Silicon Motion Technology Corporation

Good day and thank you for standing by. Welcome to the Silicon Motion Technology Corporation's first quarter 2026 earnings conference call. At this time, all participants are in 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 keypad. Please be advised that today's conference is being recorded. This conference call contains four 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 four looking statements include without limitation statements regarding trends in the semiconductor industry and our future results of 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. These 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 these risks and uncertainties and other factors, please see the documents we file from time to time with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements which apply only as of the date of this conference call. And with that, I'll now hand you over to Mr. Tom Spences, Senior Director of IR and Strategy. Please go ahead.

Good morning, everyone, and welcome to Silicon Motion's first quarter 2026 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 first 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 US Securities and Exchange Commission. For more details on our financial results, please refer to our press release, which was filed on form 6K after the close of the market yesterday. This webcast will be available for replay in the investor relations section of our website for a limited time. To enhance investors' understanding of our ongoing economic performance, we will discuss non-GAAP information during this call. We use non-GAAP financial measures internally to evaluate and manage our operations. We have therefore chosen to provide this information to enable you to perform comparisons of our operating results in a manner consistent with how we analyze our own operating results. The reconciliation of the GAAP to non-GAAP financial data can be found in our earnings release issued yesterday. We ask that you review it in conjunction with this call. With that, I will turn the call over to Wallace.

