Q1 2021 Silicon Motion Technology Corp Earnings Call

[music].

Good day, and thank you for standing by welcome to the Silicon motion technology corporations first quarter of 2021 earnings conference call. At this time all participants are in this.

And only mode. After the speaker's presentation there'll be a question answer session.

To ask a question during the session you'll need to press star one on your telephone. This conference call contains forward looking statements within the meaning of section 27, a of the Securities Act of 1933 and section 21 E of the Securities Exchange Act bold and I consider it before.

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.

Actual risks and uncertainties include but are not limited to continued competitive pressure in the semiconductor industry and the effect of such pressure on prices.

Total 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 is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker pushed speaker for today, Mr. Chris <unk> director of Investor Relations and strategy. Please go ahead.

Thank you Randy.

Good morning, everyone welcome to Silicon motions first quarter 2021 financial results conference call and webcast.

As Eddie mentioned my name is Chris training.

Best Relations.

Joining me today on this call from Walt call a.

President and CEO.

Chief Financial Officer.

Following my comments.

For me.

Total review of our key business developments, and then Riyadh will discuss our first quarter 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, which was read up in Florida. This call.

For a comprehensive overview of the risks and uncertainties involved.

Our securities please refer to the filings.

With U S and secure.

Turning to commercial.

For more details on our financial results. Please refer to our press release, which was filed on form 6K. 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 matter of similar to how we analyze our own operating results.

A reconciliation of our 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.

I'd like to turn the call over to Walt.

Thank you Chris.

Hello, everyone and thank you for joining us today.

The first quarter weighted to leave a record sales and EPS.

Sales grew 27% sequentially to a record $182 million.

I mean for ideas.

A dollar of 11 cents.

Our strong revenue growth was driven by strong sales of Boes a day controlled areas.

M. A C plus U S. Its controllers, which are both part of achieving record quarterly high.

See all the upcoming.

Coming quarter and the rest of the year continue to be very strong.

We have secured additional wafers per hour foundries.

We are raising our full year outlook.

Oh did book remains very strong income.

See our ability to supply.

Looking to next year, we expect solid growth based on continued strong demand for our products and our variable foundry supply.

We are excited about our trajectory this year.

Patient uses a D and E M C per the U S.

Doing well adoption loveseat solution growth.

And Furthermore, we are growing our market share.

Let me discuss key factors driving our growth this year.

First of all is the day controllers.

While the PC market experiencing modest growth and there's a day attach rates continue to rise, which are all beneficial for growth, but probably SD controllers.

The primary reason our controller are growing rapidly with market share gains.

Several of our customers have been gaining market share and then we have also been gaining share with our customers.

Persimmon have also being upsizing the order to us because they can consolidate their procurement.

We have been gaining as decontrol there in market share.

To continue this trend.

We have resized the clients of the market and now believe our market share last year was in the 25 to 30 per cent range.

From our strong control of the sales growth this year, which will primarily be driven by pcie. Gen. Three is a deep and OEM programs. We believe we should pick up five to 10 percentage point book.

Sure.

Our market share is increasing because our pcie Gen Street PC OEM programs, which we had discussed extensively in the past are scaling.

We are all well be shipping our chins P&C control to two six of seven NAND flash makers.

We are also shipping our gen three control due to several module maker with PC OEM programs.

It's a day using our GNC controlled or will it be us, but all of our global PC Oems.

Additionally, we are gaining market share because our small merchant competitors and the captain controlled as sources of NAND Flash makers.

<unk> also facing foundry supply issues.

Our momentum will pick up surgery with a P H and poised to Decontrol day star ramping.

She has more control there it will start shipping in the middle of this year initially with a P. O P show in using Intel Tiger Lake platform.

We expect our Gen. Four OEM program to scale quickly next year, when Intel elderly platform become widely available.

Based on the size of our current Gen. Four design win for OEM programs when fully ramped we believe our controller will it be using about half of all PC OEM Chin poised Cds.

Let me add that we continue to all gone to competition last year.

