Earnings Call: Q2 2021

Jul 30, 2021

Earnings release

Good day and thank you for standing by. Welcome to the Silicon Motion Technology Corporation's Second Quarter 2021 Earnings Conference Call. At this time, all participants are in listen only mode. And after the speakers' presentation, there will be a question and answer session. And to ask a question During the session, you may request Taiwan on the telephone and please be advised that today's conference is being recorded. And this conference call pertains forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 as amended. Such forward looking statements include, without limitation, statements regarding trends in the semiconductor industry and our future results of operations, financial condition and business prospects. Although such statements are based on our own information and information from other sources, we believe to be reliable and should not place undue reliance on them. These statements involve risks and uncertainties in 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 risks and uncertainties of 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 business statements, which apply only as of the date of this conference call. I would now like to hand the conference over to your speaker today, Mr. Cliff Chaney, Director of Investor Relations and Strategy. Please go ahead. Thank you, Annie. Good morning, everyone, and welcome to Silicon Motion's 2nd quarter 2021 financial results conference call and webcast. As Ernie mentioned, my name is Chris Chaney, and I'm the Director of Investor Relations. Joining me today on this call are Wallace Cao, our President and CEO and Riyadh Lai, our CFO. Following my comments, Wallace will provide a review of our key business developments and then Riyadh will discuss our 2nd quarter results and our outlook. And then we'll conclude with a question and answer period. Before we get started, I'd like to remind you of our safe harbor policy, which Andy just read at the start of the call. For a comprehensive overview of the risks involved in investing in our securities, please refer to our filings with the U. S. SEC. For more details on our financial results, please refer to our press release, which was filed on Form 6 ks 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 similar to how we analyze our own operating results. A reconciliation of GAAP to non GAAP financial data can be found in our earnings release issued yesterday. We ask that you view it in conjunction with this call. And with that, I'd like to now turn the call over to Wallace. Thank you, Chris. Hello, everyone, and thank you for joining us today. In the Q2, we delivered another quarter of record sales and earnings. Revenue grew 21% sequentially to a record $221,000,000 and earnings per ADS were a record $1.50 Sales of both SSD controllers and eMMC plus USB controllers grew in the Q2 and both achieved record quarterly sales. We delivered better than expected growth and profitability, primarily by upselling a richer mix of products, allocating more product to higher margin accounts and where possible, re pricing product to cover higher manufacturing costs. Additionally, Our operation team has been actively working with our contract manufacturers to tune back end processes to improve manufacturing yield and lower costs. This 4 pronged initiative of upselling a richer mix of products, Optimizing product allocation, better pricing discipline and tuning manufacturing processes is critical for creating continued remains elevated. Based on the fusion of the initiative, we are now also expecting better gross margin for the rest of this year. Earlier this year, we had communicated our 2023 $1,000,000,000 sales objectives and growth roadmap. We will likely achieve this target much earlier. Based on our latest sales projection, our annual run rate is expected to be already at least $1,000,000,000 by this year's Q4. We expect sales to comfortably exceed $1,000,000,000 next year as we add meaningful Incremental foundry capacity already committed to us and from continued execution of for 4 pronged initiative, which includes selling a richer mix of products. Sales next year will include the rapid scaling of a higher value, high volume PCIe Gen4 SSD controllers. Our customers have also provided us with purchase order for the next year And the order book today already exceeds $1,500,000,000 Our strong order book is a result of many years of hard work, not a last minute, opportunistic procurement order of out of the shell parts by customers. We have been building our business pipeline for many years, Leading to these purchase orders, our OEM projects typically kick off 1 to 3 years before initial sales, Depending on product complexity, projects start with defining the OEM product features and customization requirements before hardware and firmware product development and end with product compatibility, performance verification, analysis, Quality assurance and manufacturing support activity before we start the manufacture and sales of our controllers. What is clear from our design wins and order book, we have been gaining share of wallet As some of our NAND flash and Tier 1 module maker customers, several of our customers have been gaining market share in the SSD and UFS marketplace. SSD and UFS adoption continue to grow in PC in smartphones and our customers are actively using our controller to develop a storage solution for new applications that include game consoles and automotive systems. Our order book runs through full year 2022 and our pipeline of design wins include delivery beyond 2022. Now let me talk about our key products, starting first with our SSD