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. After the speaker's presentation, there will be a question- and- answer session. To ask a question during the session, you'll need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. 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 condition, and business prospects.
Although such statements are based on our own information and information from other sources we believe to be reliable, you should not place undue reliance on them. These statements involve risks and uncertainties, and actual market trends and our results may differ materially from those expressed or implied in these forward-looking statements for a variety of reasons. Potential risks and uncertainties include, but are not limited to, continued competitive pressure in the semiconductor industry and the effect of such pressure on prices, unpredictable changes in technology and consumer demand for multimedia consumer electronics, the state of and any change in our relationship with our major customers, and changes in political, economic, legal, and social conditions in Taiwan. For additional discussion of these risks and uncertainties and other factors, please see the documents we file from time to time with the Securities and Exchange Commission.
We assume no obligation to update any forward-looking statements, which apply only as of the date of this conference call. I'd like to hand the conference over to your speaker today, Mr. Chris Chaney, Director of Investor Relations and Strategy. Chris, go ahead.
Thank you, Annie. Good morning, everyone, and welcome to Silicon Motion's second quarter 2021 financial results conference call and webcast. As Annie mentioned, my name is Chris Chaney. I'm the Director of Investor Relations. Joining me today on this call are Wallace Kou, 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 second quarter results and our outlook. We'll conclude with the question and answer period. Before we get started, I'd like to remind you of our safe harbor policy, which Annie 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-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 similar to how we analyze our own operating results. The reconciliation of GAAP to non-GAAP financial data can be found in our earnings release issued yesterday. We ask that you review it in conjunction with this call. With that, I'd like to now turn the call over to Wallace.
Thank you, Chris. Hello, everyone, and thank you for joining us today. In the second quarter, we delivered another quarter of record sales and earnings. Revenue grew 21% sequentially to a record $221 million, and earnings per ADS for a record $1.50. Sales of both SSD controllers and eMMC plus UFS controllers grew in the second quarter 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, repricing 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 four-pronged initiative of upselling a richer mix of products, optimizing product allocation, better pricing discipline, and tuning manufacturing processes is critical for creating continued value-add growth and profitability when our manufacturing capacity this year is capped and manufacturing costs remain 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 billion sales objective and growth roadmap. We will likely achieve this target much earlier. Based on our latest sales projection, our annual run rate expected to be already at least $1 billion by this year's fourth quarter. We expect sales to comfortably exceed $1 billion next year as we add meaningful incremental foundry capacity already committed to us, and from continued execution of our four-pronged initiative, which including selling a richer mix of products.
Sales next year will include the rapid scaling of our higher value, high volume PCIe Gen 4 SSD controllers. Our customers have also provide us with purchase orders for the next year, and the order book today already exceeds $1.5 billion. Our strong order book is a result of many years of hard work, no last-minute opportunistic procurement order of off-the-shelf parts by customers. We have been building our business pipeline for many years, leading to these purchase orders. Our OEM projects typically kick off one year-three years before initial sales, depending on product complexity. Projects start with defining the OEM product features and customization requirement 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 with 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 and smartphones, and our customers are actively using our controller to develop storage solutions 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 sale grew 30%-35% sequentially. Year-to-date, our SSD controller sale grew 75%-80% year-over-year, seeing significantly faster than SSD market growth as we gain 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 order book, we expect sale of our PCIe Gen 3 SSD controller to grow modestly through next year. Our overall SSD controller sale 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 third quarter of this year, and we expect sale to ramp rapidly through 2022. Our PCIe Gen 4 SSD controller design win with NAND flash makers and Tier 1 module maker customer will ramp as three successive generation of annual performance upgraded, cost reduction, and higher layer count NAND flash support.
