Silicon Motion Technology Corporation

Good day and thank you for standing by. Welcome to Silicon Motion Technology Corporation's third quarter 2026 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be 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 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 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 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 forelooking statements which apply only as of the date of this conference call. And with that, I'll now hand you over to Mr. Thomas Sepenzis, Vice President of Investor Relations and Strategy. Please go ahead.

Good morning, everyone, and welcome to Silicon Motion's third 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 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 US 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 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, thank you for joining us to call today. I'm pleased to report that we deliver another quarter of strong growth with revenue of $560 million and gross margin of 53.7%, driven by the growth in ferrite for automotive, edge AI, and boot drive storage, our edge SD business, and our emerging Mount Titan controller for enterprise SD. We drove another quarter of higher operation performance, delivering the second consecutive quarter of record earnings per ADS. but we continue to capitalize on our product and market diversification strategy. We are on track to deliver record revenue in 2026 with over 100% top line growth. Our strategy is simple, deliver real value to customers and focus where we are uniquely differentiated so we can generate strong ROI for shareholders. For our edge controllers, We have become the de facto standard for mobile, IoT, and PC controller solutions. For NAND makers and virtually every module maker without sourcing, become a much more meaningful portion of the market. Our unmatched controller technology and design expertise deliver solutions that are better performing, consume less power, and are more cost-efficient and either in-house or other merchant solutions. Our strong share gains are driving things and growth despite end-market weakness and we expect this to continue. Among Titan Enterprise Decontrollers are winning across the ecosystem with leading NAND makers, hyperscalers and CSPs and with module makers that supply AI server to hyperscale and enterprise customers. Our success is based on our unique combination of two decades of controller and firmware design experience and our history of managing more NAND than anyone in the industry. This has created an incredible solid foundation for our leading enterprise controller products. And then we expect our Mount Titan revenue ramp to accelerate as we introduce our next generation PCIe 6 controller next year. And lastly, for our storage solution segment, our strategy has always been to focus in areas that are underserved by name makers. And we are rapidly growing share in these vital low density, smaller volume market that require more design and customization work. We have spent more than a decade building one of the industry's broadest automotive-grade portfolio, supported by a dedicated quality and supporting team. Today, that foundation positions us to capture fast-growing compute and storage demand across cars, drones, and increasingly robotics. For our enterprise boot drive solution, our unique combination of broad controller platforms, best-in-class firmware, technical know-how, land supply relationship, and manufacturing capability put us in an ideal position to serve the growing need of the AI infrastructure market. As a result, we are rapidly evolving into much more balanced and profitable company as a new enterprise and AI product enhance our leading consumer controller share Translating our competitive position from AI infrastructure to the edge to deliver long-term sustainable revenue and earning growth. I would like to take a moment to address the current market environment. The AI super cycle has driven robust demand of FBN, DRAN, NAND HDD for the past several quarters, with no sign of slowing down. Prices have risen sharply over the past year, and the strength substrate supply across memory and storage enterprise market remain relatively insensitive to price. But a PC, smartphone, and other consumer device OEM are struggling to bring affordable product to market given today's memory and storage cost, and the consumer unit volume are declining as a result. We expect conditions to stay difficult until BIT supply comes back into balance with demand. New NAND FABs are planned for 2028, and NAND makers continue to add BIT through higher layer count, but we do not see this changing the current supply-demand imbalance to any great degree. Flash makers continue to prioritize enterprise and high-capacity solutions. creating new and expanding opportunity for Silicon Motion. Our growth is benefiting from more outsourcing and larger opportunity in enterprise and the storage solution market that we are uniquely positioned to win. We are at the beginning of the journey in the enterprise AI market and our early success will drive accelerating demand for our next generation storage technologies. Let me now discuss our embedded EMC and UFS business, which include controller for smartphone IoT connected devices. Our EMC UFS business was up over 100% year-over-year in the first half of 2026, as the NAND makers are shifting their resources toward DRAN and HPN solutions, allowing module makers to take share in the mobile market This has helped drive our market share gains as market makers look to third-party controller partners to make their mobile solution. In the third quarter, EMSC and UFS revenue declined modestly from the prior quarter, reflecting customer launch timing and the challenging smartphone OEM phase in offering affordable devices and many higher NAND and durian prices. We expect the headwind to persist in the near to midterms until additional memory and storage supply comes online. Across the markets that we sell our EMC-UX controller, OEM are reducing specification to try to offset the rising memory and storage cost. We expect our EMC-UX business to remain relatively flat in the near term, given the recent, the current market challenging, but I do believe we can return to growth next year and beyond. There's our new UFS 4.1 controller and UFS 5 controller ramp and driving higher ASPs. Now turning to RSD controller business, which include Edge, and Mount Titan Enterprise-D controllers. This business delivers strong sequential and year-over-year growth. In HSD, our PCIe 5 investment continues to pay off. With growth in both our 4-channel and 8-channel controllers, PCIe 5 currently represents approximately 10% of the PC market, and we expect this will grow to 20% to 25% and many more. Our leading position in PCIe 5 is driving greater market share gains within the PC market. And as the industry transition from PCIe 4 to PCIe 5, we expect to see further top line improvement given the higher ASP associated with these Next Generation Products. We are currently working with all the major NAND makers and most of the leading module makers to deliver compelling SSD solutions that leverage PCIe 4 and PCIe 5 controllers. We are tracking well ahead of expectation to achieve our market share goals of 40%, a true Apple, by 2028. and believe we will continue to improve our