Silicon Motion Technology Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 6, 2025

There are 9 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to Silicon Motion Technology Corporation's Fourth Quarter twenty twenty four Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session.

Operator

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. Other such statements are based on our own information and information from other sources we believe to be reliable. You should have plenty of reliance on them. The statements involve risks and uncertainties and actual The statements involve risks and

Speaker 1

uncertainties and actual

Speaker 2

market trends and

Operator

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 effects of pressure on this unpredictable changes in technology and consumer demand for multimedia consumer electronics. To state that 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.

Operator

Please be advised that today's conference is being recorded. It is now my pleasure to hand you over to Mr. Tom Spences, Senior Director of IR and Strategy. Please go ahead, sir.

Speaker 3

Thank you, operator. Good morning, everyone, and welcome to Silicon Motion's fourth quarter twenty twenty four financial results conference call and webcast. Joining me today is Wallace Koh, our President and CEO and Jason Tsai, our CFO. Wallace will first provide a review of our key business developments and then Jason will discuss our fourth quarter results and outlook. Following our prepared remarks, we will conclude with a Q and A session.

Speaker 3

Before we get started, 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 six K after the close of market yesterday.

Speaker 3

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.

Speaker 3

We ask that you review it in conjunction with this call. With that, I will turn the call over to Wallace.

Speaker 4

Thank you, Tom. Hello, everyone, and thank you for joining us today. 2024 was an exceptional year for Silica Motion across multiple fronts. We delivered over 25% revenue growth year over year, seeing significantly outperforming the end market we serve. Gross margin improved from 43% to over 46% and we delivered operational margin of 15.3%, up from 11.9% in 2023, while investing heavily in next generation solution that will expand our opportunities to drive long term share gains and sustainable revenue growth.

Speaker 4

2024 was not without challenges. However, as the consumer market saw increasing pressure in the second half of the year, weak end user demand that began in the third quarter of twenty twenty four persisted through the fourth quarter, creating an unseasonably weak holiday season for PC and smartphones. Despite this, we remain focused on our execution and tabled a number of advanced controllers for SSD and UFS, leading to significant new project wins with our flash maker and module maker customers. We successfully entered the enterprise ID market, adding six customers and beginning initial shipment of our first new Mantaisun product in second half of twenty twenty four. Additionally, we further grew our automotive business to over 5% of sales and delivering strong backlog as we enter 2025.

Speaker 4

While the smartphone and PC market will always be important, our strategy to diversify and significantly grow our enterprise and automotive business are off to a strong start with many new projects, customers and product expected to scale over the next few years. Flash makers are outsourcing more and becoming increasingly reliant on silicon motion as they are being forced to rationalize spending given the increasing development cost for memory technology to support DRAM, HBM and enterprise storage needs. The cost of development of a NAND controller has rapidly increased with the necessary migration to advanced process geometry solution like a six nanometer SSD and UFS. FlashMaker decision on controller development have become increasingly aligned with Silicon Motion as their preferred partner. We are working with every NAND maker and the winning multiple projects that range from eMMC and UFS controller to SSD controller for SATA PCIe four and five star solution as our portfolio breadth breadth enable them to scale in multiple markets faster and more cost effectively.

Speaker 4

We have already built up a strong pipeline of new wins and expect more this year to further our share gains in 2026 and beyond. Now let me give you an update on what we are seeing in the NAND industry. With consumer demand a typically weak in the second half of last year, we are seeing consumer grade NAND pricing continue to decline. While NAND makers are starting to limit supply and scale back production given the ongoing weakness in the consumer markets and the global economy uncertainty surrounding tariffs. We do not expect NAND prices to recover until the second half of this year when demand for both smartphone and PC are expected to rebound.

Speaker 4

With production cut underway at most NAND makers, the focus is to limit supply of consumer grade NAND, while still growing supply of the high end enterprise grade NAND where demand for enterprise and data center SD remains healthy. For silicon motion, this means that we must focus our resources on NAND makers, strategic partners and customers who have asset to NAND. We must align our product cycles with our customer roadmaps and their steady progression toward each new generation of NAND. This is critical to our long term success and we are investing to ensure that we remain the leading merchant controller vendors across all flash makers and end markets and applications. And NAND continue to involve and the adoption of low cost per bit NAND drive higher densities.

