Q2 2021 Silicon Motion Technology Corp Earnings Call
Okay.
[music].
Good day and Goodbye.
Goodbye and welcome to the Silicon motion technology population.
Second quarter, 2021 and earnings conference call at this time, all sorts of defense and only mouse and Nokia This week.
And as such.
And again there'll be a question.
And since you've asked the question in depression.
And please be advised that could be faster and recorded computer quite enjoyed assistance and society.
And this conference call contains forward looking statements within the meaning of section 27 day of security.
And 33 and section 4 and what you'll see and Securities Exchange Act of making 34 and as amended such forward looking statements include without limitation statements regarding trends and India.
Can you talk to the industry and our future results of operations and financial position and business prospects, although such.
Such statements are data and our own information and information from other sources, we believe to be reliable and she's not place undue reliance on them.
And those involve risks and uncertainties and actual market trends and our results today and people are quite clearly from the.
Expressed or implied in forward looking statements for a variety of reasons.
Such risks and uncertainties and pizza and might be but it's true.
And just competitive pressure and the semiconductor industry and the effect of such pressure on prices and predictable changes and technology and consumer demand for what kinds of their consumer electronics the state.
And any change at our relationship with our major customers and.
Because he and political and economic legal and social conditions and Taiwan.
For additional discussions of these risks and uncertainties and lots of factors. Please see the documents and files from time to time within the Securities and Exchange Commission and the obligation to update any forward looking statements and just like long beach as of the day.
And so these conference calls.
And I'd like to hand, the continent's overdue and keep everything you said, Chris Cheney, and director of Investor Relations and and strategy and culture.
Thank you Annie.
And everyone and welcome to Silicon motion second quarter 2021 financial results conference call and webcast.
And as I mentioned my name is constrained.
Change and I'm, the director of Investor Relations joining.
Joining me today and this call.
Although let's call a per.
And.
And CEO and Riyadh Lai our CFO.
Following my comments, Ross, who will provide a review of our key business developments, and then react and will discuss our second quarter results and our outlook.
And then we'll conclude.
Terry and wash it out for a period.
Before we get started I'd like to remind you of our safe Harbor policy, which and he just read it before the call.
For comprehensive overview, and the risk involved and investing in our securities repurchase.
For the filings with the U S. S E T.
For more details on it.
Actual results may differ from our press release, which was filed on form 6K after the close of the market yesterday.
This webcast will be available for replay and the Investor Relations section of our website for a limited price.
To enhance investors' understanding of our ongoing economic performance, we will discuss non-GAAP.
And the information during this call.
These non-GAAP financial measures internally to evaluate and manage our operations.
We have therefore chosen to provide this information and data.
And you to perform comparisons of our operating results and a matter of similar to how we analyze our own operating results.
The reconciliation of GAAP to non-GAAP financial data can be found.
And earnings release issued yesterday.
We ask that and review and in conjunction with this call.
And with that I'd like to and I'll turn the call over to us.
Thank you Chris.
Hello, everyone and thank you for joining us today.
And the second quarter, we did.
Levered and another quarter of record yourselves and Ernie 7.
7 years grew 21% sequentially to a record $221 million and earnings per ideas.
Record $1.50.
Sales and ability of the day controllers and E M C per the U S and controllers grueling.
And.
And both achieved record quarterly sales.
We believe that's true that expected growth and profitability by up selling a richer mix of products and.
And being more prominent to higher margin accounts and.
And where it possible repricing and cloud.
Core to cover higher manufacturing costs.
Additionally, our operations team has been actively working with our contract manufacturers to tune back and processes to improve and manufacturing yield and lower costs.
This 4 pronged initiative.
And I believe you'll agree.
It makes our products optimizing product allocation better pricing discipline, and tell me and manufacturing processes is critical for creating and continue value.
And growth and profitability when our manufacturing capacity this year is capped and manufacturing.
Sellers remain elevated.
Based on the infusion of the initiative. We are now also expanding better gross margin for the rest of this year.
Earlier this year, we had communicated our 2020 $3.1 billion yourselves objectives.
And growth roadmap.
And we'll likely achieved this target and much better to you.
Based on our latest salad projection, our annual run rate expected to be already at least $1 billion by this year's fourth quarter.
We expect sales of comfort.
And believe it.
Seed $1 billion and next year, because we add meaningfully anymore incremental foundry capacity already committed to us and from continue execution of our 4 pronged initiative.
And crude.
Selling a richer mix flow products.
<unk> sells next year will include the rapid scaling of our higher value high volume Pcie Gen..4 is the decontrol days.
