Silicon Motion Technology Corporation (NASDAQ:SIMO) Q4 2023 Earnings Call Transcript

Silicon Motion Technology Corporation (NASDAQ:SIMO) Q4 2023 Earnings Call Transcript February 7, 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: Good day and thank you for standing by. Welcome to the Silicon Motion Technology Corporation’s Q4 2023 Earnings Conference Call. At this time, all participants are in a listen-only. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions]. This conference call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 as amended. Such forward-looking statements include without limitation statements regarding trends in the semiconductor industry and our future results of operations, financial conditions, and business prospects. Although, such statements are based on our own 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 relations 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 obligations 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. I would now like to hand the call over to Mr. Jason Tsai, Vice President of IR and Finance. Please go ahead.

Jason Tsai: Thank you and good morning everyone. Welcome to Silicon Motion’s fourth quarter 2023 financial results conference call and webcast. Joining me today is Wallace Kou our President and CEO. Wallace will first provide a key overview of our key business developments and then I will discuss our fourth quarter results and outlook. Following our prepared remarks, we will conclude with Q&A session. Before we get started, I’d like to remind you of our Safe Harbor policy which was right at the start of this call. For a comprehensive overview of the risks involved in investing in our securities please refer to our filings with the U.S. Securities and Exchange Commission. For more details on our financial results, please refer to our press release, which was filed on Form 6-K after the close of market yesterday.

This webcast will be available for replay on the Investor Relations section of our website for a limited time. To enhance investor’s 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. As we have previously shared, Silicon Motion filed its Notice of Arbitration against MaxLinear for the willful material breaches of the merger agreement that was signed on May 5, 2022.

The company is seeking payment of the termination fee of $160 million, substantial damages, interest, and costs. The company filed its Notice of Arbitration claim against MaxLinear in the Singapore International Arbitration Center on October 5, 2023. The arbitration process is confidential, and we will therefore not be commenting further on this matter today. With that, I will turn the call over to Wallace.

Wallace C. Kou: Thank you, Jason. Hello, everyone and thank you for joining us today. We are pleased by the steady recovery across our business throughout 2023, with fourth quarter revenue and gross margin exceeding expectations. We benefited in the quarter from stronger demand from both our SSD and eMMC+UFS controllers and saw pricing and mix improved to drive stronger gross margin improvement for our business than originally expected. More importantly, our technology leadership in controller and our unwavering engagement with our customers, both flash makers and module makers has laid the foundation for strong 2024 growth despite only modest growth expecting in the PC and smartphone device markets, driven largely by our ongoing share gains with our customers.

Over the past six months, we have been busy making organizational changes to better position Silicon Motion for the future. We restructured our business to better engage in a new opportunity in the market and spend a lot of time reengaging with the customers to win back their confidence in us as a long-term partner. As you saw, we formed two new business units, client and automotive storage, CAS, and our enterprise storage and display interface solution, the SDI Groups. Our new organizational structure allows us to be more focused on each segment, to have dedicated industry veterans as the leader enable our team to be more agile and responsive to the market and to better engage with customers and anticipate their need with truly differentiated high-performance and classify solutions.

We are seeing the successes of this already as our CAS Group have been increasing share as our customers by winning significant new designs with both flash makers and module makers for the PC, smartphone, automotive, industrial, and other markets. Our ASDI Group has also made incredible progress with some untitled product in a short amount of time securing more than a dozen sampling customer ready. With these changes, we are better positioned than ever before and look forward to demonstrating the ongoing strength of our business to our investor each quarter. Now let me move into our business and give you an update on the NAND market dynamic we are seeing today and what we are expecting for 2024. Pricing for NAND Flash has been steadily increasing and expected to continue to improve throughout 2024 and into 2025.

NAND makers are being disciplined in their production and limiting output, resulting in higher NAND flash prices. Demand is also expected to pick up this year as both the smartphone and PC markets will grow modestly after two years of meaningful decline in unit shipments. While higher pricing may limit the activity we typically see from our module maker customers, many have pre-bought low-cost NAND in the second half of last year, and we have secured significant wins with them for upcoming products this year. We believe our business with module maker will grow this year despite the headwinds created by higher NAND flash prices. For flash makers, while higher flash prices over the past few months have improved their profitability, most are still facing negative or very low margin, and this is why we are seeing them increasingly focus on profitability.

Flash makers need to prioritize their focused investments from developing new generation of NAND to developing storage solutions to satisfy a wide range of end market requirement. These solutions range from high performance to value-oriented using DRAM and as well as utilizing TLC or QLC to serve a broad range of end market need in eMMC+UFS, client SSD, embedded enterprise and industrial applications. We are seeing flash maker focus on their own effort on leading-edge, high-performance solution where margin and profitability tend to be highest and they are turning to us as a partner of choice to help bolster their portfolio with high-performance, lower-cost solutions, utilizing their latest generation of high-performance, high density NAND to serve a broader range of market requirements.

