Silicon Motion Technology Corporation (NASDAQ:SIMO) Q2 2024 Earnings Call Transcript

Silicon Motion Technology Corporation (NASDAQ:SIMO) Q2 2024 Earnings Call Transcript August 2, 2024

Operator: Good day, and thank you for standing by. Welcome to the Silicon Motion Technology Corporations’ Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] 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 all 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. Please be advised that today’s conference is being recorded. It is now my pleasure to hand you over to Mr. Tom Sepenzis, Senior Director of IR & Strategy of the company. Please go ahead, sir.

Tom Sepenzis: Good morning, everyone, and welcome to Silicon Motion’s second quarter 2024 financial results conference call and webcast. Joining me today is Wallace Kou, our President and CEO; and Jason Tsai, our Interim 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 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 with investing in our securities, please refer to our filings with the US 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.

Wallace Kou: Thank you, Tom. Hi, everyone, and thank you for joining us today. We had a strong start to 2024, building on the momentum that began in second half of calendar 2023. We delivered sequential revenue growth ahead of expectation and achieved gross margin at the high end of our guidance range, as better mix and pricing continued to steadily improve our profitability. The revenue upside was driven by our continued strength in our NAND flash customer, as demand from PC and smartphone OEM increased in anticipation of seasonally stronger second-half demand. Additionally, we benefited from increased market share at the top NAND flash maker, as they continued to source controller externally rather than develop them in-house.

Over the past few quarters, our team has been working hard toward deepening our partnership with our NAND flash maker customers. We are winning more and more sockets from mainstream to high-end SD, and eMMC and UFS controller for PC, smartphones, automotive and other markets. Our success with our flash maker partner has helped improve our visibility and is crucial to our strong growth this year despite market uncertainty, especially in the retail aftermarket. This quarter, our revenue from NAND flash maker grew nearly 15% sequentially, accounting for more than 60% of our total revenue. Both SSD and eMMC+UFS have controllers strengths from new program more than offset emerging softness in the retail market as our module maker customers. Demand for our product is rising as NAND flash makers increasingly outsource controller solutions, and we are in the best position to benefit from this growing trend.

We have unmatched technical and financial resources to build next generation controllers, and we intend to enhance our position through the introduction of multiple new products in the coming year, including our enterprise class MonTitan family, new PCIe 5.0 and UFS 4.0 controllers. I am pleased with our team’s execution in the first half of the year and the momentum going into second half of this year. We have significant opportunities ahead of us, as we deliver product and solution our customers’ needs and remain focused on driving additional revenue growth and improving profitability across our platform of leading NAND controller solutions. I would now like to provide you with an overview of the NAND market dynamics. NAND pricing is increasing and expected to move higher throughout the remainder of the year and early 2025, primarily driven by demand from data center and enterprise storage applications.

The pricing continued to increase from the lows experienced last year. NAND makers are beginning to bring some capacity back online and invest in new-generation NAND productions. But we do not expect NAND supply and demand to come back into balance until middle 2025. Higher NAND pricing and the weaker global economy environment caused by higher inflation has softened retail demand for our module-maker customers. With continued inflationary pressure and expected NAND price increase for the remainder of the year, we expect muted back-to-school and holiday sales of retail aftermarket SSD. Despite the headwind, the overall PC demand appears stable and we also continue to see incremental improvement in the smartphone market, with the unit sales expected to grow modestly year-over-year.

OEM entry in QLC NAND continued to increase in both the data center and the edge in PC, smartphone and other devices. This is being driven by device OEMs anticipating the need to support AI and other applications that require higher performance and higher-density solid-state storage solutions. It becomes clear 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 major product categories. As 3D NAND layer continues to increase, managing QLC NAND becomes even more challenging, as they require more sophisticated controller technology such as our proprietary advanced LDPC and 3D ray technology and advanced firmware algorithm to ensure data retention and reduce read/write disturbing issue.

