Good morning, everyone, and thank you for joining J.P. Morgan's 54th Annual Technology Media and Communications Conference. My name is Mayur Ramdhani, SMID Cap analyst at J.P. Morgan covering U.S. SMEs and semi cap equipment companies. I'm really pleased to have Wallace Kou, President and CEO of Silicon Motion, and Jason Tsai, Chief Financial Officer, joining us here today. Wallace, Jason, really appreciate you both being here and looking forward to the conversation. Before we dive into Q&A, we would love to give you and Jason a few minutes to introduce Silicon Motion for the audience. The story has evolved meaningfully over the last 18 months or so, this, I think, would be a great way to set the stage for the conversation.
Yeah. You know, our business has scaled, you know, quite meaningfully over the last couple of years. If you take a look at our expanded portfolio, you know, our core business historically was in eMMC, embedded eMMC and UFS primarily for smartphones and now increasingly more important for IoT and other connected devices. In edge computing for SSD controllers, that's been an opportunity that we've been capitalizing on as our share gains here have significantly accelerated with the latest generation. You look at some of the new opportunities that we've been going after pretty aggressively, right? On the enterprise side, we've got enterprise boot drives that has been beginning to scale since the beginning of last year and scale more meaningfully throughout this year and going forward.
We have our enterprise MonTitan SSD controllers that, you know, we've talked about winning with two tier 1s and four additional customers. Now we're seeing sell-through with that, where we have five tier 1 CSPs that'll be ramping throughout this year and then ramping more meaningfully into next year. You know, lastly, our automotive FerriSSD business where, you know, it's a business that we've been investing in for the better part of 10 years. We've got a complete portfolio here that we're able to serve an automotive market that, you know, is increasingly having a harder time to secure opportunities, sourcing. Being able to step in, provide automotive-grade solutions that we've been working with them on for the last many years has created this really strong inbound opportunity that we're seeing where there's a lot more car makers.
We service virtually every car maker around the world. Whether it's internal combustion, battery electric, autonomous or not, we've got business across the board. I think one of the things that have resonated well with investors, and one of the things certainly that we've been really proud of, is that across each of our businesses, you know, we're scaling with the top customers around the world. This is a multifaceted growth driver where we're seeing different end market catalysts, but all of those catalysts are creating a significant tailwind to our business. You know, I think we're really well-positioned. Obviously, this year, you know, we're looking at pretty significant growth if you look at what consensus expectations are.
You know, some of these big opportunities in enterprise and boot drives and automotive are really just beginning to scale towards the latter part of this year. That'll continue to fuel long-term growth into 2027, 2028 and beyond.
Got it. If we could maybe touch on the broader memory environment, can you perhaps share your views on the outlook from here? Specifically whether you see the uptrend in pricing that's been ongoing for a bit now continuing into next year? Related to that, how is Silicon Motion navigating the current memory supply tightness? In past cycles, this kind of tightness has been historically a constraint on your business, but so far in this cycle you've been thriving. What's different this time?
I think because AI is a strong demand for AI, definitely both DRAM and NAND will be in shortage continually for entire 2026 and also 2027. You won't see any meaningful improvement until 2028. As in DRAM, probably late 27 have some meaningful improvement. Because this is very unique, it's not like in the past 10 or 20 years, cyclical for NAND, DRAM supply shortage and oversupply because this is strong demand from AI. Not just infrastructure, but there's an implementation application go everywhere, go to coperate itself. I think nobody can see it's just a short-term shortage. How you can leverage a shortage and price up to gain market share, it become very critical for Silicon Motion. That's why we leverage the trend.
Our five product line, first is client embedded SSD, and second is our embedded mobile for eMMC, UFS, and third enterprise controller and enterprise boot drive solution and automotive Ferri solution all grow sequentially. I think we'll continue to grow to 19.7 or beyond. We have a strong relationship with NAND maker. We're the only company have active project with all seven NAND maker simultaneously today. That's why we can leverage NAND supply in supporting our end customer.
Maybe just touching on smartphone and PC demand specifically, do you expect end market demand to deteriorate further into the second half of this year? You know, that's on the back of these additional memory pricing increases that we've talked about. These end markets have outperformed so far in 2026. Do you view the incremental price pressure as more of a risk or an opportunity?