Our progress with our flash maker partner over the past year has resulted in strong backlog of new wins across all our product groups that will drive meaningfully higher share and faster growth this year and lay the foundation for strong long-term growth. We continue to grow our customer relationships and are on track to grow our business with every NAND flash customer we have this year. Our revenue from flash maker expected to grow approximately 50% this year, a design win across our controller program meaningfully throughout 2024. Turning to our SSD controllers, we take our first PCIe Gen 5 channel controller last quarter and have already secured three flash maker win in this product as well as several module maker wins. This is the first time that flash makers adopt our controller for high-end notebook models.

We expect sales of this high-performance controller to begin late this year. We are engaging with other flash makers as well as numerous other module makers expect to win more designs through 2024. Our second PCIe controller will be taped out early in the third quarter this year, and we already have significant interest from both flash makers and module makers for the mainstream Gen 5 solution that are expected to ramp in late 2025. While we are excited by our progress with PCIe Gen 5, it’s important to point out that we continue to win significant new programs with several flash makers with older generation interface as well, including two new starter SSD programs, several PCIe Gen 4 SSD including one using next-generation QLC flash on the value of PC OEM market and several USB 3.2 portable SSD projects.

Our QLC controller with our proprietary 3D array and more advanced LDPC for better aero correction and data protection and recovering offer, no compromise solution that maintains high performance and reliability while utilizing the most cost-effective flash to further improve affordability. We are seeing strong traction of QLC controller with both our flash makers and module maker customer and more widespread adoption by PC OEM as well. Moving on to our eMMC+UFS controller solution. We are taking out our UFS 4.0 solution this quarter and remain on track to ramp with a flash maker customer later this year as well as several module makers targeting the smartphone market. UFS 4 remains a flagship and a premium solution this year and expected to expand into high-end mainstream handset market in 2024 and after.

Aligned with win, our solution with our flash maker and module maker customer expected to ramp. UFS 3.1 and 2.2 remains a primary solution for mainstream smartphones this year, and we are seeing continuing strong demand for our current UFS controller with additional flash makers and module makers. We are seeing flash makers focusing on their own internal controller development on the latest flagship generation of UFS, where they get the highest premium for their higher performance solution. As each of UFS generation moved from flagship to mainstream, we are seeing flash maker turning to us to utilize our controller paired with their newest NAND that offer high performance and lower cost, ideal for the mainstream smartphone market. It is a symbolic relationship that has driven our strong partnership with flash makers and driving more win and long-term growth for our eMMC+UFS controller business.

Now let me give you an update on the progress of our MonTitan Enterprise State Development platform. We started sampling MonTitan to customers at the end of last year, and we are excited to announce that more than a dozen customers, many of them Tier 1 end companies ranging from NAND flash makers, hyperscaler, storage solution provider, enabler, as well as module makers are in the process of evaluating the solution. MonTitan’s highly differentiated storage solution provides support of both high-performing TLC SSD as well as high-capacity QLC SSD. We are finding that this ideal balance of performance and features is appealing to customers across all enterprise and data center market segment. Based on our ability to support a wide range of customer engagement model from the turnkey to layer firmware stack development, MonTitan has raised the asset to an extensive amount of data [indiscernible], speed ideal for a variety of applications, including high-performance edge computing and AI interference and machine learning.

We are confident that we will continue to make it grow during the Gen 5 transition into the AI era, and expect to secure a first design win in the next few months and generate clearly revenue by the end of this year. Overall, I’m excited by the opportunity ahead of us in 2024. Our team dedicating to maintaining our technology leadership and our varying commitment to our customers has enabled us to continue to win socket after socket and positioning us strong share growth this year and beyond. Our position with our flash maker customer has never been stronger with the new design wins are expected to ramp since the beginning of this year. Our module maker customers are coming into 2024 with strong inventory of low-cost NAND and choosing us to help them bring competitive SSD and embedded solutions to the market.

We are well positioned to continue to further strengthen our design pipeline in 2024 to drive growth in 2025. 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 fourth 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 with the earnings release issued yesterday. In the fourth quarter, we grew sales 17% sequentially to $202 million. SSD controller sales grew 15% to 20% sequentially. eMMC and UFS controller sales grew 25% to 30% sequentially and SSD Solution sales decreased 5% to 10% sequentially. Gross margins in the fourth quarter increased to 44.1%, reflecting both better mix and higher ASPs. Operating expenses in the fourth quarter were $61.5 million, $12 million higher than the prior quarter due to higher R&D expenses to support our technology leadership.