We expect QLC NAND will increasingly be deployed across all major market categories that we serve, given its ability to deliver high density at low cost, and we believe we are best positioned to benefit from the trend in the coming years. Now, I’d like to discuss each of our major product segments beginning with our SSD controllers. We experienced strong demand in June quarter from our flash maker customers, driven by PC OEMs. PC OEM SSD controller sales represent approximately 80% of our client SSD controller sales. It is the high end of our historical range, as the high NAND prices are putting pressure on channel and multi-makers. We continue to generate strong interest in our new PCIe Gen 5 eight-channel controller that we taped out last year.

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. The controller offers best-in-class power to performance, offers 20% to 30% lower power consumption than competitive controllers, including those internally developed by NAND makers. This is the first 6-nanometer eight-channel PCIe 5.0 controller available in the market, which has led to significant wins, including our fourth NAND maker which I’m pleased to announce we won this quarter in addition to nearly every major module makers. We remain on track to ramp initial units of the new PCIe 5.0 controller with our customers later this year.

Additionally, we have a strong pipeline of design activity with several flash makers of PCIe 4 SSD using next-generation TLC and QLC NAND. This new SSD delivers high performance and high density at a lower cost, ideal for rapidly growing AI PC market that is searching for lower-cost solutions. While the PC market remains a top priority and we’ll continue to drive significant growth in revenue, we are seeing emerging opportunity with our automotive, commercial, industrial grade SSD controllers. This includes our automotive grade PCIe 4 controller as well as multiple controllers targeting industrial and commercial applications. We intend to expand our leadership through the introduction of our upcoming dual port PCIe 5.0 controller for the automotive market next year.

And we expect to continue adding meaningful growth opportunity in 2025 and beyond with a more diversified customer and end-market base. Now, I would like to move to our eMMC and UFS business. We continued to benefit from the improving smartphone market during the June quarter, as well as with strength with our two eMMC and UFS NAND customers, we successfully taped out our first UFS 4.0 controller early this year and the response has been positive. We are beginning qualification and we are targeting production ramp in the second half of calendar 2025. UFS 3.1 and UFS 2.2 continue to account for most of the smartphone market volume today and are expected to stay relevant in the coming years. While flash makers allocate more resources to next generation UFS products in support of new generation NAND, we are seeing greater opportunity in high volume application as flash makers look to outsource mainstream controller so that they can more effectively compete in leading edge.

As with our leading PCIe product, we are generating strong inbound activity in our QLC controller technology in UFS and EMC. With the growing interest in Edge AI, smartphone OEMs are looking for cost effective ways to increase own device memory density. Our leadership in QRC NAND controller technology plays Silicon Motion as a forefront of QLC adoption and smartphone manufacturers are looking to deploy QLC with UFS for mid to high end devices, adding QLC with EMC in low-end handsets for AI and other storage intensification over the next few years. Our first handset OEM partner that will deploy QLC on UFS expected to ramp later this year. What is more, I’m pleased to report to you today that this customer expects to expand production of this new QLC UFS solution into additional smartphone models next year.

Looking beyond the smartphone market, OEMs are interested in adoption of UFS eMMC for smart connected devices and other consumer applications. Our growing list of win and customers in this additional area will further diversify our end-market growth opportunity. Given the increasing opportunity to capture share with our flash maker partners and through the introduction of new eMMC and UFS QLC solution, we believe we are well positioned for continued growth. Now, let me turn to our MonTitan platform. As we have mentioned before, enterprise and data center story offers Silicon Motion a tremendous new revenue opportunity combined with a meaningfully high ASP and margin profile over the medium to long term. We continue to see more inbound interest in our MonTitan solution.

