Silicon Motion Technology Corporation (SIMO) Earnings Call Transcript & Summary

Okay. Great. I want to thank everyone for coming out as we get into Wednesday afternoon. I appreciate everyone coming. And for this next group, we'll have Silicon Motion. And we're pleased just only a few conferences here, we get Wallace Kou, Founder of Silicon Motion. We also have, as many of you know, Jason Tsai, the CFO. And for the discussion today, we'll keep it pretty informal with a fireside chat. So we have a chance to go through a lot of the topics. And for Silicon Motion, it's been quite an impressive year, strong revenue growth. And I think coming from founding the company to now reaching $1 billion revenue run rate with quite -- quite good growth across product lines. I think, Wallace, maybe to kick off to kind of bring everyone up to speed. How does the business mix look like as we build and get to this $1 billion run rate, how are the business cut across the applications and the key areas you're in? And then we can kind of move forward and start to talk about the next step, the next $1 billion.

Thank you, Randy. We have 4 major product line. The first is the client SSD is about 50% to 60% of our total revenue. Today, we have about 30% global market share. Second is the mobile controller, EMC, UFS, about 30% to 40% of our total revenue. We have about 20% to 23% global market share for smartphone and also including the IoT devices. The third product line is our Ferri automotive and we have around -- we are ramping quickly. Last quarter, we said about 5% of total revenue, but 2026 will be grow to 10% of total revenue. We do have a very strong design win and the ramping with the leader, including Toyota and Tesla, BYD and several others. The fourth one of the enterprise MonTitan product line. This is our PCIe Gen5 with both 16-channel and 8-channel. We have mentioned we have 2 Tier 1 customers design win to start to ramp from 2026 and the total 6 customers today and will be 5% to 10% of the revenue by '26, '27. And we also have enterprise boot drive design win and start to ship to BlueField-3 customers. They're going to continue. Quite a lot of interesting strong for boot drive, including Google. So this is our major growth driver going forward.

Okay. That's a good overview. And we can dive a bit deeper into some of those product areas. Curious for enterprise, if we go back a few years ago, you had the Shannon business, which had ramped up and for a couple of years look really promising and then ended up adjusting. But go through the history on your approach to enterprise. And as you come in with MonTitan, how is the approach? How has it changed? And how do you see the confidence to kind of bring that up and grow that into a bigger business?

Yes. Shannon acquisition is 10 years ago. That's why we're starting to engage, expand to enterprise business because Shannon is based in Shanghai. Most of our China customers want the solution. So it's a learning curve. Shannon have a total different architecture. Our initial engagement is with Alibaba and Baidu. It was successful, but it's just we don't have the expert know-how for NAND procurement. So we lost quite a lot of money. So I think now MonTitan, we started 4 years ago, we grouped the team and focused on controller only and with the firmware. So we have a pretty flexible business model. We provide turnkey solution with firmware. We provide SDK for a Tier 1 customer to develop their firmware. Also, we have a semi customer. So we based on different customer workload and they can fine-tune based on the different NAND and FTL. So this gave us flexibility to expand our business, especially QLC moving forward has become very important for high-capacity SSD. We are the leading controller for QLC, work with all the NAND maker to give us privilege and the position for the high-capacity SSD.

You've talked, I think, about toward the end of next year into '27, 5% to 10% of revenue. How is the maturity of the product just in terms of technical milestones, hurdles to bring it up? And how broad do you see it? Because you mentioned having a good number of customers, I think 6 customers eventually like two to start up. But how do you see the ramp up into those customers and maturity of the platform?

So most of our firmware silicon already mature, somewhere final publication in the customer -- in the customer site because one of the customers is a NAND maker. So really as a secure supply and also we are pretty confident about in the ramp of the volume. The other Tier 1 customer in U.S. is also ramping in second half next year. But all others is in final stage of qualification. So we're pretty confident regarding the current guidance about the revenue. And I think if the customer can procure NAND better, we may change our guidance in the second half next year and probably better numbers.

That's good. Good to see better numbers. And we'll talk a bit more later about the constraints. How do you see the TAM enterprise in terms of opportunity and with this initial customer set, like how much of it do you think you've cracked to go into? And is there a way to think on units or value of these controllers what it could be?