Three successive generation of PCIe Gen 4 controller solution to be introduced annually from 2021 to 2023. We have timed our rapid introduction of first and second generation PCIe Gen 4 SSD controllers so OEM can align their product with Intel's notebook CPU platform refresh in the third quarter of this year, and introduction of their next generation, much higher volume chipset platform next year. We will start the ramp of our first generation Gen 4 with two customers. We will quickly expand our Gen 4 customer base from two-eight customers next year with our second generation solution. Our third generation will follow in 2023. We will follow up with the upcoming series of PCIe Gen 5 SSD controllers. Of our eight customers next year, five are NAND flash makers. All 8 customers are developing SSD for OEM projects.
When all of our second generation projects are fully ramped towards the end of 2022 or in the first half of the following year, we expect to be in approximately half of our PC OEM PCIe Gen 4 SSD sockets. Separately, our enterprise-class SSD controller continue to make solid progress in data center application, and will be ramping toward our first 1 million units milestone.
Our unique hardware plus software turnkey enterprise-class PCIe Gen 4 SSD controller expected to start shipping to customers such as Alibaba, Baidu, and Kingston by end of this year, and lay the foundation for upcoming PCIe Gen 5 enterprise SSD controllers. With our upcoming flagship enterprise-class PCIe Gen 5 SSD controller, we continue to meet design milestones and track toward sampling in the second half of next year and sell the 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 sale grew 10%-15% during the second quarter. Year-to-date, our eMMC plus UFS controller sale grew 35%-40% year-over-year. Significantly faster than the overall smartphone market growth as we and our customer gain market share. Our UFS NAND flash 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 makers in China and now elsewhere, growing eMMC and new UFS business activity in the low-cost smartphone as well as the large but fragmented IoT and smart devices market. eMMC is a JEDEC standard embedded storage that is generally a low-capacity solution, usually at the most 64 GB.
NAND flash makers 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+ billion unit eMMC 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 smartphone to smart TV, smart speakers, Chromebooks, set-top box, streaming TV dongles, smart watches, and other wearables, drones, portable game consoles, and many more applications popular with consumers. We are also seeing increasing design activity relating to the adoption of automotive AEC-Q100 and ASPICE-compliant eMMC and UFS embedded storage solution as electronic content in cars and other vehicle grows.
Furthermore, we are seeing increasing design activity involving multiple eMMC or UFS storage devices per vehicle. Automotive OEMs are now designing vehicles with multiple eMMC and UFS-based storage devices for central console infotainment system, navigation system, rear-seat entertainment, dashboard instrumentation, and ADAS image recognition, route decision, and data recording systems that enhance road use safety and parking. Since going public in 2005, we have seen the explosive proliferation of NAND-based storage solutions into more and more categories of applications. From initially just memory cards and USB flash drive to embedded storage for smartphones, IoT, and smart devices, as well as SSD for PC and data center. 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 four-prong initiative of optimizing resources to deliver higher value scales and enhance profitability. We believe current market condition favors Silicon Motion in partnership with our customers in continuing market share gains in a broad range of applications due to our relatively large and favorable position in the supply chain and in managing OEM product availability. In comparison, smaller merchant suppliers and the captive program are disadvantaged. We believe current market conditions could remain unchanged for the next few years. Now I will turn the call over to Riyadh to discuss our financial results and our outlook.
Thank you, Wallace, and good morning, everyone. I will discuss additional details of our second quarter results and then provide our guidance. 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 second quarter, revenue reached a record $221 million, 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 three key products during the first quarter. SSD controller sales increased 30%-35% sequentially and 105%-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%-15% sequentially and 25%-30% year-over-year.
Growth was driven by our UFS controllers. SSD solution sales increased 35%-40% sequentially and were down 15%-20% year-over-year. Our Ferri products grew year-over-year, while our Shannon products declined sharply. Gross margin in the second quarter increased slightly to 51%, from 50.7% in the prior quarter. As Wallace had discussed earlier, our better gross margin compared to guidance came from the execution of our four-prong initiative of upselling a richer mix of products, optimizing product allocation, better pricing discipline, and the tuning of manufacturing processes. Operating expenses in the second quarter were $48.4 million, $4.5 million higher than the prior quarter, primarily from higher compensation accruals. Operating margin in the second quarter was 29.2%, an increase from 26.6% in the first quarter, and up significantly from 22.2% a year ago.