Speaker 4

QLC is becoming a bigger growth driver for NAND big growth as they enable NAND maker to increase density without purchasing new manufacturing equipment and enable device makers to offer higher density cost effectively. We have a more experience meaning QLC than any other controller makers, whether that's a merchant or captives. As the consumer market begin to rebound mid year and with ongoing strength in the enterprise and AI server markets, we expect QLC will become an increasing part of the conversation in 2025 and beyond. And Silicon Motion is in the best position to capitalize on the growth of the new technology. Let me now discuss each of our major product segments beginning with our client SSD controllers.

Speaker 4

For 2024, our SSD controller business grew approximately 20% as compared to 2023. And our client SSD controller market share increased to over 30% as we continue to grow our share with flash makers and win additional sockets. Gartner expects the PC market to grow by nearly 5% this year with the second half of the year much stronger than the first driven by the sunsetting of Windows 10, the approaching COVI corporate PC refresh cycle and bolstered by the increasing demand for AI PC. We are successfully gaining market share and we saw new project wins and backlog for high performance TLC and high reliability QLC controller with flash makers and module makers. We introduced our high end six nanometer eight channel PCIe five SSD controller last year and have secured a dominant position in the market winning design win with four NAND makers as well as virtually every module makers.

Speaker 4

This controller delivered fast in class performance and substantially lower power consumption than any other solution in the market. We are gaining share in the high end PC market with this eight channel controller and with the win we have amassed already. We believe we are on track to capture at least half of the market over the next couple of years, driving additional share gain opportunity for us. We also received back the initial sample from our PayPal last year of our mainstream signalometer four channel PCIe five controller and have made exceptional progress in securing additional wins for this product with flash makers and module makers alike. We anticipate this solution to be introduced late this year and begin ramping in 2026 as PCIe five SD adoption enter the mainstream PC market.

Speaker 4

The complexity of PCIe five controller has increased significantly, not just in terms of process geometry, but also in engineering and firmware resources. They are requiring more complex field engineer support with our customers and with PC OEM. We are developing closer collaboration with our customer to deliver a matched support and reliability to ensure long term success. In addition, our existing portfolio PCIe four and the SATA controller ensure that we have the right combination of solution to serve the need of the high end to mainstream to cost sensitive market. Beyond PC SSD, our solution for the growing portable SSD market are also taking a dominant position.

Speaker 4

We have a win and shipping with several NAND makers as well as virtually every module maker in the market. Portable SD are becoming increasingly popular for data backup and our portfolio of controller enable both high speed and high density solutions that are cost effective for our customers. With our full range of product customer in the wings, we are well positioned for growth later this year as these wings scale and the overall market demand recovers. Now turning to our EMC and UFS business. Smartphone demand like the PC market remained weak as we entered 2025.

Speaker 4

However, despite this, we grew our EMC and UFS controller business by approximately 70% in 2024 as we rebound from very weak 2023. And we scale with our flash maker customers, expand its share with module makers, engage with our first device smartphone OEM for KLC UFS. We expect our customer ramp to scale in the second half of this year, in line with Gartner's current annual smartphone forecast of approximately 5% with a strong emphasis on second half growth after weaker start to this year. Our team has been steadily developing new solutions and winning additional projects. The market is shifting away from the integrated eMMCP and UMCV solution in the smartphone and moving toward discrete mobile DRAM.

Speaker 4

This is creating a significant opportunity for us as module makers are taking great share of the eMMC and UFS market, which is improving our position given there is a significant less competition discrete controllers. With the lower cost involved in using discrete LPDDR4 mobile DRAM, There is a greater competition, which in turn lead to flash makers outsourcing third party controller like SMIME to compete in value line Mobile Star solution such as EMC and UFS 2.2 and reduce R and D development cost. In addition to our existing UFS 3.1 controllers supporting the latest generation NAM, we expanded our portfolio with multiple new product introductions. These include a new EMC 5.1 for low end smartphone, smart devices IoT and automotive A new cost effective UFS 2.2 controller to cut into the mainstream market is a new signal meter UFS 4.1 controller that we tapered last year, which is currently sampling expected to begin initial ramp in the second half of this year. EMMC remained about half of the 1,800,000,000.0 annual unit market for EMC and UFS today.

