Good day, and thank you for standing by. Welcome to the Silicon Motion Technology Corporation's Q3 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. This conference call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 as amended. Such forward-looking statements include, without limitation, statements regarding trends in the semiconductor industry and our future results of operations, financial 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 discussions 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. With that, I'd now like to turn the call over to Tom Sepenzis, Senior Director of Investor Relations and Strategy. Thank you. Please go ahead.

Thank you, and good morning, everyone, and welcome to Silicon Motion's third quarter 2024 financial results conference call and webcast. Joining me today is Wallace Kou, our President and CEO; and Jason Tsai, our CFO. Wallace will first provide a review of our key business developments, and then Jason will discuss our third 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 on Form 6-K after the close of the market yesterday. This webcast will be available for replay in the Investor Relations section of our website for a limited time. To enhance investors' understanding of our ongoing economic performance, we will discuss non-GAAP information during this call. We use non-GAAP financial measures internally to evaluate and manage our operations. We have, therefore, chosen to provide this information to enable you to perform comparisons of our operating results in a manner consistent with how we analyze our own operating results. The reconciliation of the GAAP to non-GAAP financial data can be found in our earnings release issued yesterday. We ask that you review it in conjunction with this call. With that, I will turn the call over to Wallace.

Thank you, Tom. Hello, everyone, and thank you for joining us today. We delivered another quarter of sequential revenue growth and gross margin in the high end of our guided range, our sixth consecutive quarter of gross margin expansion. Revenue strengths were driven from our NAND flash maker customers as they continue to source controllers externally rather than develop them in-house as they focus on long-term profitability and reduce their operating expense. Our strategy of deepening our partnership with the leading flash makers and investing in new technology and driving success across our business. We are winning more programs in mainstream PC, smartphones, automotive, industrial and other markets, and we expect this effort to accelerate as we move into high-end PC through the introduction of our first PCIe 5.0 controllers, Silicon Motion is best positioned to capture increasing share in the markets we serve, further strengthening our position as a leading merchant controller vendor in the world. In the third quarter, our NAND maker revenue grew more than 60% year-over-year as we continue to increase share gains through new product introduction and effective strategy. Both SSD and eMMC, UFS controller strength from our OEM programs more than offset of continuing weakness in the retail aftermarket for SSD. That has been impacted by high NAND prices and lower consumer spending driven by inflationary pressures. Despite these near-term macro challenges, I'm pleased with our team's execution throughout the year and the building momentum as we continue to gain share across the markets we serve. We believe that our ability to capture increasing shares through our NAND flash maker partners and OEM channel will continue to allow us to outpace the market. Our unequalled technical and financial strength to build next-generation controllers has and will continue to enhance our position through the introduction…

Thank you, Wallace, and good morning to everyone joining us today. I will discuss additional details of our third quarter results and then provide our guidance for the fourth quarter. 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 September quarter, sales increased 23% year-over-year to $212.4 million. SSD controller sales were approximately flat sequentially in 3Q '24 as our continued share gains were offset by weakness in SSD aftermarket sales and lower-than-expected holiday ramps from the PC OEMs. The weakness was exacerbated by continued inflationary pressure, high NAND flash prices and a modest slowdown ahead of next-generation Intel, AMD and Qualcomm platforms that support PCIe 5. eMMC controller sales were up slightly in 3Q '24 and up over 44% year-over-year as our diversification strategy continues to work, with NAND makers, module makers and handset OEMs directly driving strong growth. Gross margin increased for the sixth consecutive quarter to 46.8%, as we continue to benefit from improving product mix as we shift our customers to newer solutions. Operating expenses were $65.1 million in the September quarter, up from $62.1 million in the June quarter. The increase, as we discussed in our last call, was attributable to the expected tape-out expense for our new 6-nanometer 4-channel client PCIe Gen5 SSD controller, which is targeting introduction in early 2026. This ramp of this product timing is timed with -- to coincide with PCIe 5 entering the mainstream PC market and can benefit from significant unit volume scaling. Operating margin was 16.1% in 3Q '24, down slightly from 16.5% in the June quarter given the PCIe 5 4-channel tape-out. And earnings per ADS was $0.92, down 5%…

[Operator Instructions] Our first question comes from the line of Mehdi Hosseini from SIG.