Our 29.2% operating margin this quarter is higher than the 26%-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 second quarter was 18.6%, slightly lower than our 20% tax rate guidance. Stock-based compensation in our operating expense, which we exclude from our non-GAAP results, was $2.4 million in the second quarter, within our guidance of $2 million-$3 million. We had $412.3 million of cash equivalents, restricted cash, and short-term investments at the end of the second quarter, compared to $371 million at the end of the first quarter. We paid $12.2 million in dividend to shareholders, the third quarterly installment of our $1.40 per ADS annual dividend that was announced last October.
Let me turn to our third quarter and full-year guidance and forward-looking business trends. For the third quarter, we expect revenue to increase 7.5%-12.5% sequentially to approximately $238 million-$249 million. We expect revenue growth from continued strong SSD controllers and eMMC plus UFS controller sales, partially offset by declining SSD solution sales. Third quarter gross margin is expected to be in the range of 48.5%-50.5%, which is significantly higher than our gross margin outlook three months ago, and the result of the execution of our four-prong initiative, which Wallace discussed previously. Third quarter operating margin should be in the range of 27.5%-29.5%. In the third quarter, we expect stock-based compensation in the range of $4.6 million-$5.6 million. For the full year 2021, we are now expecting the following.
Revenue is now expected to grow in the range of 65%-70%, to $890 million-$917 million. Our full-year gross margin is now expected to be in the range of 49.5%-50.5% range. Again, much higher than our full-year gross margin previously provided three months ago, and the successful result of the execution of our four-prong initiative, which Wallace had previously discussed. Fourth quarter gross margin should be flat sequentially. Operating margin is expected to be in the range of 27.5%-29.5%, up sharply from 21.8% last year, 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 million-$20 million, 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 fourth quarter of this year, we will likely meet on a run rate basis our $1 billion sales target. This $1 billion 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 upselling of a richer product mix. Already, our order book for next year is at least $1.5 billion, 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.
We continue to invest resources to expand our pipeline of R&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.
Thank you. As a reminder, to ask a question, you'll need to press star one on your telephone. To withdraw your question, please press the pound or hash key. Please stand by while we compile the Q&A roster. Once again, please press star one for your questions. First question comes from the line of Rajvindra Gill of Needham & Company. 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 $1.5 billion, 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? 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 orders book, $1.5 billion majority come from OEM projects, and some come from the order, the backlog we cannot ship this year. We have a solid $1.5 billion. By end of this year, we believe we should see even much higher in our backlog. Regarding the discussion with TSMC, as everybody know, TSMC probably 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 committed wafer supply, we have confidence to increase our sale revenue to grow in 2022 with a fair amount of percentage. However, we will continue to negotiate, discuss with TSMC and other foundry 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 upside in gross margins that you're seeing in the quarter, I'm wondering how sustainable that gross margin shift is? You mentioned in the press release a shift towards higher value products. You're now engaging in where you can actually increase the price. I think that's a change from what you talked about before, where I believe the pricing was set in some of these contracts. Maybe you could talk a little bit about those two dynamics in terms of pricing and also in terms of a richer mix of products. Thank you.
Rajvindra, we feel very good about our current situation. With the rollout of the initiatives that Wallace had pointed out earlier, focusing on upselling a richer mix of products, allocating more products to higher margin accounts and where possible, repricing products to cover our higher manufacturing costs. These are all initiatives that we're already executing and will continue to execute throughout the rest of the year and into next year. We feel very good about our gross margins at today's levels, extending to this year and into next year. Possibly, if there are opportunities, we'd love to take up our gross margin even more than where we are indicating, but there's a lot of work to do. 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.
