Earnings Call: Q1 2021

May 6, 2021

Earnings release

Good day, and thanks for standing by. Welcome to the Silicon Motion Technology Corporation's First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Onyed telephone. 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. And please be advised that today's conference being recorded. I would now like to hand the conference over to your first speaker for today, Mr. Chris Chaney, Director of Investor Relations and Strategy. Please go ahead. Thank you, Annie. Good morning, everyone, and welcome to Silicon Motion's Q1 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 Kahl, President and CEO and Riyadh Lai, our Chief Financial Officer. Following my comments, Wallace will make We'll provide a review of our key business developments, and then Riyadh will discuss our Q1 results and our outlook. We will then conclude with a question and answer period. Before we get started, I'd like to remind you of our safe harbor policy, call, which was read at the start of this call. For a comprehensive overview of the risks and uncertainties involved in investing in our securities, please refer filings with the U. S. Securities and Exchange Commission. For more details on our financial results, please refer to our press release, 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 performance comparisons of our operating results in a manner similar to how we analyze our own operating results. The reconciliation of our GAAP to non GAAP financial data can be found in our earnings release issued yesterday. Call. And with that, I'd like to turn the call over to Wallace. Thank you, Chris. Hello everyone and thank you for joining us today. In the Q1, We delivered record sales and EPS. Sales grew 27% sequentially to a record $182,000,000 and earnings per ADS were a record $1.11 Our strong revenue growth was driven by strong sales of both our SSD controllers and eMMC plus UFS controllers, which both products achieving record quarterly heights. The outlook of upcoming quarter And the rest of the year continued to be very strong and that we have secured additional wafers from our foundries. We are raising our full year outlook. Our order book remains very strong And continue to exceed our ability to supply. Looking into next year, we expect solid growth Based on continued strong demand for our products and available foundry supply, We are excited about our trajectory this year. Application that U. S. D and eMMC plus UFS Are doing well. Adoption of these solutions is growing and furthermore, we are growing our market share. Let me discuss key factors driving our growth this year. First, our SSD controllers, While the PC market is experiencing modest growth and SSD attach rate continue to rise, which are all beneficial for growth of our SSD controllers. The primary reason our controllers are growing rapidly market share gains. Several of our customers have been gaining market share and we have also been gaining share and our customers. Our customers have also been upsizing their order to us as they consolidate procurement. We have been gaining SSD controller in market share and expect to continue this trend. We have resigned the client's deep market and now believe our market share last year was in 25% to 30% range. Based on our strong controller sales growth this year, which will primarily be driven 5 PCI Gen 3 SSD and OEM programs. We believe we should pick up 5 to 10 percentage points market share. Our market share is increasing because our PCIe Gen 3 PC OEM programs, which we have discussed extensively in the past are scaling. We will be shipping our GM3 SSD controller to 6 of 7 NAND flash makers. We are also shipping our GM3 controller to several module makers with PC OEM programs. SSD using our GM3 controller will be used by all of our global PC OEMs. Additionally, We are gaining market share because our small merchant competitors and the captive controller sources of NAND flash makers are both also facing foundry supply issues. Our momentum will pick up further When our PCIe Gen4 SSD controller started ramping, our Gen4 controller will start shipping in the middle of this year, initially with a few PC OEM using Intel Tiger Lake platform. We expect our Gen 4 OEM program Based on the size of our current Gen 4 design win for OEM programs when fully ramped, we believe our controller We'll be using about half of our PC OEM Gen 4 SSDs. Let me add that We continue to outgun the competition. Last year, our client SSD controller share in the merchant market 4 times bigger than our closest competitor. And we expect our market share to grow further as more of our OEM SSD program enter production and scale. Now turning to our eMMC plus UFS controllers, Industry Recovery. Additionally, with smartphone embedded storage technology continuing Using our highly competitive jointly developed UFS controller with their industry leading NAND and Mobile DRAM technology will continue to outperform. We are also seeing positive customer engagement by our Chinese module makers and other customers with their UFS programs. In