Given our unique differentiation, we believe we are well positioned to scale with a flash maker and storage solution enabler, as well as directly with data center and enterprise customer in the coming years. Our first MonTitan PCIe 5 controller managed TLC and QLC NAND on a single platform, enabling the seamless transition and adoption of QLC NAND with enterprise and datacenter storage applications. As we announced last quarter, we have won two Tier 1 customers for our new MonTitan PCIe 5 controller, one in the US and one in China, and expect to secure two additional Tier 1 wins later this year. We are on track to begin early mass production later this year and ramp more meaningfully next year. Our early success has been driven through differentiation with our controller offering high performance and greater power efficiency, with support for more NAND than any other platform in the market today.

MonTitan delivered two key technologies, Zone Name Space and flexible data placement with QLC, which combined with — to improve latency and throughput speed while lowering overall cost through reduced DRAM demand. Additionally, our proprietary power and performance shipping technology enables our customer to dynamically adjust their storage to meet rapidly changing data-centered performance requirement. This includes in the upcoming 2-terabyte mono-die QLC NAND, the ability to deliver 128-terabyte SSD. These high-capacity SSDs have the higher sequential read performance and lower cost to meet ever-increasing AI compute and store requirement. It is becoming increasingly clear for our customers that our MonTitan solutions will be essential for the next generation data center and storage build-out plan, especially for delivering faster and more accurate AI capability to the market.

But we have mentioned on previous calls, given our record of managing our QLC NAND than anyone over the past decade. We believe that this new product platform will drive multiple-year growth cycles for silicon motion as we enter a greenfield market opportunity for our company with leading technology. Given the early MonTitan performance and widespread interest in our products, we expect the platform to grow to 5% to 10% of our total revenue in the 2026 to 2027 time frames. Overall, I’m excited by our strong start to 2024 and our outlook for the remainder of the year. I’m especially pleased that we continue to target year-over-year revenue growth of 25% to 30% despite the challenging — in the near term from increased NAND prices in the — some of our customers.

Looking ahead, we are confident that our technology leadership and diversified portfolio of our controller across a wide range of the market and application will accelerate and drive the substantial long-term growth of our business. We continue to push beyond PC and smartphone into new opportunity, including the enterprise, automotive, industrial, commercial and consumer markets. I’m especially excited about the emerging MonTitan opportunity and what I expect will be a significantly positive impact on our revenue growth and operating margins over the next few years, as we capture share in the enterprise market. I look forward to detailing more about our progress in the area in the future update. 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, joining us today. I will discuss additional details of our second 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. A reconciliation of our GAAP to non-GAAP data is included in the earnings release issued yesterday, as well as the presentation that was uploaded to our website a little — a while ago. In the second quarter, sales increased 11% sequentially to $211 million. SSD sales increased modestly sequentially, representing our fifth consecutive quarter of growth. Our strong share gains with flash makers continues to deliver outstanding results, despite some market uncertainties from continued inflationary pressure and higher NAND flash prices contributing to weaker aftermarket SSD demand.

eMMC and UFS controllers increased 25% to 30% sequentially, as demand inflected in the second quarter from increased smartphone builds in anticipation of demand growth in the second half of this year. SSD solution sales increased 20% to 25% sequentially. Gross margin in the second quarter increased to 46%, primarily from better mix to newer products. Operating expenses in the second quarter were $62.1 million, a slight decrease from the first quarter. Operating expenses, specifically R&D project expense, was higher than expected in the second quarter, as we made the decision to retape out our upcoming high-performance eight-channel PCIe 5 client SSD controller to deliver superior yields when we enter mass production later this year. This will result in higher overall gross margins for this product in the long term.

Operating margins increased to 16.5% in the quarter, up from 12% in the first quarter. Our effective tax rate in the second quarter was 16.5%, a modest increase from the 16.1% tax rate in the first quarter. Earnings per ADS were $0.96, an increase from the $0.64 in the first quarter. Total stock-based compensation, which we include — exclude from our non-GAAP results, was $385,000 in the second quarter. We had $343.6 million of cash, cash equivalents, restricted cash and short-term investments at the end of the second quarter compared to $349.3 million at the end of the first quarter. Inventory decreased sequentially in the second quarter to $241 million from $253 million in the first quarter. Before I turn to outlook, I’d like to talk a bit more about our higher R&D investments that we are making this year.

