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

Good day, and thank you for standing by. Welcome to the Silicon Motion Technology Corporation Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference 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 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 forward-looking 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 Sepenzis, Vice President of Investor Relations and Strategy. Please go ahead.

Good morning, everyone, and welcome to Silicon Motion's Second Quarter 2026 Financial Results Conference Call and Webcast. Joining me today is Wallace Kou, 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 second 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. A 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 the call today. We delivered another outstanding quarter, achieving record revenue of $451 million and gross margin above 50%, driven by continued growth across all our core markets. Stronger operational performance translate into record earnings per ADS, reflecting our ongoing solution from the leading NAND side controller makers into a diversified supplier of controller and solution, spanning AI infrastructure to the edge. During the June quarter, we grew our embedded eMMC & UFS portfolio, delivered both sequential and year-over-year gains in edge SSD controllers, began the initial commercial ramp of our MonTitan enterprise lead products and posted strong growth in our Ferri for Automotive & Enterprise boot Drives Solution business. With expanding consumer market share and rapidly broadening suite of enterprise and AI controller and solutions, our competitive position keeps strengthening. We expect to deliver record revenue in 2026, up more than 100% year-over-year, setting the foundation for sustained growth in the years ahead. With the right product in the right market at the right time, we have never been better positioned to capitalize on the accelerating demand for intelligent storage from the data center to the edge. I would like to take a moment to address the current market environment. The AI super cycle has fueled significant demand for HBM, DRAM, NAND and HDDs, driving substantial price increases over the past year and creating mounting substrate and supply pressure across memory and storage technology. As component prices, NAND and DRAM, in particular, continue to climb, OEMs are finding it increasingly difficult to build affordable consumer products such as smartphone and PC, especially at the low end. We expect this scarcity to persist likely until 2028 when new fabs come online and help bring NAND supply back to reduce supply-demand gap. While the NAND environment will stay challenging through 2028, we have a clear path to deliver significant top and bottom line growth. Silicon Motion is in the early inning of a complete transformation to a diversified supplier of NAND flash controller and solution from AI infrastructure to the edge where there is accelerating demand for next-generation storage. I will now discuss our embedded eMMC & UFS business, which include controller for smartphone and other IoT and connected devices. This business continued to thrive and grow significantly outpace industry despite the supply headwind as NAND makers increasingly rely on third-party controller while focusing their own resources on DRAM HBM solutions. Our outperformance was driven primarily by market share gains as NAND makers deemphasize these solutions to their benefit to our module maker customers. Across the many makers -- across the many markets where we sell our Embedded eMMC & UFS products, OEMs are trimming specification to offset some of the rising costs of memory and storage. While we still expect smartphone unit to be down 10% to 15% in 2026, we anticipate strong growth in our mobile business in 2026, driven by continued market share gains and ASP improvement from a mix shift toward newer UFS controllers. Our eMMC business delivering strong results as we win new business across a range of markets, including automotive, smart glasses, watches, drones, robots, next-generation cable set-top box, smart TV and more. With the NAND maker interested in these markets, we were operating in an environment of stronger pricing power and profitability. Overall, we expect strong revenue growth in our Embedded eMMC & UFS segment in 2026, and I'm pleased with the exceptional performance our team delivered in the first half of this year. We expect our growing portfolio of new product transition to next-generation solution and expansion into additional markets to drive share gains to keep outpacing the macro pressure in the smartphone market. Moving on to our SSD business, which includes edge and enterprise SSD controllers. Our edge SSD business improved significantly in the second quarter following a seasonally soft first quarter, delivering 40% to 45% year-over-year growth. We are beginning to see payoff from our PCIe 5 investment at the edge with our 4-channel controller ramping steadily since its introduction in the fourth quarter of last year. However, the transition from PCIe 4 to PCIe 5 is proceeding more slowly than we anticipated 6 months ago. OEMs are increasingly pairing the latest generation more cost-effective NAND with PCIe 4 SSD in value and mainstream PC. This offers a way of reducing the overall bill of material. We are securing a meaningful share of this business across both NAND makers and module manufacturer with our leading controllers. Despite the slower pace of PCIe 5 transition, our 4-channel [indiscernible] PCIe 5 controller continue to gain adoption among customers