Silicon Motion Technology Corporation Sponsored ADR Aktie

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 flash 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 is 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 DRAM-less 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 eSSD business entered commercial production in the second quarter with two Tier 1 customers, and we expect to ramp five 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 QLC NAND dies become more broadly available. High-capacity 1-story SSD leveraging QLC NAND remains a large addressable market for MonTitan for long-term growth, and we expect the QLC-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 for QLC 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 this 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 QLC 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 to see 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.

And 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 three 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, balance 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 Storage 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 random write performance and reduce latency.

Most other customers, including GPU, CPU and switch makers are looking for enterprise Boot Drive solution which our unique DRAM-less 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 R&D 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 Q2 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 two 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 putting more focus and CapEx into the DRAM HBM. That's why the development for 2 terabit, or to fine-tune the quality to next level is take a much longer time. So this is why at the current market situation ,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.

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.

Team, congratulations on the AI solution evolution that you're engineering with the business. Wallace, I wanted to start by seeing if you could characterize the growth that we could expect to see in the Ferri and DPU business over the next few quarters versus what we've just seen that 110% rise. And similarly, help us frame the right expectations for MonTitan. And I wanted to see if in so doing, you could also help us understand if you thought the MonTitan business could over time rise to the size of what you're seeing with Ferri and DPU?

Yes. We cannot comment specific customer. But what I can tell you our Boot Drive business is going to grow very strong, not just through one customer through multiple customers. We said last time, our Boot Drive not only winning for DPU, also winning for GPU and the telco company, and we see we're engaged with the leading server maker, too.

So our Boot Drive will grow very broadly. But definitely with the leading GPU company, it will go even much stronger and even for next year. Our MonTitan is very exciting. We have two Tier 1 customers ramping for the second quarter. We added five more customers coming in the second half. And we believe next year, we're going to ramp much more revenue growth than this year. And with our PCIe Gen6 and much broader design win even before we tape out, so we have very, very high confidence our MonTitan Gen5, Gen4 going to carry significant growth for the company for long-term growth and profitability.

I'd also point out that our solutions business in Boot Drive -- just a reminder, it's controller plus NAND. So ASPs are going to be naturally much higher than what you're going to see on a controller only. So while certainly, we're excited about the scale and opportunity MonTitan, just keep that difference in mind where ASPs are going to be certainly lower on MonTitan than relative to the Boot Drive side.

Yes. And that really relates to my follow-up question, Jason. So thanks for the color. And the question is this, given the company's unusually long-and-broad expertise with NAND makers as a controller designer and given the evolution we're seeing in the memory industry, where customers really want full solutions, to what extent are customers asking for more of a full solution beyond what you're providing today in businesses that may be auto-related or associated with MonTitan? And to what extent would that look attractive for you as a way to further evolve the business model?

Yes, you raised a pretty good question. I think the today, MonTitan controller business are totally independent of Boot Drive business. However, I think in certain cases, we see the added value together as the package sales and penetration. And because we do see our Boot Drive solution business have very unique position because, first of all, NAND maker does not have a dual list. It's enterprise SSD controller. Second, they have less interest to invest for because it's a rather smaller market compared with the enterprise SSD solution.

So we are in a very unique position to grow the enterprise Boot Drive business. At the same time, we can also offer the MonTitan controller business together to support the Tier 1 customers who don't get the enough supply from NAND maker directly. So that is how we play and try to grow together. So far, MonTitan, because we already have very, very strong momentum, and we have -- we don't even have enough R&D resources to support so many projects, it's very exciting to see the position we are today, but we'll continue to invest, and we're definitely going to see much stronger growth in 2027.

Our next question now comes from the line of Shubham Sigania from JPM.

Yes. This is Gokul from JPMorgan.

So first question on the boot drive market, Wallace, could you help us kind of size this market a little bit because it seems like this market is growing much faster and become much larger than what we would have expected or even you would have expected maybe a year back when you outlined this market for us? And secondly, could you also address how the market share and competition you're expecting to shape up here, given it looks like right now, Silicon Motion is kind of large majority of the market, do you feel like there will be some competition entering this market in the next maybe 1 or 2 generations?

Okay. I think the Boot Drive business have a very, very wide range opportunity. First of all, near CPU Boot Drive with conventional enterprise controller with DRAM together, because with DRAM, you have a much better random write performance and with low latency. So that's for server CPU, doesn't matter Intel or AMD or even Vera, they have Boot Drive with DRAM.

That business belongs to NAND maker. It's conventional, traditional. We don't compete that sector. However, I think some of server makers come to Silicon Motion, they will like have a solution. So we do provide some controller to either NAND maker or to module maker to support that portion with the DRAM for boot drive. But for the rest of the other sector like DPU, like TPU, MPU, like PCIe switch, like NVLink switch like Ethernet switch, there is a boot drive, they need -- and today, they favor DRAM-less because the cost is better without DRAM. And we have a specific security support and performance also very good. And as long as we can secure the NAND supply, that portion is really our crown jewelry to grow in the next few years.

We do see the demand is stronger because the Boot Drive number per server rack, that's a huge. That's more than 30, 40, it depends the server rack. So this is a really great opportunity we see. And not only the number of Boot Drive also capacity might be increased in the next few years, right? So this really can boost our sales revenue growth and the top line and the bottom line.

Any thoughts on competition, Wallace, from either regular NAND makers or any of the other module makers that you do see coming into this market? Or do you think you've got this largely locked down for the next couple of generations?

So far, we see we are comfortable in current position. We do not see more competition and really to NAND maker because the density is really 256 gigabytes, 512 gigabytes compared with enterprise drive, 16 terabytes, 36 terabytes is much, much smaller. So we don't see competition from NAND maker come here. And we are largest company, we also don't see the competition from module maker either.

Understood. That's clear. My second question is on MonTitan. And could you talk a little bit about your market opportunity, especially as you migrate to PCIe Gen6 with your next-generation MonTitan platform? What is the competitive landscape looking like? Because as I remember, several enterprise controller companies are kind of terminating or slowing down their development in PCIe Gen6.

So could you help us understand like your market opportunity when it comes to MonTitan with PCIe Gen6. I think originally, it was mostly about QLC, but it definitely seems like they have kind of expanded beyond just the QLC opportunity to KV cache offloading and some of the TLC opportunities stuff.

I think our MonTitan Gen5 has already set a foundation for our customer. So when we develop Gen6 not only Gen6, Gen5 customers are signing, but we attract many Tier 1 customers from NAND maker and CSP. So there's more than a dozen Tier 1 customers waiting for MonTitan PCIe Gen6 sample. And this will have a very unique architecture we have -- we offer, particular focus on either AI inference, especially around the NVIDIA CMX architecture, but also particularly for the data storage, right?

So we have multiple dimension and support and support multi-host and also it will be very efficient under the new AI route. And we work with closely with the NAND maker and also leading server maker as well as the CSP. And so this particular strong feature, we exclusively designed for certain customers. We believe when MonTitan PCIe Gen6 start to ramp will be much stronger and faster, bigger than our PCIe Gen5.

Got it. Any idea about how much of the market can you address with the PCIe Gen6 solution? Do you think you can address maybe 30%, 40% of the market already with that or that is too high an expectation?

Well, we set the market just a minimum 15% to 20% at the beginning. Hopefully, it can grow faster.

[Operator Instructions] And next question comes from the line of Suji Desilva of ROTH Capital.

Congratulations on the progress here. Maybe the first question for Jason. With the mix that's steadily shifting, would we think that seasonality would be more muted in the '27 timeframe or '28 perhaps and linearity be greater, more steady? Or would that still be kind of a further out trend?

Yes. We're not going to comment on '27 yet at this time. We're only guiding 1 quarter out. So stay tuned on that. To your point, there are a lot of moving pieces depending on how quickly certain businesses scale, that could certainly limit the seasonality that we historically would see. But right now, given how much we're in the early stages of some of these businesses ramping and some of these new customers coming on, it's hard for me to say right now, and we're not guiding that far out.

Fair enough, Jason. And then maybe the second question for, Wallace, perhaps. The Ferri road map, how are you evolving that to support newer end markets like robotics? And when might that be a meaningful contributor? How far out can that be?

It's a very good question, and we have been constantly monitoring the survey and engage with robot developers from China and U.S., also including the drone. And so we see the drone will come in earlier with a high volume and robot will probably come later. But however, the diversify is so many new opportunity for the storage and not just one solution per robot, it's multiple. So there's many -- we would like to engage and also provide certain reference as well as the custom design to show the differentiation with the robot maker. And now I think the initial for next year, the volume is still pretty small, but we believe 2029, 2030 will be much higher volume, and we want start in the early stage and make sure we can occupy the higher market share.

Next is a follow-up question from the line of Mehdi Hosseini from SIG.

A couple of follow-ups. First one, would it be possible if you could just elaborate on the mix of eMMC & UFS, either the mix of the specific product or mix by like a smartphone versus other consumer electronics? And I do have another follow-up.

So within the eMMC & UFS business, majority of revenue comes from UFS just given that it's a much higher ASP product. Unit volumes in eMMC are still very strong. But given the much lower ASPs in eMMC, it's a much smaller -- it's a smaller contributor to our overall revenue. The vast majority of our UFS business is going to smartphones. The majority of our eMMC business is going to really more IoT consumer-centric connected devices.

Got you. And then I'm not asking for a guide, but when I look into 2027, your commentary and excitement around new product ramp suggests to me that Ferri and Boot Drive could at least be 1/3 of your revenue mix. Is that in the ballpark?

Look, I think certainly, the backlog we have and the strength we're seeing in the pipeline with our customers and new customers ramping, I think that's certainly a possibility.

We have now reached the end of the question-and-answer session. I'll now turn the conference back to Mr. Wallace Kou for closing remarks.

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 the Investor Relations section of our corporate website, and we look forward to speaking with you at this event.

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

So good morning, everyone, and thank you for joining JPMorgan's 54th Annual Technology, Media and Communications Conference. My name is Mayur Ramdhani, SMID-cap analyst at JPMorgan covering U.S. semis and semi-cap equipment companies.

Really pleased to have Wallace Kou, President and CEO of Silicon Motion; and Jason Tsai, Chief Financial Officer, joining us here today. Wallace, Jason, really appreciate you both being here and looking forward to the conversation. Before we dive into Q&A, we'd like to give you and Jason a few minutes to introduce Silicon Motion for the audience. The story has evolved meaningfully over the last 18 months or so. So this, I think, would be a great way to set the stage for the conversation.

Yes. So our business has scaled quite meaningfully over the last couple of years. If you take a look at our expanded portfolio, our core business historically was in eMMC -- embedded eMMC and UFS, primarily for smartphones and now increasingly more important for IoT and other connected devices. In edge computing for SSD controllers, that's been an opportunity that we've been capitalizing on as our share gains here have significantly accelerated with the latest generation.

And then you look at some of the new opportunities that we've been going after pretty aggressively, right? On the enterprise side, we've got enterprise boot drives that has been scaling -- beginning to scale since the beginning of last year and scale more meaningfully throughout this year and going forward. We have our enterprise MonTitan SSD controllers that we've talked about winning with 2 Tier 1s and 4 additional customers. Now we're seeing sell-through with that. We have 5 Tier 1 CSPs that will be ramping throughout this year and then ramping more meaningfully into next year.

And then lastly, our automotive Ferri business, where it's a business that we've been investing in for the better part of 10 years. We've got a complete portfolio here that we're able to serve an automotive market that is increasingly having a harder time to secure opportunities sourcing. And so being able to step in, provide automotive-grade solutions that we've been working with them on for the last many years has created this really strong inbound opportunity that we're seeing where there's a lot more carmakers. We service virtually every carmaker around the world, whether it's internal combustion, battery electric, autonomous or not, we're seeing -- we've got business across the board.

And so I think as you -- one of the things that have resonated well with investors and one of the things certainly that we've been really proud of is that across each of our businesses, we're scaling with the top customers around the world. This is a multifaceted growth driver where we're seeing different end market catalysts, but all of those catalysts are creating a significant tailwind to our business.

And so I think we're really well positioned. Obviously, this year, we're looking at pretty significant growth if you look at what consensus expectations are. But some of these big opportunities in enterprise and boot drives and automotive are really just beginning to scale towards the latter part of this year. That will continue to fuel long-term growth into '27, '28 and beyond.

Got it. If we could maybe touch on the broader memory environment. Can you perhaps share your views on the outlook from here? And specifically, whether you see the uptrend in pricing that's been ongoing for a bit now continuing into next year?

And related to that, how is Silicon Motion navigating the current memory supply tightness? In past cycles, this kind of tightness has been historically a constraint on your business. But so far in this cycle, you've been thriving. So what's different this time?

I think because AI -- there is a strong demand for AI, definitely both DRAM and NAND will be in shortage continually for entire 2026 and also 2027. You won't see any meaningful improvement until 2028. I think DRAM probably late '27 have some meaningful improvement. Because this is very unique, it's not like in the past 10 or 20 years, cyclical for NAND, DRAM supply shortage and oversupply because this is a strong demand from AI and not just the infrastructure, but the implementation application go everywhere, go to cooperate itself.

So we won't -- I think nobody can see it's just a short-term shortage. So how you can leverage the shortage and price up to gain market share and become very critical for Silicon Motion. That's why we leverage the trend. Our 5 product line, first is the client embedded SSD and second is our embedded mobile for eMMC-UFS. And third is enterprise SSD controller and enterprise boot drive solution and automotive Ferri solution all grow sequentially. I think we'll continue to grow [ through 2027 ] or beyond.

We have a strong relationship with NAND maker. We're the only company have active project with all 7 NAND maker simultaneously today. So that's why we can leverage NAND supply and supporting our end customer.

So maybe just touching on smartphone and PC demand specifically. Do you expect end market demand to deteriorate further into the second half of this year? And that's on the back of these additional memory pricing increases that we've talked about. These end markets have outperformed so far in '26. So do you view the incremental price pressure as more of a risk or an opportunity?

I think the impact regarding the NAND supply shortage and the price up definitely impacted both smartphone and PC. I talk about smartphone. I think the major impact really for value line smartphone model. So all the Android value line players are going to suffer most in 2026 and probably '27. We see the most analysts' prediction will be 10% to 15% decline in 2026. However, definitely iPhone is going to gain market share because through the strong procurement capability. I think Samsung will also gain market share.