Thank you, Tom. Hello, and thank you for joining us call today. I'm pleased to report another quarter of better than expected result, highlighted by record revenue of $342.1 million. Growth and operating margin both exceeded our guidance. A stronger than anticipated revenue drove improved overall profitability. We saw strong performance across embedded EMC and UFS, as well as our fair ride and boot drive solution. driving solid growth this quarter, following an exceptional start and giving our current pipeline a win across all our markets. I'm confident that we will deliver meaningful growth throughout what should be a record revenue year for Silicon Motion. Now let me first address the current market environment. The memory and the story market continue to create significant challenges across the market in which we operate. NAND prices continue to rise sharply, with a sequential increase of about 55% to 60% in the first quarter of 2026. AI adoption has driven significant demand across all memory and storage technologies, including HPM, DRAM, NAND, and HDD. Growing demand from hyperscalers and cloud service providers for AI infrastructure deployment combined with the low NAMP B growth and insufficient D-RAMP capacity have led to significant scarcity, naturally impacting many market-included smartphones and PCs, particularly in the low end. Despite these challenges, we executed well in the first quarter with our backlog design win and new opportunity ramping throughout the year. we are confident in our ability to deliver solid growth. We have spent many years developing deep relationships with the NAND flash makers, which have allowed us to gain share as NAND makers outsource more of their controller requirements. These strong relationships have also allowed us to secure NAND in the difficult environment as we ramp our ferrite and enterprise boot drive business and help our module maker and AI smart storage system customers secure NAND, making us an even more valuable and strategic partner. While we expect the NAND shortage will remain challenging throughout 2026 and 2027, we have never been better positioned. We have and will continue to benefit from the fundamental shift by the name maker toward higher end and high capacity enterprise and data center solution, driving a greater reliance on Silicon Motion to serve the consumer market and opening a new opportunity in automotive and lower density storage solution. As a company, we are at the start of a wholesale transformation as we scale our new cloud AI opportunity with our Enterprise Mount Titan controller and boot drive storage products, which will drive meaningful growth to both our top and bottom line going forward. We are also benefiting from our edge AI opportunity, including smartphones, PC, automotive, IoT, and other applications where we are seeing a rapid shift toward next generation storage capabilities. Silicon Motion is playing pivotal role with an expanding pipeline of product spanning edge AI and cloud AI platform in 2026 and beyond. Given our current backlog and design wing pipeline, we expect sequential growth across our product portfolio in 2026 as we capitalize on our investment, gain share in existing market, and benefit from our diversification strategy, starting with another strong sequential quarter of growth of 15% to 20% in June. I will now discuss our embedded EMC and UFS business, which include controllers for smartphones and other IoT and connected devices. AI is fundamentally reshaping how memory and storage makers are allocating capital. Memory and storage makers are increasingly redirecting kind of resources toward DRAM, HBM, and other high-performance memory technologies for AI workloads, and stepping back from the edge market, including phones and other smart devices. For the first quarter, our mobile business was up between 30% to 35% sequentially and over 140% year-over-year, significantly outperforming the industry, but share gains further fueled strong growth for our business. The mobile market is undergoing a rapid shift as NAND manufacturer accelerate the outsourcing of controller to third party, especially second motion. Some NAND makers are also finding increasingly attracted to monetize wafer rather than investing in development of complete EMC and UFS solutions for smartphone. Module makers have stepped in to fill this gap. and they rely heavily on single motion controller in the firmware. Our relationship with the NAND supplier and our ability to assist our market maker customer in securing NAND put us in the best position to benefit from the rapidly shifting landscape in the mobile market. Looking ahead, the smartphone market is likely to stay pressured due to ongoing NAND and DRAND supply constraints. Chinese handset OEM are expected to face greater headwind than Apple, given Apple's purchasing scale, and Samsung, given its captive memory supply. At the start of the year, we projected global smartphone unit volume would decline by 5% to 10% in 2026. However, recent estimates suggest the decline could be more than 10% year over year. With a greater weakness, concentrated in China. Importantly, much of this unit pressure is occurring at the low end of the smartphone market, where we have limited exposure. Elevated memory and storage costs make it increasingly difficult to produce low-cost smartphones, a dynamic we expect to persist through at least the end of 2026 to 2027. Our EMC business remains stronger than expected, driven by multiple markets, including automotive, smart TV, AI glasses, smart watches, next-generation cellar box that demand higher capacity storage, and many others. The market for EMC are large and growing at over 900 million units sold every year, with major flash makers essentially Gone from this segment, competition is decreasing, and our revenue contribution from this market is growing. Based on our current backlog, customer forecast, and continuing share gains, we expect another very strong year of growth in our embedded EMC and UFS business, with share gains dramatically outpacing the macro pressure on smartphone unisales. Moving on to our ASD business, which includes Edge ASD and Enterprise Controllers. In the first quarter, our overall ASD controller business revenue declined approximately 10% sequentially, in line with the seasonal trend, but it was up approximately 45% year-over-year, as we benefited from the early impact of PCIe 5 on our mix and early RAM of our Mount Titan controllers. For our HSD business, our clients' big controllers are utilized in a variety of products, including PC, gaming consoles, and PC workstations. The PC market has been a challenging area so far this year, given supply constraints and high prices associated with both NAND and DRAM. PC manufacturers are lowering for new computers and passing on higher NAND costs to consumers, which we expect will contribute to overall unique decline in the PC market in 2026, especially at the low end. Fortunately, for Silicon Motion, our products span the market from value line to the high end, and we continue to gain share across the range of devices that the NAND market makers except the consumer segment. 