controllers. This quarter, our SSD controller sales grew 30% to 35% sequentially. Year to date, our SSD controller sales grew 75% to 80% year over year, Seemed significantly faster than SSD market growth as we gained market share. Our growth continues to be driven By further scaling of our PCIe Gen 3 SSD controller sales to a diversified set of NAND flash and Tier 1 module maker customers who are all primarily supplying SSD to leading PC OEMs. Based on our audiobook, we expect sale of our PCIe Gen 3 SSD controller to grow modestly through next year. Our overall SSD controller sales growth momentum will continue as we introduce and ramp up our PCIe Gen 4 SSD Controllers. Our Gen 4 controller OEM sales will start in the Q3 of this year, and we expect sales to ramp rapidly through 2022. Our PCIe Gen 4 SSD controller design wins With NAND flash makers and Tier 1 module maker customers, we'll ramp a 3 successive generation of annual performance upgraded, cost reduction and higher layer count and flash support, 3 successive generations of PCIe Gen4 controller solutions to be introduced annually from 2021 to 2023. We have timed our rapid introduction of 1st and second generation Pingixiai Gen4 SSD controller, so OEM can align their product with Intel's notebook CPU platform refreshed in the Q3 of this year and introduction of their next generation Much higher volume chipset platform next year. We will start the ramp of our 1st generation Gen 4 with 2 customers. We will then quickly expand our Gen 4 customer base from 2 to 8 customers next year with our 2nd generation solution. Our 3rd generation will follow in 2023. We will then follow-up with the upcoming Series of PCIe Gen 5 SSD Controllers. Of our 8 customers next year, By our NAND flash makers, all our customers are developing SSD for OEM projects. When all of our second generation projects are fully ramped towards the end of 2022 In the first half of the following year, we expect to be in approximately half of our PC OEM To make solid progress in data center applications and we are ramping toward our first 1,000,000 units milestone. Our unique hardware plus firmware turnkey enterprise class PCIe Gen 4 SSD controller is expected to start shipping to customers such as Alibaba, Baidu and Kingston by end of this year and lay the foundation for upcoming PCIe Gen5 enterprise SSD controllers. With our upcoming flagship enterprise class PCI HN5 SSD controller, we continue to meet design milestones and track towards dumpling in the second half of next year and sales of following years. Feedback from potential U. S. And China hyperscale customers continue to be very positive. Next, I will discuss our eMMC plus UFS controllers. Our eMMC plus UFS sales grew 10% to 15% during the Q2. Year to date, Our eMMC plus USB controller sales grew 35% to 40% year over year, Significantly faster than the overall smartphone market growth as we and our customers gain market share. Our UFS NAND fab customer with industry leading NAND and DRAM technologies is very well positioned to gain further market share. Additionally, we continue to support a diversified set of module maker in China and now elsewhere, growing EMC and new user business activity in the low cost smartphone as well as the large but fragmented IoT and smart devices market. DMC is a JEDI standard embedded storage that is generally a low capacity solution, usually at most 64 gigabytes. Zansagemakers, who are focusing on maximizing their sales of NAND density, have communicated their intention to exit from this low density market next year, which will create a large incremental opportunity for our eMMC controllers. Since we are effectively the sole merchant supplier of eMMC controllers to this large and growing 1,000,000,000 plus unit units in the storage market. We also have a responsibility to work with our foundry and other supply chain partners to ensure product availability to OEMs. This large market For eMMC controller range from low cost smartphones to smart TV, smart speakers, Chromebooks, set top box, Streaming TV dongles, smart watches and other wearables, drones, portable game console and many more applications popular with consumers. We are also seeing increasing design activity relating to The adoption of automotive ACQ100 and ASPICE compliant eMMC And UFS Embedded Storage Solution, as electronic content in cars and other vehicles grows. And furthermore, We are seeing increasing design activity involving multiple eMMC or unit storage devices per vehicle. Automotive OEMs are now designing vehicles with multiple eMMC and UFS based storage devices for Central console in infotainment system, navigation system, real scene entertainment, dashboard Instrumentation and ADAS image recognition, route decision and data recording systems that enhanced road use safety and parking. Since going public in 2005, We have seen the explosive proliferation of NAND based storage solution into more and more category of occasions From initially just memory cards and USB flash drives to embedded storage for smartphones, IoT and smart devices as well as SSD for PC and data center. And now we are seeing Growing design activity in automotive applications. We are delighted to share with you our growing NAND controller design activity and our successful results so far from our 4 prong initiative of optimizing resources to deliver Higher value scales and enhanced profitability. We believe current market condition favors the commotion in partnership with our customers in continuing market share gains in a small range of application due to our relatively large and favorable position in the supply chain and in managing OEM product availability. In