But to say that, Silicon Motion will continue to grow our mobile embedded eMMC-UFS. First of all, I think NAND maker outsourcing their project -- internal to Silicon Motion. That's what we gain with the NAND maker. Second is because several NAND maker, they walk away from more business. So they're selling a wafer. We own 90% of the module maker who provide solution to smartphone makers, especially in China, right, for Xiaomi, for OPPO, Vivo and Transsion. That's why we also gained market share from there.

We believe we have very, very strong growth for both eMMC, UFS. In addition, I think so many new IoT devices. We see the smart glasses, probably will be 60 million units this year, smart watch, smart TV, new set-top box, smart door lock and so many new things in AIoT devices. We're probably going to ship more than 400 million unit eMMC this year. So this is very great to be in today. And thanks for our effort in the past 10 years, we will continue to gain market share, it doesn't matter smartphone market declined 10% to 15%.

So let's turn to boot drives. We've seen faster adoption within the NVIDIA Blackwell platform since the first quarter of 2026. And how should we be thinking about boot drive revenue for Silicon Motion this year? And how does that picture evolve into next year as Vera Rubin begins to ship in greater volumes?

I think we started to gain with the leading GPU company since 2023, '24, they come back to us. The reason is their current 3 suppliers all use Silicon Motion controller. In the past, we support quite a lot of boot drive controller and firmware to NAND maker, module maker selling to server and CSP company. I think now they like to provide total solution. That's why we qualify by the BlueField-3 start to ship from second half last year.

Now we gain really more from BlueField-3 to BlueField-4. We own majority for NVLink switch boot drive as well as the Ethernet 69, 67 boot drive. So this has become tremendous growing opportunity to us. To say that, we changed our business model because we are able to secure the NAND. So for the #1 search engine company, we also start to support the boot drive solution instead of controller. We're also winning the #1 telco company for boot drive as well as additional new server maker. So I think boot drive solution for enterprise will be a meaningful, significant business for us to grow in the next few years.

I think one of the things to point out here as well is that, as Wallace pointed out, it's a very diversified range of end markets, customers. We're not -- our business isn't dependent on one customer or one product and hoping that things work out well, right? This is across a wide range of end market with multiple different factors affecting each of the demand factors there.

And so we're really excited about the opportunity here as we further diversify our business. We're also engaging with other customers in this area that we're excited to talk to you guys about longer term. But again, the expectation here for us internally is that investing in this business means a very diversified, strong revenue stream longer term.

Right. And Wallace, you touched on the boot drive opportunity at the leading search engine company. When do you expect revenue contribution for that particular product to begin? And how do you think about the scale of that opportunity relative to NVIDIA? I mean this company's AI ASICs are essentially the second largest deployment of AI accelerators in the market. So the natural question is whether the revenue contribution could be comparable to the NVIDIA platform over time.

First of all, we did not provide the full year guidance, but I believe our boot drive solution business will become very meaningful and will become significant in the company in the next few years. See, first of all, we don't compete with the NAND maker and our boot drive unique. Most of the -- next to CPU boot drive with DRAM. I believe NVIDIA Vera boot drive is really produced by Samsung. But our boot drive is DRAM-less, the controller with the NAND, with our firmware, particularly fine-tune security portion. That's why we are very unique, provide solution.

And -- it's BGA form factor sitting on a very small M.2 board and selling to major customers. NVIDIA is just one of them, right? So we see the capacity from 250 gigabyte all the way to 1 terabyte and with the price increase for NAND, so the ASP also increased dramatically. We are able to maintain 40%, 45% margin in the next 2 to 3 years. We see there will be a very meaningful contribution for the company for growth.

Right. So as that boot storage TAM expands meaningfully, how do you assess the competitive landscape? Who else is showing up here? And what gives you confidence in sustaining the market share outperformance that you built?

First of all, for NAND makers, this portion might not be the most important product for them, right? So -- and then using the R&D resource to put in. So the only probably 1 or 2 NAND makers participate, but most of them don't have DRAM-less solution. And the provider for NVIDIA BlueField-4 all use a Silicon Motion controller. So we dominate for this market. Even for search engine, Google, I think the other two companies all use Silicon Motion, different controller, different firmware, different NAND. So we feel very comfortable to grow this market with our unique technology and serve our major customer.

And then on SSD solutions, which is now approaching about 20% of your revenue mix, and that's up from low to mid-single digits in prior years. As that weighting continues to grow, how should we think about the gross margin trajectory going forward? By our estimates, boot storage solutions is running around 35% to 40% margin today. So the natural question is whether that mix -- that shift in mix dilutes the 48% to 50% corporate gross margin target as that weighting keeps moving higher?

In the past few years, we are not aggressive to engage with the automotive solution business and the boot drive solution because the margin were too low, right? So this will jeopardize the corporate average gross margin. But now because NAND supply shortage, we are able to secure NAND supply. The enterprise customer willing to pay for, we can pass through the cost incremental to the end customer. So we want to maintain -- we believe, as I said, [ 40% to 48% ] margin for boot drive, the automotive is comfortable. And because our MonTitan family have much higher gross margin, it offsets the boot drive solution margin. So our corporate's average goal, we will maintain 48% to 50% gross margin for the next few years.

Okay. And then turning to the enterprise SSD controller business. With rising inference demand, which includes dynamics like KV cache offload, how large do you currently estimate the enterprise SSD TAM to be? And how much of that is addressable for Silicon Motion over the next, say, 3 to 5 years?

This is a very exciting moment for a storage company today. I think the growing opportunity is unbelievable. You're looking for the tier for the storage, the lowest is the cold data is HDD, but second tier is warm storage, right? This is for QLC, for high capacity. But due to -- because the price increase a lot, so we see the NVIDIA ecosystem for the data storage is -- capacity decrease per drive from [ 10 ] terabyte down to 3, 4 terabyte, but there still tremendous opportunity. But so far, because the QLC output from the total NAND output is just less than 25%. So I think the demand is not as strong as expected due to the NAND supply limitation.

But the next, I think, is compute SSD. This is next to CPU. Normally, the density is about 4 to 8 terabyte, primarily is a NAND maker provided to other server makers as well as NVIDIA and Google. Now through the March GTC, NVIDIA, Jensen, they announced CMX, context memory storage. This is new because this directly through the GPU for inference, right? So this has become very, very interesting and high demand for the customer. We see each of the GPU need one drive and defined by NVIDIA, 16 terabyte. So NVL72, which means each of the server rack needs 72 drives, each have a 16 terabyte, total 1.16 petabyte.

So this is very new and they're going to consume a lot of NAND output, right? Think about how many NVIDIA are going to ship their Rubin server in this year and next year. So there's a new opportunity for Silicon Motion. So our MonTitan not only for the warm data for the QLC, but also suitable for compute SSD next to CPU as well as CMX.

And we haven't mentioned the [ storage next, ] which will ramp in 2028 for the low latency drive for the contact-less, for [ 4K, 512-byte ], right? So many new opportunity. I believe Google, AMD and others, their architecture have a different, but they all need a similar KV cache storage too. So the tremendous new opportunity coming for the controller maker as well as NAND maker.

On the MonTitan road map, you're now expecting more TLC NAND adoption in the near term. How large can the TLC TAM be for Silicon Motion? And when do you expect more meaningful QLC adoption to materialize? And how should we think about quantifying the relative QLC versus TLC opportunity?

I think the QLC, the output today is less than 25% worldwide for NAND maker. It takes time for QLC to be qualified by CSP and the Tier 1 server maker. So today, under supply shortage, the TLC, lower capacity become more favorable. That's why majority of our design win and also shipment customer use the TLC, but some QLC. I believe when Samsung and SK Hynix V9 QLC become qualified and ramping from second half '27 to '28, and QLC will become mainstream since 2028 and will be more demand for high-capacity SSD during that time.

And then on HBF, can you maybe walk us through the projects you're working on? And how does the HBF ramp change Silicon Motion's opportunity set?

HBF is high bandwidth of flash. It's a new concept, new, I think, initiated by SanDisk. This is a purpose to try to support inference demand, reduce the capacity for HBM, right? But I think it's the initial stage, we believe this should be developed by NAND maker through the experimental process. And -- if you look at technology fundamentally, it's very similar to Optane 10 years ago from Intel. You need a very, very fast, nonvolatile storage to fit in DRAM as well as NAND. But they also need a system software chain for memory mapping. We are invited by some NAND maker, but due to resource constraint, we politely turned down during time. We'll watch out the market trend continually. If -- but I don't see HBF will be NVIDIA platform might be in other CSP platform if they need it, right? So we watch it closely. We won't miss opportunity to become real.

Okay. Let's turn to PCIe Gen 6 enterprise controllers. What's your sense on the time line for introduction? And how does Silicon Motion's time to market stack up against the competition?

PCIe Gen 6 driven by NVIDIA is the first for Vera Rubin, especially for compute SSD, also will be used for CMX later. Initially, CMX will be PCIe Gen 5. Silicon Motion, we will tape out very soon. We're sampling in Q4 this year and production in maybe Q4 '27 and '28. But in the same time, we also have separate team develop PCIe Gen 7 because NVIDIA are driving the momentum every year changing. I think we'd like to become the leading provider of PCIe Gen 7 during the time. In PCIe Gen 6, we have much more design win from both U.S. and China CSP as well as the 2 NAND maker, they're all major PCIe Gen 6 with Silicon Motion controller.

So let's move on to client SSD controllers. Do you expect market share momentum to continue from here? You're already above 50% in PCIe Gen 5 share. So is there room to push higher? And is there perhaps a market share ceiling you'd flag that customers typically -- where customers typically would want some level of supplier diversification. With PCIe Gen 5 adoption accelerating this year and next year, how should we think about then the ASP uplift as well? And in addition to that, do you have any early updates on progress with upcoming PCIe generations?

For the PC industry, it's very interesting this year because the NAND maker have less allocation to PC OEM due to the supply constraint. We benefit from our market share gain because we had about 33% market share with PCIe Gen 4 in the past, but we have more than 50% market share gain in PCIe Gen 6. When PC OEMs start to ramp up the 8-channel, 4 channel, primary 4 channel in second half of this year, we'll continue to gain market share.

So it doesn't matter, see, the overall PC market will decline 10% to 15% from unit shipment. But I personally think it's much better than 10% to 15%. I think probably 10% or even less because Apple's MacBook Neo is going to gain market share and several other NAND -- PC OEMs going to produce new lower cost and very thin model coming in second half of this year. So overall, the demand is lower capacity for SSD, but also perform well to meet some consumer demand.

So I think we will continue to grow market share for both PCIe Gen 4 and Gen 5, and we continue to benefit from NAND maker outsourcing to SMI because I think Samsung, Hynix, Micron moved majority of their NAND solution team to HBM. I think as everybody know, for HBM4E and HBM5, 50% of the output will be customized. So it's not a standard product selling to everyone. All the CSP and the CPU maker will have a customization to meet certain demand. So we believe we're going to benefit from outsourcing project from NAND maker in both mobile and client SSD.

Before we continue, are there any questions in the audience?

In terms of QLC, I want to ask you guys about your road map for optimizing latency. And I think you guys have some interesting research that's probably going to be coming up in terms of how you're handling that. So I would love to get some insight.

We cannot talk specific technology, right? But QLC, we have been working with our NAND maker in the past 10 years with almost everyone. Their first sample comes Silicon Motion. And it's very interesting, you're looking for inference. You're thinking about the KV cache concept, key-value cache for enterprise, very easy to understand. But how that can transfer to mobile and to PC, they become a totally different technology because of limited DRAM and limited SSD storage space.

So you think about how that layer data transfer between from CPU and to DRAM to the storage device like UFS mobile, SSD in the PC, you need a certain technology work with the system provider, and they can optimize regarding data arrangement to make sure the performance meet the consumer end user demand, right? So many things -- it's not a unified memory architecture, it something combined between SLC, QLC, TLC, or certain cache mechanism make a user feel you are running out within the cache. I don't know whether I answered your question.

Any other questions?

So we talked about the margin consistency for the foreseeable future, but I think something that needs to get a little bit more credit is like the operating leverage that we've experienced over the last year and change. We've gone from Q1 was like high singles to now we're guiding north of 20% operating margin. So how do you balance investing in new technologies, R&D and also memory price-through, which are all variable costs while also leveraging a certain OpEx base to continue ramping this operating margin.

Yes. So the cost of NAND is going to the gross margin line, right? So our ability to maintain that gross margin line consistently is balancing growth in SSD solutions with ramping MonTitan, and we've been able to manage that pretty well. I think there's a lot of value that we're providing in building a solution that's enabling us to get better margins on the solution side than ever before. But we're also -- part of the value is being able to procure that NAND, having that security of the supply chain.

On the operating expense side, we'll continue to invest, right? I mean from an OpEx dollar, certainly, we expect to grow pretty meaningfully this year, but revenue growth is growing a lot faster. To your point, operating margins are getting back to where historically we've been, our normalized range of 20%, 25%. Longer term, we're confident that we can still get to that 25% plus long-term operating margin target as we continue to scale revenue, but continue to invest alongside.

There's going to be additional projects. We talked about 4-nano project that's for PCIe 6 that will tape out in the third quarter this year. We'll do more of these advanced process geometries, whether for PCIe 6 or 7, for UFS 6. There's new technologies that we're investing in today that will require us to continue to tape out. But we see significant revenue opportunity with these new products that help drives that operating margin leverage.

Yes. We [ envy ] this, as Micron's standard, right, gross margin more than 80%, but our controller cannot increase our margin quickly because we try to retain and maintain the customer. It's a great opportunity for us to see our Ferri for automotive as well as the boot drive solution gaining market share. And we want to leverage our technology controller and firmware as well as our ability to secure the NAND to maintain 40%, 45% gross margin. So product mix, we'll maintain 50% corporate gross margin. But because our goal is to grow top line aggressively. So wait for our Q2 earnings call and with the Q3 guidance, you can probably understand how fast we can grow in 2027.

Any other questions? So maybe to touch on the mobile controller side. How do you see growth playing out here? And do you expect increased outsourcing opportunities from the NAND makers? And on eMMC specifically, where -- what's the current composition of the market? And how does it split between mobile and nonmobile applications today? And are there additional growth drivers beyond mobile that we should be watching out for?