2026 will be a defining year for our client-side business. PCIe 5 began to displace older technologies. Our 8-channel PCIe 5 controller leads the market in performance and RAM steadily throughout 2025. While we expect a DRAM supply constraint could limit growth of this high-end controller in 2026, it is still highly sought for this unmatched power and performance. In December, we launched our four-channel D-RANless PCIe 5 controller and in the mass market. And we expect this to become the volume-leading PCIe 5 chip in our portfolio this year. This controller brings PCIe 5 performance to a broader audience at a more accessible price point and remove a significant component hurdle for our customer at a time when DRAM availability is constrained and the costs are elevated. We have our NAND FlashMaker customers for each of our PCI-Fi controllers. Well, nearly all the module makers are expected to drive high ASP and improve margin in our client-state business throughout 2026, as PCIe 5 grows as a percentage of our sales mix. Entering this year, we estimate that the PC market will experience a unique decline of 5% to 10% in 2026, given the tightening land and demand supply and increased prices. Current expectation are being lower with anticipate unique decline now in the 10% plus range. Despite this, we expect to grow our Edge SD business through a combination of increased market share and higher ASP as our PG55 controller continue to ramp and as NAND FlashMaker found retrieved from Edge market in favor of Enterprise and Cloud AI. For our MonTitan enterprise controller business, our cloud AI opportunity in the data center and AI infrastructure are growing rapidly. And we are in the early inning. NAND is a central part of enterprise and AI infrastructure deployment spanning warm storage, compute storage, and increasingly near CPU and near GPU storage applications. The need for speed, lower latency, greater power efficiency is driving a technological shift in the data center. And Mount Titan is squarely in the middle of the transition. Mount Titan, when paired with TLC NAND, power high-performance CMX, KV cache, and Compute SD using near CPU and near GPU environment. When paired with QLC NAND, Mount Titan enable high capacity high-performance enterprise and AI data storage. During the December quarter, end-user qualification of TLC base and high-performance compute SD powered by Mount Titan began with multiple customers. These qualifications have been progressing well and these end customers are now expected to begin volume commercial ramp in the current quarter. one quarter earlier than expected. Currently, we see greater demand for TLC-based CMX compute and the KVCache SD controller than for QLC, given a slower rollout of two terabit NAND than initially expected, while we anticipate more initial revenue contribution to come from TLC Configure Mount Titan solution. we believe QLC configured solution will begin contributing more meaningful later this year and long-term. Higher capacity one storage SD leveraging QLC NAND will represent the largest addressable market for Montyton. And we expect to begin ramping multiple customer as broader availability of the next generation two terabit QLC NAND die become available from nearly all net makers and supply return to more normal levels. Our QLC solution offers a meaningful advantage over HDD for AI inference workload, faster asset, higher speed, lower power consumption, and improving cost trajectory. I'm excited to announce that our Montyton customer plan to begin ramping of three Tier 1 Asian CSP and two U.S. Tier 1 CSP later this year, which both TLC compute and QLC one-star SSD solutions. In the third quarter, we expect to tape out our first four-nanometer controller, a PCIe 6 mount Titan controller, targeting hyperscalers and CSPs. that have been developed in close collaboration with multiple partners and customers. And we expect to drive the next phase of Mount Titan growth beginning in the 2027-2028 timeframe. Importantly, we have already secured design wins with multiple Tier 1 customers with volume expected to ramp meaningfully in 2028. Given the traction we are seeing and the progression of end user qualification for both TLC and TLC implementation of Mount Titan, we are increasingly confident that the business will grow rapidly throughout this year and exit at our target run rate of five to 10% of our now expanded 2026 revenue expectation with the further growth anticipate in 2027. and beyond as our entry into the enterprise market scales meaningfully over time. And finally, I would like to provide an update on our ferrite and the bulldry storage business. Our ferrite and bulldry storage business delivered exceptionally performance in the March quarter as we began scaling several new projects in ferrite for automotive as well as in our emerging enterprise boot drive business. So this business is growing rapidly this year. Sourcing NAND is becoming more critical to our long-term success. Our unparalleled relationship with the NAND maker has become a key differentiation and has enabled us to secure NAND from three different makers. which will ensure we will remain a resilient supplier of Fairlight solutions and boot drives for our customers despite the increasing supply constraints. NAND supply allocations for 2026 were largely finalized by all factory makers by mid last year. Our ability to secure NAND has given us a meaningful competitive advantage as we are one of few suppliers globally able to consistently source NAND to support our customers' accelerating requirements. Ultra-light storage is rapidly becoming one of our most exciting growth opportunities as we are actively engaged with multiple customers to build solutions that operate across a variety of platforms. This includes leading DPU, Ethernet, and AV link switches and other opportunity across different AI infrastructure architecture. In the fourth quarter of 2025, we began volume boot drive shipment to a leading AI GPU manufacturer for their current DPU product. In the first quarter, we work with that customer to qualify next generation DPU design, as well as Ethernet and AV link switches of their new GPU CPU platform to be launched in the second half of this year. As our customer transition to the next generation GPU CPU platform, our opportunity is increasing rapidly with a much broader footprint beyond the DPU boot drive and with a density that increased two to four times from the previous generation. We anticipate strong revenue contribution and growth with this customer this year and throughout 2027. In addition to this customer, we have recently won the design with the leading telecommunication infrastructure provider, and it will be ramping initial scale with them later this year. We are also sampling with the leading search engine company for the TPU architecture as well. and we will continue to develop a new boot drive storage device built around our leading controller to drive future growth. Our ferrite business is experiencing strong demand from automotive and industrial customers as the name maker continues to shift away from lower density solutions to focus on higher ASP, higher density enterprise solutions. Our more than 10 years of developing automotive grade ferrite solution provides significant differentiation by offering reliable supply, proven technology, dedicated technical support, and the qualification expertise tailored to the automotive market. As a result of these investments, demand from global automotive OEM and their subsystem suppliers continue to accelerate across the U.S., Europe, China, and Japan. We are gaining meaningful share, creating a strong pipeline of near-term revenue and long-term sustainable growth opportunities. In conclusion, the first quarter was exceptional, delivering our highest quarterly revenue at Silicon Motion as we continue to drive meaningful share growth across our markets Despite ongoing supply constraints and price increases associated with NAND and DRAM, we continue to expect that we will deliver sequential growth throughout 2026 as we reap the benefit from the investment we have made over the past few years. This growth will cross all our major business propelled by our growing cloud AI opportunity with our enterprise AI product, including Mount Titan, and our emerging boot drive storage business that are just beginning to ramp. We are in the strongest position in our company history with a deeper product portfolio, growing foothold in edge and cloud AI, with multiple opportunity growing in tandem in the legacy and new market. The successes we have made through the partnership with all the NAND makers over the past many years have given us an unparalleled advantage that we leverage these relationships to gain access to NAND supply. These relationships are the strategic differentiation for our company, and I am extremely confident in our ability to deliver broad-based sustainable growth as we scale both establish an emerging opportunity across the business in 2026 and beyond. Now, let me turn the call to Jason to go over our financial performance and outlook.