comparison, smaller merchant supplier and CAFD program are disadvantaged. We believe current market conditions could remain unchanged for the next few years. Now, I will turn the call over to Ria to discuss our financial results and our outlook. Thank you, Wallace, and good morning, everyone. I will discuss additional details of our 2nd quarter results and then provide our guidance. My comments today will focus primarily on our non GAAP A reconciliation of our GAAP to non GAAP data is included with the earnings release issued yesterday. In the 2nd quarter, revenue reached a record $221,000,000 21% higher sequentially and 62% higher year over year. Earnings per ADS were $1.50 35% higher sequentially and 84% higher year over year. Now I will walk through the performance of our 3 key during the Q1. SSD controller sales increased 30% to 35% sequentially and 105% to 110% year over year. Growth was driven entirely by our PCIe Gen 3 SSD controllers, which are primarily for OEMs. EMMC plus UFS controller sales also reached a record high, growing 10% to 15% sequentially and 25% to 30% year over year. Growth was driven by our UFS controllers. SSD solution sales increased 35% to 40% sequentially and were down 15% to 20% year over year. Our Ferri products grew year over year, while our Shannon products declined sharply. Gross margin in the 2nd quarter increased slightly to 51% from 50.3 50.7% in the prior quarter. As well as had discussed earlier, our better gross margin compared to guidance came from the execution of our 4 pronged Initiatives of up selling a richer mix of products, optimizing product allocation, better pricing discipline and the tuning of manufacturing processes. Operating expenses in the 2nd quarter were $48,400,000 $4,500,000 higher than the prior quarter, primarily from higher compensation accruals. Operating margin in the 2nd quarter was 29.2%, an increase from 26.6% in the 1st quarter and up significantly from 22.2% a year ago. Our 29.2% operating margin in this quarter is higher than the 26% to 28% guidance due to stronger revenue growth and better gross margin, partially offset by higher operating expenses. We are delivering strong operating leverage and making good progress toward our 30% operating margin target. Our effective tax rate in the 2nd quarter was 18.6%, slightly lower than our 20% tax rate guidance. Stock based compensation and our operating expense, which we exclude from our non GAAP results, was $2,400,000 in the 2nd quarter, within our guidance of $2,000,000 to $3,000,000 We had $412,300,000 of cash, cash equivalents, Restricted cash and short term investments at the end of the second quarter compared to $371,000,000 at the end of the first quarter. We paid $12,200,000 in dividend to shareholders, the 3rd quarterly installment of our $1.40 for ADS annual dividend that was announced last October. Now let me turn to our Q3 and full year guidance and full year looking forward looking business trends. For the Q3, we expect Revenue to increase 7.5% to 12.5% sequentially to approximately 238 to $249,000,000 We expect revenue growth from continued strong SSD controllers and eMMC plus UFS controller sales, partially offset by declining SSD solution sales. 3rd quarter gross margin is expected to be in the range of 48.5% to 50.5%, which is significantly higher than our gross margin outlook 3 months ago and the result of the execution of our 4 pronged initiatives, which Wallace discussed previously. 3rd quarter operating margin should be in the range of 27.5% to 29.5%. In the Q3, we expect stock based compensation in the range of 4.6 to $5,600,000 For the full year 2021, we are now expecting the following: Revenue is now expected to grow in the range of 65% to 70% to 890 to $917,000,000 Our full year gross margin is now expected to be in the range of 49.5% to 50 point and the successful result of the execution of our 4 pronged initiative, which Wallace had previously discussed. 4th quarter gross margin should be flat sequentially. Operating margin is expected to be in the range of 20 up further from our previous guidance and approaching our 30% target. For the full year, we expect stock based compensation in the range of $18,000,000 to $20,000,000 more than the prior year. We expect our effective tax rate for the year to be about 20%, similar to our year to date rate. To conclude, this year, we will be able to power ahead and pull in our strategic sales and profitability targets without additional incremental foundry wafer supply. Let me reiterate that by the Q4 of this year, This $1,000,000,000 run rate is the foundation on top of which we expect to add strong sales growth from committed incremental foundry wafer capacity next year and the continued up selling of a richer product mix. Already our order book for next year is at least $1,500,000,000 and our team is currently working to ensure we can deliver this. Next quarter, we will provide an update on our work, And at the start of next year, we will provide our official 2022 revenue guidance. Additionally, We continue to invest resources to expand our pipeline of R and D activities relating to our core SSD, eMMC and UFS controllers, as well as expansion into new applications such as automotive. This concludes our prepared remarks, and we will now open the call to your questions. First question comes from the line of Jinja Hial of Needham and Company. Your line is open. Please go ahead. Yes. Thank you and congratulations on the great momentum that you're seeing. When you're indicating that your order book now points to 1,500,000,000 I was wondering if you could elaborate further on what you're seeing within that order book, what's driving