Z control this year in the merchant market.

Four times bigger than our closest competitor.

We expect our market share to grow further.

More of all year, and it's a day program and to production and scale.

Now turning to our U M. A C per users controllers, which are primarily used in smartphones and Iot devices.

For smartphones this year we are.

Benefiting from in <unk>.

Industry recovery.

Additionally.

With smartphone battery storage technology, continuing to rapidly transition from legacy E. M. C. Two U S is our user controller sales will continue to scale rapidly as we further benefit from this trend.

Furthermore, we spend all our share gains.

Increase our customer can you help us market share.

We easily are you is NAND flash partner using our highly competitive jointly develop the U S and control their with their industrial 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 customer we there Europe as programs.

In the legacy EMC segment, we continue to be positively surprised by both the staying power of <unk>.

M C and is the expansion of our market opportunities.

You haven't seen remains ideas storage solution flow vacation that do not require a loss data salaried capacity.

And are price sensitive.

And we'll continue to be widely used for the foreseeable future by low cost smartphones as well as Iot and other non smartphone indication such as smart TV streaming done goes setup box smart speaker and mainstream chromebooks.

UMC can children opportunity has also growing significantly larger with NAND makers.

The team from the M C market.

Our priority has been change.

We are becoming the primary supplier of EMC controllers.

There are no other meaningful merchant suppliers of EMC controllers.

Our strong order book as a result of solid end market and growing demand of all controllers.

Demand for our controller continue 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 of the products.

All day by all customers.

We have however, secure additional foundry supply and as a result are able to meet more of our customers need and increase our full year revenue guidance.

We have also secured additional foundry supply that should enable us to deliver solid growth next year.

But again.

From a product will likely continue to exceed our ability to supply.

We are thankful to TSMC.

And our customers for their support in securing additional foundry supply.

And to our many customer we fulfill orders we ask for the understanding on this matter.

We continue to work.

Wilco are securing incremental foundry supply.

Resolve which many ecosystem such as PC and smartphones that the Panama controller, plus storage solution could be negatively affected.

Last quarter, we announced our $1 billion sales target by 2023.

In three years.

With stronger sales growth this year.

Solid growth next year. It is likely we could reach all go sooner than our original expectation.

Let me conclude by providing an update of enterprise grade Pcie Gen five SD controller.

Acting engineering work continued and we have been marketing our unique chip architecture to Hyperscale is in both the U S and China with very positive feedback.

Do you expect to start sampling. This is a DRAM children with customers in the second half of next year.

I will turn the call over to Ria to discuss our financial results and our outlook.

Thank you Olaf and good morning, everyone.

I will discuss additional details of our first 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.

Yeah.

In the first quarter revenue reached a record $182 million, 27% higher sequentially and 37% higher year over year.

Earnings per ads were $1 11, 629% higher sequentially and 38% higher year over year.

Now I will walk through the performance of our three key products during the first quarter.

SSD controller sales increased 25% to 30% sequentially and 45% to 50% year over year.

Sequential strength of our first quarter SSD controller sales growth.

Was primarily driven by our Pcie Gen three OEM programs.

Channel market sales also grew sequentially, but more modestly.

MMC price Europe as controller sales also reached a record high growing 30% to 35% sequentially and 50% to 55 per cent year over year.

Sequential strength of our MMC plus <unk> controller sales growth was primarily driven by our Uff's controllers.

Yes, MMC controller sales also grew sequentially, but more modestly.

SSD solutions.

Solutions sales increased zero to 5% sequentially and were down 40% to 45 per cent year over year.

Gross margin in the first quarter increased from 49, 3% in the prior quarter to 57%.

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 first quarter were $43 $9 million.

$4 $4 million higher than the prior quarter, primarily due to higher compensation accruals.

Operating margin in the first quarter.

Was 26, 6% an increase from the 21, 9% we generated in last year's fourth quarter.

Our effective tax rate in the first quarter was 29% 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 three $3.0 million in the first quarter.

Slightly below our guidance of $3, one to $3 $3 million.