Thank you, Wallace, and good morning everyone for joining us today. I will discuss additional details of our first 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. The reconciliation of our gap to non-gap data is included in the earnings release issued yesterday. This was an outstanding start to the year for Solcomotion as our investments over the past several years are bearing fruit. We're gaining share across our entire portfolio in a difficult macro environment and rapidly expanding into new opportunities in edge and cloud AI applications which should drive we should continue to drive significant top and bottom line outperformance. In the March quarter, sales increased 23% sequentially and 105% year-on-year to $342.1 million, coming in well above the high end of our guided range, delivering our second consecutive quarter of record revenue. Outperformance in the quarter came primarily from our embedded EMMC and UFS controllers and strong growth in our ferrite and boot drive storage business. Gross margin was 47.2% above our guided range of 46 to 47% as we capitalized on new product introductions. Operating expenses increased sequentially to 99.2 million given increased investments in our emerging MonTitan AI and enterprise SSD controller and boot drive storage solutions. Operating margin was 18.2% above our guided range driven by higher than expected revenue and gross margin during the March quarter. Earnings per ADS was $1.58. Total stock compensation, which we exclude from non-GAAP results, was 8.4 million in 1Q26. We had 210.9 million cash equivalents and restricted cash at the end of the first quarter compared to 277.1 million at the end of the fourth quarter of 2025. Cash decrease in the first quarter due to a combination of dividend payment of $16.9 million and an increase in inventory to support our expected strong business ramp. Our team is executing exceptionally well in this challenging NAND and DRAM pricing and supply environment. We continue to invest in advanced geometry products for both our established markets and our emerging enterprise markets, including Montitan SSD and enterprise boot drive storage solutions. These investments will continue throughout 2026 as we support the growing demand for our enterprise portfolio. For the second quarter of 26, we now expect revenue to grow 15 to 20% sequentially to 393 to 411 million. We see strength across nearly all our product segments with an emphasis on continuing market share gains and new cloud AI opportunities with our Montaigne and boot drive business as they ramp. Gross margins are expected to increase sequentially to 48.5 to 49.5% in the June quarter, given the product mix, assisted by greater contribution from Montitan and our PCI-5 controllers. Operating margin is expected to be in the range of 21 to 22%, and our effective tax rate is expected to be 19%. Stock-based compensation and dispute-related expenses is expected to be in the range of 3.6 to 4.6 million. 2026 is on track to deliver record revenue for Silicon Motion, with strengths across all of our major product lines. We expect sequential top line growth for the remainder of the year, with further improvements in profitability. We still anticipate additional development costs, which will drive higher operating expenses in the second and third quarters of this year, which will be more than offset by higher revenue and gross margin performance. We anticipate our full year 2026 operating margin to improve as compared to 25, despite our higher investments this year. We're navigating the current memory and storage supply constraints and high-pricing environment with remarkable success, driven by our relentless strategy of relationship building with NAND flashmakers over the past 20-plus years. We're also beginning to reap the benefits of our multi-year investments in ESSDs for enterprise and AI with Montitan and our growing boot drive storage business beginning to ramp in volume. Our leading position of merchant controller combined with unmatched NAND maker partnerships will drive higher share across EMMC and UFS, client SSDs, enterprise, automotive, boot drives, and the high-performance, high-capacity enterprise and data center storage markets. We expect this will lead to significant revenue growth for Silicon Motion in 2026 and the years to come. I look forward to sharing more detail on our progress when we report next quarter. This concludes our prepared remarks. I'd like to open up for questions now. Operator?