the legacy eMMC segment, we continue to be positively surprised by both sustaining power of eMMC and the expansion of our market opportunities. EMC remains ideal storage solution for applications that do not require large data storage capacity and are price sensitive and will continue to be widely used for the foreseeable future by low cost smartphones as well as IoT and other non smartphone applications such as smart TV, streaming dongles, set top box, smart speaker and mainstream Chromebooks. Our eMMC controller opportunity has also grown significantly larger with NAND maker exiting from the eMMC market as their priority has been changed. We are becoming the primary supplier of eMMC controllers. There are no other meaningful merchant suppliers of eMMC Controllers. Our strong audiobook is a result of solid end markets and growing demand of our controllers. Demand for our controller continues to exceed our ability to supply To our customers because of the very tight foundry industry capacity, We still do not have enough foundry capacity to manufacture all the products ordered by our customers. We have, however, secured additional foundry supply and as a result are able to meet more of our customers' needs and increase our full year revenue guidance. We have also secured additional foundry supply and our customers for their support in securing additional foundry supply. And to our many customers Welcome to our securing incremental foundry supply, without which the many ecosystems such as PC and smartphone that depend on our controller for storage solution could be negatively affected. Last quarter, we announced our $1,000,000,000 cell target by 2023 We could reach our goal sooner than our original expectation. Let me conclude And we have been marketing our unique Tian plan architecture to hyperscalers in both the U. S. In China, with very positive feedback, we expect to start sampling this SSD controller with customers in the second half of next year. 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 Q1 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 Q1, revenue reached a record $182,000,000 27% higher sequentially and 37% higher year over year. Earnings per ADS were $1.11 29 percent higher sequentially and 38% higher year over year. Now I will walk through the performance of our 3 key products during the Q1. SSD controller sales increased 25% to 30% sequentially and 45% to 50% year over year. Sequential strength of our Q1 SSD controller sales growth was primarily driven by our PCIe Gen 3 OEM programs. Channel market sales also grew sequentially, but more modestly. EMMC plus UFS controller sales also reached a record high, growing 30% to 35% sequentially and 50% to 55% year over year. Sequential strength of our eMMC plus UFS controller sales growth was primarily driven by our UFS controllers. UMMC controller sales also grew sequentially, but more modestly. SSD solutions sales increased 0% to 5% sequentially and were down 40% to 45% year over year. Gross margin in the Q1 increased from 49.3% in the prior quarter to 50.7%. Gross margin was higher than our guidance, primarily due to our focus on selling a better product mix for non OEM programs. Operating expenses in the Q1 were $43,900,000 $4,400,000 higher than the prior quarter, primarily due to higher compensation accruals. Operating margin in the Q1 was 26.6%, an increase from the 21.9% we generated in last year's Q4. Our effective tax rate in the Q1 was 20.9%, above our 15% to 20% tax rate guidance due to more sales from higher tax operating entities. Stock based compensation in our operating expense, which we exclude from our non GAAP results was $3,000,000 in the Q1, slightly below our guidance of $3,100,000 to 3 $300,000 We had $371,000,000 of cash, cash equivalents, restricted cash and short term investments at the end of the Q1 compared to $369,200,000 at the end of the Q4 last We paid $12,200,000 in dividends to shareholders. The 2nd quarterly installment of our $1.40 per ADS annual dividend that was announced last October. Now let me turn to our 2nd quarter and full year guidance and forward looking business trends. For the Q2, we expect revenue to increase 5% to 10% sequentially to approximately $192,000,000 to $201,000,000 We expect all three of our key products, SSD controllers, eMMC plus UFS controllers and SSD solutions 2nd quarter gross margin should be in the range of 48% to 50%. 