the uptick in the growth? And then secondly, could you talk about your conversations with TSMC Regarding capacity allocation next year, what have those conversations been like? How much capacity has been allocated to support those targets. Thank you. I think regarding from our order book $1,500,000,000 majority come from OEM projects And some come from the order to backlog we cannot ship this year, but we have a solid $1,500,000,000 By end of this year, we believe we should see even much higher in our backlog. Regarding the discussion with TSMC, As everybody knows, TSMC Public has announced they see the wafer allocation will continue Through the 2021 also to entire 2022, because all the new investment Probably will not contribute, especially for mature technology until 2023. With the incremental To meet the wafer supply, we have confidence to increase our cell revenue to grow in 2022 with a fair amount of percentage. However, we will continue to negotiate this call with TSMC and other Boundary maker to increase wafer supply in order to meet the very large amount of demand from our worldwide customers. Thank you for that Wallace. With respect to the upsize in gross margins that you're seeing in the quarter, Wondering how sustainable that gross margin shift is. You mentioned in the press release the shift towards higher value products, Hi. You're now engaging in where you can actually increase the price. I think that's a change from what you talked about 4 where I believe the pricing was set in some of these contracts. So maybe you could talk a little bit about those two dynamics in terms of pricing and also in terms of mix of Higher richer mix of products. Thank you. Rajiv, we feel very good about our current situation. With the rollout of the initiatives that Wallace had pointed out earlier, focusing on upselling Richard, mix of products, allocating more products to higher margin accounts and where possible, re pricing products to cover our higher manufacturing costs. These are all initiatives that we are already executing and we'll continue to execute throughout the rest of the year and into next year. So we feel very good about our Is there opportunities? We love to take up our gross margin even more than where we are indicating, but there's a lot of work to do. And for what we're doing right now, the gross margin guidance that we just talked about, those are numbers that we feel fairly comfortable about. Next question is from the line of Anthony Shaw of Craig Hallum. Your line is open. Please go ahead. Hello, Craig Hallum, your line is open. Please go ahead. Tony, are you on mute? No, I'm not on mute. Go ahead. Can you hear me? Yes. Okay, great. Finally. Rehan, probably for you, can you give us a breakdown of your non kind of notebook business, what percent of revenues that might be, the IoT Bucket, if you will, what kind of growth rates you're seeing? And then I had a follow-up after that. Right. So for the non VOX notebooks products, they're primarily related to our eMMC plus UFS as our SSD controllers are very PC, notebook PC oriented. Now for the eMMC plus UFS, they were about 25% to 30% of sales last year and we expect this to inch up this year given the very strong growth. And within that bucket, a large part of it is smartphone, but we also have a lot of eMMC going into non smart Applications, Wallace had mentioned a long list of those applications are very popular with consumers, including smart TVs and other applications, smart speakers. So these are products that Are still growing, and we expect this part of the market to continue to grow modestly over the foreseeable future. Okay. Just as a follow-up, the question that I get asked most from investors in increasing amounts Recently is a share buyback. You have incredible visibility. You're talking about an Order book of over $1,500,000,000 heading into next year, 3 years' worth of visibility. You got a stock trading at an 8pex cash. It just astounds me and investors that you guys haven't initiated a share buyback. So I'm hoping your Board has listened to this call and I'd love to hear your thoughts on Why you haven't initiated a share buyback? Thanks. Well, Tony, our primary means of returning capital to shareholders is from Our dividend payment and historically, we paid up to half of our free cash flow. Given our Our very strong operating performance and good visibility into 2022, it is likely that our Board, during the next Dividend declaration in October, they could consider something a dividend higher than what we paid last year. All right. Thanks, Riyadh. Thank you. Next question is from the line of Craig K. Ellis of B. Riley Securities. Please go ahead. Yes. Thanks for taking the question and guys congratulations on the very strong performance in the business. I wanted to start with a question Wallace, and Wallace, what I want to do is kind of pick up where I left off on the last quarter's call where I inquired about Really the trends you were seeing as more of your customers look to outsource eMMC controllers and you The dominant share of the market like you talked about again today and the question is a little bit different and it focuses on the SSD controller Opportunity, given the very robust outlook you have for PCIe Gen 4, do you get the sense that more of The NAND OEMs are starting to outsource more of their controller work. And to the extent that they are, to what extent do you think you're going to That is a very good question. In general, We think NAND maker, they all want to maximize their NAND based solution profitability. For eMMC, it's very natural. For eMMC, the average density is small. Maximum is 64 gigabyte. There's very few