Thank you. To ask a question now, please press star 1 1 on your telephone keypad and wait for your name to be announced. To withdraw your question, please press star 1 1 again. A moment for our first question. We will now take our first question from the line of Neil Young of Needham and Company. Please ask your question, Neil. Your line is open.

Hey, everyone. Thank you for letting me ask your question. So it obviously sounds like everything is supposed to grow quarter on quarter throughout the year, but, you know, maybe specifically looking to 2Q, could you sort of rank the segments on what you think should grow the most and what you think should grow the least? Thanks.

We anticipate growth, as I said, across all of our business segments. I think, you know, obviously we've had some very strong growth in EMMC and UFS early on in the year. If you take a look at our automotive, ferrite, and our boot drives, we're just in the early stages of that ramping. So we do anticipate stronger growth from those products. And then certainly the rest of the other products continue to grow as well throughout the quarter.

Okay, thanks. And then I have a follow up. So within the EMC and UFS business, it sounds like it's diversifying a little bit away from handsets. Could you maybe update us on, you know, the mix of handset revenue in the business versus sort of the broad markets that you talk about? Thank you.

So for EMC and UFS controller business, UFS majority is in handsets. I think EMC majority is in the smart devices, such as smart glasses and IoT device. smart TV, new set of box, and smart door lock, and many others is going to the automotive. So I think that although the smartphone unit shipment will decline, but our overall EMC plus UFO controller shipment will continue to grow throughout the year.

Neil, we also anticipate Montitan to begin to ramp more meaningfully in the second quarter, starting the second quarter as well. So that'll be another growth factor for our second quarter.

Okay, thank you. Thank you.

We will now take our next question from the line of Mehdi Hosseini of Susquehanna Financial Group. Please ask your question, Mehdi.

Hi, so this is Amy filling in for Maddie. So thanks for taking my question. The first one is with the new SM8008 product launch in March, can you give a bit more color on the boot drive revenue trajectory? I know the contribution of revenue is small this year, so how should we frame the ramp from here, and what does a more meaningful contribution year look like? And I have a follow-up. Thanks.

So we don't break out those segments specifically, but as I said before, we do anticipate boot drives and Farai to be more meaningful contributors of revenue in the second quarter as well as throughout 2026. SM8008 is a boot drive controller that was introduced and that will be part of the portfolio solutions that we have in this category of products. but we have other solutions here as well that have been ramping.

So, I mean, let me add some comments. For ASM-8000A, our PCIe Gen 5 high-end boot drive controller, it primarily is selling the controller and the firmware to the customer who make a boot drive solution. So, for this year, most of our boot drive solutions were not based on 8008 controller. This is only shipped specific to certain customers, major customers, but will start to ship by late this year.

Got it. Really helpful. And my next question is regarding the revenue diversification. Do you remain on target to have a 20% of your total revenue from a mix of Montyton, Bull Drive, and Auto?