Okay. Thank you. Next question is from the line of Anthony Stoss of Craig-Hallum. 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.
Please go ahead.
Can you hear me?
Yes.
Okay, great. Finally. Riyadh, probably for you, can you give us a breakdown of your non-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. For the non-notebook products, they're primarily related to our eMMC plus UFS, as our SSD controllers are very notebook PC oriented. For the eMMC plus UFS, they were about 25%-30% of sales last year, and we expect this to inch up this year given the very strong growth. 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. 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 $1.5 billion heading into next year, three years' worth of visibility. You got a stock trading at an eight PE ex cash. It just astounds me and investors that you guys haven't initiated a share buyback. 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, Anthony, our primary means of returning capital to shareholders is from our dividend payment. Historically, we paid up to half of our free cash flow. Given 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 a dividend higher than what we paid last year.
All right. Thanks, Riyadh.
Thank you. Next question is from the line of Craig A. Ellis of B. Riley Securities. Please go ahead.
Thanks for taking the question, guys, congratulations on the very strong performance in the business. I wanted to start with a question for Wallace. Wallace, what I want to do is 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 wind up with a dominant share of the market like you talked about again today. The question's 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?
To the extent that they are, to what extent do you think you're going to benefit or benefit disproportionately from such a move?
That is a very good question. In general, we're seeing NAND maker, they all want to maximize their NAND-based solution profitability. eMMC, it's very natural because eMMC, the average density is small. Maximum is 64 GB. There's very few in 128 GB. We see a lot of even 32 GB application. NAND maker, they also see the wafer supply constraint. They move all the variable wafer, move to a higher density storage product. That's why we see a tremendous demand from eMMC controller to our company. The demand 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 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 project to third party like Silicon Motion. We have a strong track record with long history with all NAND makers, that we become the default standard candidate to take the opportunity. Frankly speaking, today, we have a more project opportunity than our resource can support. This is very important moment. We continue to grow and recruit talent, R&D, to join us and continue work on our really new project to make it successful. It's very important is because the new generation of a technology for NAND beyond 136-layer or even beyond 200-layer stack is very critical for controller maker, have a deep knowledge, work closely with the NAND maker so we can provide sufficient compensation for NAND endurance and retention.
It's very important we can work closely with NAND maker to deliver various profound solution to the OEM customer as well as consumer. There's a great opportunity. We see the trend will continue, and we are in very favorable position to take the opportunity from all sorts of opportunities from NAND makers.
That's really helpful, Kou. Thank you. Then, for my follow-up question, I wanted to flip it over to Riyadh. Very helpful framework that you've provided and that Wallace has provided on the factors that are leading to higher gross margin. 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? As we look to calendar 2022, 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 margin. That said, where possible, we'd also seek to reprice our products to better reflect the higher cost of our products that we're seeing 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. 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 nm capacity from 40,000 to 100,000 wafers per month by the end of this year. While that should enable you to fulfill existing customer orders, have you seen any indication from NAND OEMs reversing earlier decisions to outsource to you next year as incremental capacity comes online? Thank you.
I cannot com ment for TSMC because they have their proprietary capacity guidance, and because some factory expansion also relate to some political issue, we really have no insight, sorry. However, we do know we do have many opportunity come from NAND maker or directly from major OEM customer, including the very large scale customer from automotive as well as other sectors. It's really how we really can manage so many opportunity under the supply shortage condition is have to be very careful to make a decision. When we commit, we have put all the resource development, IP, software development, quality people, everything, and count. We have to make sure to use our R&D resources wisely in order to get a sufficient financial return. It's very, very important. We don't really worry about the business today, our constraint is wafer supply.
That is the most important thing we should focus on, and to secure more supply in order to meet customers' demand for next year and 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.