seeking leading performance in the mid- to high-end segment of the PC market. We, therefore, expect to further increase SSD average selling price as we progress through the remaining of the year. I would now like to provide you with an update on our MonTitan Enterprise SSD business. Our new ESD business entered commercial production in the second quarter with 2 Tier 1 customers, and we expect to ramp 5 additional Tier 1 customers in the second half of the year. There is an exceptional strong start after several years of investment in our enterprise AI class controllers. NAND is an essential and growing technology across the enterprise storage ecosystem, spanning warm storage and compute storage application and MonTitan is well positioned for rapid growth. Our first customers are targeting the compute market using TLC NAND, which is in growing demand for next-generation AI platform that leverage NAND to support compute storage solution that deliver high-speed, low-latency storage dedicated for near GPU and near CPU KV cache. Several customers are leveraging MonTitan to target this market and will be ramping production throughout the remainder of this year. We continue to believe that TLC MonTitan solution will ramp faster than TLC-based solution until 2 terabit TLC NAND dies become more broadly available. High-capacity 1-story SSD leveraging TLC NAND remains a large addressable market for Titan for long-term growth, and we expect the TLC-based solution will begin their initial ramp in the second half of the year with multiple customers. We are seeing increasing inbound interest in our MonTitan solution to drive long-term growth. Finally, we are completing the tape-out of our next-generation 4-nanometer PCIe Gen 6 controller in August of the year, targeting hyperscaler and CSP. We developed this controller in close collaboration with several customers, and we have already secured multiple design wins with both flash makers and CSPs. We expect this new controller to be a significant growth driver in 2028. With TLC and TLC MonTitan controller already in customer qualification and clear rollout plan in place, I'm confident we will hit our revenue target this year, and I expect significant growth in 2027 and beyond as the business scales. Our customer base is strong and expanding and MonTitan is well positioned to drive meaningful revenue growth from here. I look forward to sharing further updates. And finally, I would like to provide an update on our Ferri for Automotive & Enterprise Boot Drive storage business. Our Ferri for Automotive & Enterprise Boot Drives storage business is growing rapidly across automotive and AI infrastructure markets. NAND makers are leaving the automotive market as the volume are not meaningful to their business and the quality and technical support demand are significantly greater than in other markets. As the NAND makers exit automotive, the module makers should seem likely successors, but they do not have the infrastructure, the resources, the certification process or the expertise to deliver automotive-grade products. This has benefited Silicon Motion significantly as we know the automotive market, the customers and supply chain extremely well. We have developed our automotive product and certification for over a decade and already support 3 of the NAND makers with our automotive controller and firmware. Our success in automotive has generated interest in our Ferri solution for additional large and growing markets, including robots, drones, advanced networking and other applications. In the emerging robotic market, we are now actively engaged with multiple companies that want to leverage our storage product. We believe there are multiple opportunities in the emerging physical AI market for storage in humanoid robotics, including vision system, LiDAR, computing storage, [indiscernible] system and many others. In fact, it appears that from our initial conversation, the opportunity in robotics may be larger than automotive, and our Ferri solution will be ideally suited to support this future opportunity. Moving on to our growing enterprise Boot Drive business. This is a new and growing market. Enterprise Boot Drive for server CPU has been around for over 30 years, and the NAND maker have supported this market with solutions that employ both DRAM and NAND. As we move into next generation of AI and enterprise application, enterprise CPU customers will continue to use enterprise boot drive with DRAM to enhance [indiscernible] performance and reduce latency. Most other customers, including GPU, CPU and switch makers are looking for enterprise Boot Drive solution which our unique [indiscernible] technology that offer enhanced security and is our primary focus today. While some NAND makers may choose to continue the support of conventional architectures, they do not have DRAM-less PCIe SSD controller, and they are not likely going to dedicate the resources necessary to develop them for comparatively low volume market. Silicon Motion has the right technical know-how, the leading controller and firmware technology and the right leadership to deliver turnkey enterprise Boot Drive solution, and this is why we are winning in the market. The Ferri and Boot Drive storage solutions segment is growing rapidly, and we expect new customer design wins in both automotive and AI infrastructure to drive strong growth for the future. One of the most important reasons of our success in the solution business has been our long-term relationship, which have allowed us to secure NAND from multiple suppliers despite recent supply shortage, a significant and enduring