As the industry adopts new high performance standards that doubles the performance from previous standards, power consumption needs to remain at the same or lower to assure the same battery life for smartphones and notebooks that consumers demand. The only way to balance both significantly higher performance and lower power is to move to lower process geometry production, and that means building these next-generation PCIe and UFS controllers on 6 nanometer. In addition, we need to develop new SoC architecture, new firmware architecture, and customized mixed signal capabilities that collaborate closely with our NAND partners to achieve these goals. While all of this does result in higher R&D expenses in the near term, we do see significant benefits, including higher ASPs, more outsourcing, and a bigger moat around our product leadership than ever before.

We have unmatched technical and financial resources, and intend to make this essential investment in order for us to continue to grow faster and increase our market share and to drive higher growth and better profitability over the long term. Let me now turn to our outlook. As Wallace talked about earlier this year — earlier, due to the ongoing higher NAND prices and weaker retail consumer electronics demand, our customers, especially module makers, are seeing demand soften in the retail aftermarket. As a result, they are anticipating a much more muted seasonal pattern for retail demand for the second half of this year Despite this, our ongoing success with flash makers, customers and the increased outsourcing we have won over the past year gives us confidence that we’ll be able to achieve our full-year revenue outlook.

For the third quarter, we expect revenue to be flat, plus or minus 2.5% sequentially to approximately $205 million to $216 million, due to the expected weaker than seasonal aftermarket SSD demand. We expect eMMC and SSD controller sales to be stable sequentially. Third-quarter gross margin is expected to continue to improve and be in the range of 46% to 47%. Our improving mix of sales towards newer products should lead to sustained gross margin improvements. Third-quarter operating margin will experience a one-quarter decline driven by the expected tape-out of our new six-nm four-channel mainstream client PCIe 5.0 SSD controller. We expect this new controller will enter mass production in early 2026, as PCIe 5.0 SSDs expand into the mainstream market.

Operating margin is expected to be in the range of 14.3% to 15.3% in the September quarter and then return to more normalized levels. Third-quarter effective tax rate should be 18% and third quarter stock-based compensation and dispute-related expenses to be in the range of $6.4 million to $7.4 million. For the full year, we are maintaining our revenue outlook given the continuing strong demand from our NAND maker customers, but improving our profitability. Revenue is expected to increase 25% to 30% this year to approximately $800 million to $830 million. We’re tightening our gross margin range. Given the strength of our margin improvement this year already, full-year gross margins is expected to be in the 46% to 47% range. Operating margin is expected to improve modestly, given the better gross margin performance in the first half this year and is expected to be in the range of 14.8% to 16.8% despite accelerated investments in our technology leadership and the new product introductions that should lead to revenue growth in 2025 and beyond.

Our 2024 effective tax rate is expected to come down slightly and be now approximately 18%. 2024 stock-based compensation, dispute-related expenses, and loss from settlement of litigation should be in the range of $29 million to $31 million. With the dedication of our team over the past year, we have been able to develop and deliver cutting-edge controller solutions that will power AI applications and PCs, smartphones, and soon, data centers and enterprises. Our wide range of controller solutions are gaining significant traction in other markets such as automotive, industrial and commercial applications, further diversifying our long-term growth drivers. Our efforts to collaborate more with flash makers have allowed us to benefit from the recent trend of more outsourcing, driving more predictable growth and better visibility despite near-term market volatility.

While we will continue to invest in growing our R&D capabilities and building more leading-edge controllers, we’re seeing these investments begin to pay dividends and we expect these products to scale meaningfully next year, driving additional revenue growth and profitability, and further extending our technology and market share leadership in the flash controller market. This concludes our prepared remarks. We’ll now open the call for your questions.

Operator: [Operator Instructions] Our first question comes from the line of Craig Ellis from B. Riley Securities. Please ask your question.