in 128 gigabyte. We see a lot of the even 32 gigabyte application. So NAND maker, they also see the wafer supply constraint. So they move all the wafer, variable wafer, move to higher density solid product. That's why we see tremendous demand from eMMC controller To our company, a direct matter from NAND maker, our leading module maker, we have much more than we can supply and support. We will continue the effort and try to another industrial breakdown for eMMC solution to many, many consumer electronic devices. For SSD, that's another story because we do see NAND makers, They have a tendency to start to outsource mainstream and value line projects to 3rd party like Silicon Motion because we have a strong track record with loan history with all NAND makers That becomes a default standard candidate to take the opportunity. Frankly speaking, today, We have more project opportunities than we can we are resorting and support. So this is very, very important moment. We continue to grow and recruit talent R and D to join us and continue to work on our really new project to make it successful. It's very, very important because the new generation of technology for NAND beyond 176 layer Even beyond 200 layer stack, it is very critical for controller maker to have a deep knowledge to work closely with the NAND maker So we can provide sufficient compensation for NAND Endurance and retention. This is very, very important. We can work closely with NAND maker to deliver various profound solution to the OEM customer as well as consumer. So this is a great opportunity. We see the trend will continue and we are in a very favorable position to take the opportunity And all sorts of different NAND makers. That's really helpful color. Thank you. And then for my follow-up question, I wanted to flip it Over to Riyadh. Very helpful framework that you provided and that Wallace has provided on the factors that are leading to higher gross margin. And Riyadh, my Question is, for the change in gross margin in the back half of the year that we're seeing very significant improvement from prior expectations, What's the relative contribution from each of the four factors that were mentioned? And as we look to calendar 'twenty two, Which of those factors has the greatest potential and how significant would that be for further gross margin improvement? Thank you. Craig, the largest piece relates to our product mix, which also includes our allocation of products towards Higher accounts, the initiatives relating to these moves have been the biggest driver in terms of contributing to higher gross But that said, where possible, we'd also seek to reprice our products to better reflect the higher cost of our products that we're Going into what we need to do to deliver. Got it. Thanks guys. Good luck. Thank you. Our next question is from the line of Karl Ackerman of Cowen and Company. Your line is open. Please go ahead. Hey, hello guys. This is Eddie for Karl Ackerman. I have a couple of questions. There have been reports that your largest foundry partner will increase 28 nanometer capacity from 40,000 to 100,000 records per month by the end of this year. While that should enable you to control existing customer orders, have you seen any indication from NAND OEMs I cannot comment for TSMC, because they have their capacity guidance and because some Factory expansion also relate to some political issue and we really have no insight, sorry. However, we do know the We do have many opportunity come from NAND maker or directly from major OEM customers, including The very large scale customer from automotive as well as other sectors. So, it's really how we really can manage so many opportunity under the supply shortage condition They have to be very careful to make a decision because when we come meet, we have put all the resource development, IP, software development, Quality people, everything and count. And we have to make sure to use our RD resources wisely in order to get a Sufficient financial return is very, very important. We don't really worry about the business today, which is Our constraint is wafer supply. So this is the most important thing we should focus on and to secure more supply in order to meet customers' demand For next year end 2023. Eddie, let me also add with the investments that TSMC has been announcing, we do not believe it's going to change the direction of our NAND partners outsourcing to us, the reason Wallace had talked about earlier. No, that's great. Thanks. Thanks for the color. And another question is NAND demand appears to Further outstrips supply and our field work indicates NAND OEMs are prioritizing high capacity SSDs. Now in the past, as Mencapacities had silent OEMs prioritized enterprise as the season that became a growth challenge for you. May you address why that reasoning may not make sense in the current environment? And thank you and congrats on the results. This year, it's the underlying condition that we're facing for our business It's more about the supply picture. We have demand that is significantly outstripping our So the underlying conditions on the NAND flash dynamic side Industry conditions, whether their allocation is more towards enterprise or into other Those decisions have no real material impact to our business as it relates to the shifting Of the demand picture. Right now, the key focus for us is about the supply side, how we can drive more products And the supply capacity that we have on hand. Thank you. Thank you. Next question is from the line of Suji Desilva of ROTH Capital, the line is open. Please go ahead. Hello, Wallace. Hello, again, congratulations on the momentum here. So given the NAND