Silicon Motion Technology Corporation (NASDAQ:SIMO) Q1 2024 Earnings Call Transcript

Silicon Motion Technology Corporation (NASDAQ:SIMO) Q1 2024 Earnings Call Transcript May 3, 2024

Silicon Motion Technology Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Goo day and thank you for standing by. Welcome to the Silicon Motion Technology Corporation’s first quarter 2024 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, at which time if you wish to ask a question, you need to press star-one-one on your telephone keypad. This conference call contains forward-looking statements within the meaning of Section 27(a) of the Securities Act of 1933 and Section 21(e) 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 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 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 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. Please be advised that today’s call is being recorded. It is now my pleasure to hand you over to the interim Chief Financial Officer, Mr. Jason Tsai. Please go ahead.

Jason Tsai: Thank you and good morning everyone, and welcome to Silicon Motion’s first quarter 2024 financial results conference call and webcast. Joining me today is Wallace Kou, our President and CEO. Wallace will first provide a review of our key business developments and then I will discuss our first quarter results and outlook. Following our prepared remarks, we will conclude with a Q&A session. 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 in Form 6-K after the close of the market yesterday.

The 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 similar to how we analyze our own operating results. The reconciliation of 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.

Wallace Kou: Thank you Jason. Hi everyone and thank you for joining us today. We had a good start to 2024. We delivered sequential revenue growth ahead of expectations, achieved gross margin in the high end of our guidance range, and exceeded our operation margin outlook. Our SSD controller business was better than expected, primarily driven by demand from two of our flash maker customers. We continue to improve our pricing in the quarter, which is driving the steady improvement in our gross margin and profitability. Our results this quarter reinforce our leadership position in controller technology and our product continues to be in high demand as some customers recognize how important our technology innovation and service are to their business.

[Indiscernible] macro environment remains uncertain, I’m pleased by our team’s execution this quarter. We are taking the right steps to efficiently navigate market dynamics, remain steadfast in delivering the products and solutions our customers need, and focus on continuing growth and improving profitability across our platform. Let me start now with an overview of the NAND market and dynamics we are seeing today. We have seen NAND flash prices continue to increase since late last year and more recently have seen flash makers gradually increase utilization in their fabs, but a more meaningful capacity increase from the build-out of next generation NAND flash isn’t expected until next year. Demand remains robust, especially with Chinese handset OEMs as well as with enterprise and data center storage markets.

while PC demand has been steadily increasing. All of this will continue to drive NAND flash prices higher throughout this year. We are seeing some near term pricing fluctuations in [indiscernible] market that may cause some uncertainty with our customers that are more focused on the retail aftermarket, but demand for our controllers for [indiscernible] remains robust, especially with our flash maker customers. Our leadership in controller technology continues to drive stronger demand across the board with our customers. It is becoming clearer each day that our experience and expertise with QLC NAND is a defining differentiator that has resulted in significant wins with flash makers and other customers across all our product categories. As 3D NAND layers continue to increase, managing QLC NAND becomes even more challenging and continues to require more sophisticated controller technology to ensure high data retention and reduce [indiscernible] issues.

Our advanced LDPC and 3D [indiscernible] technology are best in class to protect data during high speed data transfer between the controller and the NAND, and operate under wide temperature range. We can deliver controllers that enable a no-compromise high performance and low cost solid state storage solution incorporating the latest generation of QLC NAND, especially with the rapid adoption of AI, whether it is in edge devices like PC and smartphone or in data center and enterprise storage. QLC storage devices are becoming increasingly central to AI applications and growth going forward. OEMs no longer need to choose between high performance and lower cost. With QLC’s [indiscernible] QLC NAND, they are able to have high sequential read performance, high density, and lower cost solutions to meet their ever-increasing AI compute and storage requirements.

Now let me start with our SSD controllers. We are seeing strong traction with our new PCIe Gen 5 8-channel controller we [indiscernible] last year. This is the first 6 nanometer 8-channel PCIe Gen 5 controller available in the market and we are winning with virtually every top module maker in addition to our three flash maker customers. The result from our early testing has been very good. This is a premium product that will be ideally suited for high end notebook and desktop AI PC, as well as for gaming and workstation PC that offer unparalleled performance with ultra-low power consumption. In addition, we have a strong pipeline of design activity with several flash makers for PCIe Gen 4 SSD, building their next generation QLC and QLC NAND.