We had 307 three.

$371 million of cash cash equivalents restricted cash and short term investments at the end of the first quarter compared to 362 point $369 2 million at the end of the fourth quarter last year.

We paid $12 2 million in dividends to shareholders. The second quarterly installment of our $1 40 per <unk> annual dividend that was announced last October.

Yes.

Now, let me turn to our second quarter and full year guidance and forward looking business trends.

For the second quarter, we expect.

Revenue to increase 5% to 10% sequentially to approximately $192 million to $201 million.

We expect all three of our key products.

The controllers MMC plus you have fast controllers, and SSD solutions to all grow in the second quarter.

As well as have discussed our growth remains capped by foundry supply limitations.

Second growth second quarter gross margin should be in the range of $48 50 per cent.

Second quarter operating margin should be in the range of $26 28 per cent.

In the second quarter, we expect stock based compensation in the range of $2 million to $3 million.

For full year 2021, we are now expecting the following.

With it with additional foundry supply allocation, we now expect revenue to grow in the range of 45% to 55%.

$782 million to $836 million.

Our ability to meet customer demand, however will remain capped by foundry supply availabilities.

Yes.

Our full year gross margin expectations remain in the range of 47% to 49% we.

We expect gross margin in the second half of the year to be less favorable as our backend 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 industries primary supplier of non 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 million to $18 million more than the prior year.

We.

Our effective tax rate per year for the year to be about 20% similar to the first quarter.

On February 24th we broke ground on the construction of our share two office building.

Construction is budgeted to cost $77 million with $5 million spent this year and $33 million next year.

We expect to complete construction in 2024.

Non construction upon completion upon completion, we plan on a sale and leaseback of the building.

Separately on February 18th we want a bid with a third party to build an office building in Taipei.

Paid $1 million did bond and expect to execute a property development agreement in the next few weeks.

At which time, we will pay $5 million performance bond and other fees.

We expect to spend approximately 75% to $85 million and complete construction in about six years.

This concludes our prepared remarks, we will now open the call to your questions.

Yes.

Okay.

Annie. Please go ahead and give instructions for the Q&A session.

Thank you.

To ask a question you need the best tier one on your telephone.

All your question press the pound key once again, please press star one on your telephone.

My 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 <unk>.

Unbelievable results for you guys a.

Couple of questions Riyadh or wallets, maybe if you could give us.

Your sense right now when do you think the wafer shortages really start to ease up.

T S M and others are talking about in Q3 things just start 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 to get wafers can you quantify that is it 30% higher 50% higher or maybe just if you wouldn't mind share.

Kind of your view on where your bookings are for this year. Thanks.

Yeah, I believe Chisholm <unk> said, they expect Korean foundry shortage to continue throughout this year.

And maybe extend into 2022.

As many of you know from your suppliers shortly especially.

<unk> with a mature technology nodes, we just significantly affect our ability to have a product fabricated.

None of our products today are manufactured using files seven nanometer, we do not know wins from new supply will improve.

Tony Let me add to all this out for you. So 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 to to put a framework around that is if.

If we do not have that constraint, we will be significantly on our way towards the $1 billion sales target that we have outlined.

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 Walter's comments about solid growth through 2022, do you think you could grow faster than the overall, let's say PC market in 2022 over 2021 revenues.

I think from the demand yes.

But from the wafer supply.

We're not sure, but we already secured additional wafer to support our growth, but as the demand is much bigger than the supply of weekend secured today.

Okay, great. Thank you I appreciate it guys.

Thank you our.

Our next question is from the line of a quake.

<unk> Securities. Your line is open please.

Please go ahead.

Yeah. Thanks, very much for taking the question and congratulations on the real robust execution guys great to see the growth and the margin performance has come through in the second quarter. So the first question is just on the new $1 billion target and its really a clarification. So the the clarification there.

Can you just identify what prior and what's the new.

Embedded underlying PC growth is and.

And calendar 'twenty, one revenue target, which at the midpoint I think is $809 million.