I think the impact regarding the NAND supply shortage and the price up definitely impacts both smartphone and PC. I talk about smartphone. I think the major impact really for value line smartphone model. All the Android value line player going to suffer most in 2026 and probably 2027. We see the most analyst prediction will be 10%-15% decline in 2026. Definitely iPhone going to gain market share because through the strong procurement capability. I think Samsung will also gain market share. To say that, Silicon Motion will continue grow our mobile embedded eMMC, UFS. First of all, as a NAND maker outsourcing their project, internal project to Silicon Motion. That's why we gain with the NAND maker.
Second is because several NAND maker, they walk away from mobile business, so they're selling a wafer. We own 90% of the module maker who provide solution to smartphone maker, especially in China, right? For Xiaomi, for OPPO, Vivo, and Transsion. That's why we also gain market share from there. We believe we have very, very strong growth for both eMMC, UFS. In addition, I've seen so many new IoT devices. We see the smart glasses, probably will be 60 million units this year. Smart watch, smart TV, new set-top box, smart door lock, and so many new thing in AIoT devices. We probably going to ship more than 400 million unit eMMC this year. This is very great to be in today and thank for our effort in the past 10 years. We will continue to gain market share. It doesn't matter smartphone market decline 10%-15%.
Let's turn to boot drives. We've seen faster adoption within the NVIDIA Blackwell platform since the first quarter of 2026. How should we be thinking about boot drive revenue for Silicon Motion this year? How does that picture evolve into next year as Vera Rubin begins to ship in greater volumes?
I think we're starting gate with the leading GPU company since 2023, 2024, they come back to us. The reason is their current three supplier all use Silicon Motion controller. In the past, we support quite a lot of the boot drive controller and firmware to NAND maker, module maker, selling to server and CSP company. I think now they like to provide total solution. That's why we qualify by the BlueField-3, start to ship from second half last year. Now we gain really more from BlueField-3 to BlueField-4. We own majority for NVLink switch boot drive, as well as the Ethernet 6967 boot drive. This has become tremendous growing opportunity to us.
To say that, we change our business model because we are able to secure the NAND. For the number one search engine company, we also start to support the boot drive solution in flash controller. We're also winning the number one telco company for boot drive, as well as additional new server maker. I think boot drive solution for enterprise will be a meaningful, significant business for us to grow in the next few years.
I think one of the things to point out here as well is that as Wallace pointed out, it's a very diversified range of end markets, customers. Our business isn't dependent on one customer or one product and, you know, hoping that things work out well, right? This is across a wide range of end market with multiple different factors affecting each of the demand factors there. We're really excited about the opportunity here as we further diversify our business. We're also engaging with other customers in this area that we're excited to talk to you guys about longer term. The expectation here for us internally is that investing in this business means a very diversified, strong revenue stream longer term.
Right. Wallace, you touched on the boot drive opportunity at the leading search engine company. When do you expect revenue contribution for that particular product to begin? How do you think about the scale of that opportunity relative to NVIDIA? I mean, this company's AI ASICs are essentially the second-largest deployment of AI accelerators in the market. The natural question is whether the revenue contribution could be comparable to the NVIDIA platform over time.
First of all, we did not provide the full year guidance. I believe our boot drive solution business will become very meaningful as it will become significant in the company in the next few years. First of all, we don't compete with the NAND maker, and our boot drive is unique. Most of us connect to CPU boot drive with DRAM. I believe NVIDIA Vera boot drive is really produced by Samsung. Our boot drive is DRAM-less. The controller with NAND, with our firmware, particularly fine-tune the security portion. That's why we are very unique, provide solution in its BGA form factor sit in a very small M.2 board and selling to major customer. NVIDIA just one of them, right?
We see the capacities from 250 GB all the way to 1 TB, and with the price increase for NAND, the ASP also increase dramatically. We are able to maintain 40%-45% margin in next 2-3 years. We see there will be a very meaningful contribution for the company for growth.
Right. As that boot storage TAM expands meaningfully, how do you assess the competitive landscape? Who else is showing up here, what gives you confidence in sustaining the market share outperformance that you've built?