We are very exciting about the enterprise business for our growing momentum because our PCIe Gen5 MonTitan is a very unique architecture. Their performance shape is make it more suitable for AI ecosystem because performance and the power can be scalable based on different workloads and they can change dynamically. So most of our CSP customers and also NAND makers, they really like it because it's much more flexible. And as everybody knows, the warm storage demand for high capacity become bigger and bigger, and it's all required 2-terabit QLC mono die to make it cost effective. So this gives us a strong position to focus on the warm storage, although supply is still limited. But I think by second half 2026, we're going to see more NAND maker provide the output. In addition, compute storage is TLC-based, 4 terabytes to 6 terabytes. I think our initial ramp for next year is TLC. Second half will follow by QLC. Even we haven't talked about Gen6. I think the Q2 earnings call next year, we will give a full guidance and picture about the Gen6 development. Gen6 design momentum is much stronger, even our silicon won't be available until second half next year, but the Gen6 design will have multiple Tier 1, including our Gen5, but additional couple of Tier 1 coming for Gen6 controller.

Yes. And if that silicon is available second half '26, how long does it take to go from the silicon ready to solutions?

It's about 9 months to 1 year, full qualification specialty and customer side, but including 2 NAND makers.

Yes. And when this comes up, so it sounds like that, as you move beyond 5% to 10% towards second half '27, '28, it sounds like it scales up a bit more from there.

We didn't give the guidance yet.

Yes. So my goal here -- our goal here is to first provide the first wave point, right, which is 5% to 10%. And we gave this -- we started talking about this back in 2024. Once we hit -- achieve that way point, we'll talk about how that inflects going forward with new products, new customers, how that scales. Certainly, there's a lot of demand around QLC high-capacity SSDs. Right now, the gating factor being availability of those dies. But as that opens up, we should be able to give you guys a better understanding as how that scales longer term.

Yes. Just the hard drive constraint help that. I mean NAND is tight, but there's also the constraint on hard drive. Is that accelerating some of the activity? Were they looking at this solution that could help this business ramp up?

Exactly. I think the enterprise SSD is more suitable than HDD in the AI, especially inference, right? That's why the storage has very high demand. But now the major challenge is really NAND supply shortage. If NAND supply can be stronger, our dependent customer we pick, we engage with, I think we're going to see the very strong ramp-up.

Okay. Good. Actually, the other one I want to address, I think boot Drive, talk -- you introduced it a bit, and that's one where you talked about being on BlueField, so NVIDIA's DPU product line. Could you talk about traction both for GPU and also for ASIC market with like what leader in ASIC, just your position there? And how is the business growth for that as we start moving to new platforms like Ruben or we move to next-generation ASIC designs, if that business actually looks more promising to scale up.

So we starting engage with NVIDIA 2 years ago for BlueField-3 design. BlueField-3 is a DPU. There's a network accelerator. They use for the NVIDIA storage ecosystem. Initially, I think we did not see there will be a very big volume will be meaningful revenue for Silicon Motion. But I think lately, we start to ramp in September. The current forecast in the PO is quite large. We have to work closely with the NAND supplier to make sure secure the supply because this is a sole solution. The first time we put a boot drive solution, initial range about 128 and 200 gigabyte and the margins aligned with the corporate average margin. And we're also in the process for qualification for BlueField-4 and NVIDIA gives us 4 additional switch project for boot drive. This is also range from 256 to 512 gigabyte. So BlueField-4 will be 5 to 1 terabyte range. So now we see this business become more interesting. We haven't given guidance yet. But in addition for MonTitan business, although the part of MonTitan, but we don't want to miss the investor origin MonTitan focus on controller only, see boot drive will be upside for our revenue growth. I think I cannot tell the number, but I think it will be significant. But the dollar range per unit will be around 20-something to above $100, depending on capacity, right? So this will be a significant contribution to our top line as well as the profit. And besides NVIDIA, I think we -- as we mentioned, we have supported this boot drive controller for Google since 5 years ago. I believe we'll also be part of the DPU. But just this is a controller only also support to the other NAND maker who support to Google directly. We have other boot drive for certain other Tier 1 CSP. But I think this look at very interesting business model we had to rethink maybe in the future long term, when NAND is not in a supply shortage, we might provide solution for Bury.

Okay. Actually -- and clarify for boot drive, is that one for the NVIDIA solution you have to pass through the memory? And as pricing moves up, can you pass through? So it doesn't affect the margin. It's a pass-through but it's higher revenue.

Yes. That's correct.