Speaker 4

And 70% of EMC market is a non smartphone application like set top box, smart TV, automotive and IoT. While smartphone will continue to account for less and less of the EMC market as the UFS adoption increase. For UFS, the vast majority are for smartphone today, while non smartphone application primary going into automotive application are growing at a much faster rate. So while the overall smartphone market may be mature, we see tremendous opportunity as we expand with the flash makers and the module maker partners into these additional opportunities. Our broad portfolio allow us to deliver solution to our customers that address the expanding need of the market and gain further share.

Speaker 4

Now turning to our enterprise monetizing platform. We made remarkable progress in 2024 and are well positioned for strong growth in the enterprise story market for us long term. When we started 2024, we had target winning two Tier one customers. We won those two customers in the first quarter of twenty twenty four and increased our target to four customers for the year. I'm happy to report that we added four additional customers and now expect this six customers to ramp later this year.

Speaker 4

So four new customers have a long history of supporting Tier one and Tier two enterprise and CSP in The U. S, Europe and Asia, further expanding to the reach and adoption of Mount Titan family of enterprise controllers. We began early shipment and generated revenue in second half twenty twenty four. And we remain confident that with our current mix of customers and our expanding family of Mount Titan's Mount Titan solution, we can achieve our target of 5% to 10% of our total revenue by the twenty twenty six, twenty twenty seven timeframe. Mount Titan represents one of the largest greenfield growth opportunity for silicon motion in the coming years, given the large addressable market for TLC and TLC NAND within the AI server enterprise and data center storage markets.

Speaker 4

Growing interest in our unique Mount Titan platform is driven by our leading experience in QLC and TLC NAND, our dominant position in the merchant controller market and our ability to deliver a wide range of firmware capability to meet the unique need of different customers' application and use cases. We are expanding our capability with Mengtai's family of solutions in 2025 through the development of additional controller and the more comprehensive suite of firmware and software to address broader range of opportunity for our customer. We plan to offer more complete family of solutions to customer including controller for SATA and PCIe five server boot drives, higher performance and higher density 16 channel and eight channel PCIe five controller for enterprise storage and servers. And we are already engaged with new customer and developing next generation PCIe six controller. This combined with our existing advantage including our flexible firmware stack options, unique AC architecture, high capacity, leading performance and pro form a shape technology delivers a compelling enterprise class portfolio that is unmatched by our competition.

Speaker 4

With the Mont Haitien supporting the upcoming two terabit monodiode QLC NAND, we will be able to deliver high density, high performance 128 terabyte SSD with a best in class random read of 3,500,000 IOPS. That will be ideally suited for AI applications. This combination of capacity and performance will deliver faster training in AI applications, save power and lower the total cost of ownership. Lastly, let me give you an update of the progress we are making in the automotive market. We support the multi market across all our product category.

Speaker 4

We have win for our SATA PCIe four SSD controller, our eMMC and UFS controller as well as our Feride embedded solution across a variety of use cases in vehicle. From traditional cars to new generation software defined vehicle, there is a significant increase in processing capability sensors, cameras, CPUs and ECUs. With these new capabilities, the need of more memory is growing rapidly. Despite a mature overall automotive market, as the complexity increases, the need of a more robust capability significantly increases and that's why ASPI certification is becoming more critical and more a differentiator. We are proud to be the only supplier with a PCIe four point zero controller to achieve ASPI Level three certification, significantly increasing our lead over the competition.

Speaker 4

We are already shipping into all major Tier one automotive customers including Mercedes, Tesla, General Motors, BYT, Xiaomi, Toyota, Honda and several other including the leading automotive car service in the world. While we have been growing automotive wings for the past several years, it's now beginning to scale meaningfully and reach five percent of our revenue in the third quarter of last year. We are confident it can ramp approximately 10% of our revenue by 2027 given our current slate of customers and win and expected ramp of new products. In conclusion, as we enter 2025, despite the near term broader market headwinds, we remain extremely well positioned for future growth as we are growing share within our existing markets and expanding into new high growth markets including enterprise ID controller, automotive, IoT and others. We have an incredible strong portfolio of new products in our pipeline that will help drive long term share gains and improve our product diversification including our PCIe Gen five, UFS 4.1, ACE five certified automotive grade PCIe Gen four and of course Mount Titan.