First of all, for NAND makers, this portion might not be the most important product for them, right? They need significant R&D resource to put in. It's the only probably one or two NAND maker participate, but most of them don't have a tier-1 solution. The provider for NVIDIA BlueField-4 all use a Silicon Motion controller. We dominate for this market. Even for a search engine, Google, I think the other two company all use a Silicon Motion, different controller, different firmware, different NAND. We feel very comfortable to grow this market with our unique technology and to serve our major customer.
On SSD solutions, which is now approaching about 20% of your revenue mix, that's up from low to mid-single digits in prior years. As that weighting continues to grow, how should we think about the gross margin trajectory going forward? You know, by our estimates, boot storage solutions is running around 35%-40% margin today. The natural question is whether that mix, that shift in mix dilutes the 48%-50% corporate gross margin target as that weighting keeps moving higher.
In the past few years, we're now aggressive to engage with the automotive, solution business and the boot drive solution because the margin were too low, right. This will jeopardize the corporate average gross margin. Now, because NAND supply is shortage, we are able to secure NAND supply, see enterprise customer willing to pay for. We can pass through the cost incremental to the end customer. We want to maintain, we believe, as I said, 40%-40% margin, for boot drive as our motive is comfortable. Because our MonTitan family have much higher gross margin, it offsets the boot drive solution margin. Our corporate average goal, we will maintain 48%-50% gross margin for the next few years.
Okay. Turning to the enterprise SSD controller business, with rising inference demand, which includes dynamics like KV cache offload, how large do you currently estimate the enterprise SSD TAM to be, and how much of that is addressable for Silicon Motion over the next, say, three to five years?
This a very exciting moment for a storage company today. I think the growing opportunities is unbelievable. You're looking for the tier 4 for the storage to lower the cold data, so HDD. Second tier is warm storage, right? This is for QLC, for high capacity. Due to because the price increased a lot, so we see the NVIDIA ecosystem for the data storage is capacity, the degree per drive from 110 TB down to 3 TB-4 TB. Tremendous opportunity. So far, because the QLC output from the total NAND output is just less than 25%. I think the demand is not as strong as expected due to the NAND supply limitation. Next, I think it's a compute SSD. This is next to CPU.
Normally, the density is about 4 TB-8 TB. Primarily it's a NAND maker provided to other server maker as well as NVIDIA and Google. Through the March GTC, NVIDIA, Jensen, they announced CMX as a context memory storage. This is new, because this directly suit the GPU for inference, right? This has become very interesting and high demand for the customer. We see, each of the GPU need 1 drive and defined by NVIDIA 16 TB. NVL72, which mean each of the server rack need a 72 drive, each have a 16 TB, total is 1.16 PB. This is very new and they're going to consume a lot of NAND output, right? Think about how many NVIDIA are going to ship their Rubin server in this year and next year. This is a new opportunity for Silicon Motion.
Our MonTitan not only for the warm data for the QLC, but also suitable for compute SSD next to CPU as well as CMX. We haven't mentioned the storage next, which will ramp by in 2028 for the low latency drive for the contact, less than 4 KB or 5 TB. Right, so many new opportunity. I believe Google, AMD, and others, their architecture have a different, but they all need a similar KV cache storage too. The tremendous new opportunity coming for the controller maker as well as NAND maker.
On the MonTitan roadmap, you're now expecting more TLC NAND, the adoption in the near term. How large can the TLC TAM be for Silicon Motion, and when do you expect more meaningful QLC adoption to materialize? How should we think about quantifying the relative QLC versus TLC opportunity?
I think the QLC, the output today is less than 25% worldwide for NAND maker. It take time for QLC to be qualified by CSP and tier 1 server maker. Today, under supply shortage. On the TLC, a lower capacity become more favorable. That's why majority are designed win, and also shipment, customer use a TLC, but some still use QLC. I believe when Samsung and SK Hynix V9 QLC become qualified and ramping from second half 2027 to 2028, QLC will become mainstream since 2028, and will be more demand for high capacity SSD during that time.
On HBF, can you maybe walk us through the projects you're working on, and how does the HBF ramp change Silicon Motion's opportunity set?
