial star 11. We have a follow-up question. Just a moment, please. Follow-up questions from Chris Ellis from BYLix.

Yeah, thanks for taking the follow-up question, Tim. Wallace, I wanted to just talk about something and ask about something that we've started to see much more broadly with manned flash and DRAM OEM sublight and see if it's got applicability to silicon motion. And the topic is long-term supply agreements, LTAs or LTSAs. Is that something that would make sense for CMO? If so, where would that be? Would it not make sense for CMO? Just talk about the gives and takes with any move in that direction.

We currently, we did not have the LTA agreement, but I think based on partnership and relationship. See, because in the past, we never want to build a much bigger revenue from storage solution. And for automotive, because automotive sector, they are the lowest priority for land and during maker. That's why many, many major Tier 1 suppliers come to Second Motion as for help. That's why we work case by case to make a decision whether we can support them. If we are able to pass through the incremental cost to the automotive supply chain, we will do the business. On the other hand, for boot drive, it's more strategic business. So some, in certain case, we might have to sacrifice the margin lower than our corporate average margin because more strategic. So balancing, I think the long-term, because we cannot use a multiple NAND selection, it takes time, and the customer does not want to change the NAND solution either. So we just have to. work out with our NAND partner to get a stable supply. The challenge is much more severe than everybody can imagine because CSP really demand much more than the current supply can support. And that's why even leading smartphone maker have a tough time to procure their NAND and LPDDR5 in the supply. So this is the fact. And it's just not what NAND Maker can now supply us because just they really have tough time to do allocation. And there's so many big tier one customers ask for help and ask for supply. So this is a challenging situation right now.

That's really helpful. The follow-up somewhat relates to the way you concluded that. And it's an inquiry on some of the inside baseball, not asking for customer names. But if we go back to January 5th or 6th when NVIDIA said that, okay, look, the bottleneck in inference is all around the DPU. It's all around the storage. We've got to find a way to drive a 5X increase in inference processing time. We're going to do it with much more NAND-intensive architectures. The question is, what have you seen from existing and new enterprise customers following that? Have you seen that catalyze new levels of engagement, and what does it mean for how you think about R&D and just how you're looking at opportunities going forward?

Because AI inferencing is growing much faster than anybody can anticipate. There's so many new technology, so many new storage technology around, right, for KV cache, how you can improve the latency, how you really, and capacity of the inquiry dramatically because so many new content, new data need a storage device to keep it. So this is a huge momentum and need the name maker to increase capacity. But because there's a limitation for land, for clean room, for equipment build, it all takes time. You need a tremendous K-PAC. So a lot of the several NAND D-RAM maker, the preference is definitely DDR and HVN, right? So the leftover, the K-PAC for the NAND is limited. Demand is very strong, and so many variable technology, and it's just much more. And we all need Mount Titan to fill the role. And hopefully, I think our customer and ourselves can secure the NAND, and we can pay our duty to fill our obligation to be part of the AI game.

Thanks for that color, Wallace.

I would like to invite, once again, Matt Bryson from Web Push to ask a question.

Hey, can you hear me now?

Yes, we can.

Awesome. Sorry about that. Great quarter. One question, one follow-up from me. So you have the large fab seemingly shipping allocation away from handsets and PCs to support that cloud demand. And that, at least to me, seems like it creates significant room for share gains for SMI over a multi-year period, particularly in the Chinese handset market. But we also know that China tends to prefer Chinese production when it's a viable alternative. At the same time, it also seems like the Chinese controller vendors have really struggled to compete technically. So would you mind just talking a little bit about competitive dynamics, whether anything's changing in that market, and some of the short-term dynamics that might make it hard for the domestic Chinese players to compete?

I think the Chinese controller maker, they will have a tough time to secure TSMC, advanced technology node. I think to beyond 12 nanometers, like a seven, six, five nanometer, it has to be applied and to be approved by TSMC or Samsung in order to fabricate their advanced technology product. For mature technology, for 22, 28 nanometer, China local can fabricate. But that is really legacy product. So I think this is the tough part, and we don't even need to mention the technology, how good they are, or whatever. But that is a manufacturing point of view. We see due to the NAND supply shortage, I think create another dilemma, so that will probably give even tough time for China local supplier. But to say that, I think that both YMTC and 6MT, they also, try to increase capacity as much as they can, but just take time.

Another thing, Matt, is that, you know, our controllers manage everybody's net, right? And so working with a lot of the module makers, especially in China, that does, you know, qualify as a lot of local production there because we're using the module makers are building a lot of these solutions for the Chinese handset OEMs as well.

Using our controller, not only can sell China locally, can sell to internationally.

Makes sense. And so, just one more quick question. With regards to the lower gross margins in Q1 on mix, Jason, can you just talk to whether that's lower margins on controllers or whether it's you're shipping more modules and so the NAND weighs on the gross margins?

Yeah, as we've talked about before, EMMC and UFS, our mobile controller, tends to be a little bit below corporate average. So as that business is a little bit stronger here in the first quarter, that's going to have some pressure on our gross margins in the near term. But as we have, you know, MonTitan and more PC client SSD products ramping in the back half of the year, we do expect to see improvements in our gross margins as we go into the back half of the year.

Awesome. Thank you.

Thank you. At this time, there are no further questions on the line. I'd like to have a call back to the management for closing.

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

That's all for today's conference call. Thank you for your participation.