We see NAND maker, beside YMTC in China, because the application to support the local smartphone maker, all other NAND makers, they probably only focus on high end. So they're going to outsource the mainstream value line to controller maker like Silicon Motion because the current solution, UFS 3 and 4, their NAND is a legacy generation. When they move to -- from V9 like Samsung Hynix to V10, they have to use additional solution if they continue to play the UFS 4 and 3 in the market, right? So we see great opportunity to Silicon Motion.

For eMMC, today in the smartphone is less than 10%, and I think they continue going down. But eMMC, I see great opportunity, as I said, for the AIoT devices and other smart devices. So we own almost 90% of module maker who is supporting for that sector. Doesn't matter, Google, Meta, Amazon, Xiaomi, their smartphone, smart glasses all using SMI controller, right? So I think that portion we see growing very well, especially new generation set-top box, new generation smart TV and door lock. It just gave a tremendous opportunity to expand. But that portion, we don't want to touch solution. We only focus solution controller provide for all the module maker and some NAND maker to grow. We'll continue to grow our embedded eMMC-UFS controller, especially this year, growing very, very fast, even the smartphone decline.

Great. And then finally, on capital allocation. Can you maybe outline for us how you're thinking about use of cash given your quite strong balance sheet position? Should investors expect the cash dividend to scale meaningfully alongside your strong earnings growth trajectory? And then maybe on M&A, are there any key areas of focus that you'd want to highlight?

Sure. From a capital allocation standpoint, as you know, we've been paying a dividend for the better part of 10 years. We've raised that periodically as the business has scaled and profitability scaled. One of the things that we look at more closely now, though, is certainly as our revenue is ramping much more meaningfully, working capital needs have also gone up. Inventory has gone up. Inventory days have stayed relatively stable around kind of the 7-plus month range. However, dollar inventory has gone up quite a bit now to north of $400 million.

As our business continues to further scale, as we have, obviously, ambitions to continue to grow our SSD solutions more, that's going to require, again, continuing purchases of NAND, continuing increases of inventory. So we're trying to balance certainly capital allocation, capital return to shareholders as well as our working capital needs.

Got it. Well, we're almost out of time here, gentlemen. So thank you so much for the time. This has been a great update.

Thank you.

Thank you.

Good day, and thank you for standing by. Welcome to the Silicon Motion Technology Corporation's First 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, 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 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 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 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 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 our call today. I'm pleased to report another quarter of better-than-expected results, highlighted by record revenue of $342.1 million. Growth and operating margin both exceeded our guidance as stronger-than-anticipated revenue drove improved overall profitability.

We saw strong performance across embedded eMMC and UFS as well as our Ferri and boot drive solutions, driving solid growth this quarter, following an exceptional start and given our current pipeline of 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 storage 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 HBM, DRAM, NAND and HDD.

Growing demand from hyperscalers and cloud service providers for AI infrastructure deployment, combined with the low NAND bit growth and insufficient DRAM capacity have led to significant scarcity, negatively impacting many markets include smartphone and PC, 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 relationship with the NAND flash makers, which have allowed us to gain share as NAND makers outsource more of their controller requirement. These strong relationships have also allowed us to secure NAND in the difficult environment as we ramp our Ferri 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 '27, we have never been better positioned. We have and will continue to benefit from the fundamental shift by the NAND maker towards higher-end and high-capacity enterprise and data center solutions, 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 the wholesale transformation as we scale our new cloud AI opportunity with our enterprise MonTitan 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 a pivotal role with an expanding pipeline of products spanning edge AI and cloud AI platform in 2026 and beyond. Given our current backlog and design win pipeline, we expect sequential growth across our product portfolio in 2026 as we capitalize on our investment, gain share in existing markets 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 eMMC and UFS business, which include controllers for smartphone 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 internal resources towards DRAM, HBM and other high-performance memory technologies for AI workload and stepping back from edge market, including phone 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 as share gain further fuel strong growth for our business. The mobile market is undergoing a rapid shift as NAND manufacturers accelerate the outsourcing of controller to third party, especially Silicon Motion. Some NAND makers are also finding increasingly attractive to monetize wafer rather than investing in development of complete eMMC and UFS solutions for smartphone.

Module makers have stepped in to fill this gap, and they rely heavily on Silicon Motion controller and firmware. Our relationship with the NAND supplier and our ability to assist our module maker customers 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 DRAM supply constraints. Chinese handset OEMs 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 will 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 smartphone, a dynamic we expect to persist through at least the end of '26 to '27. Our eMMC business remains stronger than expected, driven by multiple markets, including automotive, smart TV, AI glasses, smart watches, next-generation set-top box that demand higher capacity storage and many others.

The market for eMMC 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 eMMC and UFS business with share gains dramatically outpacing the macro pressure on smartphone unit sales.

Moving on to our SSD business, which includes edge SSD and enterprise controllers. In the first quarter, our overall SSD controller business revenue declined approximately 10% sequentially, in line with the seasonal trend, but was up approximately 45% year-over-year as we benefited from the early impact of PCIe 5 on our mix and the early ramp of our MonTitan controllers.

For our edge SSD business, our client SSD controllers are utilized in a variety of products, including PC, gaming console and PC workstation. 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 specification for new computers and passing on higher NAND cost to consumers, which we expect will contribute to overall unit 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 as the NAND market makers exit the consumer segment. 2026 will be a defining year for our client SSD business. PCIe 5 began to displace older technologies. Our 8-channel PCIe 5 controller leads the market in performance and ramp 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 4-channel DRAMless PCIe 5 controller and at a mass market, and we expect this to become the volume leading PCIe 5 chip in our portfolio this year. This controller bring PCIe 5 performance to a broader audience at a more accessible price point and remove a significant component hurdle for our customers at the time when DRAM availability is constrained and the costs are elevated.

We have our NAND flash maker customer for each of our PCIe 5 controller well as nearly all the module makers and expected to drive higher ASP and improve margin in our client SSD business throughout 2026 as PCIe 5 grow as a percentage of our sales mix. Entering this year, we estimate that the PC market will experience unit decline of 5% to 10% in 2026, given the tightening NAND and DRAM supply and increased prices. Current expectations are a bit lower with anticipate unit decline now in the 10% plus range.

Despite this, we expect to grow our edge SSD business through a combination of increased market share and higher ASP as our PCIe 5 controller continue to ramp and as NAND flash maker retrieve from edge market in favor 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 innings. 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 MonTitan is squarely in the middle of the transition.

MonTitan when paired with the TLC NAND power high-performance CMX, KVCache and compute SSD using near CPU and near GPU environment. When paired with the QLC NAND, MonTitan enable high-capacity, high-performance enterprise and AI data storage.

During the December quarter, end user qualification of TLC-based and high-performance compute SSD powered by MonTitan began with multiple customers. This qualification have been progressing well, and the 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 KVCache SSD controller than for QLC given a slower rollout of 2 terabit NAND than initially expected. While we anticipate more initial revenue contribution to come from TLC configurate MonTitan solution, we believe QLC configure solution will begin contributing more meaningful later this year and long term.

High capacity storage SSD leveraging QLC NAND will represent the largest addressable market for MonTitan, and we expect to begin ramping multiple customers as broader availability of the next-generation 2-terabit QLC NAND die become available from nearly all NAND makers and as supply returned to more normal levels. Our QLC solution offer meaningful advantage over HDD for AI inference workload, faster assets, higher speed, lower power consumption and improving cost to jatterory.

I'm excited to announce that our MonTitan customer plan to begin ramping of 3 Tier 1 Asian CSP and 2 U.S. Tier 1 CSP later this year with both TLC compute and QLC1ory SSD solutions.

In the third quarter, we expect to tape-out our first 4-nanometer controller, a PCIe 6 MonTitan controller targeting hyperscaler and CSPs. It has been developed in close collaboration with multiple partners and customers, and we expect it to drive the next phase of MonTitan growth beginning in the 2027, '28 time frame. 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 QLC implementation of MonTitan, we are increasingly confident that the business will grow rapidly throughout this year and at our target run rate of 5% to 10% of our now expanded 2026 revenue expectation with further growth anticipated 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 Ferri and the boot drive storage business. Our Ferri and boot drive storage business delivered exceptional performance in the March quarter as we began scaling several new projects in Ferri for automotive as well as in our emerging enterprise boot drive business. So this business are 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 3 different makers, which will ensure we will remain a resilient supplier of Ferri solution and boot drive for our customers despite the increasing supply constraints.

NAND supply allocation for 2026 were largely finalized by all flash 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 storage is rapidly becoming one of our most exciting growth opportunity as we are actively engaged with multiple customers to build solutions that operate across a variety of platforms. This includes leading DPU, Ethernet and NVLink 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 worked with that customer to qualify next-generation DPU design as well as Ethernet and NVLink switches of their new GPU CPU platform to be launched in the second half of this year.

As our customers 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 the density that increased 2 to 4x 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 a design with a leading telecommunication infrastructure provider and will be ramping initial scale with them later this year. We are also sampling with a leading search engine company for its TPU architecture as well. And we will continue to develop a new boot storage device built around our leading controller to drive future growth.

Our Ferri business is experiencing strong demand from automotive and industrial customers as the NAND maker continue to shift away from lower density solution to focus on higher ASP, higher-density enterprise solution. Our more than 10 years of developing automotive-grade a solution provides significant differentiation by offering reliable supply, proven technology, dedicated technical support and qualification expertise tailored to the automotive market.

As a result of this investment, demand from global automotive OEMs and their subsystem supplier 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 the NAND and DRAM, we continue to expect that we will deliver sequential growth throughout 2026 as we reap the benefit from the investments we have made over the past few years.

This growth was across all our major business propelled by our growing cloud AI opportunity with our enterprise AI product, including MonTitan 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 markets.

The successes we have made through the partnership with all the NAND makers over the past many years have given us an unparalleled advantage as we leverage these relationships to gain access to NAND supply. This relationship as a strategic differentiation for our company, and I am extremely confident in our ability to deliver broad-based sustainable growth as we scale both established and emerging opportunities 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 GAAP to non-GAAP data is included in the earnings release issued yesterday.

This was an outstanding start to the year for Silicon Motion 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 -- which 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 Ferri 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 1Q '26. We had $210.9 million cash, 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 decreased 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 million 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 MonTitan 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 PCIe 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 million to $4.6 million.

2026 is on track to deliver record revenue for Silicon Motion with strength 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 are 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 flash makers over the past 20-plus years.

We are also beginning to reap the benefits of our multiyear investments in eSSDs for enterprise and AI with MonTitan and our growing boot drive storage business beginning to ramp in volume. Our leading position in 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?

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

So it obviously sounds like everything is supposed to grow quarter-on-quarter throughout the year. But 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?

We anticipate growth, as I said, across all of our business segments. I think, 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, Ferri 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 -- for the quarter.

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

So for our eMMC and UFS controller business, UFS majority is in handset. I think eMMC majority is in the smart devices such as smart glasses -- and IoT device, smart TV, new set-top box and smart door lock and many others is going to the automotive. So I think the -- although the smartphone unit shipment will decline, but our overall eMMC UFS 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 in the second quarter as well. So that will be another growth vector for our second quarter.

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

So this is Amy filling in for Mehdi. 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.

So we don't break out those segments specifically. But as I said before, we do anticipate boot drives and Ferri 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 of 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 SM8000A, our PCIe Gen5 high-end boot drive controller, primarily selling the controller and the firmware to the customer who make a boot drive solution. So for this year, most of our boot drive solution were not based on 8000A controller. This is only ship specific to certain customer, major customer, that 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 20% of your total revenue from a mix of MonTitan boot drive and auto?

Yes. We definitely will reach the goal. I think we quarter-by-quarter figure. We didn't give a full year guidance, but wait for our next quarter results and the guidance for Q3.

We will now take our next question from Suji Desilva of ROTH Capital.

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 would be helpful.

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

Okay. Jason, can you remind us what the typical year is? Or do you have that data?

Yes. I mean, typically, we're about 45, 55, somewhere in that ballpark.

Great. And then my other question is 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 MonTitan, we are ramping today in production with 2 customers, but we are going to have 5 additional major customers from CSP by late this year, 3 from Asia, 2 from U.S.

We will now take our next question from Gokul Hariharan of JPMorgan.

Great results. So Wallace, I just wanted to dig in a little bit on your comment about having more interest on the MonTitan solution from TLC NAND and KVCache, 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 MonTitan 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 5 customers or at least the 2 non-Asia customers that you're seeing ramping up along the CSPs? 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 NAND price increased dramatically and because the NAND supply shortage and the most of the majority output and taken away by the CSP customer. Now because the NAND price increased dramatically, so the customer who originally designed with the QLC with 128 terabyte, even higher capacity, they have certain drawback because the price increased almost 5 to 10x compared with a year ago. It is very, very unlikely.

So we see more demand, either the QLC capacity reduced or they're shifting more for compute storage. As everybody know, compute storage, we say is the compute SSD, which is next to CPU and the new compute SSD, which is called by NVIDIA CMX content memory storage is for KVCache for AI inference is also use TLC because latency is very, very important.

So we see more and more customers moving to TLC with a smaller capacity like 4 and 16 terabyte. And this is really a benefit for Silicon Motion because we ship more controller. But for QLC, we also still have 2 customers continue and ramping later this year, and they are able -- we can help -- we help them to secure NAND supply because the QLC 2 terabit today only have 3 NAND maker can provide the production. I think wait for 1 more year, we see all the NAND maker can produce QLC availability will be better. We will see more demand for high-capacity QLC and supply will become more normal. So that situation we see.

Regarding the CSP customer, because MonTitan are one of the unique technology called performance shaping, which is very, very good for AI inference because when AI inference go to KVCache, you need to have managed multiple token and our MonTitan have the architecture can handle 4 tokens simultaneously. That's why the many, many leading customers and CSP like the great architecture. That's why we see demand is very, very high from U.S. to Asia.

Got it. That's very clear. Just on the client SSD controller side, I do notice that the strength is still very robust even in a reasonably challenging PC 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 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 NAND 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, you've talked about maybe 50% or 40%, 50%. Is that threshold increasing given the industry trends we are seeing?