Okay. How do we think of the application? Is it scaling up more that you're seeing more NAND attached to these AI servers? So this is more about the inference and as the [indiscernible] models pick up or the compute and agenic ends up expanding? I'm curious where the upside or is it just that we're selling more AI GPU systems?

So the BlueField is attaching, not have to be selling with NVIDIA Blackwell GB system. It can be attached to Intel or AMD because the interface InfiniBand or Ethernet. So quite flexible. We see this architecture can be scalable. It's not only NVIDIA has a DPU. I think MDL have DPU, which is not popular today. We think this is a great opportunity. And we not only want to expand for DPU, hopefully, we'll also expand to the CPU and the GPU boot drive. So this is -- we are looking for the market TAM because this is very interesting and high momentum and can grow faster in the near term.

Okay. And how do you think of that?

Yes. I think what we've seen here is that when we first started with the first project after the success there and the win there, we're invited into qualifying for additional projects. Those additional projects brings to us additional volume. But on top of additional volume, it's higher ASP because they're higher density. So you're going from products that are in the 20s ASP when you scale up to upwards of 1 terabyte for some of these boot drives, you're scaling up to north of $100. So not only are we getting the benefit of both the volume increase because of the additional projects that we're winning, but we're also benefiting from the ASP increase from that higher density. So we're very excited by the opportunities. And to Wallace's point, I think over the next few years, this is a business that can to become much more meaningful.

Our initial intention for boot drive really enable the high capacity drive because through NVIDIA, we understand the ecosystem for their software partner like DDN, like VAS data, the VCA and go through the Dell, EMC, go to NetApp, go to Cisco, go to IBN, go to HPE. So this is the customer we're talking for the high-capacity SSD beyond the CSP. But suddenly the boot drive itself becomes a very interesting business. So this upside for MonTitan.

And I think, Jason, you're saying it's single digit. It's still single-digit contribution now, but it's...

We haven't commented on what the contribution is. So once we get into next year and we talk more about kind of next year, we will kind of frame the opportunity.

But it sounds like even with all the NAND pass-through margins and what you're running this business, it's good margin.

It's good margin.

Yes. Okay. Good. Actually, I want to switch to a couple of the traditional applications. Smartphone, first, I mean, there's 2 sides. One would be just opportunities. And I feel like there's always been in the mobile, the higher end, these like new UFS standards. And in the past, it was kind of tied to like individual memory companies, whether it's Hynix and then Micron. How do you see the opportunity now for those higher-end controllers, like the mobile business? Do you think it's going to be driven by standard upgrade to like UFS 4? And are there areas to gain? I think you're saying low 20s market share.

Yes. We're about 20%, 23% market share today from global market, including iPhone, which we don't have. But I think the UFS4 becomes very important for the company, not only you can grow with the existing NAND partner, but also we have opportunity to catch the outsourcing from a Korean company because the UFS5 will become high end in late '26 and '27. I think the NAND maker, they are not going to redo the UFS 4 become mainstream. So they need a new controller and supporting the upcoming new generation NAND to consume the NAND output. So they give a tremendous opportunity to expand not only in the mainstream, the low end, but also expand to the high end.

Okay. That's good. So it sounds like '26, '27, UFS 5 might be the time you're market share.

We will also get the opportunity to invite to be participating in UFS 5, but I think we played low key. We don't want to compete with Samsung, Micron and Ecosia. But there's opportunity we catch the UFS 4. We -- in parallel, we have UFS 5 coming in 2027.

Okay. Is there any headwind on your U.S. customer, I think they exited some of the managed NAND, how do you see the business with that customer continuing on?

We continue to support the same controller for the automotive. But I think they -- I think Micron probably already announced that they work with to continue selling the NAND wafer to support the module maker. So I think that will help us to grow for module makers, especially during the NAND supply shortage. We feel very comfortable for the high growth for 2026 and into '27 for our mobile controller.

Yes. Could you talk actually broadly about the supply shortage? I mean in the past, there were certain cycles that impacted the unit demand just when it gets very tight and there's pressure on the bill of materials, pressure to spec down. How does the impact from rising NAND price? How do you think it impacts the business next year?