Mm-hmm. No, that's great. Thanks. Thanks for that. Another question is, NAND demand appears to further outstrip supply, and our field work indicates NAND OEMs are prioritizing high-capacity SSDs. Now, in the past, as NAND capacity has tightened, OEMs prioritize enterprise SSDs, and that became a growth challenge for you. May you address why that reasoning may not make sense in the current environment? Thank you, and congrats on the results.
This year, the underlying condition that we're facing for our business is more about the supply picture. We have demand that is significantly outstripping our ability to deliver. The underlying conditions on the NAND flash dynamic side of industry conditions, whether their allocation is more towards enterprise or into other application, 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 given the supply capacity that we have on hand.
Thank you.
Thank you. Next question is from the line of Suji Desilva of Roth Capital. Line is open. Please go ahead.
Hello, Wallace. Hello, Riyadh. Congratulations on the momentum here. Given the NAND supply demand situation, I'm wondering if the mix of OEM versus module maker is 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 the wise choice, but keep a balance. Definitely OEM project is more important because we have to allocate sufficient wafer and to supply the OEM project because that's we can meet. At the same time, we also want to balance the module maker. We don't want the majority module maker die because many of them been with us for 16 or 18 years. I think we really have to look at the product itself and the importance for the supply chain. If the existing customer, they have multiple source, sometimes we will try to reduce the weight. If really we are sole supplier, we have to make sure we can meet to fulfill the supply. It's a pretty complicated decision equation.
Through that, we also will review all the gross margin from among all the product and put as a priority. 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 shortage from Silicon Motion. We feel very sorry for that situation. That's why we work very hard, try to secure more wafer to meet the customer demand.
Suji, let me also add, some of our module makers are now very large and very sophisticated, and are already engaged in taking projects with OEMs like the PC OEMs. For these large, sophisticated module makers, we don't treat them any differently than the NAND flash makers. The level of profitability really depends on the projects. It doesn't necessarily mean that the profitability is better with one class of customers or the other. It really is the value add that we're bringing that matters.
Okay. It's good margin for you folks. That's helpful to know. The SSD 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 are? I imagine that's also a lower margin business that you'd be moving away from.
Regarding Shannon business, our main goal this year and next transition is maintain the relationship with the customer because it's also Shannon, some NAND procurement also is challenging. We do not want to grow Shannon business due to lower margin to dilute overall gross margin. However, we have maintained certain important project engaged with Alibaba, Baidu, and our major customer, make sure our development technology will continue waiting for our Gen 5 major controller coming and to shine the market. I think it also due to because, we have a wafer constraint, a wafer allocation. That's why we have to allocate carefully because so many OEM demand from NAND makers as well as PC OEM and smartphone customer.
Okay. Once again, congrats guys.
Thank you. Next question is from the line of Mehdi Hosseini of SIG. Line is open. Please go ahead.
Yes. Thanks for taking my question. A couple of follow-ups. Also thanks for providing visibility into 2022 with minimum revenue of $1.5 billion. The question I have here is, what are the key growth assumptions for different sectors? If you don't want to elaborate, how should I think about the fastest growth versus the relatively lower growth segment?
Well, I would say our clients SSDs , definitely will continue grow, although PCIe Gen 3 next year, growth rate will be modestly. PCIe Gen 4 will grow very strong, to carry because we have a very large design share in PC OEM. We state is almost 50% or higher by end of the next year, so that we have eight different customer, five from NAND maker with our Gen 4 controller and ramping next year. For eMMC plus UFS, we also will grow very strongly. It also depend how many wafer we can secure. We say it's good enough to grow for a certain level, we guarantee is exceed $1 billion sale revenue next year. We think the backlog will continue pile up by end of this year.
We'll continue work very hard to secure more wafer, especially in mature technology, because many eMMC are in 55 nm, 40 nm, and 28 nm. These mature technology wafer are in severe allocation from all foundry makers.
Sure.