Customers have also provide us with purchase orders for the next year and the order book today already exceed 1.
So and $5 billion.
Oh sure order book as a result from many years from Howard Weil.
And our last minute opportunistic procurement order book off the shelf parts by customers.
We have been building and cut our.
And our business pipeline for many years.
1 leading to these purchase orders.
Our OEM projects typically kick off 1.2 or 3 years before and each yourselves depending.
Depending on product capacity.
Partly of Star we are defining the OEM product features and customer in Asia and requirement before Howard.
Yes, and Phil we're proud of that development and.
And with product compatibility perform and verification analysis quality assurance and manufacturing and support activity before we start to and manufactures and sells so far and controllers.
What is clear from our design.
Our earnings and order book.
Have been gaining share of wallet as some of our NAND flash and tier 1 module maker customers.
Several of our customers have been gaining market share and there is a D and you even said U S marketplace.
As a D and usa's adoption.
And continue to grow in PC and smartphones and our customers are actively using our controller to develop and storage solutions for a new application volume crew game consoles and automotive systems.
All day book runs through full year, 2020.
And our pipeline of design wins and crude delivery beyond 'twenty 'twenty 2.
Now, let me talk about our key products, starting first with our is a day controllers.
This quarter, obviously control yourself to 30% to 35% sequentially.
Year to day, our SSD controllers yourself through 75% to 80% year over year.
See significantly faster than as a day market growth as a weekend market share.
Our growth continues to be driven by purchase scouting for our PCI each industry is a day controllers.
And this sells to a diversified set of and men's fashion and tier 1 module maker customers.
All primarily supplying us be to leading PC Oems.
Yeah.
Based on our holiday book, we expect several of our pizza and each industry has a day controller to grow modestly.
True next year.
Our overall is to control the cell growth momentum will continue as we introduce and ramp of our pcie Gen..4 SSD controllers.
Our Gen 4 controller OEM sales will start in the third quarter of this year and the weeks.
And they sell.
Tell to rent and rapidly through 2020.2.
Our pcie and she and poised to be controller design win with NAND flash makers and tier 1 module maker customer.
And the street successor successive generation of and your performance upgrades.
Great.
Cost reduction and higher layer count and price support.
3 successive generation Pcie channel 4 controller solution to be introduced annually from 2020, 1 to 2020.3.
Yeah.
We have timed our rapid introduction of first and second generation Pcie Gen..4 HD controller, so OEM and cant align their product with Intel's millbrook.
To your platform refresh and the third quarter of this year.
And introduction of their next generation.
Much higher volume chipset platform next year.
We will start to ramp of our first generation Gen 4 with 2 customers.
Good day and quickly expand our channel for our customer base from 2 to 8 customer and next year with our second generation solution.
I'll share generation.
And we are following in 2020.3 we will then follow up with the upcoming series of Pcie Gen 5 and it's a day controllers.
Oh, probably customer and next year.
And our NAND flash makers.
All he customary developing it's a deep OEM projects.
And all of our 6 second generation project fully ramp towards the end of 2020.2 in the first half for the full year, we expect to be in approximately half of our PC OEM Pcie Gen..4 is a day sockets.
Clearly.
Alright, and supply classes decontrol, there and continue to make solid progress in data center application and are we ramping to where our first 1 million unit milestone.
Are you and me hardware plus firmware turnkey enterprise class Pizza age and poised to.
Several of the expected to start shipping to customers such as Alibaba Baidu and Kingston by end of this year and there is a foundation for upcoming Pcie Gen 5 and to buy SD controllers.
With our upcoming flagship enterprise class.
And the country's age and size and he control the <unk>.
Continue to meet design and milestone and track to work stumbling and second half of next year and sells a fully and yes.
<unk> from Patel.
Potential U S and China hyper scale customers continues to be very positive.
Next I will just because of our EMC, but you have to control. This.
Our M C per use itself grew 10% to 15% during the second quarter and year to day.
M C per user control itself grew 35%, 40% year over year.
Yes.
It gets significantly faster than the overall smartphone market growth.
We and our customer and gain market share.
As a matter of fact customers with industry, leading NAND and DRAM technologies is very well positioned to gain further market share.
Additionally.
We continue to support and die.
Aggressive price set of module maker in China.
And now elsewhere.
Growing UMC and new business activity in the low cost smartphone as well as the large and fragmented Iot and smart devices market.
EMC has a J that standard embedded storage.
It is generally a low capacity solution.
Usually and the most 64 gigabyte.
And as such makers, who are focusing on maximizing.
Sales of NAND density.