Okay. I think you asked a very good question. As everybody knows, the NAND supply is shortage and the NAND maker allocate less SSD to PC OEM customers. But this trend benefit for Silicon Motion because, first of all, we get a more outsourcing project from NAND maker for PC OEM.

Second, and because the module maker, they step up to fill the gap because we own almost majority module maker to design our controller for PC OEM. And that's why although we see the PC unit shipment might decline 10% or more, but we will continue to gain market share, and we see the client SSD business continue to grow.

When the PCIe 5 moving from high end to mainstream and PC OEM and shipping more PCIe 5, we benefit much more because ASP is higher and also we dominate for PCIe 5 more than 50%. So we see a market share gain continually when PC OEMs start to ramp the 4-channel DRAMless PCIe 5 controller.

We will now take our next question from the line of Sebastien Naji of William Blair.

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 maker, now they have limited R&D resources, and they probably will outsource more projects to Silicon Motion. So we try to reserve all the R&D, and we're very busy to catch all this outsourcing opportunity.

And we see we continue to gain the embedded eMMC and UFS controller business as well as client SSD for PC OEM because retail for client SSD almost gone. It's very, very low. We see the PC OEM, but we have a much broader customer to provide the SSD solution to PC OEM, not just NAND maker. There'll be more module 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 subsegments? Or should it be pretty similar? Any pointers there?

So for our first engagement for the DPU BlueField 3, there will be 3 makers provide the solution. Two other NAND makers also use the 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 C69 switches project to us because for the new generation boot drive, security becomes very critical. I believe today, we are probably only one to have a specific security in our firmware and hardware in our controller. And we have a unique firmware with -- 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.

We will now take our next question from Tiffany Yeh of Morgan Stanley.

On the great results. And my first question would be, could you share with us your latest view on the TAM for the MonTitan or the overall eSSD market and also your targeted market share in the overall market? And I have a follow-up.

We see MonTitan now get tremendous attention and a very, very broad design win. We're very happy in our progress. We see we'll continue to gain market share. We see MonTitan, even for PCIe Gen 5 and associate product, we will grow to at least 5% to 10%, aligned with our expanded 2026 revenue and '27.

Our PCIe Gen 6 MonTitan even stronger even before we tape-out, we have multiple design wins from Tier 1 customers, including 2 NAND maker and several CSP customers. So this is bringing a very, very broad and long-term commitment and for development. We see the -- our PCIe Gen 6 MonTitan also have a very, very unique technology with 160x LDPC and support both TLC and QLC for next-generation QLC. So we have a very, very broad customer waiting for the product, and we'll continue ramping PCIe Gen 5 and waiting for PCIe Gen 6 for design win pipeline.

All right. Very clear. And my second question would be, as we see elevated material costs and also the OSAT costs, would you consider conduct price hike on your product to pass through all these costs to your customers?

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 40% 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...

Let me add a comment. At the moment, our concern is not in the price increase regarding manufacturing side. Our main concern is the Ton material for the BGA substrate because it's very, very tight and supply is very limited. We have to fight with all the U.S. Tier 1 customer. But our operation worked very hard with both the Japan customer directly and work with all the Taiwan manufacturers. And so we try to overcome the challenging and manage supply to make sure we can meet the customer demand.

Do you have any follow-up question, Tiffany? We will proceed with our next question from the line of Craig Ellis of B. Riley Securities.

Congratulations on the great performance, guys. I wanted to ask an intermediate to longer-term question. Wallace, congratulations on what appears to be really significant MonTitan customer diversification through this year, and you've got a boot drive position that seems to be broadening out significantly in next-generation drives through the year and auto with Ferri is expanding nicely as well.

So the question is this, 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, NAND supply is a little challenging to us. It's not because the NAND maker won't provide NAND supply to Silicon Motion because we provide the PO were late last year because the NAND maker and DRAM maker, they almost finished allocation before August time frame. And this is why we -- but through our strategic relationship and deep partnership and presentation 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 partner in advance. So we are pretty sure and we are able to secure all the NAND we need for '27 growth. And I believe 2027 DRAM and NAND supply will be more severe than 2026. But the DRAM will get easier from late 2027 to '28 because all the new mega fab start to ramp from second half 2027. And I think Micron, the second fab in Boise will ramp from second half 2028.

But I think the NAND will start to see release probably from early '28 or second half '28, but still in shortage. But 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 have -- we're sourcing from 3 different flash makers. So we've got a really good range of suppliers to work with.

That's really helpful color, guys. 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. It sounds like there'll be some asset costs for PCIe Gen 6, but you're also looking for much higher revenue and higher gross margins. So can you talk a little bit more the gives and takes that we should be thinking about in the middle of the back half of the year?

Yes. I think from an OpEx standpoint, we will have our OpEx obviously higher this quarter, and then that will 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, those we should have a lot less development costs, so that will come down. Overall, we expect to see margins continue to improve, operating margins continue to improve throughout this year.

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

We have reached the end of the question-and-answer session. Thank you all very much for your questions. I'll now turn back to Mr. Wallace Kou 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 this event will be posted on our Investor Relationship section of our corporate website, and we look forward to speaking with you at this event. Thank you.

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

Hello, everyone. Welcome to Silicon Motion Technology Corporation's Q4 2025 Earnings Conference Call. [Operator Instructions] I must advise you that today's call is being recorded.

This conference call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 as amended. Such forward-looking statements include, without limitation, statements regarding trends in the semiconductor industry and our future results of operations, financial conditions and business prospects. Although such statements are based on our own informations and informations 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 pressures on prices, unpredictable changes in technology and consumer demand for multimedia consumer electronics, the state of and any change in our relationship with our major customers and changes in political, economic, legal and social conditions in Taiwan. For additional discussions on these risks and uncertainties and other factors, please see the documents we file from time to time with the Securities and Exchange Commission. We assume no obligations to update any forward-looking statements, which apply only as of the date of this conference call.

With that, I would now like to hand the call over to your first speaker today, Mr. Tom Sepenzis, Senior Director of IR and Strategy. Thank you. Please go ahead.

Good morning, everyone and welcome to Silicon Motion's Fourth Quarter 2025 Financial Results Conference Call and Webcast. Joining me today is Wallace 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 fourth quarter results and outlook. Following our prepared remarks, we will conclude with a Q&A session.

Before we begin, I would like to remind you of our safe harbor policy, which was read at the start of this call. For a comprehensive overview of the risks involved in investing in our securities, please refer to our filings with the U.S. Securities and Exchange Commission. For more details on our financial results, please refer to our press release, which was filed on Form 6-K after the close of market yesterday. This webcast will be available for replay in the Investor Relations section of our website for a limited time. To enhance investors' understanding of our ongoing economic performance, we will discuss non-GAAP information during this call. We use non-GAAP financial measures internally to evaluate and manage our operations. We have, therefore, chosen to provide this information to enable you to perform comparisons of our operating results in a manner consistent with how we analyze our own operating results. The reconciliation of the GAAP to non-GAAP financial data can be found in our earnings release issued yesterday. We ask that you review it in conjunction with this call.

With that, I will turn the call over to Wallace.

Thank you, Tom. Hello, everyone and thank you for joining the call today. I'm pleased to report that we delivered another excellent performance in the fourth quarter, exceeding our revenue and near the high end of operating margin guidance and positioning us for a record-breaking year in 2026. We benefit from strong demand across all our markets and through the introduction of compelling new controller and solutions. We increased market share in existing and new markets and expect the momentum to continue throughout 2026. We remain focused on delivering long-term growth, while investing heavily in next-generation products, increasing our engineering resources to support new product end markets and further positioning Silicon Motion for long-term market share expansion.

While 2026 memory and storage industry dynamics are challenging given the supply tightness of NAND and DRAM and rapidly increasing prices of these components, we believe our resilient operation strategy and our unmatched NAND maker relationship will allow us to deliver strong growth across our business. Given our current backlog and sales plan, we believe that first quarter '26 revenue will be the lowest of 2026 and expect sequential growth throughout the remainder of the year. As we continue to introduce the [indiscernible] compelling new eMMC and UFS controller, PCIe client SSD controller, MonTitan enterprise SSD controllers, enterprise bodes solution and our expansion in Ferri automotive portfolio, we expect to deliver broad-based growth and to deliver the highest annual revenue in the history of the company in 2026 as we capitalize on multiple new products and execute on our continuing diversification strategy.

I would like to start by addressing the current market environment. The rapid adoption and growth of AI has introduced significant demand across all memory and storage technology, including HBM, DRAM, NAND flash and even hard drives. The new and growing demand has led more recently to supply constraints, tight market condition and increasing pricing pressure across multiple markets, including AI and enterprise storage, boot drive drives, PC, smartphone and most other markets that use NAND flash. AI CSPs has attempt to lock up all the DRAM and NAND supply through 2026, which has made it increasingly difficult for other market player to get product and is driving significant intra-quarter price increases.

Given the growing supply constraint in DRAM and NAND, industry analysts are beginning to take a more cautious approach regarding smartphone, automotive and PC unit growth in 2026. Silicon Motion, however, remain extremely well positioned in the consumer market despite the tight condition given our long-standing partnership with all the major flash vendors, our expanding market share within our existing market and the introduction of the new higher ASP products. We are leveraging our strong relationship with flash makers, OEMs and module maker to help secure NAND supply for our smartphone and PC OEM customers and ensure steady access to NAND even in the tight times. We are delivering greater value add to both our NAND maker partners and OEM customers, driving stronger partnership that will lead to sustainable long-term growth.

As a result, despite the expected market headwind, based on our existing backlog, we expect growth in all our major product lines in 2026, including automotive, mobile, PC, enterprise SSD and boot drive storage solution given our strong and growing market position and leading product portfolios. I would now like to discuss our highlights in eMMC and UFS. Growing AI demand in focusing a more disciplined CapEx approach by memory and storage market to prioritize resources across multiple technology products and market. Increasingly, we are seeing additional opportunity for Silicon Motion to supply controller as NAND makers shift their internal resources to focus on DRAM, HBM and customized memory technology for high-performance AI requirements.

The mobile market is a prime example of this trend as NAND makers are actively exiting mobile in favor of DRAM HBM, which has led our mobile business to outperform in 2025 as our eMMC, UFS business grew 25% for the full year, far outperforming the smartphone embedded market. Module maker are seeing great assets to access by using local NAND supply, coupled with our controller, just as many of other NAND flash maker have looked in to exit the mobile market in favor of the enterprise. We will continue to benefit given that we are the only meaningful merchant controller maker for the eMMC and UFS.

While the overall smartphone market is expected to decline this year due to higher DRAM and NAND component cost, we expect the continuing shift from NAND flash maker to module maker to continue in 2026 and further benefit our eMMC, UFS controller business. Leveraging our strong relationship with local NAND makers and helping to align supply with handset OEMs and module maker will lead to continuing outperformance for our business. In addition, the market for eMMC are vast and growing with over 900 million units shipped annually. We are shipping eMMC into automotive, industrial, commercial, IoT, smart device, streaming device and many other markets. As flash makers has all but exited for eMMC market, the competition has diminished significantly and we are experiencing strong revenue contribution from this segment. Given our current backlog and customer outlook for 2026, we expect to significantly outpace the market and deliver another strong year of growth of our eMMC and UFS business despite the difficult market environment.

I will now discuss our client SSD business. 2025 marked a turning point of our client SSD business, given the success of our new PCIe 5 controllers. We introduced our 8-channel PCIe 5 controller at the end of 2024 with 4 flash maker partners and nearly all module maker makers, setting us a clear path to grow our client PC market share from 30% today to 40% over the next few years. We expect our new DRAM-less 4-channel PCIe 5 controller that we introduced last quarter to ramp significantly throughout 2026, targeting the mainstream market and driving higher adoption of PCIe 5 given that it is DRAM-less, making it easier for our customers to create SSD despite DRAM shortage. We have secured design wins with 4 NAND flash makers, including the 2 from South Korea for TLC and QLC SSD and nearly all the module maker for this controller. And we expect to benefit from higher ASP and profitability as this new controller enters the mix.

Until the memory and storage makers increase their big production capacity to alleviate the current shortage, the PC market will likely experience some difficulty driven by both shortage and demand destruction from higher prices. Silicon Motion, however, remain in excellent position to grow its PC business in the near to long term, given market share gains, ASP increases and growing decision by the NAND flash maker to walk away from the consumer business in favor of AI. And we expect continued growth from our client SSD business in 2026. I will now provide an update on our enterprise business. The opportunity of Silicon Motion in data centers and AI infrastructure expanding daily.

Current expectation are for data center and AI infrastructure investment to exceed $1 trillion by 2030 and the [indiscernible] of NAND technology expanding rapidly to help store and process large volume of data quickly. The need for increased speed and lower latency has driven greater adoption of SSD in the data center. And the industry is increasingly looking to adopt NAND solution in one storage, compute storage and eventually near GPU storage as well. Interest in our growing portfolio of MonTitan controller is increasing as they are ideally suited to address the evolving requirement of AI workload for both compute and storage.

In the December quarter, we began end user qualification of TLC-based high-performance compute SSD using MonTitan with multiple customers. This qualification will progress throughout the first half of calendar 2026 and will begin to ramp commercially in the second half of the year. High-capacity QLC-based storage SSD represents the largest addressable market for MonTitan and we remain on track with multiple customers to begin qualification this year. Our MonTitan QLC one storage solution offers significant advantage over HDD for AI inferences, including speed and power. Additionally, demand for QLC storage solution has accelerated in recent months given the current supply shortage of HDD.

Over the next few years, we expect the QLC SSD will become a compelling alternative to HDD as they offer unmatched economies of scale, which will lead to lower prices over time, in addition to the inherent speed and power advantage. During 2026, we plan to tapeout our first 4-nanometer chip, a PCIe 6 version of MonTitan that is targeting hyperscalers, NAND flash maker, storage system provider, CSPs and other Tier 1 customers. We have been developing the chip in association with multiple partner customer and expect this new controller to drive additional success for MonTitan beginning in the 2027, '28 time frame. I'm pleased to announce that we have already secured design wins with multiple Tier 1 customer for this new controller, which is expected to ramp significantly in 2028. We remain confident that MonTitan will ramp to represent at least 5% to 10% of revenue, exiting 2026 and should experience further success in 2027 and beyond as our entry into enterprise market scale meaningfully in the near to midterm.