differentiator. In second quarter '26, Ferri and Boot Drive solutions more than doubled sequentially and represent near 30% of our total revenue, up from 4% a year ago, and we are just getting started. In conclusion, we reported our second consecutive quarter of record revenue for Silicon Motion as we executed across our rapidly diversifying business. We are fundamentally a much stronger company today than we were just a year ago with a broad suite of products to support the increasing demand from AI, from the data center to the edge. This gives us a strong balance across our markets and greater flexibility to capitalize on pockets of strength while overcoming end market challenge like those we are seeing today in PC and smartphones. I'm extremely proud of our teams for building a durable, diversified business that benefit from best-in-class technology, expanding share and entering into new end markets, all while monetizing the strong relationship we have built with OEMs, module makers and NAND maker over the past 2 decades. I'm more confident than ever that we will deliver broad-based sustainable growth across our 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 to everyone joining us today. I will discuss additional details of our second 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. Our second quarter performance was even stronger than expected. Sales increased 32% sequentially and 127% year-on-year to $451 million, coming in well above the high end of our guided range of $393 million to $411 million, delivering our third consecutive quarter of record revenue. We experienced strong growth across all our businesses in the second quarter with standout growth in Ferri for automotive, enterprise boot drives and embedded eMMC & UFS. Gross margin was 50.2%, exceeded our guided range of 48.5% to 49.5% as we capitalize on new product introductions. Operating expenses increased sequentially to $122.1 million, given increased investments in new controller and solution development, new tape-out-related expenses and higher headcount. Operating margin was 23.1% and exceeded our guided range of 21% to 22%, driven by higher-than-expected revenue and gross margins during the second quarter. Our earnings per ADS was $2.43. Total stock-based compensation, which we exclude from non-GAAP results, was $3.4 million in the June quarter. We had $181.8 million in cash, cash equivalents and restricted cash at the end of the second quarter compared to $210.9 million at the end of the first quarter. Cash decreased in the second quarter through a combination of dividend payments of $16.9 million and an increase in inventories to support our growing business. We continue to navigate the memory and storage supply challenges effectively. Investments in new advanced geometry products for both our established markets and our emerging enterprise markets are ongoing, and we are building a balanced and resilient portfolio of products that target everything from AI infrastructure to the edge. These investments will continue throughout 2026 as we support the growing demand for our new enterprise portfolio and fuel our growing market share across our consumer portfolio. For the third quarter of 2026, we now expect revenue to grow 15% to 20% sequentially to $519 million to $541 million. We expect growth across nearly all our product segments, led by Ferri for Automotive, Enterprise Boot Drive solutions and our new MonTitan enterprise SSD controllers. Gross margins are expected to increase sequentially to 50% to 51% in the September quarter, given the product mix existed by greater contribution from MonTitan and our PCIe 5 controllers. Operating margin is expected to grow substantially to 27.5% to 28.5% as strong revenue growth drives leverage to the bottom line. Our effective tax rate is expected to be 22%. Stock-based compensation and dispute-related expenses is expected to be in the range of $14.9 million to $15.9 million. 2026 is on track to deliver record revenue for Silicon Motion, with top line expected to more than double this year. While we continue to invest heavily in R&D this year to expand our portfolio with leading-edge solutions, we're confident that along with much higher revenue and improved gross profitability, our operating margins can exceed 30% exiting this year. We are navigating today's memory and storage supply constraints and elevated pricing with remarkable success, a direct result of the relationships we spent more than 2 decades building with NAND flash makers. At the same time, our leadership in the merchant controller market and our multiyear investments in enterprise and AI SSDs are starting to pay off with MonTitan and our enterprise boot drive storage business now ramping in volume. Our diversification strategy to expand beyond consumer-centric applications into automotive and enterprise is beginning to yield outsized results. Our wins in these new markets are for solutions that bring much better visibility, much longer product cycles and much higher barriers to entry that ensure strong long-term revenue and profitability growth for Silicon Motion. We will be less subject to consumer cyclicality as these new wins scale in a diverse range of end markets and our visibility and predictability will further improve significantly. Together, these drivers are the foundation of the transformation Wallace spoke about earlier and will set the stage for significant revenue growth at Silicon Motion in 2026 and well beyond. I look forward to sharing more on our progress next quarter. This concludes our prepared comments. I'd like to open it up for questions. Operator?