This delivers high performance, high density and low cost SSD ideal for the rapidly growing AI PC market. Beyond the PC market, we also had automotive-grade PCIe Gen 4 controller wins with two of our flash maker customers that will ramp with a leading electrical car platform next year. We also expect to [indiscernible] for PCIe Gen 5 controller for the automotive market next year for several of our flash maker customers to further our leadership in the market. We are confident that our broad-based SSD controller solution will continue to scale this business meaningfully this year and into 2025 as many of these new products and platforms begin to ramp up. Moving to our eMMC plus UFS controllers, we have successfully [indiscernible] our first UFS 4.0 controller in the first quarter and are on track to start qualification with this new controller in second half of this year.

We also continue to see stronger than ever demand for our UFS 3.1 and 2.2 controllers, especially to support a new generation of low-cost NAND. In addition to several top module makers serving the smartphone market, we started ramping up a new flash maker customer for UFS 3.1 and 2.2 this quarter, and this customer is expected to ramp with our UFS 4.0 controller next year. While the smartphone market has predominantly used TLC NAND, we are now seeing increasing interest of QLC NAND, especially in mainstream handsets where an OEM can offer higher density without significant increase in cost. We are collaborating with one of the leading handset OEMs directly for a QLC UFS solution that is expected to come to market later this year for their mainstream smartphone.

We expect the demand for QLC UFS products, especially in mainstream and entry-level 5G smartphones will continue to increase as this higher density, low cost UFS solution will be required to drive adoption of AI beyond the premium segments of the smartphone market over the next few years. In addition, we have seen significant traction with our eMMC and UFS controllers in the automotive market, as well as in commercial, industrial, and other connected and smart devices. This non-smartphone application accounts for more than 40% of the overall eMMC plus UFS market today, with the market for automotive applications growing faster than the smartphone market. We are working with several flash makers and building eMMC and UFS controllers for this customer specially for the automotive market and expect this to scale meaningfully in the next years to come.

Now let me turn to our MonTitan platform. As we have talked about before, the enterprise data center storage market is a tremendous opportunity that we believe we now have a truly differentiated solution with MonTitan to scale with flash makers and storage solutions enablers, as well as directly with data centers and enterprise customers. Based on market data from [indiscernible] and IDC, as well as our own analysis, we anticipate the market for enterprise [indiscernible] for both enterprise storage and data centers will grow by more than 50% to approximately 35 million units by 2027, but more importantly the market for PCIe Gen 5 [indiscernible] is expected to increase more than five times to more than 50 million units in 2027. QLC [indiscernible] are expected to account for nearly 30% of the total petabytes in 2027, up from less than 10% in 2023, representing a huge growth opportunity that we are uniquely positioned to lead.

Our first MonTitan PCIe Gen 5 controller will manage TLC or QLC NAND on the single platform, enabling the seamless transition and adoption of QLC NAND with enterprise and data center storage applications long term. I am excited to announce that we have won two Tier 1 customers in the first quarter for the MonTitan PCIe Gen 5 controller, one in the United States and one in China, and I expect to begin ramping later next year. We continue to sample with more than a dozen additional customers and expect to secure more wins throughout this year. We are on track to begin mass production later this year and ramp more meaningfully next year. Our early success here has been our ability to [indiscernible] with our high performance and power efficient controller that supports more NAND, including TLC and QLC for high capacity [indiscernible], than any other platform in the market today.

Building on our patented performance and power shaping technology, we enable our customers to dynamically adjust for peak performance with low power consumption, depending on the various workload requirements to achieve the best result. We are seeing inbound interest from the world-leading data center providers because of our ability to give a high density, high performance, low cost TLC and QLC SSD for the increasingly data-hungry AI compute and storage needed. Given our proven track record of managing more QLC NAND than any one other vendor in the market over the past decade, we can leverage our unparalleled experience and expertise with QLC through the MonTitan controller platform to build an SSD solution that can effectively displace a portion of the new line HDD with high capacity main line SSD.