And finally, I would like to discuss our enterprise-grade full drive storage business, which is rapidly evolving into a significant new era of growth for our company. We are allocating -- we are collaborating with multiple customers to develop an enterprise boot dive solution that can work across multiple platforms. In the fourth quarter, we started volume shipment to the leading AI GPU maker for their current DPU product. We are currently working with this customer to qualify the next-generation version of their DPU as well as their -- for several NVLink and Ethernet switches of their new GPU/CPU platform that are expected to launch in the second half of 2026. This next-generation DPU and switch product require higher capacities with much higher ASP and unit volume, creating a significant new growth opportunity for Silicon Motion. We are also working with other potential customer, including a leader -- leading search engine company to develop enterprise-grade boot storage drive based on our leading controllers.

With the enterprise boot drive, our complete SSD product, this business will face greater exposure to our NAND scarcity and the high price environment, placing greater emphasis on sourcing NAND to supply our customer. While this has become more difficult given the supply constraint and recent price increases, we remain confident that our relationship with the NAND flash maker developed over the past 20 years will help us succeed with these significant new opportunities. For our Ferri storage solution, we are seeing strong demand from our automotive and industrial customers, especially in the tight NAND environment, our customer are relying more on us for steady and consistent supply to ensure smooth supply chain dynamics. We will continue to play a more strategic role and partner to our Ferri customer but we will also look to balance revenue growth with margin stability to drive profitability growth.

In conclusion, the fourth quarter of 2025 delivered a significant growth for our business and accelerated our boot drive storage business. In 2026, beginning in the first quarter, we expect to continue to reap the reward of our investment in MonTitan, our 6-nanometer client SSD controller and our new portfolio of eMMC and UFS products that are experiencing rapid growth and the ramp of automotive business to about 10% of total business by the end of this year. We have never been better positioned as a company given our expanding product portfolio and scaling in a large new market, including the AI and enterprise storage market. I'm increasingly confident that we will deliver strong, broad-based, sustainable sequential growth throughout 2026 and beyond as we scale multiple existing and new opportunity.

Now let me turn the call to Jason to go over our financial performance and outlook.

Thank you, Wallace and good morning to everyone joining us today. I will discuss additional details of our fourth quarter results and then provide our outlook. Please note that my comments today will focus primarily on our non-GAAP results unless otherwise specifically noted. A reconciliation of our GAAP to non-GAAP data is included in the earnings release issued yesterday. In the December quarter, sales increased 15% sequentially and over 45% year-on-year to $278.5 million, coming in well above the high end of our guided range and surpassing our $1 billion target run rate set at the start of the year as we experienced continued strength in mobile demand and strong growth in our PCIe 5 client SSD business.

Gross margins was at the higher end of our guidance range and increased again in the quarter to 49.2% as we capitalized on new product introductions and benefited from mix shift towards client PC products. Operating expenses increased sequentially to $83.2 million, given increased investments in our emerging AI and enterprise SSD and boot drive storage businesses. Operating margin increased sequentially to 19.3%, within our guided range, driven by the higher-than-expected revenue and gross margin during the December quarter. Our earnings per ADS was $1.26. Total stock compensation, which we exclude from non-GAAP results, was $15.8 million in the fourth quarter. We had $277.1 million in cash, cash equivalents and restricted cash at the end of the fourth quarter compared to $272.4 million at the end of the third quarter of 2025. Cash increased in the fourth quarter from improved operational performance, offset by a combination of dividend payments of $16.7 million and an increase in inventories to support expected strong business ramp.

Our team is executing well despite the difficult NAND and DRAM pricing environment. During the fourth quarter of '25, we continue to invest in new advanced [ geometry ] products for our existing markets and for our emerging enterprise markets, including MonTitan SSD and enterprise boot drive solutions. These investments will be ongoing in 2026 as we support new growing interests for our new enterprise portfolio. For the first quarter of 2026, we now expect revenue to grow 5% to 10% to $292 million to $306 million, up sequentially and counter to typical seasonality. We expect continued strength across nearly all our product segments with a particular emphasis on mobile where we expect significant outperformance due to continued market share gains. Gross margins are expected to be slightly lower sequentially to -- at 46% to 47% in the March quarter, given the product mix. But we expect overall margins to recover back to our target range of 48% to 50% throughout the year, as the mix of newer products increases, including our PCIe 5 controllers and our enterprise SSD solutions.

Operating margin is expected to be in the range of 16% to 18%. Our effective tax rate is expected to be 19%. Stock-based compensation and dispute-related expenses is expected to be in the range of $10.8 million to $11.8 million. We're well positioned for growth this year and expect 2026 to be a record revenue year for Silicon Motion with sequential revenue growth each quarter. We anticipate additional tapeout and development costs, especially from our upcoming 4-nanometer tapeout in the second quarter, will drive higher operating expenses in the second and third quarters of the year. Our focus has always been growing profitably and 2026 is no exception. We anticipate full year 2026 operating margins to improve as compared to 2025 despite our higher investments this year. While the current supply shortages and resulting component increases are creating headwinds, our pipeline for growth in 2026 and beyond remains stronger than it has ever been in the history of our company.

We remain focused on our market and product diversification strategy, which has already begun to deliver results. We have successfully entered the enterprise market with our boot drive storage solutions and are currently in the end customer qualifications with our MonTitan enterprise SSD products, which are expected to scale in the second half of 2026. Our leading position in the merchant controller market and unmatched NAND maker partnerships will drive higher share in eMMC and UFS, client SSDs, enterprise, automotive, boot drives, storage, high-performance and high-capacity enterprise and data center storage markets. And I look forward to sharing our progress in greater detail when we report again in 3 months.

This concludes our prepared remarks. I'd like to open the questions -- open it up to questions now. Operator?

[Operator Instructions] First question comes from the line of Mehdi Hosseini from SIG (sic) [ SFG ].

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

Our UFS controller majority is smartphone. eMMC controller majority is in IoT devices, smart device, streaming device and set-top box and nonautomotive. So the combination, I think the -- around probably 40% controller -- or probably roughly is similar, 50% for smartphone, 50% for nonsmartphone area.

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

Yes. BlueField -- our boot drive is a solution for BlueField and also several other switches platform. We need to procure the NAND and NAND price at the market price. So we have to work out with the customer, we can pass through the cost increase to the end customer. So it is challenging but ongoing process quarter-by-quarter. It definitely will impact some of our gross margin but we manage the margin pass-through. So I think because even the customers, they have at least 2 to 3 supplier, so they're based on the price and based on the supply and depends the percentage. We believe BlueField-3 is for -- primarily for this year [indiscernible] and the NVLink and the Ethernet switches is for the second half and really more volume in 2027.

Next question comes from the line of Neil Young of Needham & Co.

My first question is, I wanted to understand how you're segmenting revenue from the boot drive opportunity. And same question for MonTitan. Are they both in SSD solutions? Or is it just the boot drive, are you placing that in SSD solutions? And then at what point -- I think you sort of just answered this but just for clarification, what point do you anticipate revenue from the next-gen boot drive and those other switch opportunities that you talked about, with the leading GPU maker? When do you expect revenue for those to begin to ramp?

Yes. So you're right. For the boot drives, that's going to be part of our SSD solutions that we talk about each quarter. Enterprise controllers, MonTitan is part of our controller business. We will give you guys more color as it's appropriate.

I think we -- when we talk about 5% to 10% for our company revenue, does not include the boot drive solution. So currently, that's only kind of MonTitan controller. But boot drive solution is part of our enterprise business. The -- we cannot comment regarding what percent about the boot drive. I think this year it's relatively still small but I think next year will be much bigger. But #1 is, we're trying to secure the NAND supply. Currently, we have 2 NAND supplier. One is secure but the other is not. So we're working with our NAND partner continually to support the major project.

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

Okay. That's helpful. And then the second question. I just wanted to ask about the smartphone strength in 1Q. Maybe if you could just provide a little more detail sort of what's driving that? I think it's predominantly market share gains but if there's anything, different customer behavior or anything that you guys are seeing, that would be great.

So first of all, as you know, probably 2 NAND makers walked away from the mobile storage. And we see -- but they're also still selling the wafer to module maker. And I think we benefit from majority module maker using silicon motion controller. They not only use NAND maker from U.S. and Japan but also use local NAND maker in China. That's why we continue to gain market share. And we see -- we gained market share from [indiscernible] and we expect to start to ramp the high end by end of 2026.

Anything else, Neil? Next question.

The next questions comes from Craig Ellis from B. Riley Securities.

Congratulations on the great execution, guys. I wanted to start out by going back to the comments on sequential growth through the year and just better understand some of the product level gives and takes as we go through the year. I think from what I've heard, it sounds like we'll see some real strength starting the year from eMMC and UFS and the color on MonTitan transition from sampling to revenue ramp-up would suggest more of a back half of the year orientation towards SSD solutions. And I think that would lead SSD controllers plugging along. Along with that, if we have sequential growth in the 3% to 5% range, we exit the year annualizing at a $1.3 billion to $1.4 billion run rate. Is that the right level of growth we should be thinking about? Or are you thinking about growth higher than that?

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

So let me add some comment. I think we have very strong backlog and we have a very strong momentum from all product line. But because some of the products like automotive, Ferri and the boot drive, we required to procure the NAND. So the case by case, some business, we probably just bypass, some business we become strategic, we're going to take. So even potentially, we have a much higher growth rate but we might skip some of the business if the margin didn't meet our company target. So that's why we balance and the thing. But just from the backlog in the business, we decide to engage, we have a sequential growth quarter-by-quarter.

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

I think enterprise segment definitely is a target one to grow. But when we can -- the enterprise portion exceed the consumer portion, we cannot really reveal to you. We target -- try to accelerate the momentum. But I think the boot drive is a really pretty strong business for us. We also have a multiple customers, not just one of the GPU customer. And in addition, automotive storage also very strategic. And we believe if we can procure NAND stably, we can grow even much faster. So we have a multiple weapon to grow but enterprise is stronger portion and we do have a -- some new product coming in the next 2 years. So we're excited -- we're very exciting about the opportunity to grow but just be patient with us and hopefully can grow much faster even 2027.

Our next question comes from Suji Desilva of ROTH Capital.

Congratulations on the progress here. Maybe stepping back on calendar year '26, you talked about it being a growth year. You talked about 5 segments, auto, mobile, PC, enterprise, boot drive. Maybe you can talk about which ones would have the highest percent or dollar contribution to the growth in '26, given some of the moving parts around NAND supply and so forth?

Percentage, I think the enterprise controller definitely grow much faster. Boot drive also is new to us. It growth percentage is much bigger. But from dollar-wise, I think the mobile controller, eMMC, UFS is a bigger one and it will exceed probably about 35%, 40% of our total company revenue. So I think these are all strong momentum to grow but we also see a more balanced growth continually moving to 2027.

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

So this is a very good question. I think the -- as you know very well, DRAM and the NAND supply is really very tied to PC OEM customers. So some can -- are able to secure the supply, some don't. So it gave a tremendous opportunity to Silicon Motion because the NAND maker, they move all the resource allocation to CSP. So the [indiscernible] is not enough for all the PC maker to meet their demand. So the -- because we have a 4 NAND maker using PCIe 5, 8-channel controller, 4 NAND maker also use a 4-channel [indiscernible] controller that balance about their internal allocation to fulfill the demand for NAND maker. In addition, because there's a shortage from NAND supply to PC OEM, module makers start to take -- takes the opportunity. So because we have majority module maker design win, that's why we fills the other gap. So even the total unit shipment for 2026 PC OEM will decline but I think for 5% to 10%. But we still have a pretty strong confident to grow continually in 2026.

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

Our next question comes from Gokul Hariharan from JPMorgan.

So just wanted to understand, again, on the client SSD controller. What is the conversations you're having on the -- from the PC OEMs, given many of them are already sounding a little bit more skeptical about overall demand? Is there any indication that the spec migration is slowing down because of the cost inflation from PCIe Gen4 to PCIe Gen5 because the general commentary in the industry seems to be about some degree of despecing of certain specs. Just wanted to understand if you can give some indication of what is the baseline like PC market expectations that you have? And then how are you building on top of that, both for market share and units and ASP to kind of get to growth in the client SSD business? Yes. That's my first question.

Yes. I think, Gokul, you got a very good question. It's -- we cannot comment for each individual PC OEM. But overall, I think the 2026 PC unit shipment will decline 5% to 10% and each OEM perform differently. Now regarding the sharp NAND price and DRAM price increase, so PC OEM outpaced the price increase quickly. So I think from value line and many would despec the storage product. So [indiscernible] gigabyte go down to 120 gigabyte. But for high end, they need to increase the price. So from despec portion, I think they will lose the demand and interest from value line customer. So that is a fact. So I think the impact for each of PC OEMs are different. And we see this is a current challenging situation for all the PC OEMs. And we work with the -- our module makers and work with the NAND maker because we also depend on their internal allocation for the NAND quarter-by-quarter. So it is very challenging. But because we have a much better position, so we have a much stronger opportunity to grow continually in 2026.

Got it. And any comments about like the PCIe Gen5 penetration? I think last year, I remember it was like 5% to 8%, or 5% to 6%. Are we expecting that this goes to like high teens, 20% by end of this year?

Yes. So PCIe Gen5 is supposed to ramp much stronger in 2026 but for 8-channel high end because of DRAM shortage, that's why 8-channel increase will slow down dramatically in 2026. However, the PCIe 5 4-channel DRAM-less because no DRAM has much more to build the SSD to ship. So we see the much stronger demand for DRAM-less PCIe 5 controller, especially from the second half to ramp more meaningfully.

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

Yes. First of all, let me talk about the TAM. I think, first of all, the DPU, the boot drive business, it depend on the several factor, right, including the success of the DPU. But so far, we see the volume is very meaningful in 2026. And the -- all the leading CPU and GPU maker, they use a multiple supplier, 2 or 3 supplier. So we are not the sole supplier for the DPU program. We see this year revenue relatively around $50 million but I think next year will be much higher. So it all depends the NAND procurement from us.