2nd quarter operating margin should be in the range of 26% to 28%. In the Q2, we expect stock based compensation in the range of $2,000,000 to $3,000,000 For full year 2021, we are now expecting the following: With additional foundry supply allocation, we now expect revenue to grow in the range of 45% to 55% to $782,000,000 to $836,000,000 Our ability to meet customer demand, however, in the range of 47% to 49%. We expect gross margin in the second half of the year to be less favorable as Our back end and substrate costs have increased, while our prices to customers for OEM programs are bound by contractual terms. Furthermore, our OEM programs are driving our growth and despite foundry capacity limitations, scaling faster than expectations and subject to volume discounts. We believe our short term investment in slightly lower gross margin Will pay off in the years to come as we pull further ahead of both merchant and captive competitors and secure our position as the tech industry's primary supplier of NAND controllers. Operating margin is expected to be in the range of 26 to 28%, up sharply from 21.8% last year and approaching our 30% target. For the full year, we expect stock based compensation in the range of $16,000,000 to $18,000,000 more than the prior year. We expect our effective tax rate for the year to be about 20%, similar to the Q1. On February 24, we broke ground on the construction of our Shinsu office building. Construction is budgeted to cost 77,000,000 with $5,000,000 spent this year and $33,000,000 next year. We expect to complete construction in 2024. Upon construction upon completion upon completion, we plan on a sale and leaseback of the buildings. Separately, on February 18, we won a bid with a third party to build an office building in Taipei. Paid $1,000,000 bid bond and expect to execute a property development agreement in the next few weeks, At which time, we will pay a $5,000,000 performance bond and other fees. We expect to spend approximately $75,000,000 to $85,000,000 in complete construction in about 6 years. This concludes our prepared remarks. We will now open the call to your questions. Andy, please go ahead and get instructions for the Q and A session. Thank you. Our first question is from the line of Anthony Stoss of Craig Hallum. Your line is open. Please go ahead. Good morning, everybody. Congrats on just the unbelievable results for you guys. A couple of questions. Riyadh or Wallace, maybe if you could give us your sense right now, when do you think the wafer shortages really start to ease up? TSM and others are talking about in Q3 things are starting to loosen up a little bit. So I'm curious what your view is on that. And then also Either one of you two guys, you're talking about bookings being sharply above your ability to get wafers. Can you quantify that? Is it 30% higher, 50% higher? Or maybe just if you wouldn't mind sharing kind of your view on where your bookings are for this year? Thanks. Yes. I believe TSMC said they expect current foundry shortage to continue throughout this year and maybe extend into 2022. As many of you know, foundry supply shortage especially acute with the mature technology nodes, which significantly affect our ability to have a product fabricated. None of our products today are manufactured using 5 or 7 nanometer. We do not know when the foundry supply well improved. And Tony, let me add to Wallace for your other question About our booking, what you think your question about how much our bookings could be in excess of our wafer supply. One way to put a framework around that is with If we do not have that constraint, we will be significantly on our way towards the $1,000,000,000 sales target line that we had outlined last quarter and we believe we'll be delivering faster than expected because of our stronger growth This year. Thanks for that. And then as a follow-up, your comments or Wallace's comments about solid growth for 20 I think from the demand, yes, but from the wafer supply, We are not sure, but we already secured additional wafer to support our growth, but as the demand is much bigger than The supplier we can secure today. Okay, great. Thank you. Appreciate it, guys. Thank you. Our next question is from the line of Craig A. Ellis of B. Riley Securities. Your line is open. Please go ahead. Yes. Thanks very much for taking the question and congratulations on the real robust execution guys. Great to see the growth and the margin performance So the first question is just on the new $1,000,000,000 target, and it's really a clarification. So The clarification is this. Can you just identify what the prior and what the new embedded underlying PC growth is in the calendar 2021 revenue target, which At a midpoint, I think, is $809,000,000 And is there any benefit from some of the improved product mix and pricing that you're seeing in channel Okay. Let me start with your first question. The 1,000,000,000 target, the underlying assumptions that we had baked in The growth from these two products will get us to $1,000,000,000 Additionally, we also expect our Ferro SSDs to contribute and we are not expecting our enterprise SSDs to be part of this. Our enterprise SSD, we're building growth driver beyond the $1,000,000,000 In terms of PC growth, where we are obviously expecting modest PC growth this Sure. In line with expectations from 3rd party industry analysts. And within the PC profile. We are expecting notebooks to grow while desktops to decline. And so that is a favorable tailwind to our overall business. But clearly, as Wallace had talked about, the key driver is not the See growth or the transition from hard disk drives to SSD, but rather because of our investments that we had put in place over the last few years in winning design