This solution offers a lower [indiscernible] compared to legacy HDD due to their smaller form factor, higher storage densities, lower power consumption and higher reliability and resiliency. We see an incredible market opportunity here to differentiate with our MonTitan platform and deliver solutions that are critical to the further build-out and adoption of AI in the enterprise and data center, driving a multi-year growth cycle for the company. Overall, I am excited by our strong start to 2024 and the [indiscernible] opportunity on the horizon for the rest of the year. Beyond our strong results, our underlying business momentum continues to accelerate as we add more products and more wins to drive the sustainable long term growth of our business.

We continue to see very strong traction across the board with controllers we are bringing to the market, and have greater confidence that our strategy to diversify beyond PC and smartphones into new opportunities in the enterprise and automotive markets will soon scale meaningfully with our Tier 1 customers. We are very proud of this, and it gives us good confidence in our pipeline and our ability to serve our current and new customers to drive long term growth. Now let me turn the call over to Jason to go over our financial results and outlook.

Jason Tsai: Thank you Wallace, and good morning everyone. I will discuss additional details of our first quarter results and then provide our guidance. 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 with the earnings release issued yesterday. In the first quarter, sales increased–excuse me, sales decreased 6% sequentially to $189 million. SSD controller sales increased slightly by zero to 5% sequentially. eMMC and UFS controllers declined 10% to 15% sequentially. SSD solutions sales decreased 5% to 10% sequentially. Gross margin in the first quarter increased to 45%, reflecting both better mix and higher ASPs. Operating expenses in the first quarter were $62.5 million, $1 million higher than the prior quarter primarily due to higher R&D expenses to support our technology leadership.

Operating margins in the first quarter was 12%, down from 13.8% in the fourth quarter. Our effective tax rate in the first quarter was 16%, an increase from the 2.3% tax rate in the fourth quarter primarily due to a tax reversal benefit we had in the fourth quarter. Earnings per ADS were $0.64, down from $0.93 we reported in the fourth quarter. Total stock-based compensation, which we exclude from our non-GAAP results, was $3.2 million in the first quarter. We had 349.3 million of cash, cash equivalents and restricted cash and short term investments at the end of the first quarter, compared to $369 million at the end of the fourth quarter. Inventory increased sequentially in the first quarter to $253 million from $217 million in the fourth quarter to support revenue growth in the second quarter and the rest of the year.

Let me now turn to our outlook. As Wallace mentioned, the continuing success we are seeing with flash makers is providing more clarity around the improving fundamentals of our business. We are seeing strong demand in smartphones and, coupled with improving demand in PCs, our design wins for this year are well positioned to drive better growth than we had anticipated just three months ago. While the strength we are seeing with our current products, as well as the increasing interest in long time [ph] products, we are prudently increasing investment in R&D, primarily through higher headcount to support increasing programs we are engaging in with our customers. Now let me turn to our second quarter outlook. Revenue is expected to increase 5% to 10% sequentially to approximately $199 million to $208 million.

We expect eMMC and UFS sales to increase and SSD controller sales will be stable sequentially. Second quarter gross margin is expected to continue to improve and be in the range of 45% to 46%. Second quarter operating margin is expected to improve and to be in the range of 16.5% to 17.5%. Second quarter effective tax rate is expected to be approximately 19% and second quarter stock-based compensation and dispute-related expenses in the range of $2.5 million to $3 million. For the full year of 2024, we are increasing our outlook given the strong momentum we are seeing from our customers. Revenue is now expected to increase 25% to 30% sequentially to approximately $800 million to $830 million. Gross margin is expected to be in the range of 45% to 47%.

Operating margin is expected to be in the range of 14.7% to 16.7% as we further invest in our technology leadership, 2025 tax rate to be approximately 19%, and 2024 stock-based compensation and dispute-related expenses in the range of $30 million to $32 million. With the strong start to the year and the building momentum in our backlog, we expect to see sequential revenue growth and profitability improvements throughout the balance of the year. For operating expenses, we tape out our new 6 nanometer UFS 4.0 controller in the first quarter and expect to tape out our 6 nanometer PCIe Gen 5 four channel SSD controller in the third quarter. We expect our operating expenses to decline sequentially but to increase again in the third quarter to support the technology leadership investments we continue to make.