So it's a case by case because we have multiple programs, not just one GPU customer. We have a multiple customer and also some will ramp up from Q4, the new program. So it depends how success we secure the NAND, also whether we can pass through the incremental cost to the customer with a meaningful margin. So this is all the negotiations. So it's -- some is dynamic. And we just make a reasonable meaningful forecast for this year. And -- but it is a very strategic business for us for long term. So we work closely and build a partnership with our GPU partner. Hopefully, this will become a much larger business in '27 and '28.

[Operator Instructions] Our question is from Craig Ellis from B. Riley.

Wallace, I wanted to just talk about something and ask about something that we've started to see much more broadly with NAND flash and DRAM OEMs of late and see if it's got applicability to Silicon Motion. And the topic is long-term supply agreements, LTAs or LTSAs. Is that something that would make sense for SIMO? If so, where would that be? Would it not make sense for SIMO? Just talk about the gives and takes with any move in that direction.

We currently we did not have the LTA agreement but I think based on partnership and relationship, see, because in the past, we never want to build a much bigger revenue from storage solution. And for automotive, because automotive sector, they are the lowest priority for NAND and DRAM maker. That's why many, many major Tier 1 supplier come to Silicon Motion, ask for help. That's why we will case by case to make a decision whether we can support them. If the -- we are able to pass through the incremental cost to the automotive supply chain and we will do the business. If the other hand, for boot drive, it's more strategic business. So some -- in certain case, we might have to sacrifice the margin lower than our corporate average margin because more strategic.

So balancing, I think in the long term, because we cannot use a multiple NAND selection, it's take a time and the customer does not want to change the NAND solution either. So we just have to work out the -- with our NAND partner to get a stable supply. The challenging thing is much more severe than anybody can imagine because CSP really demand much more than the current supply can support. And that's why even leading smartphone maker have a tough time to procure their NAND and LPDDR5 supply. So this is the fact. And it's just not one NAND maker cannot supply us because just they really have tough time to do allocation and so many big Tier 1 customer ask for help and ask for supply. So this is a challenging situation right now.

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

Because in -- AI inferencing is growing much faster than anybody can anticipate. So there's so many new technology, so many new storage technology around, right, for KV cache, how you can improve the latency, how you really -- and capacity also increased dramatically because so many new content, new data need a storage device to keep it. So this is a huge momentum and need the NAND maker to increase capacity. But because there's a limitation for land, for clean room, for equipment build, it all take your time and it need a tremendous CapEx. So a lot of the several NAND, DRAM maker, their preference is definitely DDR and HBM, right? So the left over -- the CapEx for the NAND is limited. But then we see the demand is very strong and so many variable technology and it's just much more and they all need MonTitan to fill the role. And hopefully, I think our customer and ourself can secure the NAND and we can pay our duty to fulfill obligation to be part of the AI game.

I would like to invite once again Mr. Matt Bryson from Wedbush to ask question.

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

I think the Chinese controller maker, they will have tough time to secure TSMC advanced technology node. So I think the -- to beyond 12 nanometers, like 7 nanometer, 6 nanometer, 5 nanometer, it's -- they have to be applied and to be approved by TSMC or Samsung in order to fabricate their advanced technology node product. For mature technology for 22 nanometer, 28 nanometer, China local fab can fabricate but that is really legacy product. So I think that is tough in part and we believe we need to mention the technology, how good they are or whatever. But that is a manufacturing point of view. We see due to the NAND supply shortage, I think create another dilemma. So that will probably give even tough time for China local supplier. But to say that, I think both YMTC and CXMT, they also try to increase capacity as much as they can but just take time.

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

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

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

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

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

Thanks 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 this event will be posted in the Investor Relations section of our corporate website and we look forward to speaking with you at this event. Thank you, everyone, for joining today.

That does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.

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 a year, we get Wallace Kou, Founder of Silicon Motion. We also have many of you know, Jason Tsai.

And for the discussion, say, 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 good growth across product lines. I think while it's 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.

Yes, I think to Randy. We have four major product line. The first, the [indiscernible]. It's about 50% to 60% of our total revenue. Today, we have about 30% global market share. Secondly is a mobile controller EMC, UFS, about 30% to 40% of our total revenue. We are about 20% to 23% global market share for smart and also including the IoT devices. A third product line is our Ferri automotive and we have around, we are ramping quickly. Last quarter, we said about 5% in terms of revenue but 2026 will be grow to 10% of total revenue. We do have a very strong design win and the ramping without the leader, including Toyota and Tesla BYD and so others. The fourth one of the enterprise, MonTitan [indiscernible] line. This is our [indiscernible] with both [indiscernible].

We have mentioned we have two Tier 1 customers design win. They start to ramp from 2026 and a total 6 customers today and will be 5% to 10% to the revenue by '26, '27, and we also have enterprise Bujai design win and start to ship to BlueField 3 customers they're going to continue. Quite a lot of interesting strong for [indiscernible], including Google. So this is our a 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 end up adjusting but go through the history on your approach to enterprise. And as you come in with Motion, how's the approach -- how has it changed? And how do you see the confidence to kind of bring that up and grow that into the bigger business?

Yes. Shannon acquisition is 10 years ago that we're starting to engage, expand to enterprise business because Shannon is based in Shanghai. Most of our China customers want a solution. So it's a learning curve. Shannon have a total deep 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 on MonTitan, we started 4 years ago, regroup the team and focus on controller only and with the [indiscernible]. So we have a pretty flexible business model.

We provide turnkey solution with firmware, we provide SDK for a Tier 1 customer can develop to format. Also, we have a semi customer. So we based on different customers and 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 [indiscernible] NAND maker give us privilege and position for the high capacity city.

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 homeware [indiscernible] already matured, somewhere in the final publication in the customer in the customer side because when the customer is a NANDmaker. So really as a secure supply and also we are pretty confident about in the ramp volume. The other -- the other Tier 1 customer in U.S. is also ramping in second half next year. But all others is in final stage for location -- so 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 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 excited about the enterprise business for our growing momentum because our PDT and [indiscernible]. Their performance shape is make it more suitable for AI ecosystem. Because performance and the power can be scalable based on different workloads and that can change dynamically. So most of our CSP customers and also NAND makers, they really like it because they're much more flexible. And as they really know the on sorry demand for high capacity becomes bigger and bigger. And this all required [indiscernible] the QLC monozyme make it cost effective. So this gives us a strong position to focus on the on storage, how those suppliers still limited.

But I think by second half 2026, we're going to see more NAND maker provide output. In addition, compute storage is TLC-based 4 terabyte in terabyte, I think were initial ramp for next year's TLC, second half was followed by QLC. Even we haven't talked about Gen 6. I think the Q2 earnings call next year will give a full guidance and picture about the GA development. Gen 6 design momentum is much stronger, even our silicon won't be very volunteered second half next year, but the GM design will have multiple Tier 1, including our TM5 additional couple of Tier 1 coming for GNC 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 at the point, right, which is 5% to 10%. And we gave this -- we started talking about this back in 2024. Once we achieve that way point, we'll talk about how that inflects going forward with new products, new customers, how that scale. Certainly, there's a lot of demand around QLC high-capacity SSDs right now, the gating factor being availability, those dies. But as that opens up, we should be able to give you guys a better understanding of 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 is more suitable than HDD in AI, especially inference, right? That's why the long storage has very high demand. But now the major challenging 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 [indiscernible].

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 and also for ASIC market with like what leader in ASIC, just your position there? And how's the business growth for that as we start moving to new platforms like Rubin or we move to next-generation ASIC designs if that business actually looks more promising to scale up.

So we starting [indiscernible] 2 years ago for BlueField 3 design, BlueField 3 is 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 [indiscernible]. 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 Fuji solution, initial range about 128 and 200 gigabytes. And the margins aligned with the cooperate average margin.

And we're also in the process for qualification for BlueField 4 and NVIDIA gave us 4 additional switch project for [ Bujai ]. This is also range from [indiscernible] 1 terabyte range. So now we see this business become more interesting we haven't given guidance yet. But in addition, from an titan business, though the [indiscernible] Montitan, but we don't want to miss the investor original MonTitan focus on controller only, you see Bujai 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, dependent capacity. So this will be a significant contribution to our top line as well as the profit. And beside NVIDIA, I think we -- as we mentioned, we have supported Bujai controller for Google since 5 years ago.

I believe will also be part of the but just these are controlled only also support to the other NAND maker who support to Google directly. We have other BujaI for certain other Tier 1 CSP. But I think this looks at very interesting business model. We had to rethink maybe in the future long term, but NAND is not in a supply shortage, we might provide solutions for other.

Okay. Actually -- and clarify for Bujai, 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 reasoning models pick up or the compute [indiscernible] 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 had to be selling with the NVIDIA Blackwell GB system. It can be attached to Intel or AMD because interface InfiniBand or Ethernet. So quite flexible. We see this architecture can be scalable. It's not only NVIDIA have a DPU. I see [indiscernible] DPU but just on 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 Bujai. So this is -- we are looking for the market tamp because this is a very interesting 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 Bujai really enable the high capacity dry because through NVIDIA, we understand the ecosystem for their software partner like DDN, like VAS data, the VCA and goes through the Dell EMC, go to NetApp, go to Cisco, go to IBN, go to GPE. So this is the customer we're talking for the high capacity beyond the CSP. But suddenly the Bujai 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 caught on what the contribution is. So once we get into next year and we talk more about kind of next year, we'll 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 two 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 UFS becomes very important for the company, not only we can grow with the existing NAND partner but also we have opportunity to catch the outsourcing from a Korean company because the UFS 5 would become high end in late '26 and '27 I think the NAND maker, they are not going to redo the UFS becomes mainstream. So they need a new controller and supporting the upcoming new generation NAND to consume the NAND output. So they gave us time opportunity to expand not only in the mainstream, the low end depend 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 participated in [indiscernible], but I think we played below key. We don't want to compete with sense on Micron and Ecosia. But this opportunity. We catch the USI. We -- in parallel, we have us 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 the Micron public already announced they take what we still continue to selling the NAND wafer to support the module maker. So I think that will help us to grow with market makers, especially doing 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 want to get very tight and there's pressure on the build 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'll see the HDD DRAM NAND all in short at the same time. And the -- and because short at the same time, would mean it's not because supply production cut is really demand is very high, right? Although maybe some double booking, but really the gap is so big. Today, 50% of our business, 55% business related to NAND maker project. And 70% of our business related to OEM, only 30% related to retail and as well as embedded industrial. So I think most of our customers, the module maker, they have a stronger bargain power with the NAND maker such as [indiscernible]. So I think the impact from NAND shortage to us is rather small compared with others. And because we have so many major developing pipelines start to rent from PSI Gen 5, 8 channel, 4 channel, second half for UFS 3 and new generation UFS.

And for one as well as automotive, we have so many new designs with Toyota, with BYD, with Xiaomi and Mercedes and Gena Motor. And even [indiscernible] force. So it's a tremendous new opportunity for us to grow and to upset some small impact from margin 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 but '26, '27 will be shortage. There's no way in the near term to change the situation because the equipment, it takes time, takes about 2 weeks. And I think until the NAND, the DRAM maker from Samsung, Hynix and Micron, they start to ramp up [indiscernible] being the second half 2027. I think you'll have to see some relief on DRAM, then their CapEx when moving to the NAND won't be more. today, some of the market maker is very hard to get a supply from the NAND maker due to NAND price really went up sharply in the last 3 months. you look at October, they went up at 25%, 30%. November went by again for 50%. It is incredible. It's a very hard to mutimaker to deal with the current situation. I believe when NAND price go crazy and for spa market, I think we scared away some module maker, but it work go down a little bit.

So I think we will see natural balance because the OEM price is not like a spot price. But today, I think the channel, pricing and [indiscernible] autimotive maker, there's a last group to willing or set the price up the price really up. So I see that I feel sorry for some small player for module maker, but that's the way that is. Hopefully, NAND makers, they can be more balanced about the situation. and moving forward to '26.

Do you -- 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 -- 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 margin house probably some -- most of our customers [indiscernible] much bigger size as a public company, right? We have a more financial position to bargain in the purchase NAND. And then most of our customer module maker, they have 8 to 12 months inventory already in hand. So I think this should be okay for '26, but it maybe will start to face a challenging for the second half '26, '27. But according to some of our customers, it looks 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 a different position. Hopefully, but we feel pretty strong because many of our OEM projects are for NAND maker to start to ramp up. So they will offset some small impact on module maker.

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 clients today, today, as we state were 30% market share [indiscernible] but Gen 5 controller is even stronger for high-end 8-channel PCG 5, we have more than 4 NAND maker design win and almost 90% module-maker design win. So it start to -- currently, I think last quarter, we mentioned Gen 5 ramp-up is already 15% of total SSD revenue, but it's not OEM rep yet, right? OEM will start to ramp our full channel mainstream controller drillers also have 4 other combination design wins, including 2 Korean customers.

This is also including a 90% margin maker our Gen 5 will be more than 30% for Gen 5 market. We're seeing when Gen 5 start to ramp next year and our market share is going to go up. So don't matter who is going to win. I don't know which NAND maker modem but our overall market share for [indiscernible] 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%.

80% 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 see CPI in PC is take a longer time, maybe were 2029 or 2030. We're seeing the high end propelling the mainstream. But as enterprise much faster, [indiscernible] start to transition from late '26, '27. So that's why we try to speed up and to get a more R&D resource working on the Gen 6 because we have a much bigger momentum design win pipeline. And in parallel, we start to prepare for Gen 7, we do have a Tier 1 customer on the customized chip. So the R&D resource major concern, we need to invest more. And keep good execution and focus to summation, then hopefully, it would be a much bigger pie for our company.

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 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 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 PCI fintroller. 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, you have a good dividend where you're paying out steady and it's been increasing a bit. But to over $270 million cash and you have Maxlinear, that arbitration that could come through just 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 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 [indiscernible] energy, which is not something we're commenting on, but whatever influx of cash we get, we'll continue to look at all three 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 operating 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 in our 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.

Good day, and thank you for standing by. Welcome to the Silicon Motion Technology Corporation's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] 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 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. Thomas Sepenzis, Senior Director of IR and Strategy. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and welcome to Silicon Motion's Third Quarter 2025 financial results conference call and webcast. Joining me today is Wallace Kou, our President and CEO; and Jason Tsai, our CFO. Wallace will 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 U.S. Securities and Exchange Commission. For more details on our financial results, please refer to our press release which was filed on Form 6-K after the close of market yesterday. This webcast will be available for replay in the Investor Relations section of our website for a limited time.