position. While PC unit having associated with the higher memory and storage prices present challenges, we believe we will drive further top line growth through the market share gains and ASV increases as the market shift to PCIe 5 continue. I would now like to provide you with an update on our new Mount Titan Enterprise SSD business. NAND remains a critically important technology across the enterprise and AI storage ecosystem, and Mount Titan is positioned for rapid growth in the coming years. These ESD solutions deliver high-speed, low-latency storage that targets compute and data storage applications for enterprise AI platforms. Our first two customers began shipping TLC ESD for compute that leveraged our Mount Titan controller in the second quarter. And all seven of our announced customers are on track to begin commercial ramp in 2026 with both TLC-based compute and QLC-based data storage products. TLC-based computer ESD using Mount Titan are expected to grow more quickly than QLC-based data storage ESD in the near term, until a greater supply of 2TB DAI becomes available. Encouragingly, four of our six NAND makers have started production of 2TB QLC DAI today, and we expect all NAND makers to begin shipping two terabit QLC by end of the 2027. So momentum will accelerate throughout next year. During the third quarter, we tape our next generation four nanometer PCI-E4 Mount Titan controller targeting hyperscaler and CFP. Expect to begin sampling in the first quarter of 2027. We have one design. with multiple tier one customers including NAND Fletchmakers, Hyperscalers, and CSP. The new controller was designed for both computer application using TLC and data storage using TLC-NAND as a performance shaping and multiple aging service architecture extremely well suited for a giant AI infrastructure. We continue to see increased inbound interest in our Mount Titan controllers. In fact, this new enterprise controller segment will help us deliver long-term, sustainable top and bottom line growth. And finally, I would like to provide an update on our FairEye for Automotive, Edge, and Enterprise boot drive storage business. Our solution business, which includes FairEye and boot drives, delivered the strongest result in the third quarter, with revenue up over 75% sequentially, representing over 40% of our revenue. Our automotive business has been a particularly source of strength, delivering better than expected top line results and higher gross margins. We continue to scale this business quickly as we know automotive market and the supply chain extremely well, which has driven significant backlog for long-term growth as we accelerate our share gains. We have spent more than a decade developing our automotive products and certifications. Today, our storage controller and firmware offer the broadest portfolio of solutions to serve every part of the automotive market. Our success in automotive has drawn interest in Freeride for other large growing markets, including robotics, drones, and advanced networking. In the emerging robotics market, we are actively engaged with several companies that want to use our solar product. We see multiple opportunities in humanoid robots and other physical AI systems, including vision, LIDAR, and compute storage. Our early conversation such as robotic opportunity may be larger than automotive, and we believe FairEye is ideally suited to address it. Our fast-growing boot drive business is also gaining momentum. We estimate that the market will be approximately $3 billion in 2026, growing to over $5 billion by 2030. In the third quarter, we want to design with several new Tier 1 customers for networking and AI infrastructure products. These programs are expected to ramp over the next two years and will substantially improve our backlog visibility. As the average capacity of enterprise boot drives is much smaller than compute and data storage SD drives, the NAND makers are no longer prioritized this market. Additionally, our DRAM-less controller delivers the performance, reliability, and endurance this dry needs with lower power consumption requirement, smaller form factor, and the lower cost and DRAM-based design. Bulldry handles the operation system, logging, and system management rather than heavy data workload. So they don't need the expense of onboard DRAN for DPU router and switch products. As AI infrastructure build out at the large numbers of servers, the networking and DPU equipment are increasing rapidly, each needing reliable boot storage, driving the growing demand for DRAN-less boot drives. We have been the primary supplier for DRAN-less boot drive controllers. to the NAND makers that have historically served this market, but they are moving on the higher density opportunity. SiliconMotion is uniquely positioned with the right technology, the right support, the leading security firmware, and proven ability to procure NAND, making us the best partner for those needing a boot drive solution. Looking ahead, however, We are seeing significant new opportunity for boot drive with onboard DRAM. Given the strong demand of AI inference and agenting AI, near CPU boot drive with DRAM provide lower latency and open compute project features that are increasingly high demand. The name maker have shipped the resources toward HPN D-RAN and high capacity compute and data storage SAD. There is a growing shortage of near CPU boot drives with D-RAN. We estimate that this market will reach over $10 billion by 2030, making it a significant new opportunity for Silicon Motion. We are already in discussion with multiple potential customers for boot drives that leverage our industry-leading and Channel and PCIe5 controller that can serve the near CPU market to further expand our market opportunity and expect to begin ramping product for this market in the second half of 2027. Our Fairlife Automotive, Agile AI and Bootstrap Solution business are performing especially exceptional well. and these are many large and growing opportunity for our product in the segment. Our backlog has increased significantly in just the past three months and we expect many additional customer design wins in automotive, edge AI and boot drive solution to deliver significant future growth. We continue to benefit from our proven ability to secure NAND in a difficult environment from multiple land suppliers. And this continues to be a powerful differentiator for our company. In conclusion, Silicon Motion delivered its fourth consecutive quarter of record revenue as we executed across a rapidly diversifying business. We are a fundamentally stronger company today with a stronger balance sheet brought this range of solution and product and more opportunity ahead than at any time in our history. Our broad portfolio served surging AI demand from the data center to the edge. That breadth gives us balance across our market and the flexibility to seize growing opportunity while navigating challenge like those we face today in PC and smartphones. I am extremely proud of our teams. Together, we have built a durable, diversified business powered by best-in-class technology, expanding share, and new end markets, strengthened by two decades of relationship with OEMs, module makers, and NAND makers. I'm more confident than ever that we will continue to deliver broad-based sustainable growth long-term. Now let me turn the call to Jason to go over our financial performance and outlook.