We have accelerated some R&D hiring, especially in our MonTitan enterprise controller group to support the opportunities we are seeing with our sampling customers, as well as the increasing amount of inbound interest. This concludes our prepared remarks. We’ll now open the call to your questions.

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Q&A Session

Operator: Thank you. We will now begin the question and answer session. [Operator instructions] Our first question comes from the line of Mehdi Hosseini from SIG. Please ask your question, Mehdi.

Mehdi Hosseini: Yes, thank you for taking my question. Two follow-ups. First for Wallace, can you give us an update, [indiscernible] key milestones determining your penetration into the enterprise segment with the PCIe Gen 5, I think in the past you have talked about evaluation in the second half of ’24 [indiscernible] by ’25. Where are we with those milestones? Then for Jason, what are your thoughts on longer term growth and operating margin targets?

Wallace Kou: Thank you Mehdi. We see the very strong momentum for demand for MonTitan. Q1, we had two Tier 1 customer design wins, one from the United States, the other from China. We also have some ongoing module maker designs, that’s why we’ll start to see some revenue by end of 2024, become meaningful in 2025, but the two Tier 1 customers will ramp by late 2024. We had announced our goal to win minimum two Tier 1 U.S. and two Tier 1 in China is on track. We might have more than what we really can support, but we believe 2025 late–2026 will be much more meaningful sale revenue growth for our MonTitan business by enterprise.

Jason Tsai: Mehdi, in terms of gross margin and profitability, certainly our goal is to continue to gradually improve our gross margins. We believe we can return back to our historical gross margin level by early next year, and then in terms of operating profitability, again as we scale our revenue, as we see our gross margins further improve, we believe we can continue to improve long term operating profitability and get back to our historical range of 25%-plus as well. We don’t have specific guidance around timing at this point, but certainly as we continue to execute and deliver, we expect to get closer and closer to that target each quarter.

Mehdi Hosseini: Thank you. Just a quick follow-up, given the mix in your revenue, could you hit the 25% operating margin at a lower revenue run rate?

Jason Tsai: Look, I think if you take a look at our products today, our revenue–our SSD controller business, those SSD controllers tend to be above the corporate average gross margins, while our eMMC and UFS controllers are below corporate average gross margins. There is certainly a number of growth vectors in both of these businesses, but typically what we’ve seen historically is that SSD controllers account for anywhere from half to two-thirds of our business in any given period, and eMMC and UFS account for about a quarter to a third in any given period, so we don’t see that percentage changing much, and certainly if we see automotive or MonTitan becoming a bigger portion of revenue, then that can skew our gross margins to be better than what historical average has been, but it’s too early to say that those long term targets are yet, given that we have yet to scale those products meaningfully.

Mehdi Hosseini: Okay, thank you.

Operator: Thank you Mehdi. Our next question comes from the line of Quinn Bolton from Needham & Company. Please go ahead.

Quinn Bolton: I didn’t catch that – was that Quinn from Needham?

Operator: Yes it is. Please go ahead.

Quinn Bolton: Oh, perfect. Okay, sorry – you cut out there when you announced the name. Hey Wallace, hey Jason. Congratulations on the nice results, and particularly on the MonTitan wins. Wallace, I’m wondering if you might try to size the opportunity for us for MonTitan for Silicon Motion in 2025. Is this something that you see contributing tens of millions of dollars as the two Tier 1s ramp next year? Can you try to help level-set us on what’s a reasonable expectation for MonTitan revenue next year?

Wallace Kou: Yes, we mean the two Tier 1 customers would ramp in late 2025, it will be probably more meaningful in 2026. But we believe MonTitan–the enterprise controller revenue will be [indiscernible] for 2026 and ’27, meaningful earnings at least 5% to 10% of total revenue.