wins with our big customers for OEM programs. These are now going into production and scaling very nicely, leading to very solid market share gains. Yes, good to see those gains. And we had a follow-up just on the full year 2021 guide implications for some things in the back half. So on revenue, just given your optics into increased supply and the share gain programs you have in Gen 4. Would you expect revenues to rise sequentially through the back half guidance on average would imply 46.5 percent gross margin in the back half of the year. But as you've noted, gross margin is very mix dependent. And so what does the order book pertain for the way gross margin can play out the back half? Thank you very much. Okay. For the first part of your question, our revenue, we are expecting very modest sequential revenue growth for the rest of the year quarter after quarter, very modest growth. This is going to be in line with additional wafers made available to us, but clearly ability to grow is capped by wafer limitations from our foundry suppliers. In terms of our gross margin, we are our gross margin profile Is going to be less favorable in the second half of the year as our big OEM programs continue to scale. And as these OEM programs continue to scale, our gross margin will be affected. For a lot of our OEM programs, the pricing has already been predetermined on and baked in contractually. So our flexibility so our ability to change prices are fairly limited. And furthermore, there are also volume incentive plans. And as these programs get larger and larger, they will impact Our gross margin negatively in the second half of the year. So let me comment. I think all wafers are variable right now. We won't gain any additional wafer. That's why we make a full year guidance based on all the variable wafer to us. Execution about manufacturing back end, all the assembly, testing, everything. And we know exactly the yield, the price, all fixed. That's why I think the guidance will fulfill the full year. It depends on the rest of our operation execution. Okay. That's fair, guys. Would it be fair to think that your OEM customer mix would rise from the 3rd to the 4th quarter, and therefore, we would see a commensurate gross margin impact to the business sequentially? That's correct. All right. Thank you very much. I'll hop back in the queue. Thank you. Next question is from the line of Rajvindra Gill of Needham and Company. Please go ahead. Your line is open. Yes. Thank you and congratulations as well on excellent results. Wallace, you talked about that Your market share picture is improving fairly significantly, expecting to pick up 5 to 10 points of market share. I wanted to get a sense of maybe if you could elaborate a little bit further on kind of what's driving that market share gains? How sustainable is it going into next year? And is that a major part of the underlying growth in SSDs and kind of your confidence of achieving that $1,000,000,000 target. Okay. It's a very good question. I think we have very high confidence to grow 5% to 10% market gain Because through our current PC OEM program from NAND maker, well module makers, and we are ramping very quickly with a variable wafer to us. And Due to, as we mentioned, our PCIe Gen4 controller design win is very widely And align with Intel Elder Lake next year. So, we believe when PCIe Gen 4 SSD adopted widely by PC OEM. We were about 50% of our OEM project. That's why We have very high confidence on our market. We will have a continued market gain for our clients to be continuing to next year and even beyond. And thank you for that. And your commentary that based on the sales growth this year and what you see next year that you could achieve The $1,000,000,000 target sooner rather than later. You talked about fiscal year 2023 achieving the $1,000,000,000 target And you're basically implying that could happen in 2022. I'm just trying to kind of reconcile that with your commentary about The supply constraints kind of continuing at TSMC for the remainder of the year going into possibly 2022. Is it that you have you're expecting to get additional wafer supply in 2022 That will kind of help you give you more confidence about Jim DeBillion. Is it that the Gen 4 programs are going to ramp and you have those purchase orders in hand that's giving you some of the confidence that you could get that to get to that number sooner. I'm just curious That you feel that you could get to that number sooner. However, the capacity constraints are still fairly significant. So maybe we can make it very clear to you guys. Our backlog with Billing today is over $1,000,000,000 If we have a sufficient supply, This year, we can achieve over $1,000,000,000 cell target. However, we are not able to due to wafer supply shortage. Now, we secured additional wafer supply, which will support us to continue growth For next year, it's too early to comment 2022 guidance, but we believe we'll continue growth for 2022. And we can continue negotiate this with TSMC to support major critical program because we cannot get a sufficient