supply demand situation, I'm wondering if the mix of OEM versus module maker gets higher historically if you're leaning your Shipment toward OEM and if that's one of the factors in the gross margin tailwind that might correct back if module makers get allocation again in the future? I think it's a very good question. I think every company has to make a wise choice, but keep it balanced. Daphne OEM project is more important because we have to allocate sufficient wafer and to supply the OEM project because that's what we commit. At the same time, we also want to balance module maker. We don't want the majority module maker die because many of them Being with us for 16 or 18 years, I think we really have to look at the product itself And important for the supply chain, if the customer, the existing customer, they have multiple source, sometimes we will try to We do the wait, but really we are sole supplier, we have to make sure we can meet to fulfill the supply. It's a pretty complicated Decision equation, but through that we also will review all the gross margin among all the products and put it as a priority. So this is the thing we feel very comfortable because it doesn't matter every customer, I think they all face Small percentage or large percentage is short from Silicon Motion. We feel very sorry for that situation. That's why we worked very hard to try to Thank you. So, Suji, let me also add, some of our module makers are now very large and very And our ability to and are already engaged in taking projects with OEMs like PC OEMs and so for these large sophisticated module makers, we don't treat them any differently than the NAND flash makers. And the level of profitability It really depends on the project. It doesn't necessarily mean that the product visibility is better with one class of product customers or the other. It really is the value asset that we are bringing that matters. Okay. So it's good Bart Chappell. That's helpful to know. And then, the S and P Solutions business, trying to understand where the Shannon revenue level is now. Is that going to have a further step down As you kind of manage away from that and what the margin implications there, I imagine that's also a lower margin business that you'd be moving away from. Regarding channel business, our really main goal this year and that tradition is really maintain the relationship with the customer, Because it also channels on NAND procurement also is challenging, we do not want to grow channel business due to lower margin to dilute our gross margin. However, we have maintained certain important projects in case with Alibaba, Baidu and our major customers Make sure that our development technology will continue waiting for our really Gen 5 major controller coming And to shine the market. But I think it's also due to because we have a wafer constraint, With allocation, that's why we have to allocate carefully because we have so many OEM demand from NAND makers, well, PC OEM and smartphone customer. Okay. Congrats guys. Thank you. Next question is from the line of Mehdi Hosseini of SIG. Your line is open. Please go ahead. Yes, thanks for taking my question. A couple of follow ups. And thanks for and also thanks for providing visibility into 'twenty With minimum revenue of $1,500,000,000 And the question I have here is, What are the key growth assumptions for different sectors? And if you don't want to elaborate, how should I think about the fastest growth versus the relatively lower growth segment? I would say Our clients' DWE continue to grow, although, Pingtan HN3 next year growth rate will be modestly, But the PCI Chen Fu will grow very strong to carry because we have a very large design share in PC OEM. We stated it's almost 50% or higher by end of the next year. So that we have 8 different customers, 5 on NAND maker with our Qutai Gen 4 controller and ramping next year. For eMMC plus UFS, This also will grow very, very strongly. It also depends how many wafer We can secure, we see it's good enough to grow for certain level we guarantee is Exceed the $1,000,000,000 of revenue next year, but we think the backlog will continue to pile up By end of this year, we will continue to work very hard to secure more wafer, especially mature technology, because many eMMC Are in 55, 40 nanometer and 28 nanometer. These mature technology wafers are in severe allocation All foundry makers. So this is very critical how fast we can port in, work with TSMC as well as other foundry makers That can grow overall the eMMC plus UFS business. While as PCIe $4 is used for commercial segment of the notebook. Is that correct? It's used both commercial and consumer. We have 2 generation of mentioned PCIe Gen 4 controller, 1 is 28 nanometer, 1 is 12 nanometer. This year, we're ramping with more is 28 nanometer next year, Majority will be transitioning to 12 nanometer. Sure. I think what I was trying to highlight is there is a concern that A consumer notebook like Chromebook may roll over. It can grow 20 some percent plus per year in But I think commercial segment, which has been relatively quiet or muted, could turn on and that's a Significant positive catalysts for Silicon Motion. Am I thinking about this the right way? Let me just try to get it straight. Chromebook this year, the total volume just around 40,000,000 to 50,000,000 units It's really small and majority use eMMC, not SSD, they use embedded SSD. And we are in a very small portion in the Chromebook today And the Chromebook going up and going down have relatively no impact to our business. And for SSD, we talk about really for mainstream Notebook and for both commercial for corporate accounts of consumer