Speaker 4

As our Mount Titan and automotive business continues to scale for next several years and our broad portfolio of solution for IoT, industrial, commercial and smart device applications continue to gain share, I'm confident that our strategy to diversify beyond the maturing PC and smartphone market will be successful and believe we could see 20% of our business in 2027 coming from this new opportunity. Given the strength of existing customer wins and expected second half recovery in the PC and smartphone market, we expect to exit 2025 with an annual revenue run rate of close to $1,000,000,000 in the fourth quarter. I look forward to sharing more about our success with this product and new markets throughout this year. Now, let me turn the call over to Jason to go over our financial results and outlook.

Speaker 5

Thank you, Wallace, and good morning, everyone, for 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 with our earnings release issued yesterday. In the December, sales decreased 10% sequentially to $191,200,000 and within our guidance range despite weaker end user demand for PCs and smartphones.

Speaker 5

Gross margins increased for the seventh consecutive quarter to 47% as we are benefiting from improved product mix as we shift continue our shift towards customers to newer solutions. Operating expenses declined by over 10% sequentially to $58,300,000 in the December due to the timing of tape out costs that elevated our September R and D expenses and operating margin improved sequentially from 16.1% to 16.5% in December at the high end of the guided range. Earnings per share was $0.91 down slightly from the $0.92 in the third quarter. Total stock based comp, which we exclude from non GAAP results was $9,700,000 in 4Q twenty twenty four. We had $334,300,000 in cash, cash equivalents and restricted cash at the end of the fourth quarter compared to $368,600,000 at the end of the third quarter.

Speaker 5

Cash decline in the quarter primarily due to changes in working capital driven by higher accounts receivable that typically trend higher in the fourth quarter and lower accounts payable due to timing of payments in the quarter. We see these short term impacts we see these as short term impacts to our cash balance. Inventories decreased again to $201,200,000 at end of fourth quarter from $214,600,000 at the end of the third quarter as we continue to work down our inventory levels. While our end markets grew in low single digit range last year, we increased revenue by 26%. We were able to significantly improve profitability, driving gross margins 300 basis points higher for the year, exiting the year at 47%.

Speaker 5

Operating margins increased by more than 300 basis points as well despite our significant investments in two new six nanometer controllers, increased R and D headcount and continued development for our monTitan business. As we enter 2025, the ongoing consumer weakness remains compounded by global economic uncertainty driven by potential tariffs and other challenges which are limiting near term demand, growth and visibility. Despite this, our teams have been steadily developing new solutions, winning new customers and expand our end market reach. Additionally, our teams have been extremely effective in delivering new products, driving the expansion of our opportunities in new emerging markets within the enterprise, automotive, industrial and commercial markets. We are optimistic that despite the near term environment with the combination of our strong customer pipeline, new product introductions and expect a second half recovery in the consumer markets, we're well positioned for a strong second half of the year.

Speaker 5

Now let me discuss our first quarter outlook. Revenue is expected to decline 12.5% to 17.5%, in line with the near term expectations for the PC and smartphone end markets. Gross margin should continue to expand as we continue to transition customers in newer products and expect gross margins

Speaker 1

to

Speaker 5

be in the range of 47% to 47.5% in the March. Operating margin is expected to be in the range of 7.7% to 9.7% given the seasonal revenue impact, but we expect this will rebound quickly throughout the year. Our effective tax rate is expected to be 16% and stock based comp and dispute related expenses is expected to be in the range of $7,500,000 to $8,500,000 Moving forward, to remain consistent with our semiconductor peers, we will no longer release preliminary results at the end of each quarter and will only pre announce results when they are expected to differ significantly from our outlook. We will however continue to provide qualitative view of our full year, but we'll not be providing specific guidance. To that end, while the PC and smartphone end markets are expected to grow in the low mid single digits this year, demand is expected to be significantly second half weighted with the first half expectations more muted than normal.

Speaker 5

We believe that our business in 2025 will reflect the broader industry dynamics with significant growth expected in the second half of the year. This should allow revenue to grow in the mid single digit range for 2025 as demand rebounds and our new products begin to scale. As Wallace mentioned, we believe our revenue for the fourth quarter this year will approach close to the $1,000,000,000 annual run rate. As we saw through 2024, we expect to continue to steadily improve our gross margins throughout this year as new projects and new products scale. Gross margins have historically been in the 48% to 50% range and we are confident that we will exit the year towards the higher end of that range.