supply that will impact the ecosystem So, this is very important for us and also for our customer and for the whole industry. So, we believe we current secure additional wafer will support our growth for 2022, but we cannot comment what eventually the cell revenue Will be. But we believe we'll be probably early than 2023. It's likely. Thank you for that. That's very helpful. And just my follow-up, I mean, I'll step back in the queue. Riyadh, the gross margin is kind of dipping to 46.5 range in the second half. You talked about that the pricing is committed or predetermined. And at the same time, there's back end Substrate costs that are increasing. That clearly is transitory. But I'm curious in terms of when do you Expect the back end of the substrate costs starting to subside. Is that still is going to be dependent on the capacity constrained environment? And how do you think about that balancing that with, say, the pricing commitments going into 2022 kind of looking past the second half? How are you But balancing the kind of the pricing dynamic with the back end and substrate costs that have been increasing. Thank you. That's a very good question, Raji. We're this is also tied in with When do we think foundry supply will ease up? So related to this topic is when do we expect substrate and back end tightness to also ease up. Frankly, it's not that clear right now. We are seeing improvements on the back GaN and substrates. But when will this lead to a better cost structure in terms of pricing of back end and substrates to us. We're still not quite sure. We are keeping a very close eye on this and continue to see if we can negotiate better terms. And this is something we'll be updating everyone in the following quarters. Thank you. Thank you. Next question is from the line of Karl Ackerman of Cowen. Your line is open. Yes. Thank you, gentlemen. Two questions, please. I guess, Riyadh, how sustainable are these OEM programs? You've indicated contractual agreements with NAND OEMs, but I'm curious if you could discuss the volume commitments you have ease and how that may increase the risk that those OEMs move back toward internal controller solutions. Carl, I'll let Wallace answer this question. Yes, I think these OEM programs Are not easy to be replaced by either third party controller or internal controller because it needs pre designed and have to be put a lot of effort in the design qualification and through their annual customer verification. And I think we already have a full year forecast from 2022. So we know exactly what is going to last. And this is not just a solution, it's an industrial standard and will continue they're going to stay for more than 3 or 4 years in the next 3 to 4 years. So I think we have a contract price as being discussed 2 years ago, Nobody can predict the COVID-nineteen and wafer shortage and all of these manufacturers, same kind of related issue. So, I think we respect the commitment regarding our customer. We have been working together for a long time And we committed for further agreement and contract. So we think this program It's going to impact our overall gross margin. However, this is going to drive to further growth and for net profit To the company. So I think it's a very important project and it's going to be a very unique outstanding high growth project for the industry. So it's we really try to follow our previous contract agreement and moving forward. Carl, let me also add a little bit more to what Wallace said. As Wallace mentioned, these programs Took a lot of effort, long time to put into execution. Our Gen 3 projects, our PCI Gen 3 projects, we've been working on these for over 2 years and they're now finally going to production and beginning to scale. But as a result of the work that we've been doing with Our customers for these OEM programs, we're building a lot of traction, a lot of stickiness and this is now leading to the Gen 4 programs that we have. And so this just gives you a sense of what we're working on, working on solidifying our position as a leading supplier of controllers to the tech industry. Yes. No, that's very helpful. For my follow-up, How would you characterize the level of channel inventory of controllers today? I ask because, I think There have been perhaps some news flow that module makers have been stockpiling PCIe controllers in as an afterthought or as an I guess perhaps view that client SSD demand remains strong given this recent uptick in cryptocurrency demand. So any thoughts there in terms of level of channel inventory of controllers today and your ability to service that demand? Thank you. So let me comment. It's a good question. I believe the current channel controller inventory is very, very low, probably almost near zero, because everybody is in shortage today. So, the NAND component, NAND supply is not in shortage. So no customer will try to buy additional net inventory or solution putting into inventory. I think every product, every wafer, every component we make is shipped directly to the end customer. And our agent, our distributor even cannot even