Q&A Session

Craig Ellis: Yeah, thanks for taking the question. Wallace, I wanted to start off with one that was high-level and followed-up on some of your comments regarding execution with NAND OEM share gain. At the beginning of the year, we were intending to see 500 basis points of share gain this year. Can you just talk about where you think you stand at mid-year against that objective and any positive or negative variances versus what you were hoping for six months ago?

Wallace Kou: So far, I think we’re on track for all the projects we’re aiming and plan to do. We maintain very, very close relationship with all the NAND makers and we capture all the variable socket open to us. And so, our share last year was about — for SSD about 25% to 30% and we believe we’ll continue to gain share with this as a forecast and design win. And we believe the mobile portion we’re also gaining around 20% to 25% range by year-end. So, we’re cautiously monitoring all the opportunity to capture our source to third parties, especially second motion.

Craig Ellis: That’s helpful. And then the follow-up question, excuse me, relates to the PCIe Gen 5 transition. Can you just help us put that in context by providing a summary of where PCIe Gen 4 mix would be this year? And as we look to next year when PCIe Gen 5 would ship in higher volume, how much of the business on the SSD controller side shifts over to PCIe Gen 5 next year? Thank you.

Wallace Kou: Yeah, PCIe Gen 5 will start to ramp from early 2025, but 2025 will maintain the high-end premium line. So, that will be the high-end notebook in the high-end PC — for AI PC and gaming PC and workstation PC. So, next year, the volume probably will still maintain very low, only about 5% transition But for 2026 we’re moving to the high volume and the mainstream PCIe Gen 5 coming. So next year, I think PCIe — majority of SSDs will maintain in the PCIe Gen 4 in — by 2026 and probably PCIe Gen 5 will occupy around 30% of total market.

Craig Ellis: Very helpful, Wallace. Thanks, and I’ll hop back into the queue.

Operator: Thank you. Our next question comes from the line of Tony Stoss from Craig-Hallum. Please go ahead, Tony.

Tony Stoss: Thank you. Good morning, guys. Maybe for you, Jason, just want to follow-up on the tape-out commentary expected for Q3. Can you maybe size that for us? And also, do you expect any continued tape-outs in Q4? And then, I’d love to hear your thoughts. A lot of positive commentary related to increasing gross margins. Can you give us a sense of, kind of, what you think ballpark might be heading into 2025? I would assume it’s higher than 2024.

Jason Tsai: Yeah. So for tape-out costs, we talked about 6-nanometer tape-out costs typically running $15 million to $20 million per controller. Obviously, that’s over the entire production of the tape-out. In the given — any given quarter where we do actually tape-out, that’s probably a $5 million to $10 million charge in that quarter. So, that’s what we’re — that’s the ballpark that we’re talking about here from an incremental perspective in Q3, given the new 6-nanometer four-channel PCIe 5.0 controller taping out this quarter. Going into Q4, we do not expect any additional tape-outs for PCIe — for 6- nanometer, so you should see our OpEx come down in the fourth quarter. In terms of gross margins, we’ve been steadily progressing over the last year or so, improving our gross margins due to better mix.

And we expect that to continue as more and more of our products come from newer generation products. Next year, we’ll also have PCIe 5.0 as well as MonTitan starting to ramp a little more meaningfully. So, those should be positive and additive for us as well. Historically, we’ve been at 48% to 50% gross margins. I think we’re going to get pretty close to that this year. And then going into next year, we should be in that range.

Tony Stoss: Got it. And then, Wallace, maybe a follow-up for you on the MonTitan and your adding of two additional customers to make it four at the end of this year. I think in the last quarterly conference call, you talked about a number of customers that you can handle. Can you update us on do you think you could take on even more customers and maybe give us a sense of how many additional ones you think you can take on in 2025?