Speaker 5

For operating expenses, we expect to continue to invest in advanced geometry products that will enable us to maintain and grow our share longer term and expand into new markets to diversify our business. We expect that with these investments in technology and R and D, engineers and resources, our operating expenses should grow in line with our roadmap this year. We We expect effective tax rate for 2025 to be approximately 16%. Full year stock based compensation and dispute related expenses should be in the range of $27,000,000 to $29,000,000 And for the full year, we expect $65,000,000 in CapEx of which $29,000,000 will be routine CapEx and $36,000,000 will be for their new office building construction. Finally, I'd like to spend a moment discussing our capital allocation strategy.

Speaker 5

Our business has always been one that generates significant amount of cash. Our capital allocation strategy for the excess cash our business generates has always consisted of three prongs: our dividends, share repurchases and reinvestment for growth both organically and through acquisitions. Our dividend policy has been the cornerstone of our capital return strategy since we initiated our first dividend in 2013. Our dividend has gradually increased over the past decade from $0.6 per ADS annually initially to now $2 per ADS annually. We anticipate this will continue to be a significant part of our capital return strategy and we'll look for opportunities to further increase the dividend longer term as our business continues to scale.

Speaker 5

We have complemented our dividend with share repurchase programs from time to time. And as you saw from our press release yesterday, the Board has authorized a new six month fifty million dollars share repurchase program. The near term challenges in the end markets do not reflect our views on our own long term opportunity and our Board feels that this is a good time to authorize a new share repurchase program. On the reinvestment front, we have occasionally acquired to expand our markets and this continues to be something that we look at consistently. The industry is highly focused on enterprise today and our exposure to the enterprise is through our internally developed Montaigne family of solutions.

Speaker 5

We're constantly evaluating additions to this segment through inorganic means to expand our breadth and scale in this rapidly growing market. It's too early to discuss potential targets. We do see ample opportunities to further diversify business and growth longer term. All three problems of our capital allocation strategy will remain important drivers for us to continue to increase our shareholder value and I look forward to regularly updating you on our progress. I would like to continue to conclude by saying that we are pleased by our backlog and wins for this year.

Speaker 5

Our investments continue to deliver new opportunities and additional share that will drive long term revenue growth. We anticipate the current market weakness to be short lived and anticipate a strong rebound in the second half of the year. This concludes our prepared remarks. We will now open the call to your questions. Operator?

Operator

Thank We will now take our first question from the line of Mehdi Hosseini from SIG. Please ask your question Mehdi.

Speaker 2

Thanks for taking my question. A couple of follow ups. Jason, how should we think about the OpEx, especially 25%? And then to what extent you're going to increase R and D? And what should we assume for CapEx in twenty twenty five %?

Speaker 2

And one follow-up for Wallace. Thanks for all the detail regarding your strategy, but all the NAND manufacturers that have reported over the past couple of months, they've all talked about a secular trend where demand is de accelerating. NAND market is no longer demand elastic. And given that and the enterprise, as you highlighted, will only be 10% of your revenue in 2627. What are some of these specific change in strategy or other markets that you're evaluating?

Speaker 2

I want to better understand your options optionality here, especially as a non market matures. Thank you.

Speaker 5

So to answer the first part of your question, Mehdi, from an OpEx standpoint, we talked about revenue growing for us this year in line with the end markets that we serve. So you're looking at kind of low mid single digits there. OpEx should grow roughly in line with that. The majority of our growth in OpEx is going to come on the R and D side. Our sales and marketing G and A should remain relatively flat.

Speaker 5

And so the increase in OpEx is really going to be driven by increased development costs, higher headcount on the engineering side, etcetera. From a total CapEx for the year, we're looking at about $65,000,000 of which about $29,000,000 is for routine CapEx, which is software testing equipment, etcetera. And then $36,000,000 is to finish up our new office here in Shinto.

Speaker 4

Okay. Manny, let me answer your question. First of all, I want to say this, we believe the NAND makers scale back regarding the NAND investment, especially from consumer product, it also give us tremendous new opportunity to growth because we basically in the past six months, we have more than projects that we can develop for the NAND makers. So this is a great opportunity for us to continue to gain market share for client ID and mobile controller. But beyond that, we also want to grow happily for enterprise and automotive business.