HBF is a high bandwidth of flash. It's a new concept, new, I think initiated by Sanders. This is a purpose to try to support inference demand, reduce the capacity for HBM, right? I think this initial stage, we believe this should be developed by NAND maker through the experimental process. If you look at technology fundamentally, it's very similar to Optane, 10 years ago, from Intel. See, you need a very fast, non-volatile storage to fit in DRAM as well as a NAND. It also need a system software chain for memory mapping. We are invited by some NAND maker, due to resource constraint, we are politely turn down. We'll watch how the market trend continually. I don't see HBF will be NVIDIA platform, might be in other CSP platform, if they need it, right? We watch it closely. We won't miss opportunity it become real.
Okay, let's turn to PCIe Gen 6 enterprise controllers. What's your sense on the timeline for introduction, and how does Silicon Motion's time to market stack up against the competition?
PCIe Gen 6 driven by NVIDIA is the first for Vera Rubin, especially for compute SSD. Also will be used for CMX later. Initially, CMX will be PCIe Gen 5. Silicon Motion, we will tape out very soon. We're sampling in Q4 this year and production in maybe Q4 2027 and 2028. In the same time, we also have separate team develop PCIe Gen 7 because NVIDIA are driving the momentum every year changing. I think we're like to become the leading provider PCIe Gen 7 during the time. In PCIe Gen 6, we have much more design win from both U.S. and China CSP, as well as a two NAND maker. They're all major PCIe Gen 6 with Silicon Motion controller.
Let's move on to client SSD controllers. Do you expect market share momentum to continue from here? You're already above 50% in PCIe Gen 5 share. Is there room to push higher, and is there a, you know, perhaps a market share ceiling you'd flag that customers typically, you know, customers typically would want some level of supplier diversification? With PCIe Gen 5 adoption accelerating this year and next year, how should we think about then the ASP uplift as well? In addition to that, do you have any early updates on progress with upcoming PCIe gens, generations?
For the PC industry, it's very interesting this year because the NAND maker have less allocation to PC OEM due to the supply constraint. We benefit from our market share again because we had about 33% market share with PCIe Gen 4 in the past, but we have more than 50% market share again in PCIe Gen 6. When PC OEM start to ramp up, see, eight channel, four channel, primary four channel is second half of this year will continue to gain market share. It doesn't matter, see, the overall PC market will decline 10%-15% from unit shipment. I personally think it's much better than 10%-15%. I think probably 10 or even less because Apple's MacBook Neo is going to gain market share.
Several other NAND PC OEM going to produce new, lower cost and very same model coming in second half this year. Overall, the demand is a lower capacity for SSD, but also perform well to meet some consumer demand. I think we will continue grow market share for both PCIe Gen 4 and Gen 5, and we continue to benefit from NAND maker outsourcing to SMI because I think Samsung, Hynix, Micron move majority of their NAND solution team to HBM. I think as everybody know, for HBM4E and HBM5, 50% of the output will be customized. It's not the standard product selling to everyone. All the CSP and the CPU maker will have customization to meet a certain demand. We believe we're going to benefit from outsourcing project from NAND maker in both mobile and client SSD.
Before we continue, are there any questions in the audience? Here we go.
Good morning. Thanks for your insights. In terms of QLC, I want to ask you guys about your roadmap for optimizing latency. I think you guys have some interesting research that's probably gonna be coming up in terms of how you're handling that, so would love to get some insight.
We cannot tell specific technology, right? QLC, we have been work with our own NAND maker in the past 10 years, with almost everyone. Their first sample comes Silicon Motion. It's very interesting, you're looking for inference. You're thinking about the KV cache concept, key value cache for enterprise, very easy to understand. How that can transfer to mobile and to PC, it become a total different technology because of the limited DRAM and limited SSD, the storage space. You think about how that layer data transfer between from CPU and to DRAM to the storage device, like a UFS mobile, SSD in the PC. You need a certain technology work with the system provider, and they can optimize between regarding data arrangement, to make sure the performance and meet the consumer and user demand, right?
Sir, many saying it's not a unified memory architecture, it's something combined between SLC, QLC, TLC, a certain caching mechanism, make a user feel you are running always in the cache. I don't know whether I answer your question.
Any other questions?
Thank you. We talked about the margin consistency for the foreseeable future, but I think something that needs to get a little bit more credit is like the operating leverage that we've experienced over the last year and change. We've gone from Q1 was like high singles to now we're guiding north of 20% operating margin. How do you balance investing in new technologies, R&D, and also memory price through, which are all variable costs, while also leveraging a certain OpEx base to continue ramping this operating margin?