notebook, so that is used M. 2 SSD And that portion I think will grow very strongly and consistently with all the top 5 PC OEMs. Sure. Got it. And then one follow-up for Riaz. Is it a product mix that is going to Put a lid on the gross margin in the back half of the year despite sequential revenue growth, It seems like margins are going to come down. And I'm just trying to better understand, is that because of a higher base? Is that because of the mix? Or is it just your year end gross margin, operating margin guide is conservative? Mehdi, our gross margin expectations for the second half of the year is going to be significantly higher than What we had originally guided, but obviously, we still have a lot of work to do. We'd love to take our gross margin even higher than what we've just talked about. And so this is going to be coming from the continued execution of the The 4 prong initiatives that Wallace had talked about relating to up selling our product mix to richer product mix, relating to how we allocate towards higher margin accounts, more profitable accounts, relating We're also working our operations team are also working very hard to see how we can better debottleneck our processes with our contract manufacturer for back end services. So all four of these are still in execution And the more we are able to work our initiatives, the better our gross margin could be. But as a baseline, the gross margins we talked about are what we're guiding. And if we can execute even better, We'd love to take up our gross margin higher than what we just guided. Sure. Thank you. And on the execution side, You're executing flawlessly on managing working capital. Your free cash flow margin for the June quarter was 25%. You have grown cash. And if I just take your base assumption for 2022 of $1,500,000,000 of revenue, your cash could go towards Mid teens, dollars 15 net cash per share. And I know the question came up earlier, but I'm going to ask it again. Is there Something you can offer us, why not become more aggressive with buyback or Why not consider strategic options because the cash is going up, valuation not changing. And I'm just trying to think how the management team is Thinking about reconciling execution, free cash flow margin with valuation on share price. Hi, Phil. I think let me just answer the question. I think you're looking for Silicon Motion today, our outstanding Total diluted 35,000,000 shares. So really, it's not really very meaningful for us to do share buyback. We As Ria said, we definitely, as a Board, when we have more free cash, we either do more investment Certainly MMA, we will have potentially increased the dividend. That's what the Board should try to provide to the shareholder. I think this is the direction we think in next quarter is likely to happen, but wait for the next quarter After our Board meeting. And Mehdi, let me add. Historically, we've been pretty good about returning capital to shareholders. We typically return up to half of our free cash flow, and we've been doing that, returning half of our free cash flow to shareholders for over the last a few years and we expect to continue that. And for us, the primary means of returning capital is through our dividend payments. And so with our upcoming we just paid our 3rd The installment of our quarterly dividend, the last one will be coming soon. So by October of this year, we'll have to decide on our dividend for the upcoming 4 quarters. And at that time in October, given the strong performance of our business Good visibility into next year. The likelihood of a higher dividend being declared is a good one. And Back to your question about what do we do with our cash and the answer to you is we will continue to return to our shareholders And for us, the primary mean is through our dividend payments. Thank you. Thanks for taking all my questions. Thank you. Our next question is from the line of Gokul Hariharan of JPMorgan. Please go ahead. Your line is open. Yes, hi. Congrats on the great results. Thanks for taking my questions. First of all, Valis or Riyadh, could you talk a little bit about The SSD controller market, you're growing at almost 100% in first half. Looks like the growth rate is still going to continue around the same pace. How much of that is the volume growth? How much of that is pricing roughly? Are we still looking at average ASP So we are in the $4.5 to $5 range. And could you also give us a bit of context in terms of How much market share you have of your addressable market in SSD controllers, especially in consumer SSD controllers? So we will continue to grow our client SSD controller business. We are outperformed in the market growth. But we cannot comment regarding ASP dollars, but what we can assure you, the PCIe Gen 3 is higher than SATA controller, The PCIe Gen 4 also higher than PCIe Gen 3. So we definitely expect next year because of strong growth for our PCIe Gen 4. So Regarding the market share, we believe for last year, We are around between 25% to 30% market share. This year, we'll grow 5% to 10%. So, roughly It's around 35% to 40% range. We have ambition to grow beyond 40% And just depends, it's really not depend on the business, depends how quickly we can build a more R and D team and to serve more demand, Especially also from NAND makers. Okay. So is it fair to assume that most of the growth this year is coming from units and a little bit of it is coming from mix improvement, not really pricing? Also from the mix price improvement. Okay. Maybe I move on to the second question. I think you talked about M and A. Seems like one of the problems, I think, that the market has in terms of evaluating silicon motion