Yes. I want to look into early '25. And what gives you confidence that this kind of a weakness that you're experiencing in Q4 is not going to sustain into early '25, especially since Q1 is typically a weak -- seasonally driven weak period? And I have a follow-up.

I think our today position, our design pipeline, we are definitely confident to grow in 2025. But regarding the latest retail weak demand due to the inflation, due to high NAND prices and multiple reasons, we cannot guarantee whether Q1 will recover. However, we do see more meaningful progress from module customers, including industrial customers, who believe from late Q1 or early Q2 and customer -- end customers start to do more booking. So I think it's more challenging. We also see the PC cycle refresh and demand, our smartphone customers start to have multiple new programs coming. So this is more exciting. We believe the worst situation will be gone, and we should look for more exciting 2025.

Great. And one follow-up for you, Wallace. You're very excited with the new products that you highlighted in the prepared remarks. But as it relates to capital return, I feel like we have been here before. The stock is near 2x book. More than 1/3 of your book is liquid cash. And I understand you may not be a fan of buyback. But not -- why not step up and increase cash dividend to illustrate how confident you are with all of these new products that you highlighted?

I think as you know, our share repurchase program has always been opportunities. And our Board also always evaluate the -- when we should do the share buyback and how we return cash to shareholders fairly. So this is very, very important. This strategy behind our dividend amount has always been to set it at a level that is comfortably affordable and we'll continue to evaluate it going forward. As you know, we might still have a legal expense to pay, and there's still a certain time to go. That's why we try to maintain the position and focus on the business to grow.

[Operator Instructions] Our next question comes from the line of Craig Ellis from B. Riley Securities.

Yes. Wallace, thank you very much for all the details in your prepared remarks around what you see next year. What I wanted to do is see if you could give us more of a high-level summary view of what it all adds up to as we look at PCIe Gen5 coming in with its higher ASPs and higher margins, UFS 4.0 coming in, in the back half of the year, MonTitan after initial shipments in the fourth quarter, sounding like it's ramping up in the back half of the year, and then the strength you're seeing in the automotive market and eMMC. As you look at what's happening, one, do you feel like in the core PC SSD and UFS markets, you're tracking to another year of 500 basis points of share gain as we targeted for this year? And secondly, is there a way you could quantify the level of growth we could get next year? Are we looking at a mid-single-digit year-on-year growth year, high single digits? Help us just understand what all this adds up to.

Well, thank you, but you have a pretty big question. So let me just answer the product one by one, especially for PCIe Gen5 8-channel controller. We are in a very unique position today to launch the PCIe Gen5 8-channel high-end controller with DRAM. And we won 4 major NAND flash makers. We almost won every module maker today. So for PCIe Gen5 high-end next year going to ramp, align with the Intel, AMD, the CPU and chipset by late Q1 and early Q2 for notebook. And so this initially, I think, will be take about 5% to 10%. I think the high-end will be overall 10% to 15% above the market. We believe when they reach the fully 10% to 15%, we should own minimum 50% to 60% of high-end market share by 2026. So this is a very exciting revenue growth for us and from top line and bottom line because we never have a high-end PC market before. Second, go to UFS 4. This is also a very unique product we launched, and as we are going to launch with 1 NAND maker in middle of next year, and this will be the high-end. And we're going to launch in the early 2026 with another NAND maker at the high-end. So you can see in late '26, '27, the market is going to launch UFS 5 at the high-end. UFS 4 going to transition to be mainstream. So all the current NAND maker, their current UFS 4 is a 4-channel legacy controller, support the NAND interface only go to 1.6 gigabit per second to 2 gigabit per second per NAND. So that is very limited. So you can see mainstream 2-channel UFS controller with 6-nanometer, we are much more compelling and positioned than the NAND maker today…

And Craig, in terms of guidance for next year, it's a bit early. Obviously, we normally put that out on our next earnings call when we report our fourth quarter results. So stay tuned for that. But as Wallace pointed out, there's a number of new products, new opportunities that we're scaling that we're really confident about for next year.