Good one to you, Jason.
Yeah. The cost of NAND is going to the gross margin line, right? You know, our ability to maintain that gross margin line consistently is, you know, balancing growth in SSD solutions with ramping MonTitan, and we've been able to manage that pretty well. I think there's a lot of value that we're providing in building a solution that's enabling us to get better margins on the solution side than ever before. We're also, you know, part of the value is being able to procure that NAND, having that security of the supply chain. On the operating expense side, we'll continue to invest, right? I mean from an OpEx dollar, certainly we expect to grow pretty meaningfully this year, revenue growth is growing a lot faster.
To your point, operating margins are getting back to where historically we've been our normalized range of 20%-25%. Longer term, we're confident that we can still get to that 25%+ long-term operating margin target as we continue to scale revenue but continue to invest alongside. There's gonna be additional projects. We talked about 4nm project that's for PCIe Gen 6 that'll tape out in the third quarter of this year. We'll do more of these advanced process geometries, whether for PCIe Gen 6 or 7, for UFS 6. There's new technologies that we're investing in today that will require us to continue to tape out. We see significant revenue opportunity with these new products that help drives that operating margin leverage.
Yeah, we end these as Micron standards, right? Gross margin more than 80%, our controller cannot increase our margin quickly because we try to retain and maintain the customer. It's a great opportunity for us to see our Ferri for automotive as well as a boot drive solution gaining market share. We want to leverage our technology controller and firmware as well as our ability to secure the NAND to maintain 40%-45% gross margin. Product mix will maintain 30% corporate gross margin. Because our goal is to grow top line aggressively, wait for our Q2 earning call and with the Q3 guidance, you can probably understand how fast we can grow in 2027.
Any other questions? Maybe to touch on the mobile controller side. How do you see growth playing out here, and do you expect increased outsourcing opportunities from the NAND makers? On eMMC specifically, where or what's the current composition of the market, and how does it split between mobile and non-mobile applications today? Are there additional growth drivers beyond mobile that we should be watching out for?
We see NAND maker beside YMTC in China because they have obligation to support the local smartphone maker. All other NAND maker, they probably only focus on high-end. They're going to outsource the mainstream bottom line to controller maker like Silicon Motion because, as the current solution, UFS 3 and 4, their NAND is a legacy generation. When they move to from V9 like a Samsung, Hynix to V10, they have to use additional solution if they continue to play the UFS 4 and 3 in the market, right? We see great opportunity to Silicon Motion. For eMMC in the smartphone is less than 10%, and I think that continue going down. eMMC is a great opportunity, as I said, for the AIoT devices and other smart devices. We own almost 90% of module maker who's supporting for that sector.
They're met at Google, Meta, Amazon, Xiaomi, their smartphone, smart glasses, all using SMI controller, right? I think that portion we see growing very well, especially new generation set-top box, new generation smart TV and door lock. It just give a tremendous opportunity to expand. That portion, we don't want to touch solution. We only focus solution controller, provide for other module maker and some name maker to grow. We're continue grow our embedded eMMC UEFI controller, especially this year, growing very, very fast, even the smartphone decline.
Great. Finally on capital allocation, can you maybe outline for us how you're thinking about use of cash, given your quite strong balance sheet position? Should investors expect the cash dividend to scale meaningfully alongside your strong earnings growth trajectory? Then maybe on M&A, are there any key areas of focus that you'd want to highlight?
Sure. From a capital allocation standpoint, you know, as you know, we've been paying a dividend for the better part of 10 years. We've raised that periodically as the business has scaled and profitability scaled. One of the things that we look at more closely now, though, is certainly as our revenue is ramping much more meaningfully, working capital needs have also gone up. Inventory has gone up. Inventory days has stayed relatively stable around kind of the 7+ month range. However, dollar inventory has gone up quite a bit. Now it's north of $400 million. As our business continues to further scale, as we have, you know, obviously ambitions to continue to grow our SSD solutions more, that's going to require, again, continuing purchases of NAND, continuing increases of inventory. We're trying to balance certainly capital allocation, capital return to shareholders, as well as our working capital needs.
All right, well, we're almost out of time here, gentlemen, so thank you so much for the time. This has been a great update.
Thank you.
Thank you.