Yes, we definitely reached the goal. I think we're a quarter by quarter figure. We didn't give a full year guidance, but wait for our next quarter result in the guidance for Q3.

Got it. Thank you. Thank you. We will now take our next question from Sujie DeSilva of Ross Capital. Please ask your question, Sujie. Your line is open.

Hi, Wallace, Jason, Tom. Congratulations on the progress here. Perhaps you can give us some fundamental color here. Maybe understanding how the second half versus first half, half over half revenue would be this year, perhaps, versus typical years. And is 50% gross margin potentially in the near future or any puts and takes there be helpful?

I think, first of all, 50% gross margin is definitely achievable. We're confident for this year. But second is, we cannot give you the, we just say quarter by quarter sequentially. So we continue to grow quarter by quarter, but we cannot give you a percent regarding first half and second half.

Okay. Jason, can you write us what a typical year is, or do you have that data?

Yeah, I mean, typically we're about 45, 55, you know, somewhere in that ballpark.

Great, thanks. And then my other question, One of the questions around MonTitan, can you give us an update on how many customers are ramping today that are going to ramp start near term and how many you have or pipeline? Any update on MonTitan number of customers would be helpful.

So on MonTitan, we are ramping today in production with two customers, but we are going to have five additional major customers from CSP by late this year, three from Asia, two from U.S.,

Excellent. Thank you, Wallace. Thanks, guys.

Thank you. We will now take our next question from Gokul Hariharan of JP Morgan. Please go ahead, Gokul. Your line is open.

Yeah, hi. Great results. So, Wallace, I just wanted to begin a little bit on your comment about having more interest on the Montyton solution from TLC, NAND, and KVCash, especially for the CMX piece of the equation. Could you talk a little bit about what has changed there, given I think previously I think you were a lot more optimistic about the QLC NAND solution, and that was kind of like the key selling point for Montyton, given Silicon Motion's experience in managing QLC NAND. And in addition to that, can you also talk a little bit about how is the adoption that you're seeing from a lot of these customers on the CMX solution or the previously called ICMS solution? Is that largely the five customers or at least the two non-Asia customers that you're seeing ramping up among the CFPs? Is that related to the CMX solution?

Okay, you have a very long and good questions. Let me try to answer one by one. First of all, because the NAM price increase dramatically and because the NAM supply shortage and see most of the majority output and taken away by the CSP customer. Now, because the NAM price increase dramatically, so the customer who originally designed with the QLC with a 128 terabyte, even higher capacity, they have certain drawback because the price increase almost five to 10 times compared to a year ago. It's very, very unlikely. So we see more demand, either the QLC capacity reduced, or they're shifting more for compute storage. As everybody knows, compute storage, we say, is the compute SD, which is next to CPU, and the new ComputeSD, which is a calling by NVIDIA CMX content memory storage is for KVCAT or AI inference is also used TLC because latency is very, very important. We see more and more customer moving to TLC with a smaller capacity, like A4 and 16 terabytes. And this is really a benefit for Silicon Motion because we ship more controller. But for QLC, we also still have two customers continue and ramping later this year. And they are able, we can help, we help them to secure NAND supply. Because QLC today only have three NAND maker can provide the production I think wait for one more year, we see all the NAND maker can produce JLB QLC availability will be better. We'll see more demand for high capacity QLC and the supply will become more normal. So that situation we see. Regarding the CSP customer, because Mount Titan are one of the unique technology called performance shaping, which is very, very good for AI inference, because when AI inference goes to KVCache, you need to have managed multiple tokens, and our Montyton has the architecture to handle four tokens simultaneously. That's why the many, many leading customers and CSPs like the great architecture. That's why we see demand is very, very high from US to Asia.

Got it. That's very clear. Thank you. Just on the client SSD controller side, I do notice that the strength is still very robust, even in a reasonably challenging PT market. Do you sense any pull forward demand from some of these customers? Because this is something that we hear from some of the other vendors that even though our end demand has been not that great, there's been some pull forward demand, customers trying to stock up inventory ahead of cost hikes and price increases. Is that something that you're seeing among your customers? And secondly, when you talk about non-makers exiting this market, does it change the threshold in terms of what kind of market share you could eventually have of client SSD? I think previously we've talked about maybe 50% or 40 to 50%. Is that threshold increasing given the industry ?