keep the inner stock. So we see the inventory is very, very low. Demand dependent product. Some products are really high demand, some just moderate. But In average, I believe there's almost no inventory or inventory very, very low for controller Thank you. Thank you. Next question is from the line of Donnie Tang of Nomura. Please go ahead. Good evening, Wallace and Riyadh. Thank you for taking my question and congrats on the good results. The first question is also related to gross margin. So for 2022, Do you think there is a chance that we can renegotiate the price with the OEM customers in terms of the As you have said that the foundry supply could be pretty tight all the way into 2022. And also, could you kind of clarify the so called OEM projects includes both SSD controller as well as UFS controller or mainly SSD controller? Thank you. I think that everything is negotiable, but for a very large program With the contract, it's difficult, it's challenging, because especially I think For some additional wafer also held by our Mingzhou Yan customers to negotiate together. We respect the contract we engage with the customer. But I think to 2022, we will definitely try the best for the company And we also want to see what the price trend for the wafer. If wafer price increase dramatically, we have to negotiate the price with the customer. By the way, this OEM program is involved for both PCIe as well as UFS. Donnie, let me also add, there are 2 other variables that we also look at. The first is, we're constantly winning new designs, right? So new designs, new contracts, new OEM programs. And so with new OEM programs, The terms could be more favorable, more reflective of current circumstances, right. And another factor is, while back end substrates, very tight right now. The industry is always cyclical. Our semiconductor industry is always cyclical. And so sometime down the road, there will be more supply, more back end, more substrates and prices will change and our gross margin circumstances will also become more favorable. So these are 2 other factors to keep in mind. Yes. Thank you, Ria. I think it's very helpful. Just a follow-up. When you mentioned about back end capacity as well as substrate supply, If we compare with the foundry capacity constraint, when do you think I mean, which one would you think that the supply tightness And also, I think Samsung's Austin fab previously suffered from The difficult weather. So I think they have resumed some production in terms of controllers as well. Have you seen any kind of supply demand change after they resume the production. My personal opinion, the back end, the substrate supply and assembly capacity that will be released earlier than wafer supply. I think when we talk about wafer shortage, we need to separate advanced technology node and mature technology node. Currently, I believe 90% of iSi Design Company are in mature technology node. And these technology node wafer is very hard to increase capacity, because during the matter for TSMC, GlobalFoundry, Samsung, UMC, It's my city. They want to invest any mature technology. No, it takes a minimum 2 years to get a land, to build a clean room fab and to get new equipment to install to fine tune, it really takes time. So, it won't result They will increase capacity within just 1 to 2 years. So, the Thai We will supply solution will continue, but it also depends if the release related to overbooking or related to other factors And maybe that can result certain of the tight supply. However, I think according to TSMC, They don't see there will be solution this year. It's probably the tight capacity we extend to 2022. Thank you, Wallace. Very helpful. And the last question is regarding to the operating margin. So It looks like the gross margin, of course, in the second half, there could be some pressure. But for operating margin, it looks like pretty strong. So, Riyadh, just wondering, besides the operating efficiency, are there any other reasons behind improving operating margin? Thank you. Donnie, it's a big trade off that we have, right? With these OEM programs, they're very large. And when ramp. The trade off is we have these volume incentive programs that result in slightly lower gross margin, but the offset is we're getting very significant operating leverage, so helps our bottom line significantly. Thank you. Thank you. Next question is from the line of Tyler Fain of SIG. Please go ahead. Your line is open. Yes, this is actually Mehdi Hosseini. I have a couple of follow ups. And by the way, congrats for gaining market share. Wallace, how are you seeing new crypto currency technologies, specifically, Shay. There has been a lot of headlines over the past month as to how the new cryptocurrency is going to consume low end SSDs. And it appears that maybe some of the channel inventory of low end SSDs have been completely depleted. And I'm just wondering if you have any thoughts you can share with us. And I have a follow-up. Yes. I think the NeoCrypto Technology and Chia, The preferred storage really is for capacity drive and really is