And is there any benefit from some of the improved product mix and pricing that you're seeing in channel markets and the increase from initial two 809 million now.

Yeah.

Okay. Let me start with your first question the one day target.

Underlying assumptions that we had baked in with our growth will be driven primarily from our SSD controllers and also from our MMC plus uff's controllers.

The growth from these two products will get us to a $1 billion.

Additionally, we also expect <unk> to contribute.

And we are not expecting our enterprise ssds to to be part of this our enterprise SSD, where we're building as as growth driver beyond.

$1 billion.

In terms of PC growth.

Where we are obviously expecting modest PC growth this year.

In line with expectations from from third party.

History analyst.

And within the PC.

Profile, we are expecting notebooks to grow while desktops to decline and so that is that is a favorable.

A tailwind to our overall business, but clearly as well as had talked about the key driver is is not the PC growth or the transition from 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 with our <unk>.

Customers for OEM programs. These are now.

Going into production and scaling very nicely, leading to a very solid market share gains.

Yes, good to see those gains.

And a follow up just on the before your 'twenty One guide implications for some things from the back half. So on revenue just given your optics into increased supply.

N D.

Share gain programs you have in Gen. Four would you expect revenues to rise sequentially through the back half of the year or do you get supply early enough, but that we would see revenues peaked in the third quarter and then on the gross margin side for your gross margin guidance on average would imply 46, 5% gross margin.

In the back half of the year, but does she have noted gross margin is very mixed dependent so what does the order book per 10 for the way your gross margin can play out in the back half. Thank you very much.

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 our ability to grow is is capped by wafer limitations from our foundry suppliers.

In terms of our gross margin we are.

Our gross margin profile is is going to be less favorable in the second half of the year as our big OEM programs continue to scale up 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.

Pre determined on.

And baked in contractually or our flexibility.

Our ability to change prices are fairly limited and Furthermore.

There are also volume incentive plans and as these programs get larger and larger.

Will impact our gross margin negatively in the second half of the year.

So let me add a comment I think always there are variable right now we won't gain any additional wafer. That's why we may give full year guidance based on all the variable labor to US now is accusing about manufacturer bag in all of the assembly testing everything and we know exactly the yield the price also.

That's why I seen the guidance will fulfill the full year is a debenture the reservoir originally infusion.

Okay. That's fair guys would it be fair to think that your.

Your OEM customer mix would rise.

From the third to the fourth quarter, and therefore, we would see a commensurate sort of gross margin impact.

To the business sequentially.

That's correct.

Alright, Thank you very much I'll hop back in the queue.

Thank you.

Next question is from the line of Raj Bindra Gill of Needham and company. Please go ahead. Your line is open.

Yes, thank you and congratulations as well on excellent results.

You talked about that.

Our 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 that going into <unk>.

For next year and does that have.

A major part of the underlying growth in ssds and kind of your confidence of achieving that $1 billion target.

Based on the sales growth this year and what you see next year that you can achieve that billion dollars target sooner rather than later.

You talked about fiscal year twenty-three, achieving the ability to our target and you 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 at TSMC.

For the remainder of the year going into possibly 2020.

To is it that you have Ah you're expecting to get additional away for supply in 2022.

Will kind of help you give you more confidence about ashamed 1 billion is that that the gen for programs are going to ramp and you you have those purchase orders and hand is giving you some of the confidence that you could could get that to get to that number sooner I'm. Just it's just curious that you feel that you could get to that number sooner.

However, the capacity constraints are still fairly fairly significant.

So maybe we can make get married.

Clear to to to to you guys.

Basketball was a billing today is.

Is over $1 billion.

Yeah, we have a sufficient supply this year, we can achieve over $1 billion sales target. However, we are not able to do two weibo's supply shortage now we secure additional.

Additional wafer supply, which is supported to continued growth for next year is too early to come in 2022 guidance, but we believe we're continued growth flow of 2022.

And we can.

We can continue negotiate with test with TSMC to support major critical critical program because here, we cannot get a subpoena supply.