I've communicated their intention to exit.
And really from this low density market next year.
And you will create a large incremental opportunity for E. M C controllers.
It seems that we are in factually the sole merchant and supply of EMC controllers to this large and growing 1 billion plus unit.
<unk> large market.
Also have a responsibility to work with our foundry and other supply chain partners to ensure product the ability to Oems.
This large market for UMC and until they range from low cost smartphones to smart TV.
Union boss speakers chromebooks setup box.
Streaming TV dongles, and smart watches and other wearables drones portable game console and many more application popular with consumers.
We're also seeing increasing design activity.
Relating to the adoption of automotive AUC cue 100, <unk> and Ace 5 compliant UMC and users and value salaries solution.
The electronic content in cars and other vehicle growth and Furthermore, we are seeing increasing design.
Good day involving multiple UMC are used as storage devices per vehicle.
Automotive OEM and now designing vehicle with multiple UMC and euro per space storage devices.
Sure.
Central counsel and for 10 minutes system.
And we gave him system.
Real C entertainment dashboards instrumentation and.
And Adas image recognition relative vision and data recording systems.
Value hand, and road use safety and parking.
And do you think going public in 2005.
We have seen the explosive proliferation of NAND day salary solution into more and more category of locations.
Phone initially just memory card and USB flash drive to embedded storage.
For smartphones, Iot and smart devices.
Well as I said D..4 P C and data center and now we have seen growing design activity and automotive applications.
We are delighted to share with you are growing and control the design activity and our success.
Successful result, so far.
4 pronged initiative.
Optimizing resources to deliver higher value skills and enhance profitability.
We believe current market condition favorites like emotion in partnership with our customers.
Customers and continuing market share gains and.
And at storage application due to our relatively large and a favorable position in the supply chain and.
Managing OEM part of the therapy.
In comparison.
Smaller and merchant supplier.
And then Cathy program.
Vantage.
We believe current market condition could remain unchanged for the next few years.
No I would turns accounts over to Ria to detail, our financial results and our outlook.
Thank you <unk> and.
Good morning, everyone.
I will discuss additional details of our second quarter results and then provide our guidance.
My comments today will focus primarily on our non-GAAP results unless otherwise specifically noted.
A reconciliation of our GAAP to non-GAAP data is included with the earnings.
And release issued yesterday.
And the second quarter revenue reached a record 221 million, 21% higher sequentially and 62% higher year over year.
Earnings per ads were $1.50.
35% higher.
Here sequentially, and 84% higher year over year.
Now I will walk through the performance of our 3 key products during the first quarter.
SSD controller sales increased 30% to 35% sequentially and 105% to 110% year.
Year over year.
Growth was driven entirely by our Pcie Gen..3 SSD controllers, which are primarily for Oems.
M M C plus Uff's controller sales also reached a record high growing 10%, 15% sequentially and 25% to 30%.
And year over year.
Growth was driven by our Uff's controllers.
SSD solution sales increased 35% to 40% sequentially and were down 15% to 20% year over year.
Our ferri products grew year over year, while our Shannon products declined sharply.
Gross margin.
And the second quarter increased slightly to 51 per cent from 50, 357% in the prior quarter.
As well as had discussed earlier, a better gross margin compared to guidance came from the execution of our 4 pronged initiative.
Upselling.
Selling and a richer mix of products optimizing product allocation better pricing discipline and the tuning of manufacturing processes.
Operating expenses and the second quarter were $48.4 million.
$4.5 million higher than the prior quarter.
Primarily from higher compensation accruals.
Operating margin and the second quarter was 29, 2% and increased from 26, 6% in the first quarter and up significantly from 22, 2% a year ago.
Our 29.
2% operating margin this quarter is higher than the 26% to 28% and guidance due to stronger revenue growth and better gross margin, partially offset by higher operating expenses.
We are delivering strong operating leverage and making good progress towards our 30% operating margin targets.
Our effective tax rate in the second quarter was 18, 6% slightly lower than <unk> 20 per cent tax rate guidance.
Stock based compensation and our operating expense, which we exclude from our non-GAAP results was $2.4 million and the second quarter within our guidance of.
$2 million to $3 million.
We had $412.3 million of cash cash equivalents district.
Restricted cash and short term investments at the end of the second quarter compared to $371 million at the end of the first quarter.
We paid $12.2 million and dividend to shareholders. The third quarterly installment of our $1.40 per.
For Ats annual dividend and that was announced last October.
Now, let me turn to our third quarter and full year guidance and full year looking forward looking business trends.
And the third quarter, we expect.