To enhance investors' understanding of our ongoing economic performance, we will discuss non-GAAP information during this call. We use non-GAAP financial measures internally to evaluate and manage our operations. We have, therefore, chosen to provide this information to enable you to perform comparisons of our operating results in a manner consistent with how we analyze our own operating results. The reconciliation of the GAAP to non-GAAP financial data can be found in our earnings release issued yesterday. We ask that you review it in conjunction with this call.

With that, I will turn the call over to Wallace.

Thank you, Tom. Hello, everyone, and thank you for joining us today. I'm pleased to report that we delivered another strong performance in the third quarter, exceeding our revenue and operational margin guidance, we continue to benefit from the introduction of new controller existing and new markets and drive increased market share across our portfolio. We remain focused on delivering both top and bottom line growth and improving profitability while investing heavily in the next-generation controllers, increasing our engineering resources to support new products and markets and further positioning Silicon Motion for long-term market share expansion.

We expect strong revenue growth to continue as we introduced compelling new PCIe client SSD controller, next-generation eMMC and UFS controllers that drive higher share, benefit from strong growth in our automotive business and as our MonTitan enterprise business begins to scale.

I'm excited about the foundation for growth that we are building across each of our major markets and believe we are well positioned to see sustained revenue and profitability growth in both the near and long term. Let me start by discussion and broader market environment and then each of our major business in greater detail.

AI remains a significant growth vector across memory and storage industry, driving strong demand for NAND and other technology, including DRAM and HDD. The growing AI demand has, for the first time, greater supply shortages in HDD, NAND and DRAM, leading to price increases for the past 3 quarters, a trend we expect will continue at least through 2026.

In the early stage of AI development, AI training drove strong demand for high-performance memory and storage using DRAM, HBM and NAND for lower capacity TLC-based compute SSD. As AI evolves, the focus is changing to inference, which relies more on high-performance, high-capacity storage rather than raw computing power. The increasing demand from inference is putting a large strength in HDD supply chain that traditionally serve this market, and is expected to continue well into next year as HDD makers struggle to quickly meet the growing demand.

Inference is also increasing NAND demand for high-capacity, high-performance QLC-based SSD and creating a significant trend for the NAND market supply and availability. As AI is still in its infancy, we expect that these demand drivers will continue to impact supply availability across all memory technologies for quite some time as CapEx spend increases to catch up with market demand over the next few years.

Growing AI demand is also forcing a more disciplined CapEx spending approach and is driving difficult resource allocation decisions by the memory and storage makers to prioritize engineering resources across multiple technologies, products and markets. Increasingly, we are seeing a greater willingness by the NAND flash makers to rely on Silicon Motion to complete their product portfolio as they shift their internal resources to focus on DRAM, HBM and future customized memory technology for high-performance AI [ in promise ].

We are in active discussion with all NAND makers about expanding our partnership and taking on broader range of project long term to offset growing internal resource shortages. Looking ahead, we see continued NAND flash price increases and shortages given the impact of AI on overall demand, which has been amplified by reduced new capacity investment at the flash maker over the past years.

Despite the challenges inherent with the NAND price increases, we believe our business will remain robust. Our module maker customers have been building NAND inventory ahead of anticipated price increases and are well positioned for next year to meet expected market demand. Our direct business with NAND makers continue to be strong, accounting for more than 50% of our revenue, and we expect to gain significant share over the next few years. Additionally, more than 70% of our business with NAND flash maker and module maker customers goes directly to PC, smartphones, servers and other device OEMs that are not significantly impacted by high NAND markets.

We are a robust design pipeline in eMMC and UFS, client SSD and enterprise SSD controllers and our Ferri product line should benefit from the increased NAND price trend. Additionally, given increased NAND prices, we expect OEMs to more rapidly adopt QLC technology where we have a significant advantage over our competition.

And finally, we are starting to scale our new enterprise products, including, MonTitan, which are less price sensitive than the consumer markets. We expect AI demand to continue to put greater demand on inference than it has. A more large learning model reach maturity, putting more focus on the high-performance, high-capacity storage capability that QLC-based SSD are ideally suited to address.

I will now discuss each of our business units in greater detail, starting with eMMC and UFS. We experienced another exceptional quarter of growth in our eMMC/UFS business with strength across the board in smartphone, automotive, industrial and IoT. eMMC and UFS revenue was up over 20% sequentially as we continue to increase our market share and capitalize on new product introduction.

Module makers are benefiting as NAND makers have walked away from eMMC and UFS 2 due to lower ASP margin, which have helped module makers gain market share rapidly using our eMMC and UFS controllers. Overall, end market demand in the third quarter was higher than expected and helped us deliver strong sequential growth with our NAND flash partner as well.

Smartphone OEM continued to shift to our new UFS controller in mainstream and now value line devices, driving better ASP and margin for our business. Additionally, we continue to have success with our direct OEM engagement with QLC controller. Our first customer is introducing a second smartphone with our chip in the current quarter. We plan to introduce additional model next year. Given the current NAND environment, we expect that other smartphone manufacturers will increasingly look to QLC to deliver high-capacity storage at lower cost, which could lead to further customer engagement.

UFS will continue to grow rapidly in the smartphone market as low-end smartphone continue migrating from eMMC to UFS to deliver better performance cost effectively. While smartphones are rapidly shifting away from eMMC to UFS, eMMC remains an important revenue driver for Silicon Motion. As we mentioned, the market for eMMC extended well beyond mobile phones and account for more than 900 million units annually.

The market for eMMC include automotive, commercial, industrial, IoT, smart devices, set-top box and streaming devices, robotics and many more, including the rapid growing market for smart glasses championed by Meta, Apple, Google, Amazon, Xiaomi and others. These solutions will likely continue to use eMMC, providing a strong foundation for market growth for years to come.

As the NAND flash maker increasingly concentrate on the enterprise market, the opportunity for Silicon Motion eMMC UFS continue to grow. We expect to see further market share expansion as the flash maker outsource more and believe that our share gain in eMMC UFS will remain strong, a strong contributor for our future growth, leading to expanding market opportunity and end market growth.

I will now discuss our client SSD business. Our client SSD revenue was up more than 20% sequentially in the September quarter after a slower start in the first half of the year. We are beginning to see greater PC demand driven by sunsetting of Windows 10 this month and the adoption of AI at the edge in commercial and consumer PC, which require higher performance SSD solutions. We are also benefiting from the positive impact of our 8-channel PCIe 5 controller that launched at the end of last year, which with revenue growing 45% sequentially in the third quarter and which now represents more than 15% of our client SSD revenue.

This new controller has significantly higher ASP than our PCIe 4 offering and will help drive revenue growth as they scale. As we have discussed, we have 4 of the 6 NAND flash makers and nearly all the module makers using this performance leading controller for their high-end offerings. And we expect to capture significant market share in the top tier for the PC market first time, which represent approximately 10% to 15% of the overall market.

We have win with all the top PC OEMs in many of their upcoming high-end models that are expected to ship later this year and scale throughout next year. We are introducing our second 6-nanometer PCIe 5 controller even with 4-channel version by targeting the mass PC market and that we will begin initial shipments this quarter.

We have already secured design wins with also 4 NAND flash makers and nearly all the module makers for this controller as well. This new controller targets the largest segment of PC and retail SSD market, and we expect that it will help drive our client SSD market share from approximately 30% today to 40% over the next few years.

We expect the, PCIe 5 will become the dominant technology in consumer application over the next few years, and we are in the best position to benefit given our strong customer partnership with both NAND flash makers and module makers.

I will now provide an update of our automotive business. We continue to experience significant design win activity in our automotive segment across each of our product units, including eMMC, UFS, PCIe and our Ferri embedded solutions. While the overall market has experienced challenges in 2025, given the broader geopolitical and tariff issues, we continue to grow our product portfolio and market share. We are also benefiting from the super trend of increased vehicle complexity, which is driving the need for additional high-speed, high-performance storage.

We recently won significant design wins with a Tier 1 Japanese auto manufacturer in their global model that could contribute to top line growth moving forward. As I mentioned during our last call, we also recently won with a large South Korea customer that has started to sample our eMMC controller-based solution to multiple automotive OEMs, which we expect to drive further growth in our automotive business in 2026 and beyond.

We are also on track to extend our lead in ASPICE certification, which we achieved this year with the Level 3 certification for our PCIe 4 controller with plan to take out our next-generation automotive PCIe 5 controller next year.

Increased demand for advanced storage solutions in automotive is being driven by AI multiple screen integration, ADAS sensors, cameras, navigation and other applications. We are shipping to many of the leading automotive manufacturers in the world, including Tesla, BYD, Xiaomi, Mercedes, Toyota, Honda and many others.

Entering the second half 2025, we experienced greater-than-expected demand from our partner in China as our strong design pipeline has led to market share gains with Beijing car makers like BYD and Geely. Chinese automotive brands are rapidly taking market share worldwide given their leadership in electric low-cost vehicles. As we continue to introduce compelling new automotive controllers and as we expand our customer relationships, we remain confident that automotive will represent at least 10% of our revenue by 2026 and 2027.

Finally, I will now provide an update to our enterprise business. The requirement of AI computation, training and inference are rapidly evolving and driving new requirements from storage and memory solutions that deliver performance, capacity, power and affordability. These growing opportunity are expanding the prospect, the prospect for Silicon Motion MonTitan family of enterprise-grade controllers. The need for increased speed and lower latency is driving greater adoption of [indiscernible] in the data center and the industry is increasingly looking to adopt NAND solution in 1 storage, 2 storage and eventually near DPU storage as well.

Our MonTitan solution ideally suited to address the increasing requirements of AI workload for both compute SSD using TLC and high-capacity warm storage SSD using QLC. The opportunity for compute SSD represent most of the enterprise SSD market today, while high-capacity SSD are just beginning to ramp, but are expected to be much larger market opportunity [indiscernible]

Interest in MonTitan for compute storage TLC SSD application is increasing. This quarter, our customers are beginning qualification with end customer TLC, enterprise and data center with TLC-based high-performance USB using our MonTitan controller, targeting the high-performance requirements of AI in the data center.

We expect this qualification to progress into first half of next year and begin to ramp commercially in the second half of next year. For high-performance, high-capacity QLC SSD, our MonTitan-based solution helped deliver significant advantage over HDD for the AI inference for CSP, hyperscaler and enterprise by elevating the speed and power bottleneck inherent in HDD technology for warm storage.

The switch to NAND technology for warm storage is being accelerated by the current supply shortage in the major HD manufacturers, making HDD more expensive and high-capacity QLC SSD is cost effective, better performance option.

Longer term, warm storage requirement offer a much bigger market opportunity when compared to the opportunity for compute SSD, and we see increasing interest in our industry-leading MonTitan QLC solution. We are on track to begin end customer qualification for QLC-based high-capacity SSD late this year or early next year.

We are increasingly confident in MonTitan, a significant new growth opportunity given our successes and win to date in both the compute and high-capacity warm storage market. We remain confident that MonTitan will deliver 5% to 10% of revenue by the late 2026 or '27 time frame as this new opportunity and customer scale in the near and the midterm.

And finally, we continue to collaborate with customers to deliver [ compounding ] enterprise boot drive solution that can work across multiple platforms, engaging directly with the world's leading AI GPU makers as well as hyperscaler and CSP. We began volume shipments of the boot drive to the leading AI GPU makers this quarter for their current DPU product and starting qualification of their next-generation DPU for follow-on products.

Working on expanding our relationship with the customer, we are also in the qualification process of our Boot Drive Solutions for a variety of switch products also as well, including [indiscernible] based design as well as Ethernet switch design, both of which are expected to ramp later next year.

We expect the Boot Drive Solutions will add an additional long-term sustainable growth driver for Silicon Motion as we expand our storage technology and business partnership with this leading GPU-DPU maker.

In conclusion, the third quarter of 2025 delivered significant growth of our business as we execute on our diversification strategy with new products and into new markets. We continue to see the reward of investments that we have made over the past few years. These investments include our market-leading 6-nanometer product, our new UFS and PCIe 5 controller, our new MonTitan and Boot Storage Enterprise cloud solution, our growing automotive portfolio and our new microSD product for multiple locations, including Nintendo Switch 2. We have never been in a better position to expand our market share given our leading product portfolio and the growing need for flash makers to shift their focus from consumer to enterprise applications. Given the growing demand in our legacy business and our new automotive and enterprise products, I'm increasingly confident that we will deliver strong, sustainable top and bottom line growth. And given our current backlog, I'm very confident in our ability to exceed our target annual revenue run rate of more than $1 billion this quarter.

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 third quarter results and then provide our outlook. Please note and 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 today. The September quarter sales increased 22% to $242 million, coming in well above the high end of our guided ranges. We experienced a strong rebound to mobile demand, strong growth in our PCIe 5 climate.

Gross margins was at the higher end of our guidance range and increased again in the quarter to 48.7% as we continue to capitalize on new product introductions and improving mix. Operating expenses increased sequentially to $79.5 million as we continue to invest in new projects and expand our customer engagements to further grow and support our significant pipeline of new opportunities.

Operating margin increased sequentially to 15.8%, well above our guided range, resulting from improved gross margins and higher-than-expected revenues during the quarter. Our earnings per ADS was $1. Total stock compensation, which we exclude from non-GAAP results, was $5.5 million in the third quarter, and we had $272.4 million cash, cash equivalents and restricted cash at the end of the third quarter compared to $282.3 million at the end of the second quarter 2025. Cash declined in the third quarter primarily from a combination of dividend payment of $16.7 million and an increase in inventory to support our expected strong business ramp.

Our team executed well, and our operational discipline delivered significant outperformance despite continuing investments in new advanced geometry products and our emerging MonTitan platform for their enterprise and AI market.

Now I'll discuss our fourth quarter outlook. Revenue is expected to increase 5% to 10% to $254 million to $266 million, above our initial target of $250 million we had set at the start of this year. We expect fourth quarter strength to be driven primarily from our client SSD controllers and SSD solutions. Gross margins are expected to be in the range of 48.5% to 49.5%, and operating margin is expected to be in the range of 15% -- excuse me, 19% to 20%, approaching our historical operating profitability levels as we plan to benefit from higher revenue, higher gross margins and lower operating expenses sequentially.