is that the obviously, there is ASP upgrades. Could you talk about any of the initiatives that Silicon Motion is doing to potentially address some newer addressable market, either an adjacency or something else that you have in mind, given that you've executed extremely well in the current SoC controller and eMMC market? Gokul, we're doing really well in the client device market, right. So this Our market SSDs already account for 60%, 65% last year, we'll probably be up to 75 Dan, clearly there is a cap in terms of what's addressable. Same thing with UFS and smartphones. There is We've year to date, we're just getting to our 1st million milestone. We have our upcoming Gen 5, we're still executing with our enterprise class Gen 4. So this is a huge blue sky opportunity for us that will But additionally, in addition to the enterprise class of SSD controllers, we also have our For eMMC products where with the NAND flash makers exiting beginning to exit the low density applications, this creates opportunity for us And we're talking about a 1,000,000,000 unit plus opportunity with EMMC. And so this is another interesting Relating to what we can play in and this is still at a pretty early stage, but already we're seeing a lot of design activities by The automotive OEMs and their partners and we've been involved in a lot of these projects. Let me just add some comment is As you see from the business model, traditionally, when the storage product become mature and The NAND maker moving to the new generation and they're moving to higher density, higher performance. But you're Looking for the eMMC, for example, is one of a great example today because eMMC, the maximum density probably 128 gigabyte, Majority around 64, 32 or even 16 gigabyte. And there's a lot of interest for the NAND maker because manufacturing costs similar. But as the financial return, this is very limited. However, that is a huge because of the JAD standard, that's a huge demand for all consumer electronics And growing IoT devices. And we become the seller from merchant controller maker provide solution. Our really backlog is 2 times than what we can supply today. So there's quite a lot of things because we NAND maker probably won't use their R and D resources for this kind of a trend because this product is mature. Same thing for clients being in the future. And we also have some other important product to do because really cell revenue is very, very small. We really do not want to talk It's going to become very mature and we will try to talk with the investor analysts because I think Silicon Motion, we are not counting on just a few controller. We have much bigger ambition than where we are today. Understood. Thank you very much. Thank you. The last question is from the line of Matt Rysen of Redbush Securities, thank you so much. Please go ahead. Good morning. Thanks for taking my question. So the prominent pushback or concern I hear from investors around S and I is talking to the cyclicality of End markets for NAND, so whether it's PCs, handsets, what have you. Wallace, I think what you've described is a number Secular growth opportunities that are very company specific, whether it's new Gen 4 PK customer wins, Opportunities, you're just talking about an IoT with EMMC, new UFS customers. Is there any way you when we look at that order book of $1,500,000,000 for 2022, You can talk to how much of that incremental how much of those incremental orders are tied to new business Versus either existing designs or follow on designs to existing designs, like any characterization you could provide that would be Very helpful. Thanks. So I think in the past couple of years, It looks like our business really not showed growth consistency. That's why a lot of the investors have concern regarding How stable and how fast the promotion can grow. Now I think we are moving to the more Healthy business model, all our sales revenue this year is designed from last year or 2 years ago. And what we are working on today is working for next year and beyond next year in 2024. So that's why the book we have is very, very stable. That's really doesn't need any new design that already happened today. And that's why the audit book is very rock solid and I'm pretty sure they will pile up to even higher number by end of this year. And our really main goal is to secure more wafer and such we can Fulfilled the demand from many, many customers from a very, very important project, very, very critical, not just for PC, Not just for smartphone, not just for consumer electronic devices, Some new innovation, but we do have quite a lot for automotive sector we really haven't really speak for. I think we have a very diversified product portfolio. We have very strong, very broad customer base. We have many, many opportunity. Now we really want to leverage our base, our technology product and try to have a more manufacturable capacity and to feel the demand. And we think our growth is very, very solid and consistent and the market trend favors the commotion and our customers gained market share. That's a fact. Thanks, Walt. That's all from me. Thank you. Now I'd like to hand the conference back to Mr. Raul's Qiu for closing remarks. Please go ahead, sir. Thank you everyone for joining us today and for your continued interest in the ComMotion. We will be attending several investor conferences over the next few months, all of which we believe remain virtual events. The schedule of this event will be posted on the Investor Relations section of our corporate website. Thank you everyone for joining us today. Goodbye for now. Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now all disconnect.