Quinn Bolton: Perfect, and then I think you commented in the script but also in the press release about increasing backlog and visibility. I guess I’m kind of wondering–you know, I guess I would think the NAND controllers base would typically be a pretty short lead time business because it just–you know, the market can change pretty quickly. How far does your backlog extend? Do you have pretty good visibility now into the second half or is your backlog shorter term in nature and really only covers, say, 90 or so days?

Jason Tsai: Yes, so our backlog, we obviously have some long term customers, especially with our NAND makers, where we have much better clarity on what their demand profile looks like over a longer term. These are rolling forecasts, so we do get updated on that pretty regularly. So it does vary, depending on the end markets they’re serving – they’re serving PC OEM customers, there’s certainly a little bit better visibility there, but I would also point out that from an inventory management standpoint, it does take us about three months to get products in and out of our manufacturing partners’ door, so we do need that advance notice in order to build inventory to support those upcoming products, those upcoming sales, those upcoming ramps, especially going into the back half of the year where demand is typically stronger. We need to make sure that we’ve got adequate inventory to support that revenue growth.

Wallace Kou: One other comment – we were able to increase our annual sale guidance, which means we have better visibility for the second half of this year.

Quinn Bolton: Got it, and then lastly, Wallace, you mentioned the price, the NAND price fluctuations might cause some [indiscernible] in the retail SSD market. Just wondering if you could sort of expand on those comments – is it just the pricing is coming up pretty quickly and that could create lower demand temporarily in the retail channel, or were you trying to imply some other behavior? Thank you.

Wallace Kou: Well, I think the current solution like this, the NAND makers have pretty high confidence because demand from data centers and enterprise is very, very strong, so that’s why they definitely continue to see the supply shortage is going to increase wafer price, and we see it going to increase gradually throughout the whole year. However, for certain channel markets for demand for SSD, the demand is not that strong as the wafer price increase, that’s why some fluctuation, but overall we see it stabilize and we see the demand for our controller is still strong and stable, so I think primarily because a lot of our module customers have acquired [indiscernible] inventory last year, so they can balance their cost.

Quinn Bolton: Got it, thank you.

Operator: Thank you Quinn. Our next question comes from the line of Craig Ellis from B. Riley Securities. Please ask your question, Craig.

Craig Ellis: Yes, thanks for taking the questions, and congratulations on the very strong start to 2024. Wallace, I wanted to start with a higher level question for you that helps put into context what you’re seeing with NAND OEM controller outsourcing. If we take a look at where we are today and compare it to January and early February, can you talk about the incremental design wins that you’ve seen with NAND OEMs that would ship in 2024? It seems from your prepared commentary that you’re also being actively engage with some 2025 projects, so the question is, what have you seen in the last three months that impacts this year’s revenues, and what are you seeing that kind of starts to give you at least project visibility for 2025?

Wallace Kou: I think there’s three areas that really have major changes, but we really start to see the NAND makers, they are all focusing on profitability. Every NAND maker has their own strategy and how to really embed [indiscernible] for the agreement. We’re definitely working, even seeing from last year, for several 2025 OEM projects covered from [indiscernible] or UFS for automotive EMSC, automotive [indiscernible], multiple projects with individual NAND makers, so they’re quite busy, and our MonTitan also working with quite–we had two major design wins for Tier 1 customers, we have several in the process [indiscernible] and engagement, so we are quite busy this year and we are pretty confident in our design pipeline for 2025.

Craig Ellis: On that MonTitan point, to follow up Mehdi and Quinn’s questions, it seemed like you were saying if we look in 2027 at market projections with PLC, where you have just an amazing history with product development and performance, that that part of the market would be about a third of the market, or maybe 25 million units. The question is given your history with the technology, given the solutions you’ve developed, what might be a reasonable share position that investors could look at, even if it’s a fairly wide range, for 2027, Wallace?