really either for HDD or high density enterprise CD, not client CD. So this is really not related to our business. We didn't pay really extra attention. I think even our Shannon will focus on the real solid customer to grow our business in technology. But we just know this relates to the high density HDDR End of Vice City. Mehdi, apologies. I appreciate if you could repeat your second question. Yes. I was going to get into it. Actually, 2 part second question. One for Wallace. You have historically had pretty good assessment of NAND supply and demand. You just told us that There is absolutely no channel inventory of controllers. Does that apply to NAND, especially looking into the second half? And the second part of the second question is for Riaz. Would it be fair to assume that perhaps OpEx are going to be in the range of RMB40 1,000,000 to RMB42 1,000,000 on a quarterly basis for the foreseeable future. I think let me comment regarding the channel for controller in the NAND. As I said, We believe there is no inventory for controller because every controller we have in and it will be sold out. We have a huge backlog in hand and we cannot fulfill the order. And regarding the NAND, NAND maker also observed there is a severe controller shortage. So, NAND maker moved their storage product to higher density product As you can see from PC OEM before, the lower density is 120 gigabyte SSD, not anymore. So value line starts from 256 gigabyte. So that is a way how you see NAND maker, they manage to move all the products to high density and that can consume the NAND quickly. That's why we don't see that many even NAND inventory in the market. From Q2, we start to see NAND price going up and I think supply will continue gradually going up, but within single digit. So, We really don't see the high inventory either controller or storage solution in the channel. Mehdi, to your other question about our OpEx in the second half of the year, we are expecting our OpEx to be fairly stable sequentially in the following quarters. We are expecting our top line to inch up a little bit quarter after quarter. We're expecting our gross margins to drift down a little bit, but we are expecting our operating to drift down a little bit, but we are expecting our operating margins to be fairly stable. So this is going Great. Thank you, and thanks for all the details. Thank you. We have Suji Desilva of ROTH Capital for the next question. Please go ahead. Hi, Wallace. Hi Riyadh. Congratulations on the results here. As you approach that $1,000,000,000 revenue, can you give us a sense of what kind of mix of SSD and smartphone EMC, UFS controller we should expect roughly? We cannot really tell you the detail of the percentage, which is both The client and EMC plus UFS are very strong and we also see our various product going strong in the second half of this year. Okay. That's helpful. And then, for UFS, can you talk about the number of NAND customers that are now ramping? Is it still Maybe 2 major ones or is it more at this point and how many do you expect 6 to 12 months out? So for this year, The momentum is really driven by 1 major US NAND makers, but we're going to have 5 more customer to grow UFS product in 2022. So all 5 of those will be starting Wireless in 2022 or some come on this year? This year will be very small, very like the king in Norway, but All 5 will grow really in 2022. Okay, great. Thanks for that. Congrats again, guys. Thank you. And we have Matt Bison from Wedbush for the next question. Please go ahead. Thanks. Good evening, guys. I think while stocks are shipping in the 6 of the 7 nanfabs, can you remind us Where that was a year ago. Also, could you characterize which markets you're getting more traction with your Gen 3, Gen 4 solutions? Is it Primarily product ending up at retail, is it low end OEM, is it across the gamut? And I have one follow-up. Thank you. As we said before, for module maker, we already have around 70% market share. Last year, I think our OEM program were just above 30%. So, we are starting to grow PC OEM program from this year and the major driver for this year is PCIe Gen 3 controller. So, we see the very strong demand from PC OEM as well as customer gain market share and we gain market share. And we see the growing carry momentum through from Gen 3 to Gen 4 next year, because we have roughly around 50% design win socket from all PC OEMs and TM4 program to 2022 aligned with Intel elderly platform. So we see the momentum will continue and we will continue to gain market share. Our PC OEM percentage also will gain Q2, from 21 to 2022. Matt, the line was a bit choppy. Appreciate if you could repeat your first question again. I think, Riyadh, that Wallace got most of what I was asking It sounds like it's predominantly PC OEMs. But my follow-up is there any color you can give us Around how much the newest NAND makers growth is contributing to Your strong results and better outlook moving forward. The new NAND makers OEM program will contribute from 2022. Okay. Thank you so much. Thank you. Next question is from the line of