[Operator Instructions] we will now take our first question from the line of Neil Young of Needham & Company.

So it sounds like there's some bigger contribution from Ferri that I think people have expected. So I was wondering if you could give us the approximate Boot Drive revenue contribution in 2Q or maybe some idea of the percentage split between the Boot Drive -- enterprise Boot Drive and Ferri? And maybe what's embedded in the 3Q guidance between the 2 of those? And then I have a follow-up.

Yes. Neil, we're not giving out that level of granularity. I can tell you, though, that we are seeing tremendous growth across both of those categories. So this isn't really driven by one or the other. It's driven by both. For Q3, again, we're not going to be providing that much detail. But certainly, from the backlog that we've talked about -- that we've seen that we have been building and the order patterns that we're seeing, we're seeing very strong contributions across all of these SSD solution products.

Okay. Great. That's helpful. And then on MonTitan, you obviously gave the update on the customers in production, sort of what you're expecting to the rest of the year. Are you still guiding to that 10% revenue run rate exiting 2026? And then maybe helpful if you could distinguish the timing of the TLC compute and the KV Cache programs from the QLC warm storage programs, just what you're seeing there?

Yes, we're still on track. I think Wallace had mentioned that we're well on track to achieve that 5% to 10% of our overall revenue coming from MonTitan exiting this year. So we are confident that we can achieve that. In terms of where we're seeing more contribution, certainly, initially, we're seeing more contribution from TLC-based solutions. but we are seeing early QLC shipments that will begin late this year. But we don't expect QLC to become more meaningful until probably late '27 into '28 as 2 terabit dies become more affordable.

And the next question comes from the line of Mehdi Hosseini from SFG.

I think it will be very helpful for us and the investment community if you guys could elaborate on the revenue mix by end market, like enterprise, consumer and auto and how it would map to specific products? And I understand you don't want to be specific, but any kind of a qualitative view on how end market and products are mapping will be great. And I have a follow-up.

I think as we said in the past, all our product lines are growing in 2026. Of course, SSD, I think because the PC market unit declined. But however, due to the market share gain, we continue to grow 50% compared with the last year first half. Our enterprise because the base is small, so we grow faster enterprise controller. And for Ferri and for automotive and Boot Drives, we do have multiple major customers supporting our growth trends. So we expect to see continued growth through the 2026 and to 2027.

I think another way to look at it also is the majority of eMMC & UFS is really going to be consumer-centric. Today, SSD controller sales, the majority of that is going to be consumer-centric going to edge SSD controllers. But certainly, as we exit this year, getting to that 5% to 10% coming from MonTitan contribution. Ferri and Boot Drives, Ferri for automotive and enterprise Boot Drive solutions, again, you can see -- you can imagine those are going to be more -- less consumer-centric.

Okay. Moving on to my next question, the 2-terabit die and the timing of the [ QLC ] ramp. It's been more than a year of waiting. And I'm just wondering if Wallace could share with us, is there a qualification that is an issue? Is that the capacity? Or is there something else? And I'm asking this question in the context of would this actually provide an opportunity for controller suppliers like Silicon Motion? Or is it just a manufacturing ramp that is delayed? Any color would be great.