Yes, regarding -- sorry, I would add regarding automotive, automotive today, the total is about 5% of total revenue, but we have confidence to grow to 10% by late '26 or early 2027. Because this year, pricing is very challenging, we are not aggressive to win any design because margin is very, very low. But we continue to develop new products and winning new NAND maker and also our Ferri product line. And we believe next year, we're going to launch with the Toyota global model, are going to bring meaningful revenue with company growth, and we have multiple new projects we're going to announce in by second half next year, wait and see.

And that sounds very encouraging, Wallace. And I get the point on the specific guidance, Jason. I'm hoping that you could help us on a 2025 set of items related to gross margins. Without providing guidance, can you just talk about some of the gives and takes with gross margins? Clearly, there's a lot happening with new products that should be a tailwind. Are there any pressures we need to be aware of in on OpEx? Help us level set with what we should expect with mask set cost intensity versus 2024? And do you expect to increase R&D intensity in areas like enterprise SSD just given the demand you're seeing?

Yes. So we said that we expect our gross margins to get back to historical levels of 48% to 50% by early next year. We're still on track for that. So we don't expect that to change. We obviously have a good mix. PCIe 5 on the client side, higher ASPs, higher gross margins. MonTitan on the enterprise, certainly, again, much higher ASPs and higher margins. So as those continue to become bigger and bigger portions of revenue, certainly, longer term, we could see that being additive to our overall gross margin picture longer term. In terms of the OpEx, we are planning to have 2 more advanced controller tape-outs for next year. And so that will -- we expect that to continue to be kind of steady state from where we are this year. We taped out 2 6-nanometer controllers this year. We expect to tape out an equivalent number next year. So I think from an OpEx standpoint, we do anticipate obviously some inflationary growth in terms of wages and headcount, et cetera, but also maintaining the same level of tape-out activity for next year as well.

Our next question comes from Suji Desilva from ROTH Capital.

So on the client side, the PCIe 5 wins on any of four flash makers, are those ramps going to be staggered? Or are they all hitting in a time frame where the new PC processes are available to support PCIe 5?

For PC OEM, they definitely align with the PC OEM requirement. But for retail, because 2 of them have a retail business, so they're going to start to ramp by late this year and Q1 next year. So depends the retail demand. I think, well, probably 2026, they're going to reach a maximum around 15% level. But we do see we might have opportunity to gain more -- one more NAND maker opportunity in the high-end by late next year. So hopefully, we can really have the -- really home run with the 6-nanometer. Very, very great power efficiency and data efficiency to position into the mainstream notebook.

Okay. And then on the MonTitan side, I'm curious, the use of QLC, is that, Wallace, by application workload or is it across the board opportunities? And are the customers initially going for their own firmware or more using SIMO's turnkey? I'm curious which are the directions they're going initially.

You have a very good question. I think one of the Tier 1 has developed their firmware themselves. One of the other Tier 1 is the kind of a joint development firmware. So this is, try to accelerate the time to market. And we do see certain OEMs, they prefer develop their own firmware, certain preferred turnkey, especially time to market. Because for the AI data space, as you know well, there are 4 major stages, right, like ingest to collect all the data, and second stage go to the -- go to preposition, which we call transformation, is to be tokenized and changing for become AI GPU recognized language, and then the third stage go to training, and the third stage go to inference. But during the process, because of MonTitan, our data shipping, program shipping and power shipping technology, that's ideal for the customer to adjust when you're going to reach the highest performance, when you can reduce the power and reduce overall the power efficiency. So this is ideal case for our customer to utilize the MonTitan technology and software to dynamic changing and help for the data center and for the server. So that's why this is very, very attractive to the end customer because it's very unique. And this we believe with FDP and QLC that can make the high-density SSD drive become more interesting and more valuable.