I think this is the first time in the past 30 years, you see the HDD, DRAM, NAND all in short at the same time. And because the short at the same time, I mean it's not because supply production cut, it's really demand is very high, right? Although maybe some double booking, but really the gap is so big. Today, 50% of our business, 50-plus percent business related to NAND maker project and 70% of our business related to OEM, only 30% related to retail as well as the embedded industrial. So I think most of our customers, even module maker, they have a stronger buying power with the NAND maker, such as Kingston and ADATA. So I think the impact from NAND shortage to us is relatively small compared with others. And because we have so many major design win pipeline start to ramp on PCIe Gen 5, 8 channel, 4 channel, second half for UFS 3 and new generation UFS 2.2 and 4.1 as well as automotive, we have so many new designs with Toyota, with BYD, with Xiaomi and Mercedes and General Motor. And even including for. So it's a tremendous new opportunity for us to grow and to offset some small impact from module maker if they cannot secure the NAND. So overall, we feel very comfortable to move into 2026, waiting for our earnings call for Q4.

Okay. How severe is this shortage like because it's unprecedented when you mentioned all memory types. But are some channels struggling to get parts, like where you could see certain segments of like, say, Tier 2, Tier 3 smartphone brands in China, you could see PC brands a bit tight. Is it that level of severity or is it more just they're managing through higher pricing?

In my personal view, the shortage will stay at least 2 years. I cannot comment 2028, but '26, '27 will be shortage. There's no way in the near term to change the situation because the equipment, it takes time, take about 52 weeks. And I think until the NAND -- the DRAM maker from Samsung, Hynix and Micron, they start to ramp up their mega fab in the second half 2027. I think we'll have to see some relief on DRAM, then their CapEx will move to the NAND will be more. Today, some of the module makers is very hard to get a supply from the NAND maker due to NAND price really went up sharply in the last 3 months. If you look at October, they went up 25%, 30%. November went up again for 50%. It's just incredible. It's very hard to module maker to deal with this current situation. I believe when NAND price go crazy and for spot market, I think we scared away some module maker, but it will cool down a little bit. So I think we will see natural balance because the OEM price is not like the spot price. But today, I think the channel pricing and even automotive maker, there's a last group to willing accept the price up, but the price really up. So I see that -- I feel sorry for some small player for module maker, but that's the way it is. Hopefully, NAND makers, they can be more balanced about the situation and going forward to '26.

And remind us like that module, the ones you think are a bit more at risk, like how much exposure do you think you have in that business? Is that more kind of some of the lower end like eMMC or would that be SSD? Like what parts of the business could you see some impact from some of those like smaller module houses?

Smaller module house probably some -- most of our customer module house a much bigger size as a public company, right? They have a more financial position to bargain and purchase NAND. And then most of our customer module maker, they have 8 to 12 months inventory already in hand. So I think it should be okay for '26, but maybe we'll start to face a challenging for second half '26, but according to some of our customers, I think look like they negotiate with NAND maker, the bit supply '26, '25, '26 is similar. But I cannot really comment for all the different customers because everybody has different position. Hopefully, but we feel pretty strong because many of our OEM projects are our NAND maker as they start to ramp up. So they will offset some small impact on module makers.

Yes. It's good to have those share opportunities in these new businesses like the boot drive. And core SSD, like I think in the introduction, 50% to 60% of revenue still, when do you see the share gains coming in? Because I think of that market, it might be a little bit capacity constrained. And somewhat more mature, but if market share is a potential there, how do you see your share trending?

For consumer client SSD today, as we state, we're 30% market share for PCIe Gen4. But Gen5 controller is even stronger for high-end 8-channel PCIe Gen5, we have more than 4 NAND maker design win and almost 90% module maker design win. So they start to -- currently, I think last quarter, we mentioned Gen5 ramp-up is already 15% of total SSD revenue, but it's not OEM ramp yet. OEM will start to ramp from Q1. Our 4-channel mainstream controller DRAM also have 4 other combination design wins, including 2 Korean customers. This is also including a 90% module maker. So our Gen5 will be more than 30% for Gen5 market. We think the Gen5 start to ramp next year and our market share is going to go up. So it doesn't matter who is going to win. I don't know which NAND maker or module maker, but our overall market share moving toward 40%.

Okay. So to clarify, you were saying Gen 4, it was about 30% for Gen 5, based on design wins, it seems like closer to 50%.

50% or higher.

Okay. 50% or higher Okay. And then for cycles, are they moving faster? Like do we need to start thinking about PCI 6 for the generation on?