Speaker 4

So automotive because they take a longer term and so we won't see the immediately and strong rebound in this year. But we are confident we said we'll be see double from now to 2027. But for enterprise, we have a strategy. I think we're growing high in more R and D for enterprise storage now cover high performance, high density as well as the boost storage from both in U. S.

Speaker 4

And China market. In the same time, I think we evaluate because we are building a new team for service and mix signal development. And this team is developed for all the high performance connectivity with the story together. I cannot give a more detail. Certain development we consider will be internally, certain we consider to do acquisition.

Speaker 4

Some we could do the joint development with third party. So this is being discussion. And I think when the products mature, we're going to have a press release to our investors.

Speaker 6

Thank you.

Speaker 5

And also one more thing, Betty, in terms of Mondtitan and automotive growing each roughly 5% to 10% of our business by 2027, that's not a final target, right? We do expect that to continue to grow longer term. That is just the first way point for you guys in the relatively medium term.

Speaker 2

So just quickly, I think you said that the incremental revenue contribution from these new areas would be about 20% of revenue by 2027. Did I hear that correct?

Speaker 4

That's correct. That's correct.

Speaker 2

Okay. Thank you.

Operator

Thank you. We will now take our next question from the line of Craig Ellis from B. Riley Securities. Please ask your question.

Speaker 7

Yes. Thanks for taking the question. Good evening, team, and congratulations on the way you executed '24 and how you're starting '25. Wallace, I wanted to start going back to some of your comments on Mondtitan in the enterprise SSD area. Great to see customer expansion to six customers.

Speaker 7

What I'm hoping you can do is share with us some color on what you'd expect in the back half of this year on a couple of parameters. One, give some color around which of the customers, maybe not by name, but just characterize who are going to be the leaders and when would early shipments start and when would the latter of the six customers start to ship and maybe help us understand how you see the volume potential across those customers and how that plays out? Just enrich the view of what's coming with enterprise SSD, please.

Speaker 4

So we do have a tremendous interest opportunity and currently we secured six customers, two Tier one, one in U. S. And China. The other is really enabling to supporting Tier one, Tier two customer in both The U. S.

Speaker 4

And China. Now for Tier one customers, the firmware development, really they need to tailor their own development. So they take time, but initial production were about late this year and was gradually ramping. Normally it takes about six months for the ramp to reach the high level. So we expect they will start to ramp from late this year and you're going to see the high volume reach a more meaningful volume by from middle of twenty twenty six.

Speaker 4

The same for the China customers, I think they also have a dedicated customer and for the phone development. For others, for customers, some use our turnkey solution, some use a joint development format. So this we also have a very limited resources to support the customer. But importantly for us to expand for the other business is our turnkey solution needs to be full mature ready then we can use same solution and one or two dedicated NAND to expand to further business. We see many, many customers especially from U.

Speaker 4

S. Really demand high density QLC. For China side, majority is a TLC from 32 terabyte to 64 terabyte. But U. S.

Speaker 4

All have high density and from 64 terabyte to 128 terabyte. So this need a tremendous time. But because we really don't see near term competition and we really need to need deliver results. It just need the time deliver results. We believe the ramping could be much higher and faster than we planned right now, but just we want to be patient and to see the fruitful result next year.

Speaker 7

That's really helpful color and would certainly appreciate if it was much higher and much faster. I wanted to move on to another question that was really related to the back half of the year. So it's really helpful to get the color that in the calendar 4Q, the business could be operating at a $1,000,000,000 annual revenue run rate. The question is this, from first half levels as we work through soft PC and smartphone demand, etcetera, how would you force rank the growth drivers half on half within the business, either client SSD, UFS, Mondtitan, etcetera? Help us understand how we get from where we are now to that $1,000,000,000 run rate.

Speaker 4

Yes. The major growth driver from our business this year, it depends on PCIe five eight channel high end product line. Currently, we are just in the very small volume and we will start to ramp from second quarter. And I believe in Q3 will be meaningful volume because this is including four NAND maker and almost half dozen module maker. And this is a higher ASP.