Impact ecosystem negatively.

So this is very important for us and also for our customer and for the whole industry. So.

So we believe we curran secure.

Additional way for support our growth 420 million too, but we cannot comment was.

Okay.

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 I guess Riyadh, how sustainable are these OEM programs.

You know you've indicated contractual agreements with NAND Oems, but I'm curious if you could discuss the volume commitments you have with the Oems that extend into the second half and into 2022.

In the event capacity constraints ease and how that may increase the risk that those Oems move back toward internal control solutions.

Call. It wall has answered this question.

<unk> C share.

These OEM programs are not easy to be replayed by either a third party controller at all internal controller, because it needed to pre design and have to be put a lot of effort in the design qualification and the and the Suzanne and know your.

Customer verification.

Okay.

We're building a lot of attraction lot of stickiness and this is now leading to adjourn for programs that that we have and so.

This this gives you a sense of what we're working on working on solidifying our position as a leading supplier controllers to a tech industry.

No that's very helpful.

From my follow up how would you characterize the level of channel inventory of controllers today I asked because.

I think you know.

There have been perhaps some some <unk>.

News flow that module makers have been stockpiling P show you controllers in you know as a as an afterthought R. As in I guess, perhaps [noise] view that classes day demand remains strong given this reaching up taken crypto currency demand so any any thoughts there in terms of.

The level of channel inventory of controllers today and your ability to service has demand. Thank you. So let me comment this good question.

I believe that courage channel controller inventory is very very low.

Probably almost near zero, because everybody is even shorter today.

So so nan component NAND supply is non even shortage so no customer we'll try to.

By additional inventory all solution, putting to inventory I think every product every way for every component we make a ship directly to the end customer.

And our our agent distributor even cannot even keep it in their stock. So we see the inventories very very low demand dependent prada, some part of our really high demand some just a moderate but.

In the average I believe there's almost.

No inventories are you enjoy very very low flow controller.

In the channel.

Thank you.

Thank you.

Next question is from the line of Donny Tang.

Police called the head.

Good evening Wallows in reality. Thank you for taking my question in Congress from the good results. The first question is also related to gross margin.

So for 20 twenty-two.

Do think there is a chance that we can renegotiate the price with the OEM customers in terms of the the two two to revise off the price.

Substrate and prices will change and and our gross margin circumstances will also become more favorable. So these are two other factors too to keep in mind.

Yeah, just the.

Thank you I think it's very helpful. Just a follow up.

You mentioned about backend capacity as well as substrate supplied.

If we compare with the foundry.

So the comp trend.

When do you think I mean.

Which one would you think that the supply tightness will be easing a first.

And also I think samsung's Austin fab.

Previously suffer from the difficult weather.

So I think they have resumed some production in terms of flow controllers as well have you seen any kind of a supply demand change after a day resumed the production.

Yes.

My personal opinions of backend C substrate supply and assembly capacity.

It'll be released earlier than the wafer supply I assumed when we talked about wafer shortage, we need to separate other than technology know and mature technology.

Currently I believe 90% by the company.

Barring mature technology know Nz's technology, no wafer is very hard to increase capacity because.

Imagine for TSMC Globalfoundries, Samsung UMC SMIC, they wanted to invest any mature technology know it'd take a minimum two years to get and land to be the clean room fab and to get a new equipment being installed to fine tune. It will take time, so they won't they won't.

Result will increase capacity within just one to two years. So this sea tie wafer solicitation will continue but I also depend.

<unk> related to overbooking, all relate to other factor and maybe that can resolve certain well see.

Thai supply. However, we I think are going to TSMC. They don't see there'll be solution. This year, probably the tight capacity, we extend to 2022.

Thank you Walter 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 a real just wondering.

Besides the operating frequency are there any other reasons behind the improving operating margins. Thank you.

It's a big trade off that we have right.

With these OEM programs, they are very large and when they they ramp.

The trade off is we have these volume incentive programs that result in slightly lower gross margin, but the offset is were getting very significant operating leverage so helps our bottom line significantly.