Craig A. Ellis of B. Riley Securities. Please go ahead. Yes. Thanks for taking the follow-up question. Guys, I wanted to go back to the eMMC market, And it's typically not a focus, but there were 2 notable things in the commentary I wanted to follow-up on. 1, there is an instance where it appears one OEM, Due to some of the recent dynamics that we're seeing in the marketplace and with their manufacturing, maybe moving away from doing eMMC internally. And you mentioned that you're The only merchant eMMC supplier. So the twofold question is this one, is it possible that The decision around eMMC could be the tip of the iceberg for more controller work, which would actually go merchant, not just eMMC, SSD controllers. And 2, given industry structure with merchant EMMC now, how would you characterize Is it more possible to price for functional value and the value you create given the industry landscape? Thank you very much. Okay. Let me try to answer your 3 questions. 1st, regarding eMMC is a very good question. I'd like to answer it. I think the market trend favors CMO in the next few years. First is because the market really demand more low density storage solution. EMMC is the best solution which you can fit in lower density. Lower density mean It's a 120 gigabyte of lower or smaller, it's low density and price sensitive. So, eMMC is adopted by not just a low end smartphone, but also from set of box from smart TV, smartwatch, smart speaker, IoT and Chromebook and many, many even cable box, many, many electronic devices. This has become standard because it's JADAC standard, that's why it's a well accepted by many, many consumer electronic makers. But because of controller shortage, wafer shortage, because controller shortage, NAND maker try to utilize their variable controller to make a higher density solution. That's why NAND maker moving away eMMC controller. They moved to UFS, our higher density SSD, our enterprise SSD, our other storage solution. This gives us tremendous opportunity. That's why we see the huge demand PEO come to our company, But we cannot even fulfill 50% of the demand because demand is large. And even there are more NAND makers come to us To play PEO, but we have to apologize because we don't have a wafer to support the trend. So this is a really market trend. You see NAND maker even tried outsourcing for the 3rd party and we are the only one merchant company have the capability and scale and Technology to Swaddon. So this is really a favorite for Silicon Motion. 2nd is, we also see for mainstream clients During client SSD, this trend will happen and will continue to happen because NAND maker finally realized They don't have to develop the client SSD controller for mainstream our value line. They will focus on high end client SSD or enterprise that added more value to their own benefit, because our turnkey solution is more cost effective and time to market and serve with the customer with a very integrated technology good solution. This is much better than the internal development. So, when controlling our wafer shortage, the market trend is moving to the direction. That's why We gained almost majority of the NAND makers business for clients indeed. That's why we see RPCI e Channel 4 design win is going to occupy minimum almost half of PCIe Gen 4 SSD in next year ramping 2022. Regarding the third question, It's related to the surprise. I think When wafer is in shortage, the price will become more stable And it was favoring our controller side. So, we were based on the product to do certain adjustment. If For major OEM, we will respect for the contract. So I think the price will become more stable as long as our foundry supplier and our backend service provider, the price their adjustment is reasonable. We were not changing the price dramatically. We were really trying to monitor the market trend carefully, make sure we can keep a very stable gross margin to our product mix. Furthermore, as Wallace talked about, more and more new businesses coming in our door. To the extent that we can take on new projects, the terms of new projects will be reset at today's condition. So the margins are for new projects will be more favorable than projects that we took on, say, 2 years ago and facing higher costs today. That's very helpful color guys. Thank you very much. Thank you. And as there are Thank you, everyone, for joining us today and for your continuing interest in Silicon Motion. I will leave you with some final thoughts. I'm extremely proud of our execution over the past several quarters and want to thank our team for their hard work and dedication. As the largest merchant controller supplier, we play an increasingly critical role in both the NAND supply chain and many critical technology ecosystems. Technology today is built on data and data need to be stored to be used and solid state story required controllers. Our competitive position in the story controller market has never been stronger, and I remain confident that our growth will continue. Thank you for your interest and listening to our call. Goodbye for now.