Speaker 4

I can only tell you it's more than $10 per ASP. So they were driving were much stronger. And our mobile controller and also going very fast and because we are engaged with multiple NAND maker as well as module maker, primarily from low end EMC UFS 2.2 and moving to 3.1, our high end UFS 4.1 also will start to ramp in fourth quarter. So I think the major we have a multiple major program and just we really it is a timing project transition. I hopefully we are not suffer the really seasonality, but we do have many, many multiple major project pipeline in our hand.

Speaker 4

That's why we're confident have a $1,000,000,000 run rate by Q4 this year.

Speaker 7

That's very helpful. Thanks team.

Operator

Thank you. Our next question comes from the line of Quinn Boden from Needham and Company. Please ask your question.

Speaker 8

Hi. This is Mick Doyle on for Quinn. Thanks for taking our questions. How are you thinking about the gross margin target of 48% to 50% through the year? It sounds like this PCIe, a channel will really be a big driver there.

Speaker 8

So is that the main tailwind or maybe any other end market expansions getting to that higher end of the range like you mentioned? Thanks.

Speaker 4

So PCIe five, eight channel that's new to the market. So see for notebook this year, probably just about 5%. But majority also moved to desktop and gaming PC and the PC workstation. And we have confident we can own more than 50% of the high end market for PCIe Gen five. And with the momentum and I think next year PCIe Gen five high end will grow to 10% of the notebook.

Speaker 4

And so this is where our four channel for mainstream also will start to ramp up by late this year and early twenty twenty six. So I think the PCI EGM5 2026 will have roughly around 20% to 30% market share. And this is the thing we see the pipeline transition favors the commotion with because we have a much more design pipeline in our hand, just a transition. And sometimes it depends each of the NAND maker customers their NAND allocation. Sometimes they allocate more for enterprise, for data center.

Speaker 4

Sometimes they need it for the consumer for PC OEM. So, but we when we have multiple NAND customer and the module maker support both channel and the PC OEM, we feel very comfortable and to do that. In addition, I think our UFS even value line UFS controller and also new UFS 4.1 controller also margin it above our corporate average. That's why this will help our average gross margin to work to 48% to 50% by the year end.

Speaker 8

Thanks. Which of the NAND providers is the biggest competitor in the auto market? And what's your geographic exposure? It was definitely helpful to hear some of those customers, but just wondering if you're more levered to the share gainers versus the share takers? Thanks.

Speaker 4

We cannot comment our NAND partner because we work with every NAND maker for specific project development. I think every NAND make have a different strategy, they have different planning. They also have R and D resource allocation, some move to more to HBN, some move more to a different category. So we cannot comment from time to time. However, we always want to be sure when they do outsourcing to third party, Think of Motion is the best candidate there.

Operator

Thank you. Do you have a follow-up question, Quinn?

Speaker 6

No. Thank you.

Operator

Thank you. Now, we will take our next question from the line of Suji Desilva from Roth Capital. Please ask your question, Suji.

Speaker 6

Hi, Wallace. Hi, Jason. So just expounding on the $25,000,000,000 guidance, the $1,000,000,000 run rate exiting the year, what's a typical 2H versus 1H sort of split for a year and this year sounds like it's more backend loaded. Just trying to get a sense of maybe how much more back end loaded this year versus the typical year? And if maybe you could touch on inventory and if the channel inventories are in good shape or whether you're starting to see any build there, that'd be helpful.

Speaker 5

Yes. Typically for us, you're looking at roughly kind of 40 five-fifty five split between first half, second half. It's going to be much more second half loaded this year compared to kind of previous or normalized year. From an inventory basis, we don't see really a whole lot of excess inventory in the channel. We see our customers ordering roughly in line with end market demand.

Speaker 5

So we think channel inventory remains healthy and we don't see that as an issue as demand ramps up.

Speaker 6

Okay, great. Thanks, Jason. And then maybe a longer term strategic question. On the diversification strategy, the multi year plan here, maybe Wallace or Jason, could you give us a framework of what areas you've been in areas you've divested, you've acquired in the past? What areas would be kind of make sense from a strategic perspective?

Speaker 6

Any color there would be helpful.