Thank you.

Thank you.

Next question is from the line.

Okay.

Please go ahead your line is open.

Yes, it's actually Mehdi hosseini.

I have a couple of follow ups.

And by the way congrats for gaining market share.

Uh huh.

Are you seeing.

New crypto currency technologies, specifically shied there has been a lot of the headlines over the past month as.

Two how the new crypto currency is going to consume low and ssds and and it appears that maybe some of the channel inventory.

Aloha and 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.

<unk>.

The new crypto technology and the <unk>.

First storage really is for capacity drive.

And really it's really easier for HDD.

High density and have ICD non clients a day. So this is really not related to our business and we didn't pay really accurate attention I seeing even our Shannon we're focused on so a real solid customer to grow our business and technology.

We just know that as it relates to the high density HDD and devices.

Apologies.

If you could repeat your second question.

Yes I was.

Going to get into it actually two part second question.

One for wireless 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 <unk> would it be fair to assume that perhaps opex are going to be in the range of $40 million to $42 million on a quarterly basis for the foreseeable future.

I've seen.

<unk> commented regarding the channel four controller in the NAND as I said, we we we believe there is no inventory per controller because every controller, we have in hand, it will be sold out we have a huge backlog in hand, and we cannot fulfill the all day and.

And regarding the NAND NAND maker also observed there's a severe controllers shortage, so NAND maker and move their solid product to higher density product cycling consume more NAND.

Can see from PC Oems before lower densities 120, gigabyte SSD non anymore. So value line star from 256 gigabyte. So that is a way how you see NAND maker they manage to move all of the product to a higher density and that can consume the net quickly.

That's why we don't see that many even name entry in the market from Q2, we start to see NAND price going up and I see suppliers will continue gradually going up but within single digit. So we really don't see the high inventory either controller.

Storage solution in the channel.

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.

<unk>, 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 margins to be fairly stable. So this is going to be coming from fairly stable.

That line fairly stable operating expenses in each one of the quarters in second half.

Great. Thank you and thanks for all the detail.

Yeah.

Thank you.

Yes.

Sure.

The next question.

Go ahead.

Hi, Wallace Riyadh congratulations on the results here.

As you approach that $1 billion revenue can you give us a sense of what kind of mix of SSD and smartphone MMC with pest control or we should expect roughly.

We cannot really tell the detailed percentage which is.

Both.

The kinds of D and EMC per you have is a very strong and we also see a.

Very proud of our growing strong in the second half of this year.

Okay. That's helpful. And then for <unk> can you talk about the number of NAND customers that are now ramping is it still maybe two major ones or is it more at this point and how many do you expect 612 months out.

So for this year.

<unk> really driven by one major U S NAND makers, but we're going to have more customers to to grow your EPS product in 2020 true.

So all five of those would be starting wireless in 'twenty 'twenty, two or something come on this year.

Sales youll be very small very line with King and northern Cal fire will grow really tiny range you.

Okay, great. Thanks for that.

Hi, guys.

Thank you.

Yeah.

From Wedbush.

Please go ahead.

Thanks, Good evening guys.

I think well start shipping in the six to seven non subs could you remind us where that was a year ago.

Also could you characterize which markets youre getting more traction with the Gen. Three Gen four solutions.

Primarily product I think retail is a low end OEM across the gamut.

One follow up thank you.

So as we said before for a module maker, who already have around 70% market share.

Last year, I think our OEM program, where just about below 30%. So we're star to grow PC OEM program from this year and the major driver for this year and the Pcie Gen. Four Gen. II controller, so we see the very strong demand.

Found some PC Oems as well as customer gain market share and we gain market share and we see that growing carries a moment in true from Gen. Three to Gen. Four next year, because we have roughly around 30%.

These non wing socket from all PC OEM for program to 2020 to align with Intel elderly platform. So we see the momentum will continue and we will continue to gain market share our PC OEM percentage. He also where again schuh from 'twenty one to carry through 2022.