OK. I think you have a very good question. As everybody knows, the NAND supplies shortage, and the NAND maker allocate less SD to PCoEN customer. But this trend benefit for Silicon Motion because, first of all, we get a more outsourcing project from NAND maker for PCoEN. And because the module maker is step up to fill the gap because we own almost majority module maker to design our controller for PCI-E 5. And that's why although we see the PC unit shipment might decline 10% or more, but we will continue gain market share and we see the clients' business continue to grow. When the PCI-E 5 moving from high end to mainstream, And PCOEN and shipping more PCIe 5, we benefit much more because ASV is higher, and also we dominate for PCIe 5 more than 50%. So we see a market share again continually when PCOEN starts to ramp the full channel during this PCIe 5 controller.

Got it. Yeah, thanks, Wallace. Thank you very much.

Thank you. We will now take our next question from the line of Sebastian Nagy of William Bear. Please go ahead, Sebastian. Your line is open.

Yeah, thank you. Good morning and congrats on the strong results and guidance. My first question is on the share gain momentum that you're seeing, particularly in the mobile and PC markets. How do you think about the trajectory of those share gains? In other words, have you seen maybe more meaningful share gains been front-loaded here, Q4, Q1, Q2 of this year? or is there significantly more runway for you to keep taking share as we move into the second half and even into 2027?

Our goal is to continue gaining market share. When NAND makers know they have limited R&D resources and they probably will outsource more projects to Silicon Motion, so we'll try to reserve all the R&D and we're very busy to catch all these outsourcing opportunities. And we see we continue again see embedded EMC and the UFS controller business as well as client SD for PCOEN because retail for client SD almost gone. It's very, very low. We see the PCOEN, but we have a much broader customer to provide the SD solution to PCOEN, not just NAND maker. There'll be more multi-maker coming too.

Great, great. Okay, that's nice to hear. And then my follow-up is just on the boot drive opportunity. Can you just remind us what the competitive landscape looks like? Who else might be in a position to provide these types of boot drive controllers? And then relatedly, how should we think about your share in that market? Should it be higher than in some of your other sub-segments or should it be pretty similar? Any pointers there?

So for our first engagement, for the DPU Bufill 3, there will be three makers provide the solution. Two other NAND makers also use a silicon motion controller, but different controller, different NAND, and we also with our additional different controller to support. But I think through the engagement, I believe the customer will like to focus on the new generation DPU. and also provide much more deeper NVLink and Ethernet, the CX9 switches project to us. Because for the new generation boot drive, security becomes very critical. I believe today we are probably the only one to have a specific security in our ronco and hardware in our controller. we have a unique firmware to manage the NAND into a pseudo-LC mode, provide specific function for the end customer. So that's why we believe we probably have a majority of the new generation boot drive in this particular customer.

Great. Okay. Thank you very much and congrats again.

Thank you. We will now take our next question from Tiffany Yeh of Morgan Stanley. Please ask your question, Tiffany, your line is open.

Yeah, thank you gentlemen for taking my question and congrats on a great result. And my first question would be, could you share with us your latest view on the TAM for the Mount Titan or the overall ESSC market and also your targeted market share in the overall market? And I have a follow-up.

Thank you. We see where Mount Titan now gets tremendous attention and a very, very broad design wing. We're very happy in our progress. We see we'll continue to gain market share. We see Mount Titan, even for PCIe Gen 5 and associate products, we will grow to at least 5% to 10% aligned with our expanded 2026 revenue and 2027. Our PCIe Gen 6 Mount Titan even stronger. Even before we tape out, we have a multiple design wing from tier one customer, including two net maker and several CSP customer. So this is bringing a very, very broad and long-term commitment and for development. We see our PCIe 2N6 Mount Titan also have a very, very unique technology with 16K5 LDPC and support both TLC and the QLC for next-generation QLC. So we have a very, very broad customer waiting for the product and will continue and ramping PCIe 2N5 and waiting for PCIe 2N6 for design wing pipeline.