Wallace Kou: Yeah. So, we have a — roughly, our R&D resource can handle maximum around four Tier 1 customers simultaneously. But the — as of today, we’re winning two Tier 1 customers. One of the customers would develop the firmware themselves with our SDK, so that will help us offload the resources. We provide complete documentation. It’s about technology and by the way, help them to porting their firmware into our platform. So, once it gets done, I think that will be the golden basis for the complete SDK and documentation we can offer to other OEM customers. We’re looking forward to expand more resources and we try to expand a wider range of customers in 2025 because if customers decide to use our standard turnkey solution with both firmware and our ASIC, I think we are able to support more than for Tier 1 customers.

Tony Stoss: Great. Thanks guys. Appreciate it.

Operator: Thank you. Our next question comes from the line of Quinn Bolton from Needham & Company. Please ask your question, Quinn.

Quinn Bolton: Hey guys, just want follow-up, sort of similar question to what Craig asked, except this time maybe on the mix of QLC. Where do you see QLC as a percent of both SSDs and the smartphone business as you get into ’25 and ’26? And then I’ve got a couple of follow-ups.

Wallace Kou: So, it’s a very good question. I think the QLC today in the PC, that’s about around 10% to 15% in the very low single digit — very low side. But all the NAND makers are roughly driving into the QLC office. So, in 2025 for clients would be — what should be minimum 20% to 25%. For smartphone, because majority smartphone makers, they are deploying the opportunity in the trial mode, so for next year, the total percentage should be very, very low single-digit, probably less than 5%. But after they deploy very successful, they will expand to multiple models. We see the UFS adoption initially come from the mid-range, but after mid-range is down, they will try to fill into the high end. At the same time, we see two smartphone makers going to try QLC into the eMMC for value line.

So, this is a tremendous opportunity and momentum. But they have to try the field — try and make sure it’s really transparent to end users and consumers. They probably won’t see the difference between TLC and QLC, but with a higher density than traditional TLC.

Quinn Bolton: Got it. Thank you for that, Wallace. And then a follow-up question on MonTitan. As you ramp that solution, you mentioned it carries premium margins. Wondering if that ramp to the extended hits that 5% to 10% target in ’26, ’27, do you think that, that carries enough, lift on margins that it puts you to the higher end of your, kind of target range of 48% to 50%? Could it push you above the 50% level? Just, any sense on how additive MonTitan could be to the margin profile.

Jason Tsai: Yes, it’s a little too early for us to comment about ’26, ’27 margin profile at this point, Quinn. But, I think historically we’ve been able to achieve that 48% to 50% based upon what we have today and what — the products that we have today versus MonTitan is a greenfield opportunity, like Wallace had pointed out. So, I think that could be additive to that, maybe potentially lift us up longer term. But it’s a little too early to say how additive that is in that ’26 to ’27 time frame.

Quinn Bolton: Yeah, no, I know it’s a long ways out. And then lastly, Jason, just, as you look at the expenses you’re spending today on the PCIe Gen 5 products, the UFS 4 controllers, wondering if you expect another heavy investment year in ’25. You guys have done a great job upside in revenue this year, but obviously expenses are increasing as well and so, there’s been less fall-through to EPS. And, just wondering if you might expect additional operating leverage on revenue growth next year as perhaps some of those investments kind of maybe stabilize next year rather than continue to increase at a pretty fast pace.

Jason Tsai: Yeah, that’s exactly the way we look at it. We’re going to start seeing the dividends pay off of these investments we’re making this year. That’ll lead to revenue growth. But we do expect to — I think it’s a little early talk about OpEx for next year, but we wouldn’t expect it to grow nearly as fast as we saw it grow this year, just given the kind of initial sting of the 6-nanometer tape-outs that we had to bear this year.

Wallace Kou: Let me just add some comments. I think we try to control our operating spend next year. However, we have a very, very strong demand from NAND makers. So, you have to customize certain new UFS controllers. We have the base on the resource and financial return to do calculation. If we decide to do it, that will increase some — our operating expense. But I think we will — based on every major project we will be — cautiously review the ROI to make a decision.