But the line was a bit choppy I. Appreciate if you could repeat your first question again.

I think that was the wall Scott most of what I was asking for it sounds like you'll just predominantly PC Oems.

But my follow up is.

Is there any color you can give us around how much.

The newest NAND makers growth.

<unk> to your strong results and better outlook moving.

Strong outlook moving forward.

So the new NAND makers, the OEM program will contribute from 2022.

Okay. Thank you so much.

Thank you next question is from.

Okay.

Securities.

Yes, thanks for taking the follow up question guys I wanted to go back to the E. M C market and its typically not a focus but there were two notable things from the commentary I wanted to follow up on one.

There is an instance, where it appears when OEM due to some of the recent dynamics that we're seeing in the marketplace from with their manufacturing may be moving away from doing E. M. C. Internally and you mentioned that you are the only merchant E. M. M. C supplier. So so the two part question as this one.

Is it possible that the decision around D. M C could be the tip of the iceberg for for more controller work, which would actually go merchant not just EMC, but but SSD controllers and two given given industry structure with a merchant T. M. C. Now how would your character.

Or is the pricing dynamics is it more possible to price for functional value and the value you create Kevin given the industry landscape. Thank you very much.

Okay, Let me try to answer.

Three question very getting EMC is a very good question I'd like to answer it.

I think the market trend favors simo in the next few years.

First is because the market is really demand more low density storage solution.

<unk> is the best solution, which you can feeding low density low density is a 100 gigabyte lower or smaller as low density and price sensitive. So EMC is adopted by not just the low.

Low end smartphone, but also found setup box from smart TV Smartwatch, Smart speaker, Iot and Chromebook and many many then.

Cable bought many many electronic devices has become the standard because just jadeite standard that's why is that well Lee accepted by mainly many consumer electronic makers.

But because of control there is shortage wafer shortage because controller shortage.

<unk> tried to utilize their variable controller to make a higher density solution.

That's why NAND maker and moving away from EMC controllers. They moved to use this higher density is a D. Our enterprise a day or other storage solution.

This gave us tremendous opportunity that's why we see a huge demand peel come to our company, but we cannot fulfill 50% of the demand because demand is it's a large and even more NAND maker come to us to play PEO, but we have to apologize because we don't have a <unk>.

Refer to support that trend. So this is really market trend youll see NAND maker evenly and trade all sourcing 43rd party and we are the only one merchant company have the capability and scale and technology to swollen.

So this is really a favor for silicon motion.

We also see for mainstream clients a day this trend.

Will happen and will continue to happen because NAND maker finally realized.

<unk>.

They don't have to develop the clients a controller for a mainstream or value line. They will focus on high end clients a day, while enterprise a day that added more value to their own benefit because our turnkey solution is more cost effective and time to market and service serve with our customer.

With a very integrated technology solution. This is a much better than their internal development sales plan controller wafer shortage.

It's a market trend and moving to the direction. We that's why we can almost match.

The majority of the NAND makers the business for clients a day, that's why we see our pcie Gen. Four design wins are going to argue by minimum.

Almost half or Pcie Gen <unk> in next year ramping 2022.

Regarding C.

The third question.

As it relates to see.

So price.

I think I think the.

When when the wafer is in shortage.

Price will become more stable and it was favoring our controller side. So we will based on the product to do certain adjustment.

If certain products in the past is below corporate average would do a little adjustment, but if there is a contract base for a major OEM, we will respect for the contract. So I sing surprise will become more stable as long list are.

Foundry supplier and are back in service provider.

Is there adjustment is reasonable.

Not.

Changing the price dramatically.

We were really trying to monitor the market trends carefully make sure we can keep a very stable gross margin.

Two to a product mix.

Furthermore, as Walt has talked about more and more new businesses coming in.

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 for.

New projects will be more favorable than than projects that we took on in say two years ago.

Facing higher costs today.

Yeah.

Thank you from Canadian inches and listening to our call Goodbye for now.

Thank you and this concludes today's conference call. Thank you for participating you've been out with this.

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