Very clear. Thank you, Wallace. And my second question would be, as we see elevated material costs and also the offset costs, would you consider conduct price tag on your product to pass through all these costs to your customer?

I think we've developed a very good relationship with our back-end packaging and testing, as well as our suppliers. Look, I think our goal here is to maintain our gross margins in this 48% to 50% range, and we're comfortable through our existing relationships with our suppliers as well as our relationships with our customers that we can maintain that pricing. We're not going to go into specifics about pricing changes with customers, but we're confident that we can maintain our margin levels.

Let me add a comment. At the moment, our concern is not in the price increase regarding manufacturing site. Our main concern is the T-con material for the BJA substrate. because it's very, very tight, and supply is very limited, with all the US Tier 1 customers. But our operation worked very hard with both the Japan customer directly, and what we saw, the Taiwan manufacturer. And so we tried to overcome the challenging and manage the supply to make sure we can meet the customer demand.

Thank you. Do you have any follow-up questions, Tiffany?

No, that's all from me. Thank you. Thank you. We will proceed with our next question from the line of Craig Ellis of B Reilly Securities. Please ask your question, Craig. Your line is open.

Yeah, thank you for taking the question, and congratulations on the great performance, guys. I wanted to ask an intermediate to longer-term question. Craig Ellis, congratulations on what appears to be really significant mon Titan customer diversification through this year. And, and you've got a boot drive position that seems to be broadening out significantly and next generation drives through the year and auto with fairy is, is expanding nicely as well. So the question is this, as, as we look at reports, seeing that, that memory related order pipeline is happening deep into 2027. And as you exit this year with a much broader customer and program footprint, how do you feel about supply availability next year? And are you seeing from your customers extended order visibility? And if so, where is that happening?

I think for this year's NAN supply is a little challenging to us. It's not because It's not because the NAND maker won't provide the NAND supply to Silicon Motion because we provided the PO late last year because the NAND maker and DRN maker, they almost finished allocation before August time frame. And this is why we, through our strategic relationship and deep partnership and personal relationship with the NAND maker, we're able to secure the full supply for 2026. Now for next year, we will start to provide our demand to our NAND partners in advance. So we are pretty sure and we are able to secure all the NAND we need for 2027 growth. And I believe 2027 DRAND and NAND, the supply will be more severe than 2026. But DRAND will get easier from late 2027 to 2028 because All the new mega fab start to run from second half of 2027. I think Micron, the second fab in Boise, will run from second half of 2028. I think the NAND will start to see release probably from early 2028 or second half of 2028, but still in shortage. We will try to maintain the position, make sure we secure all the NAND in advance, meet our customer demand, and meet the growth demand.

And also keep in mind, Craig, we're sourcing from three different flash makers, so we've got a really good range of suppliers to work with.

That's really helpful, guys. Thanks. And then for the second question, I think just thinking near term about how some of the hydraulics play out in the second half of the year with product-related investments. Sounds like there'll be some asset costs for PCI Gen 6, but you're also looking for much higher revenue and higher gross margins. So can you talk a little bit more about the gifts and takes that we should be thinking about in the middle of the income account year? Thanks so much.

Yeah, I think from an OPEX standpoint, we will have our OPEX obviously higher this quarter, and then that'll probably tick up a little bit in the third quarter as well as some of these tape-out costs come in, and then our expectation for timing is that fourth quarter we should have a lot less of those development costs, so that will come down. Overall, we expect to see margins continue to improve, operating margins continue to improve throughout this year.

Thanks so much, guys. Good luck.

Sam, let me add some comment. Silicon Motion Procurement is not like a normal customer. We are strategic partner for NAND maker because we are a mutual business and we engage their project to many, many large scale customer too. So they treat us as a partner, not just a normal buyer for NAND.

Thank you. We have reached the end of the question and answer session. Thank you all very much for your questions. And I'll turn back to Mr. Wallace for his closing comments.

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

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