Wallace Kou: Yes, we cannot comment regarding our amount this year for 2027, but I can give you certain guidance regarding why MonTitan lately gets tremendous traction and interest on the Tier 1 customer. The main reason is because AI cloud and AI server demand is very, very strong, and we see many Tier 1 customers from the U.S. and China, they really try to export the QLC base SSD for enterprise storage solutions because QLC base would be cheaper and can do much bigger capacity. We see so many demands for 32 terabytes or higher density for future SSD, so that will be suitable for AI data process, especially sequential read and low latency. Because we have a very, very strong position and know-how in QLC so that we get tremendous interest from customers to engage with us for qualification and joint development, that’s why we see that trigger the stronger demand [indiscernible] process, and we receive especially for 2 terabyte monodie [ph] QLC, they’ve become the main, main product to enable the future near line [ph] SSD to replace a portion of HDD, so we are very happy we can be part of it.

Craig Ellis: That’s really helpful color. Then Jason, if I could follow up with one for you before hopping back in the queue, appreciate the point on revenues rising sequentially through the year. Any color as we look at the year’s progression on how mix between SSD controllers and eMMC, UFS and some of the other segments might play out, even if high level? Thank you.

Jason Tsai: Yes, I mean, we anticipate growth this year from both of those segments. Obviously eMMC, I think we obviously had a much–it was a much more difficult year for eMMC and UFS last year, given where inventory levels were in the smartphone market, so I think you’ll see certainly stronger year-on-year growth, given that it was a bit more depressed last year. SSDs were a bit more stable, and so while it will also grow, it’s not going to grow at the same growth rates as we saw–as we expect to see with eMMC and UFS this year. But overall, again the percentage of our business for SSDs and eMMC UFS kind of typically stay in those bands that we talked about earlier, and we don’t see that changing any time in the near future.

Wallace Kou: Let me add some comments. Definitely both [indiscernible] and mobile eMMC UFS will gain market share this year; however, our mobile controller eMMC UFS last year, the base is smaller, so we have much bigger momentum to gain market share in mobile controllers.

Craig Ellis: Really helpful color, guys. Thank you.

Operator: Thank you Craig. Our next question will come from the line of Suji Desilva from Roth. Please ask your question, Suji.

Suji Desilva: Yes, good morning Wallace and Jason. Congrats on the progress here and the strong start to the year. Sticking on MonTitan and the AI opportunity, if it supporting AI, do you have a sense of whether it’s supporting inference or whether it’s supporting training or traditional cloud instances? Any specific color on those programs and where you’re seeing traction?

Wallace Kou: You ask a very good question, but naturally we really don’t know. But I think that SSD today is not helping any for compute for AI but are supporting it with storage. For storage, I think fundamentally it’s with data. I believe when you really see the upcoming, the Flash Memory Summit in August in Santa Clara, you’re going to see many NAND makers and enterprise SSD suppliers are going to tell you what exactly they see regarding supporting AI and [indiscernible], so that [indiscernible] relates to inference, also relates to training process. Also, it’s really regarding the swapping between the LN model and doing the season application running [ph]. I think the storage has specific performance requirements and there are certain features we can add, especially for edge devices because they have limited DRAM density. SSD or mobile UFS, they have many, many technologies we can help in the AI application.

Suji Desilva: Okay, thanks Wallace. Then my other question is on the smartphone market. I heard you guys talk about an OEM that is trying to in-source the controller effort versus using a merchant controller. I know some of the flagships have been doing that for years, but curious if that’s a trend you’re seeing or if that’s an exception, and what that impact might be for SIMO in terms of opportunity?

Wallace Kou: It’s very, very good we see the momentum from some smartphone makers, they are considering [indiscernible] the QLC into the mobile solution. I think you can see Samsung, which is one of the leading smartphone makers in the last two years, is bringing the solution to the market since Q4 production last year, and we’re very happy to work with one major leading smartphone maker for QLC projects, and we believe this will be in production by later this year. This is going to bring us real momentum. I think a lot of the players in the smartphone segment, they are looking for how to bring the [indiscernible] model into the AI smartphone, because everybody is looking for very high performance and how to maintain low power and to support different [indiscernible] model, but in the other area, many, many smartphone makers are also bringing the mainstream smartphone into the AI arena, so this is why we see the leading smartphone maker try to increase the density but without increasing cost, and that’s why QLC becomes the best candidate, and so many smartphone makers, we believe, are going to try to exploit the potential opportunity to bring the USF with the QLC solution and to try the market, and I think eventually they will become the key to enable smartphones, AI smartphones from the flagship to mainstream and beyond.