It is very critical how fast we can port in, work with TSMC as well as other foundry maker that can grow overall the eMMC plus UFS business.
Well, as PCIe 4.0 is used for commercial segment of the notebook. Is that correct?
It's used both commercial and consumer. We have a two generation of mentioned PCIe Gen 4 controller. One use 28 nm, one use 12 nm. This year, we're ramping with more is 28 nm. Next year, majority will be transitioning to 12 nm.
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't grow 20 %+ per year in a perpetuity. I think commercial segment, which has been relatively quiet or muted, could turn on, and that's a significant positive catalyst for Silicon Motion. Am I thinking about this the right way?
Let me just try to get this straight. Chromebook, this year, the total volume just around 40 million-50 million units. It's relatively small. Majority use an eMMC, not SSD. They use embedded SSD. 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. For SSD, we talk about really for mainstream notebook and for both commercial, for corporate account, or for consumer notebook. That is used to M.2 SSD. That portion, I think, will grow very strongly and consistently with all the top five PC OEMs.
Sure. Got it. Then one follow-up for Riyadh. 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. 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. This is going to be coming from the continued execution of the four prime initiatives that Wallace had talked about relating to upselling our product mix to a richer product mix, relating to how we allocate towards higher margin accounts, more profitable accounts, relating to the ability to reprice our products where possible to reflect the higher costs that we have in our products. Furthermore, 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.
All four of these are still in execution, the more we are able to work our initiatives, the better our gross margin could be. As a baseline, the gross margins we talked about are what we're guiding. If we can execute even better, we'd love to take up our gross margin higher than what we've just guided.
Sure. Thank you. 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. If I just take your base assumption for 2022 off of $1.5 billion of revenue, your cash could go towards mid-teen, $15 net cash per share. 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? 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 the valuation on share price.
Hi, Hosseini. Let me just answer the question. I think you're looking for Silicon Motion today are outstanding share total dilute is 35 million shares. Really, it's not really very meaningful for us to do share buyback. As Riaz said, we definitely as a board, when we have more free cash, we either do more investment for certain M&A, or we will have potentially increase the dividend. That is the board to try to provide to the shareholder. I think this is the direction we think the next quarter is likely to happen, but wait for the next quarter after our board meeting.
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 few years, and we expect to continue that. For us, the primary means of returning capital to shareholders is through our dividend payments. We just paid our third installment of our quarterly dividend. The last one will be coming soon. By October of this year, we'll have to decide on our dividend for the upcoming four quarters. At that time in October, given the strong performance of our business and good visibility into next year, the likelihood of a higher dividend being declared is a good one.
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 means is through our dividend payments.
Thank you. Thanks for taking all my questions.
Thank you. The next question is from the line of Gokul Hariharan of JP Morgan. Please go ahead. Line is open.
Yeah, hi. Congrats on the great results. Thanks for taking my questions. First of all, Wallace 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 per SSD controller in the $4.50-$5 range? 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?
We will continue to grow our client SSD controller business. We over-performed in the market growth. We cannot comment regarding ASP dollar, but what we can assure you, the PCIe Gen 3 is higher than SATA controller. The PCIe Gen 4 also is higher than PCIe Gen 3. We definitely expect next year to be because a strong growth for our PCIe Gen 4, so every ASP for client controller should go higher. Regarding the market share, we believe for last year, we are around between 25%-30% market share. This year will grow 5%-10%. Roughly, it's around 35%-40% range. We have ambition to grow beyond 40%, and it's really not depend on the business, depend how quickly we can build a more R&D team and to serve more demand, especially all sorts of NAND makers.
Okay. 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 move on to the second question. I think you talked about M&A. Feels like one of the problems, I think, that the market has in terms of evaluating Silicon Motion is that the addressable market is still primarily SSD controller, which I think at least is a limited TAM in terms of units, but 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 SSD controller and eMMC market?