I think PCIe 6 in PC is take a longer time, maybe we're 2029 or 2030. We're seeing the high end, one in the mainstream. But enterprise is much faster. will start to see Gen6 transition from late '26, '27. So that's why we try to speed up and to get more R&D resource working on the Gen6 because we have a much bigger momentum in design win pipeline. And in parallel, we start to prepare for Gen7, where we do have a Tier 1 customer want to customize the chip. So the R&D resources are major concern. We need to invest more and keep a good execution and focus to see on Titan and hopefully, it will be a much bigger pie for our company.

Yes. Actually, maybe a segue a couple of questions for Jason. First, it came up on the call, I'm curious the inventory because there was actually a big -- a huge increase. It sounds like you have a lot of design traction. But when I look at that balance, is that just you're getting ahead of it to prepare parts?

Yes, that's right. We've got a tremendous amount of visibility towards order flow for the next 12 months. And certainly building up inventory for NAND as well to supply some of these new opportunities in automotive, in boot drives, we've been procuring NAND as well. So it's a combination of all of these products, both controllers and NAND to support, again, order flow that we've got high visibility towards.

Okay. Good. And profitability, it was a clawback. You're back to gross margin, almost like kind of 49% operating margins '19 to '20. That's pretty close to the target range you probably get asked now that you're here. But is this the level you think based on the mix, the design wins, is the level? Or is there room for leverage?

Look, I think for now for gross margins, 48% to 50% has been our historical run rate. And I think we're smacked out in the middle of that right now. For the fourth quarter, we're guiding right in the middle of that as well. I think longer term, as we see MonTitan and enterprise business scale beyond 5% to 10% of revenue, we will talk more holistically about how that affects long-term gross margin run rate, how that uplift looks like. From an operating margin perspective, we've been spending a fair bit of money investing in our products over the last 2 years. We had 3 6-nanometer products. We've been investing in enterprise. And the reality is that those investments are really just coming to ROI, seeing ROI, early stages of ROI for just one product. That's the 8-channel PCIe 5 controller. Enterprise, we're starting to see a little bit of revenue, but we haven't seen that inflection yet. And certainly, the other products that are coming, but it's still not there yet. So we'll start seeing significant revenue scale starting to build momentum going into next year. We will continue to invest. As Wallace pointed out, we've got a 4-nanometer investment coming next year, but we will be judicious about how we spend and how we manage our margins going forward. Normal operating margins for us is 20% to 25% our target longer term is 25% plus. So we're confident that we can still achieve those numbers.

Okay. So it sounds like even with the tape out, even going to 4-nanometer in the R&D cost, the engineering cost, your sales could grow faster than even this R&D investment you're making?

Yes, we're going to -- we'll certainly talk more about what next year looks like next year, but our goal is certainly, again, to be responsible.

Okay. Curious to the cash. And you have a good dividend where you're paying out steady and it's been increasing a bit. But over $270 million in cash and you have max linear area, you have that arbitration that could come through. If you were to ramp up and get additional cash, like what's the intention for that if it's different ways you reinvest, different cash return, M&A.

I think for us, capital allocation and capital return has always been a 3-pronged strategy, right? So first one being the dividend. We've been paying that for the better part of 10 years. It's increased gradually over the last 10 years from $0.60 a share to now $2 a share. The second part is share buybacks. Over the last 3 to 5 years, about half of our free cash flow has gone to periodic share repurchases. And thirdly is acquisitions. While we have not been very acquisitive, we continue to look for opportunities that are additive to what our core capabilities are. How do we accelerate next-generation technology? How do we accelerate capabilities. So that's what we continue to look at. And so whether -- whatever happens with the Mass liner, which is not something we're commenting on, but whatever influx of cash we get, we'll continue to look at all 3 as priorities and allocate appropriately.

Okay. And maybe I'll squeeze one last one. Just on the input costs because there's been more talk steady foundry price increase and substrates are a bit of a cost. How do you see the cost pressures in the business going into next year?

I think the TSMC cost increase -- wafer increases has been at 5-nanometer and below. So we're 6, 12, 28, 40 nano. So we're largely insulated from that. From a substrate basis, I think we've done -- our operations team has done a good job in maintaining those relationships and securing enough supply to make sure that we can supply our customers, right? Part of the inventory build is because we have good order visibility, so we're able to make sure we allocate our operations to have them build up enough supply.

Okay. Good. I think with that, we have to wrap up. But it sounds like a good story, a lot of growth drivers, managing this NAND tight as well and seeing a good way to mix up into some of these opportunities. So I look forward to hearing more as we go into next year. Okay. Thank you.

Thank you, Randy.