Our effective tax rate is expected to be approximately 18%. Stock-based compensation and dispute-related expenses is expected to be in the range of $18.1 million to $19.1 million. Despite the uncertainty this year given rapid geopolitical changes and tariff impacts, our team has remained focused on execution and building an incredibly strong pipeline for long-term growth. We have successfully scaled new products, engaged with new customers and expanded into new markets that will lead to higher market share and greenfield growth opportunities in enterprise storage, and we're just getting started.

We expect to continue to invest to further expand our position as the leading merchant controller maker in the world for eMMC and UFS, client SSDs, automotive applications, high-performance and high-capacity enterprise and data storage -- data center storage. As we look ahead, our pipeline for growth in 2026 and beyond has never been stronger, and we look forward to discussing it in greater detail when we report again in 3 months. This concludes our prepared comments. I'd like to open up for questions now. Operator?

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

Could you dive a little deeper in your comment in the press release about white box AI server makers continuing to leverage mainstream hardware components. I believe your SSD controller sales are typically a PC/other consumer applications. So can you just give us a sense of how much of the SSD controller revenue in this quarter came from the white box AI server makers you referenced? And where you expect that to trend going forward? And then I have a follow-up.

The mention with the white box is an AI all-in-one server and primarily that come from China and Taiwan from the DeepSeek Volume-1 surveyor [ flybox ] and some in others, bundled with other training model. I think there are 2508 8-channel PCIe 5 controller is well positioned in the market. We cannot comment. We don't know exactly the volume, but there is a growing momentum for all the AI all-in-one server. it is similar like NVIDIA announced MGX, DGX GPU for this kind of a market.

Okay. And then looking at the gross margin guide, midpoint coming in at 49%. I was wondering if you could maybe walk through the moving pieces of the gross margin in 4Q. And then if possible, could you share sort of where you expect gross margin to trend next year? If not, at least what the main drivers of the gross margin improvement should be in 2026?

So certainly, as we continue into the fourth quarter, scaling new products like PCIe 5 new generation products tend to have better gross margins that offset the declining gross margins of older products. We do expect to see, as MonTitan continues to scale to have some incremental benefits, but certainly, that remains a relatively small portion of our business today.

We're not guiding for 2026 at this point. We'll talk more about that in 3 months' time. So stay tuned for that. But certainly, we are excited that we're back to kind of the normalized range that we historically have been, historical range has been 48% to 50%, and we're guiding smack in the middle of that. So we're pretty happy that we've been able to recover off of obviously some tough times a couple of years ago, but we're back to where we historically have been.

We will now take the next question from the line of Craig Ellis from B. Riley Securities.

Team, congratulations on real good execution. I wanted to start with a question that takes off from Jason's comments that the company is just getting started in enterprise storage and ask a question that's fairly broad and has a couple of parts to it.

So if we look at what our ambition is over the next year plus with MonTitan and enterprise storage classically defined and think about what's going on currently with boot drive controllers and full solutions already starting to ship and picking up and maybe diversifying our customer base next year.

And then -- and this part would be for you, Wallace. As we think about some of the news that's coming out of Korea and other countries about the development of high-bandwidth flash. And while some could be skeptical that, that may just be like storage class memory, which went nowhere for 15 years, but with some leading OEMs behind it, it very likely could. How do we think about the arc of those drivers as we go from '25 to '26 and '27? And what can enterprise broadly defined be for the company longer term?

Thank you for your question. Please remain on the line. Your conference will resume shortly. Thank you. Presenters, you may continue your conference. Craig, you may want to repeat your question?

Yes. The question is this, if we look at enterprise storage broadly, including MonTitan's traditional enterprise storage but also include the boot drive business with one customer shipping now, but maybe diversifying and think longer term about what's possible from high bandwidth flash, if that were to be an opportunity because certainly that's going to be QLC where you're particularly strong. Can you talk about...

Just a moment, sir. The conference will resume shortly. Just a moment. Ladies and gentlemen, please remain on the line your conference will resume shortly.

[Technical Difficulty]

We have the speakers back.

Hi, there. Sorry about that. We're back.

Should I give the question a third shot.

Yes, one more time Craig. Sorry about that.

So looking at enterprise storage broadly from MonTitan classic enterprise storage that's starting to ramp with qualifications and then shipments next year, but boot drive controllers and storage getting going now and with the potential for high bandwidth flash to come in as a much-needed AI-based solution a few years down the road, how do we think about the longer-term market storage as we just get started with boot drives this year, pick up MonTitan and then ramp those over the ensuing years. And what could high-bandwidth flash do to the business as a third driver longer term?

So first of all, I want to clarify the 5% to 10% of total revenue, '26 to '27 does not include our Blue Drive for the current DPU design and also for the additional switch Blue Drive solution. But we do see -- moving to 2026 is the best and challenging year for storage industry. There's so many new opportunity coming, not the conventional compute storage, but also one storage, the high-capacity QLC SSD. And then moving forward, it will be near GPU storage. So there's so many new opportunities for MonTitan controller to fit in. And we're also preparing to work on growing market. We just need more R&D resources to meet the demand. And in parallel, I think this is a great opportunity. We see MonTitan to scale up. our Blue Drive solution also could scale up quickly in 2026 and moving to some CSV design too.

And Wallace, what's your view on the potential for high bandwidth flash to be a third driver of enterprise broadly defined longer term?

So high HBF, I think this is a very interesting product. And this is -- as you know, this is all designed for AI inference near GPU. We see there's 3D SoC technology moving to meet certain new GPU leaders requirement. But HBS also very interesting in packing technology is the conventional standard 3D NAND. But this require new controller and packing technology. We will monitor it carefully because we believe initially this belong to all the NAND makers development, and we are also invited to join the business. But I think we are out of a resource. We want to monitor when the market become more mature, more stable and where we'll participate.

And then the second question is a question regarding the comments from you and Jason around NAND sufficiency and the implications for shipments next year. So you have an advantage, you're levered with all NAND suppliers. What messaging are they giving you with regard to how they're going to prioritize their output and capacity allocations across enterprise versus PC versus smartphone and then consumer applications? And what does that mean for the various growth drivers of the business in 2026?

I think you asked a very good question. We are facing a never happened before the HDD, DRAM, HBM, NAND, all in severe shortage in 2026. Most of our capacity are sold out. And I think I did talk to many of the major makers but I really cannot comment what kind of allocation policy is going to do. However the leading maker, they will keep a discipline and then we can see the balancing for the industry. They are not just favoring AI and server of AI data center. They will consider certain percent for smart phone, certain percentage for PC and certain percent for automotive, of course, the majority would go to the AI and the AI server. So but balancing is very important so we can keep the whole industry moving forward.

We will now take our next question from the line of Suji Desilva from ROTH Capital.

Wallace, Jason, congratulations on the progress here. For MonTitan, I know you're going to talk about 2 lead customers initially, now more. I know one of them was an OEM who was, I think, in turn, trying to themselves secure hyperscaler customers. Has that happened with that lead customer? And if so, what's the start of ramp timing for that customer?

I cannot comment their ramping. I think they're very close to the -- as you know, Tier 1 customers, some will develop their firmware themselves, some with joint development with us together. We cannot comment their ramping but getting very close. But because MonTitan getting tremendous demand from multiple customers from Tier 2, so we are busy to provide solutions for both TLC and QLC. Hopefully, we can start a small ramp in the Q4, and we see the more meaningful ramp in 2026.

Okay. Well, it's very helpful. And my other question is on the arbitration. I'm wondering if there's any update there.

Yes. Thanks, Suji. Yes, the arbitration, we had -- the arbitration has begun. The hearing was held as scheduled earlier this month. The tribunal scheduled oral closing arguments to be in March of 2026 and is expected that a decision by the tribunal will be available sometime after that.

We will now take our next question from the line of Tiffany Ye from Morgan Stanley.

Congrats on the great results and guidance. So my first question is that it seems your inventory value rose around 62% in the third quarter. May we know the reason behind? Is it due to the inventory preparation for the BT substrate shortage? And I have a follow-up.

Yes. So inventory did come up. Inventory increase is to support the growing backlog and new business and orders that we have already received. And that's expected to ship over the next few quarters. And the increase in inventories across really all of our product categories, including some low-cost NAND that we have procured earlier as well as controllers for SSD as well as eMMC and UFS. So it's a pretty broad-based demand that we're seeing, and we're preparing ahead of that.

Okay. Got it. So it seems that the BT substrate shortage has kept some of our fabless peers upside in first half next year. So do we see any impact from that? Or because as what you just indicated, we're fully loaded now. So not worry about that impact.

I think the substrate PCB shortage or long lead time in non-power business, we have prepared in advance. But we do need to prepare the production ramp for more controller as well as the Ferri product line. That's why we increased our inventory right now.

Got it. Got it. I have one more question. So as we head into 2026, we see both our foundry partner and OSAT partners all initiating price hike to reflect the elevated material costs. So how should we think about the impact to our profitability? And do you think we can further pass through all these elevated costs to our customers? That's all.

I think what I can say that TSMC will increase the wafer price from 5, 4, 3, 2-nanometer, start from 2025. Our PCIe Gen6 TSMC 4-nanometer won't be production until late '27 or '28. So there's no cost impact, foundry wafer impact for our cost in our controller in the next 2 to 3 years.

And Tiffany, most of our products are on more trailing edge process geometry. So availability is -- and pricing is certainly better at those trailing edges. The more advanced ones we have today is 6 nano, but a lot of our other products are at 12 and 20 or even higher process geometries.

So maybe the impact from foundry is quite nearly limited in 2026, but how about OSATs?

OSAT, I think because we have a preliminary agreement, so the OSAT cost impact will be very limited to us almost irrelevant.

Next question comes from Gokul Hariharan from JPMorgan.

My first question, given this very rapid increase in NAND flash pricing, and it seems like you're going to be in a reasonably short supply situation all through 2026. What are the business dynamics that you're seeing from your customers? Historically, Silicon Motion used to be a little bit more affected when NAND flash is very tight, given OEMs try to allocate to certain customers. At the same time, QLC NAND is clearly rising. Could you talk a little bit about anything more that you see in terms of either engagement, any reason why you're not kind of getting more bullish about your 5% to 10% kind of enterprise SSD exposure given a lot of the activities happening in QLC NAND right now?

I think, first of all, more than 50% of our business we engage with the NAND OEM business. So we are really well protected in the NAND maker. Second is most of our module maker, they have prepared the potential NAND price increase and shortage in advance. So they all have at least 8 to 12 months inventory. And I think they also -- although they do have a certain contract with the NAND supplier, but definitely, there will be some impact. But I think most of our customers, when we discussed in the last couple of weeks, they all have confidence they should walk through in 2026. So we do not see impact of our business as the coming quarter or even the first half of 2026. We feel very strong for our backlog and we see we will benefit from the NAND supply shortage and become a stronger player in the industry.

Understood. Any updates on the QLC NAND pipeline -- design pipeline and revenue pipeline, I was thinking maybe you would be sounding a little bit more bullish about enterprise SSD given a lot of the activity on QLD NANDs recently.

That's exactly true. We are very excited about the high demand for QLC, high-capacity enterprise SSD. We just need to deliver the result. I think the -- as you can see, even it's not just the AI inferences, really require high-capacity enterprise SSD because HDD shortage also trigger higher demand or an urgent demand for the high-capacity SSD. That's why we are very busy. I cannot comment about the potential outcome, but we have to deliver results ASAP.

Gokul, we're not changing our expectations at this point in spite of the strong demand. We're still targeting 5% to 10% of our revenue in that '26, '27 time frame.

Okay. Are your existing customers because new designs will obviously take time to kind of cascade in. But are your existing customers upsizing meaningfully compared to what you thought maybe 6 months back?

I mean I think across the board, we're certainly doing better, right? We're coming in ahead of where we were anticipating exiting the year at. So we're going to be above the $1 billion run rate. We are seeing strength in eMMC, UFS as we gain share there. We're seeing strength with our PCIe 5 as we gain share there. So across the board, we are. And so our business today is certainly stronger than what we had anticipated at the start of the year.

Yes, I think this is more to do with enterprise rather than -- I mean consumer is very clear, I think, but this is more to do with enterprise.

Yes. I mean, look, our target still remains at 5% to 10% in '26, '27. Obviously, if we can get -- do that faster, we certainly will, but we are resource constrained. We are working as fast as we can. Our products are beginning to sample with end customers. So as they get ready to ramp up, we're going to be ready to support them. So there are a number of processes in place that right now, we're working through it.

Got it. Just back to client SSDs. How are you thinking about the next couple of quarters? I think we have probably seen a lot of the benefits of the Windows 10 sunsetting and the demand pull in for PC as a result of that. As we kind of start to lap that in the next couple of quarters, how do you see this pan out? Do you see a little bit of moderation in growth there or the spec migration to PCIe 5 is enough to kind of offset any of that volume growth tail off?

I think you are correct. We benefit from PCIe 5 market share gain. As we said, our PCIe 5, 8 channel have a 4 NAND maker and nearly all the module maker design win. So when PC OEMs start to ramp late this quarter, I think we benefit from revenue growth as well as market share gain. Our 4-channel mainstream DRAM PCIe 5 also is near production. I think we will start to see initial production by late this quarter and start to ramping up by middle of next year through another combination 4 NAND maker as well as the module maker. So when PCIe 5 become mainstream in the PC market, Silicon Motion will benefit from the market trend because we will move towards 40% global market share.

And we -- as I said in the comments that we do anticipate our SSD controller business to grow again sequentially in the fourth quarter.

Okay. So just a clarification. So for PCIe Gen5, let's say, for next year, what percentage of the PC OEM market do you expect it to be? Is it like 15%, 20%? Or once you have your 4-channel controller also ready? Or is it even higher than that?

We cannot comment for PC OEM what they plan to ramp. We just know when they ramp more model, we benefit from market share gain.

[Operator Instructions] our next question comes from Matt Bryson from Wedbush.

All right. We are not getting a response from Matt. So I'm not showing any further questions. I'll now turn the conference back to Mr. Wallace Kou for closing comments.

Thank you, everyone, for joining us today and for your continued 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 the Investor Relationship section of our corporate website, and we look forward to speaking with you at these events. Thank you, everyone, for joining us today.

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