Quinn Bolton: Thank you, Wallace. Thank you, Jason.

Operator: Thank you. Our next question comes from the line of Suji Desilva from Roth Capital. Please ask your questions, Suji.

Suji Desilva: Hi,, Wallace. Hi, Jason, congrats on the progress here. The AI PC, I’m just wondering, what is the content uplift there for the SSDs in terms of product or ASP versus the non-AI PCs? Just if you could clarify that, it’d be helpful.

Wallace Kou: Yeah, it’s a very good question. I hope I can answer you by saying that so far AI PC got a tremendous momentum. However, we did not see any meaningful impact or increase in PC unit shipment so far. Besides Microsoft Copilot, I think the market really waiting for more meaningful application coming to add a practical application purpose to make both the corporate and consumer feel comfortable. So, I think there’s many — different new platform coming, but it’s also some — bundled with PC OEM’s own AI application. So, we have to wait for — see the consumer feedback to see adoption. So far, I think the PC unit shipment for 2024 is maintained the same as at the beginning of the year for single-digit increase compared to 2023.

Suji Desilva: Okay. And then switching over to the infrastructure side…

Wallace Kou: Sorry. We definitely see PCIe Gen 5 SSD, that becomes a plus because they have much better performance, provided better sequential read, provided much better shorter latency. So, that’s why this — we do see — potentially there’ll be high demand for PCIe Gen 5 Channel SSD in 2025.

Suji Desilva: Okay, that’s available ’25. Great, got it. And then, switching overall to the AI infrastructure side. Can you give us some framework for these programs that are on the — that you might be adding. How to think about the inner ASPs maybe on a content per server, content per rack opportunity framework, maybe that would be one way to kind of get a sense of these MonTitan programs and how big they can get for you.

Jason Tsai: We talk about it on a volume basis, right, because we are — we sell controllers, we don’t sell density. I think if you take a look at historically, enterprise SSD controllers, typically in the 50 to 75 plus range, in that ballpark. Obviously, configurations for different servers, different applications can vary. So, it’s difficult for us to assess or to really say that there is any sort of real kind of algorithm you could use on that.

Wallace Kou: So, we can only give you roughly range for the 16-channel MonTitan controller, the ASP is between $55 to $65 range. [Talking about] (ph) TLC/QLC, talking about density, the conservative price is similar range. For the — we also have a version for eight channel controller, which we have a new design probably tape-out middle next year. And this will — so for eight channel controller the selling price between $42 to $50 range. So, this is part of the ballpark for the MonTitan family controller price.

Suji Desilva: All right, very helpful, Wallace, Jason. Thanks.

Operator: [Operator Instructions] Our next question comes from the line of Robert Hsu from JPMorgan. Please ask your question, Robert.

Robert Hsu: Okay, thank you. I’m asking on behalf of Gokul Hariharan. So, I have a quick question on the inventory level. How should we think about the inventory level for the client SSD with the PC OEMs as well as the mobile solutions with the OEM customers? Thank you.

Wallace Kou: So at this moment we see the inventory level in the channel naturally relatively healthy. But however, just because demand side is very weak from the channel in retail. So, most of our customers see inventory level I think is largely healthy and in line now. And for the NAND maker, I think they definitely have a much lesser inventory for the clients to do.

Operator: Do you have any follow-up question, Robert?

Robert Hsu: Yeah, that’s it.

Operator: All right. Thank you. I’m showing no further questions. I’ll now turn the conference back to the President and CEO, Mr. Wallace Kou, for closing comments.

Wallace Kou: Thank you, everyone, for joining us today and for your continued interest in Silicon Motion. We’ll be attending the Future of Memory and Storage Conference in Santa Clara next week, as well as several investor conferences in the coming months. The schedule of these events will be posted on the Investor Relations section of our cooperate website. And look forward to speaking with you at this event. Thank you, everyone, for joining today. Good-bye for now.

Operator: Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.