Suji Desilva: All right, great. Very helpful color, Wallace. It sounds like you guys are well positioned. Thanks.

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

Matt Bryson: Thanks for taking my question. I have a few. On the enterprise SSD side, we’ve seen substantial demand for 32 and 64 terabyte SSDs recently. I guess it sounds like what you’re doing with your technology is enabling QLC, so allowing other vendors beyond, say, Solidigm with their QLC solution to address this market with those capacities and higher capacities. Historically, there hasn’t been a ton of success for third party controller vendors in the enterprise market. I mean, do you see your advantage around QLC as enabling that opportunity for you, so you can get some success in this market? Is that correct, and do you see more momentum over the last three, four months, when it appears like these high capacity SSDs have all of a sudden started to see incremental demand?

Wallace Kou: [Indiscernible] will be the first SIMO QLC for enterprise SSD. Definitely we are the leader for [indiscernible] with QLC, but–because lately we got tremendous demand but also because all NAND makers are going to have QLC, a variable in the market, and I believe all NAND makers are going to have a 2 terabyte QLC [indiscernible] by late 2025, that’s why that triggered the strong interest from hyperscalers, data centers, and [indiscernible] who try to potentially adopt QLC for the upcoming strong demand for AI server, AI cost services. Because QLC financial is built for near line SSD, it will be much more attractive for near line HDD from data asset [indiscernible], so with Silicon Motion, because our controllers can work with all NAND maker QLC, so we are in a very unique position for the customer directly work with Silicon Motion and with different NAND suppliers.

I cannot say we are better in NAND maker, but we think we are in a very unique position to enable the trend to adopt QLC into enterprise [indiscernible].

Matt Bryson: Got it, and Wallace, it sounds like you’re working with all of the different customers out there in the sense you’ve talked about hyperscalers, OEMs, module makers. I guess my question is, can you characterize what those first two customers that selected your solution, which bucket they’d fit into in the OEM–

Wallace Kou: We cannot comment on customers until they really announce the name, but it was one Tier 1 U.S., one Tier 1 China. We believe by end of the year, we’ll have two more to add on the list.

Matt Bryson: Awesome, and then I guess my last question, I know this has kind of been asked, but just in terms of the TAM either on both–with that enterprise product but also in the automotive market, can you characterize what you see those two TAMs as being versus your more traditional markets in UFS, eMMC and SSD controllers?

Jason Tsai: In terms of the enterprise TAM, obviously from a unit volume perspective, it’s not going to be anywhere near as big as the PC market or the smartphone market, right? But however, ASPs for our MonTitan product are certainly several multiples higher than our client SSD controllers, margins certainly better than corporate average, so it is a big opportunity even though the unit volumes are much smaller compared to PCs and smartphones. On the automotive side, again total number of cars shipped today is a lot smaller than either of those other markets, but what we’re seeing now is multiple storage requirements and multiple storage devices required per car to run things like not just the infotainment system, but the ADAS, the sensors, the cameras.

All of those things require individual, independent storage solutions that significantly balloon the size of the number of units. I don’t have that number handy – we can get back to you on that one, Matt, but it’s a–you know, these are certainly much higher, more sticky engagements that we would be going into, as opposed to PC and smartphone.

Wallace Kou: Let me add a comment regarding automotive. As you know, SMI has two different approaches to expand our automotive visibility. One is direct controller, the other our [indiscernible] product line. For controller, we have engaged three NAND makers and for PCIe, also as well as UFS and eMMC development. I think some are in production today. We have two makers going into production with PCIe Gen 4, and we also have new eMMC with a NAND maker. [Indiscernible] we are already–is based on our own solution and engaging with automotive customers, and we already won, which we have said, with Toyota and Honda, also including China BYD, so we have multiple design wins in the pipeline. We believe we will grow our automotive business very, very strongly from 2025.

Matt Bryson: Thanks for all the color, and congrats on a good quarter.

Operator: Thank you Matt. Just a reminder, to ask a question, please press star-one-one on your telephone keypad.