Operating margin in the fourth quarter was 13.8%, flat from the third quarter. Effective tax rate in the fourth quarter was 2.3%, a decrease from the 22.8% tax rate in the third quarter primarily due to a tax reversal in the quarter. Excluding this, tax rate would have been 28%. Earnings per ADS were $0.93, 48% higher sequentially. The stock-based compensation in our operating expense, which we exclude from our non-GAAP results, was $5.7 million, and we had $369 million in cash, cash equivalents, restricted cash, and short-term equivalents — short-term investments at the end of the fourth quarter compared to $350.3 million at the end of the third quarter. Inventory increased sequentially in the fourth quarter to $217 million from $199 million in the third quarter.

Now let me turn to our first quarter and full year 2024 guidance and forward-looking business trends. For the first quarter, we expect revenue to be down 10% to 15% sequentially to approximately $172 million to $182 million. We expect SSD controller sales will decline slightly in the first quarter and eMMC and UFS controller sales will decrease. First quarter gross margin is expected to be in the range of 44% to 45%. First quarter operating margin will be in the range of 10.5% to 11.5%. First quarter effective tax rate to be approximately 19% and in the first quarter, we expect stock-based compensation and dispute-related expenses to be in the range of $6 million to $7 million. For the full year 2024, revenue will increase 20% to 25% to $765 million to $800 million.

Gross margin is expected to be in the range of 45% to 47%. Operating margin should be in the range of 14.7% to 16.7%, and our effective tax rate for the year is expected to be approximately 19%. Full year stock-based compensation dispute and related expenses will be in the range of $31 million to $33 million. Let me provide some additional color on our first quarter and full year expectations. As Wallace mentioned, we are making strong progress with our flash maker customers. We have a strong pipeline of design wins and are positioned to gain meaningful share this year. We expect our revenue from all of our flash maker customers will grow in 2024 and to increase approximately 50% this year. In addition, we have high visibility that two additional flash makers will be ramping new projects with us this year in eMMC and UFS and in SSD controllers, and we will be able to grow revenue from each of these flash makers very meaningfully.

We expect normal seasonality to impact our business in the first quarter but are confident that we are well positioned to grow sequentially throughout the rest of the year based upon our strong backlog of wins and project ramps. We expect to see consistent improvement in our gross margins this year driven by better mix towards newer generation interfaces in our eMMC and UFS and SSD controller sales, a number of new projects ramping, and overall pricing starting to normalize and improve. For operating expenses, we’ll continue to invest in maintaining our technology leadership in the market, including the tape-out of two 6-nanometer controllers, one in Q1 for UFS 4 and one in Q3 for a second PCI Gen 5 SSD controller. This will lead to elevated operating expenses in those quarters.

This concludes our prepared remarks. We’ll now open the call for your questions.

See also 20 Big Hotels Where AARP Members Can Get Discounted Rates and 25 Countries where Muslim Population will Increase the Most by 2030.

Q&A Session

Operator: [Operator Instructions]. First question comes from the line of Mehdi Hosseini from Susquehanna International Group. Please ask your question.

Mehdi Hosseini: Yes, thanks for taking my question. I have two. Wallace, can you help me understand what you’re seeing in SSD Solutions business segment, I understand that your continued traction with flash makers and a new product ramps that are more focused on SSD controller and the smartphone, but could you give us a feel for SSD Solution and whether you would be able to actually slow down the decline in revenues here? And I have a follow-up.

Wallace C. Kou: I think our SSD Solution in Ferri has been stable, and we are seeing a strong pipeline of win. I think for Q4 revenue decline due to some of multi-customer see the inventory pile-up and we do see 2024, we have accumulated more design. But we see we have a stronger growth in 2025 from an automotive customer for our Ferri product.

Mehdi Hosseini: Okay, great. And your 2024 guide is very encouraging. You are also ramping a 6-nanometer takeout. I understand what’s driving the OPEX increase. I also look at your cash, you have almost $10 of net cash per share. Your just operations should help with additional cash generated, you sound very confident, why not revisit the capital return, especially with the buyback, especially with the investors that have been patient, any thoughts, any color here would be appreciated?

Jason Tsai: Yes, thanks for the question, Mehdi. Look, that’s a good question. If we look at our capital allocation program constantly, that’s something we review with our Board regularly. We have the dividend policy that we’ve been paying for a very long number of years with the exception of when we were in the acquisition process. Strategy behind the dividend, as you know, has been always to set it at a level that’s comfortably affordable and we’ll continue to evaluate going forward, whether to increase the dividend in a future time as business continues to scale and cash flow increases longer term. In terms of things like a share repurchase, as you know, our share repurchase program in the past has been opportunistic. We do not have a program in place today, but the Board is always evaluating ways of returning cash to shareholders and share repurchase is something they’ll continue to look at.

Mehdi Hosseini: Thank you.