Gokul, we're doing really well in the client device market, right? This part of the market, SSDs already account for 60%, 65% last year, will probably be up to 75%. Clearly, there is a cap in terms of what's addressable. Same thing with UFS and smartphones. There's still a lot of upside opportunity there, but again, there is a natural cap. The opportunities that are coming incremental to the client device and to the smartphone for us includes a couple pieces. The first piece is our enterprise SSD controller market. Year- to- date, we're just getting to our first million milestone. We have our upcoming Gen 5. We're still executing with our enterprise class Gen 4. This is a huge blue sky opportunity for us that will be a big piece of how we continue to grow rapidly beyond when our client-based devices start plateauing.
Additionally, in addition to the enterprise class of SSD controllers, we also have our eMMC products where with the NAND flash makers exiting, beginning to exit the low-density applications, this creates opportunity for us to step in. We're talking about a 1 billion unit plus opportunity with eMMC, and so this is another interesting area for us to step into. Additionally, Wallace also talked extensively about automotive applications relating to what we can play in. 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 this from a business model, traditionally, when a storage product become mature, the NAND maker moving to the new generation, they're moving to higher density, high performance. Are you looking for the eMMC, for example, is one of a great example today, because eMMC, the maximum density probably 128 GB, majority around 64 GB, 32 GB, or even 16 GB. There's a less interest for the NAND maker become manufacturer cost similar. As a financial return, this is very limited. However, that is a huge, because it's JEDEC standard, that's a huge demand for all consumer electronics and growing IoT devices. We become the seller from merchant controller maker provide solution. By our really backlog is two times than what we can supply today.
This is quite a lot of thing because we continue to develop a new controller supporting upcoming new 3D NAND. That makes us a unique position. NAND maker probably won't use their R&D resources for this kind of a trend because this product is mature. Same thing for client [screen] in the future. We also have some other important product to do because really cell revenue is very, very small. We really do not want to talk about it. When it become very mature, and we will try to talk with the investor analyst. I think Silicon Motion, we are not come on just a few controller, and we have much bigger ambition than where we are today.
Understood. Thank you very much.
Thank you. Our last question is from the line of Matthew Bryson of Wedbush Securities. Line is open. Please go ahead.
Good morning. Thanks for taking my question. The predominant pushback or concern I hear from investors around SMI is tied to the cyclicality of end markets for NAND. Whether it's PCs, handsets, or what have you. Wallace, I think what you've described is a number of secular growth opportunities that are very company specific, whether it's new Gen 4 PCIe customer wins, opportunities you're just talking about in IoT, with the eMMC, new UFS customers. Is there any way you, when we look at that order book of $1.5 billion for 2022, that you can talk to 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 there would be very helpful. Thanks.
I think in the past couple years, it look like our business really not show growth consistency. That's why a lot of the investor have a concern regarding how stable and how fast Silicon Motion can grow. I think we are moving to the more healthy business model. All our sale revenue this year is designing from last year or two years ago. What we are working on today is working for next year and beyond next year into 2024. That's why the book we have is very, very stable. That really doesn't need any new design. It already happen today. That's why the order book is very rock solid, and I'm pretty sure they'll pile up to even higher number by end this year.
Our really main goal is to secure more wafers and such we can fulfill the demand from many, many customers. Some are very, very important projects, very, very critical, not just for PC, not just for smartphone, not just for consumer electronic devices. I see some new innovation. We do have quite a lot for automotive sector. We 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 opportunities. Now we really want to leverage our base, our technology product, and try to have a more manufacturable capacity and to fill the demand. We think our growth is very, very solid and consistent, and the market trend favors Silicon Motion and our customers gain market share. That's a fact.
Thanks, Wallace. That's all from me.
Thank you. I'd like to hand the conference back to Wallace Kou for closing remarks. Please go ahead, sir.
Thank you everyone for joining us today and for your continuing interest in Silicon Motion. We'll 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.