Speaker 4

So I think we focus now in the mix signal design and also the relate to enterprise because we see the storage and connectivity, they are very closely coupled. So certain areas, I think we can share internal technology and as well as we try to acquiring some new some important technology we don't have in house. We can do joint development or we might acquire if the to do so. So this is an area we're seeing that's all around the enterprise area.

Speaker 6

Okay. Thanks, Wallace. Thanks, Jason.

Operator

Thank you. Our next question comes from the line of Matt Bryson from Wedbush. Please ask your question, Matt.

Speaker 1

Thank you. Just starting off with one more on 2025. I know it's back half loaded, but typically you tend to see seasonality lead to a pickup in Q2, Q3, Q4. Can we assume that Q1 should represent a bottom in terms of revenue for the year?

Speaker 5

Yes. We certainly believe so. Q2, we do expect to see sequential growth throughout the year and obviously that sequential growth is going to be much stronger in the back half of the year relative to Q1, Q2.

Speaker 1

And then I guess my second question is about future M and A strategy if there happens to be M and A. I guess the question would be, can you give us any idea of what you'd be looking for in terms of kind of necessary metrics around returns or opportunity to pull the trigger on M and A versus it seems like the Silke Motion has so many opportunities moving forward and is so undervalued. I guess, wouldn't it it seems that you have a pretty high bar to go out and acquire a company versus buying back your own stock given where the valuation is today, I guess. And I just I want some comfort that M and A in the past hasn't necessarily quite worked out as well as you'd hoped that we might not see another Shannon for instance?

Speaker 4

I think we our M and A is focused on core technology and focused on core business to grow. So this is not something which I want to buy the company to grow the revenue. We really want to build around the enterprise enterprise speed. So because we are starting to win design with our major customer, we also found out there's several key components around and we are able to also make a similar product, but we are lacking some key element. And so this is area we have evaluated whether we're able to win and grow faster and the market is big enough and we have a value to do so.

Speaker 4

So this is MA we have been more strategic to expand our core technology and key product for our customers. And we do have end customer committed and we will move to that direction.

Speaker 5

And also keep in mind, Matt, as I said, our capital allocation strategy is three pronged, right? Dividend will still continue to be the primary part of that. And then the dividend the share repurchase is something that we have done from time to time and the press release yesterday certainly being one of those times.

Speaker 1

Got it. So it sounds like though if you step forward with acquisitions, you'll have pretty you'll have certainty in some sense around there's this additional opportunity and this is the right way to go versus partnering or building internally. And so you'll see that the ROI will be relatively clear to us on the investment community when you assuming you move in that direction.

Speaker 5

Yes. And I would say that, look, we're always evaluating the best ways in which we can use a large amount of cash that we generate to generate shareholder value, right? Acquiring complementary technologies and businesses that offer additional growth or technologies that Wallace pointed out to our existing products has always been part of our strategy and we'll also be looking at it if there are right targets, but nothing imminent, nothing particular specific right now. That's obviously something that we continue to evaluate. But in the meantime, the dividend and time to time repurchases are going to be the primary ways of returning capital to shareholders.

Speaker 1

Awesome. And I just have one more. So it's great to hear that you guys signed four new customers versus the two you promised on Montan Titan exit in Q4. I guess you were also talking previously about Montana being 10% of revenue roughly in 2027. I guess what would you need to see to be able to lift that metric given it does sound like things are moving really well there?

Speaker 5

Yes. Look, I mean, we're still early in the process here, right? I mean, we're beginning to scale. We started shipping last quarter. We're obviously very optimistic about the wins that we have and the interest that we've generated until we start seeing the scale more meaningfully.

Speaker 5

We'll stick with the 10% target in 2027 for now. And as we have more data points to Wallace's point, we can scale that faster and larger and we have the data points to support that. We'll obviously want to bring that to your attention sooner rather than later when that's available.

Speaker 1

Awesome. Thanks again. Thank you.

Operator

Thank you. I am showing no further questions. I'll now turn the conference back to Mr. Wallace Ko for closing comments.

Speaker 4

Thank you, everyone, for joining us today and for your continued interest in Silke Motion. We will be attending several investor conferences over the next few months. The schedule of these events will be posted on the Investor Relationships section of our corporate website and look forward to speaking with you at this event. Thank you everyone for joining us today. Bye bye.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Silicon Motion Technology Q4 2024
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