So I think you asked a very good question. We have been waiting for also a very long time, too. The 2 terabit QLC is supposed to be the great darling for the NAND industry and to drive the QLC-based storage SSD to be the next level. However, due to the price increase, supply shortage, I think high-capacity data storage drive is less attractive because the price is too high. And we also see the DRAM NAND maker, the [indiscernible] putting more focus and CapEx into the DRAM HBM. That's why the development for 2 terabit have to fine-tune the quality to next level is take a much longer time. So this is why at the current market situation, [indiscernible], I think the DDR5 HBM is more attractive and driving more high profit. But it just takes some time we believe because still high demand for the -- through the AI inference for the data storage. So demand for storage is much bigger than the current supply. And through the new CapEx, we see the arrangement 2028 will see meaningful recovery from NAND supply. And we see -- that's why we see all the NAND makers should have a 2 terabit QLC by that time.

And I want to make it clear, Mehdi, that the delays here are on availability of NAND side. Our controllers are here. Our controllers are ready. As we said, we're going to be starting to ramp -- early ramp of some of the QLC-based solutions with our customers by the end of this year. So this isn't something that's a controller issue. This is an industry availability issue of the NAND.

We will now take our next question. And the next question comes from the line of Matthew Bryson of Wedbush.

Congratulations on the great results. Just with gross margins, given how strong the embedded piece was and that's typically a lower gross margin segment for Silicon Motion. I would have expected a little bit of a headwind there. Can you talk a little bit about the puts and the takes that affected the gross margin line in Q2?

Yes. So I think what we've always said is that our MonTitan controllers are margin accretive. And so as those have begun to ramp, that's been able to help offset and drive strong gross margins for us here in the second quarter as well as in the back half of the year. The back half of the year, we're also going to benefit from additional growth in our PCIe 5 controllers, for example. So that's -- all of these things are going to be margin accretive. That's going to offset some of the margin pressure that we see from the solutions business.

And Jason, just when we're thinking about things moving forward with MonTitan seemingly being as successful as it's been. I know longer term, you talked about kind of gross margins being a little bit below 50%. Should we be rethinking that if MonTitan is going to ramp like this? Any commentary there would be really helpful.

Yes. I think we're still comfortable with the 48% to 50%. As I think we've said in the past, we're going to see a little variability to that depending on mix in any given period. So we're still targeting 48% to 50%. Certainly, in certain periods like Q2, Q3, when we're seeing a little bit above that, we're certainly going to be able to take advantage of some of these mix benefits in the near term. But long term, we still expect to be in that 48% to 50%.

The next question now comes from the line of Sebastien Naji of William Blair.

congrats On another quarter of record results here. First, I just wanted to ask about what you're seeing in the mobile market and specifically at the Chinese smartphone makers. Last night, Qualcomm reported and posited that calendar Q2 will be the trough for China handset demand in their business. And given your exposure to some of those vendors, could you maybe just comment on whether you're seeing the same signals that point to a potential recovery in the second half or if you're seeing anything different?

Yes. We see the China smartphone market is very challenging due to the price increase of both LPDDR5 and also the storage product. And for especially value line, I think they suffer much more because if you're looking for the DRAM and the NAND, almost 56% of the total [ BOM ] cost for the low-end smartphone. So this is a challenge. But however, because we work with the NAND maker outsourcing to us in certain models and module maker continue to gain market share and we benefit from collaborating with the smartphone maker directly through the QLC development. So we see our demand for smartphone for our UFS and eMMC continue to grow from Q2 and also moving to next quarter. I think we do not have a significant market share in the low end. That's why the impact for our business is relatively small.

Got it. Okay. Okay. That's helpful. And then maybe for my follow-up, just on the Boot Drive business. Can you comment on whether you're starting to see the benefit of BlueField-4 sales in either Q2 or your Q3 guidance as NVIDIA starts to ramp their Vera Rubin platform? Or has much of the growth so far been tied to the first-generation BlueField-3 program?

We cannot comment specific regarding the time, but I think the BlueField-4 definitely will go with customers' announcement, right? But we do have a pretty large share for BlueField supply for the Boot Drive. So we're very happy when they ramp up in the second half of this year.

And our next question comes from the line of Craig Ellis of B. Riley Securities.