Operator: Thank you for the questions. One moment for the next questions. Next question comes from the line of Quinn Bolton from Needham. Please go ahead.

Quinn Bolton: Hey guys, congratulations on the results and outlook. Thanks for taking my questions. I wanted to follow up, Wallace on your comments. Very encouraging to hear that you’ll grow with every NAND manufacturer in 2024. But I think one of the concerns we’ve heard from investors is that as UFS 4.0 becomes mainstream, that one of your customers that’s in-sourced, UFS 4.0 that may be a headwind more in 2025 than 2024. And so I’m not trying to get you to give guidance for 2025. But overall, would you expect your business in aggregate with NAND vendors to continue to grow in 2025 as UFS 4.0 becomes more mainstream? And then I got a follow-up.

Wallace C. Kou: Yes, we believe we definitely we can continue to grow from our mobile controller for both UFS and eMMC. As you know very well, the UFS 4.0 has still remained the high end for 2024 and 2025 and probably will go to mainstream up to second half of 2026. And we have a very strong UFS 3.1, 2.2 today, not only for existing NAND partner but also winning one to two additional NAND maker business and going to ramp in 2024 and 2025. In addition, we also see NAND makers, they focus on the new development. So when UFS 4.0 becomes mainstream, their R&D is focused on UFS 5.0 development and sometimes outsourcing the new UFS 4.0 project to Silicon Motion because our new laser controller can capture the latest new generation high-performing I/O NAND with higher density NAND.

So that will become much more attractive and value add to our NAND partner, extend the product life cycle. So we see our position very well with NAND maker as well as growing module maker who are moving from eMMC to UFS.

Jason Tsai: And I think also that it’s becoming a much more diversified business. It’s no longer really driven by one customer. We have a multitude of flash makers and module makers that address the smartphone market all very effectively. And so as we ramp up with these new flash makers and module makers, we’re confident that we can continue to grow this business long term.

Quinn Bolton: Great. My second question is more a clarification about the two new NAND vendors that ramp this year. Can you give us any color, is that specifically on the eMMC UFS business, is it across both mobile as well as the SSD business, just any color? And then, Jason, just a quick looks like OPEX for the full year probably comes in at about $240 million or on average about $60 million a quarter. I know there’s some tape-outs in Q1 and Q3 that will probably increase R&D in that — in those quarters. But is that sort of $240 million not the right range to be thinking about for OPEX in calendar 2024? Thank you.

Wallace C. Kou: The two NAND makers, I think, really one is for UFS, one for eMMC, but we are continuing looking for engagement with the NAND makers.

Jason Tsai: Yes. And for OPEX, I think — yes, I think it’s in that range. $230 million to $240 million is probably the way to look at it.

Quinn Bolton: Perfect, thank you.

Operator: Thank you for the questions. One moment for the next question. Next question comes from the line of Gokul Hariharan from J.P. Morgan Chase. Please go ahead.

Gokul Hariharan: Yeah, hi. Thanks for taking my questions. First question is on enterprise, given that you have — you are getting pretty good traction with your new product and you also reorganized the organization to focus more on enterprise. Wallace, could you give us a little bit more color on how big is the enterprise addressable market for Silicon Motion, what is something that you can really achieve over the next maybe three, four years in terms of the enterprise traction? And could you also give us a little bit of color in terms of what kind of design wins are you getting, are you getting more design wins on like core storage products, or is it like making OEMs and hyperscalers, is there any mix in terms of where you’re getting the payments, maybe you will give us a little bit more color on the enterprise addressable market?

Wallace C. Kou: So it’s a very good question. I think that we are seeing very good traction today as we continue to sample and go through the qualification process with these Tier 1 customers and by a dozen customers from U.S. and to Taiwan, China. And I cannot give you the quantize number, I think by end of 2024, we’ll have meaningful revenue. We have much bigger revenue in 2025 and 2026. The reason we get traction not only the standard B&G, we’re gaining momentum because the high-performance and all the number index that exceed expectation, but also we get a traction due to the QLC SSD coming into the data center. And then the — this is for twofold. One is FTP standard for QLC, also Zone NAND safer QLC in China. I think U.S. one customer is also very interested for space.

So that makes us a very differentiated compared with conventional solution. Due to the AI server demand and AI demand, I think Gen5 SSD become much more attractive. So this is a similar our demand, and that’s why many customers will qualify our Gen 5 solution.

Gokul Hariharan: Got it, thank you very much. My next question is more near-term. For 2024, you have a 20% to 25% revenue guidance. Could you give us some color on how you expect client SSD to grow and mobile to grow? And within mobile, recently, we are hearing some concerns about the end of restocking for some of the Chinese customers. Are you seeing the China, the smartphone customers being a little bit more conservative in terms of procurement in the near-term?