[Operator Instructions] Next question comes from Matt Bryson from Wedbush Securities.

Jason, congrats on formalizing the role as CFO. I guess my first question is just looking at the QLC solution that you're shipping to a handset vendor. It's a slightly different path to market than we've typically seen, where normally you work with fabs and module makers. Is that something that you see becoming more common going forward where you're working with OEMs directly?

I think, as you know, smartphones have predominantly been using TLC NAND for memory solution. But AI-at-the-edge is driving higher density demand for low- to high-end smartphone platform. I think because QLC is much more attractive because they can provide you higher density, but the cost can be managed meaningfully. So that's why it attract many, many smartphone makers who like to provide higher density storage, but without increasing the cost significantly. This is the motivation for them. And the reason to work with the controller directly, not go to the NAND maker, I didn't say no NAND maker work for a smartphone maker, but particularly, this is a top 5 smartphone maker choosing Silicon Motion because they want to collaborate with us and do all the field tests and figure out all the issue overcome and to maintain the know-how remain in the company. So that's why they do not want to share the know-how with the NAND maker. They prefer initially want to keep the know-how and they're able to decide what they want to expand next year. So that's why we are very, very happy to have the opportunity to engage with this smartphone maker. And we believe we're going to have a second smartphone maker to engage in 2025. So this has helped us to really gain much more knowledge how to transition from QLC moving to smartphone storage and primary storage and increase the density and also add value to smartphone makers.

Just following up on Mehdi's question around Q1 seasonality. I mean, if you're not seeing the typical pickup into the holiday season, then I mean, shouldn't we expect the downtick in Q1 would also be muted simply because you're coming off a higher comp? And then just with inventories being worked down within the client OEM -- client OEMs, I mean, shouldn't we also expect that you'll see a bump back up in terms of demand when that process is completed sometime in the first half, I think you said?

I think what I can only say is, as of today, the viewing about the retail consumer electronic product is really weak and the visibility is very, very low, because we are going to launch several new products, especially PCIe Gen5, and it could change certain color in both retail and the PC OEM. So that's why we -- I think it's too early to comment about Q1 outlook, but I think we're focused on Q4, but we are more optimistic about the Q1, whether it will be like a conventional seasonality weak Q1, we might have a more broader opportunity to sustain the growth.

Awesome. And just one more for me. In terms of gross margins, you're still running a little bit below what had been normal gross margins. Should we still expect that you get back to the roughly 50% or just below 50% range in 2025? And I guess, structurally, it sounds like you have a lot of opportunities to move into higher gross margin areas. I mean, do you foresee in the future potentially being able to be above that kind of historic norm given those opportunities?

Yes, Matt. Yes, our historic norm is 48% to 50%. And so we do anticipate getting back there in early next year. In terms of going above and beyond that, it's -- obviously, with more enterprise and more higher-end products ramping, there's an opportunity for that longer term, but it's too early to say how that shapes up.

I think our goal is definitely to reach back to 50% by -- before end of 2025. But I think because there's seasonality and also there's a business strategy consideration become low end and the high end. But overall, I think the direction and the goal won't change.

[Operator Instructions] It appears to have no further questions at this time. I'd like to hand the call back to Wallace for closing remarks.

Thank you, everyone, for joining us today and for your continuing interest in Silicon Motion. We will be attending several investor conferences over the next few months. The schedule of this event will be posted on the Investor Relationship section of our corporate website and look forward to speaking with you at this event. Thank you, everyone, for joining us today. Goodbye for now.

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