Revenue increased 7.5 to 12, 5% sequentially to approximately $238 million to $249 million.
We expect revenue and growth from continued strong as the decontrol worse and E MMC.
Uff's controller sales, partially offset by declining entered the solution sales.
Third quarter gross margin is expected to be in the range of 48.5 to 50.
5%.
Which is significantly higher than our gross margin outlook 3 months ago and the result of.
And plus fusion of our 4 pronged initiatives, which Wallace discussed previously.
Third quarter operating margin should be in the range of 27.5 to 29, 5%.
In the third quarter, we expect stock based compensation in the range of 4.6 to 5.
And the extra $6 million.
For the full year 2021, we are now expecting the following.
Revenue revenue is now expected to grow and the range of 65% to 70% to 9 to $892.917 million.
Our full year.
Our gross margin is now expected to be in the range of 49, 5% to 55% range again much higher than our full year gross margin previously provided 3 months ago and the successful and result of the execution of our 4 pronged initiative, which Wallace had previously discussed.
Fourth quarter gross margin should be flat sequentially.
Operating margin is expected to be and a range of 27, 5% to 29, 5% up sharply from 21, 8% last year.
Up further from our previous guidance and approaching our 30% target.
For.
For the full year, we expect stock based compensation and a range of $18 million to $20 million more than the prior year.
We expect our effective tax rate for the year to be about 20 per cent similar to our year to date rate.
So to conclude this year, we will be able to power ahead and pull and our strategic.
Sales.
And profitability targets without additional incremental foundry wafer supply.
Let me reiterate that by the fourth quarter of this year, we will likely need or on meet on a run rate basis or $1 million sales and $1 billion sales target.
And this $1 billion run rate and.
Is the foundation on top of which we expect to add strong sales growth from committed incremental foundry wafer capacity next year and the continued upselling of a richer product mix.
Already our order book for next year is at least $1.5 billion and our team is currently working to ensure we.
We can deliver this net.
Next quarter, we will provide an update on our work and.
And at the start of next year, we will provide our official 2020.2 revenue guidance. Additionally.
Additionally, we continued to invest resources to expand our pipeline of R&D activities relating to our core SSD E. M. M C.
Your first controllers.
And as well as expansion into new applications, such as automotive.
This concludes our prepared remarks, and we will now open the call to your cash.
Thank you.
And as a question you'll need the best Taiwan.
And your telephone to withdraw your question from suppressive powder Husky and.
We standby, while we compile the Q&A Boston.
Once again please press.
And that's part 1 for your questions.
First question comes from the line.
Line of Oh, Gee, Indra, Yeah, Needham and company line is open and just go ahead.
Yes, Thank you and congratulations on the great momentum that you're seeing and.
When you're indicating that your order book.
Now points to a $1.5 billion.
I was wondering if you could elaborate further on and what Youre seeing within that order book, what's driving the uptick.
In the and the growth.
And then secondly could you talk about your conversations with TSMC.
TSMC.
Regarding capacity allocation.
And next year.
What have those conversations been like how much capacity.
Been allocated to support.
And those targets. Thank you.
And where you're going from or.
Other book $1.5 billion Maggiore.
The OEM projects and.
Income from C L.
The backlog we cannot ship this year, so we have a solid $1.5 billion.
By end of this year, we believe we should see even much higher and you are.
Clark.
Regarding the discussion with.
And the tears and see a U everybody no tears and he probably has a nose. They see the waiver application will continue to the 2020, 1 and also to entire 2020.2 because all of the new investment and probably will not contribute especially from a mature technology.
Elegy until 2020.3.
And the incremental come me to wafer supply we have confidence to increase our sell revenue to grow in 2022 with a fair amount of the percentage. However, we will continue to negotiate and discovery.
And as M C and all day.
And the foundry maker to inquiries and wafer supply and all of it.
And to meet the very large amount of demand from our worldwide customers.
And keep them that wallet.
That's true.
Si and growth margin that you've seen in the quarter.
I'm wondering how sustainable that that gross margin shift as you mentioned and the press release and shift towards higher value products.
Hi.
Now and digging and where you can actually increase the price I think that's a change from what.
You talked about before where I believe the pricing was set and some of these contracts.
And if you could talk a little bit about those 2 dynamics in terms of pricing and also in terms of our mix of higher richer mix of products.
Rajeev, we feel very good about our current situation.
The rollout of the initiatives that was had pointed out earlier.
So they are focusing on.
And on Upselling, a richer mix of products allocating more products to higher margin accounts, and where possible and repricing products to cover our higher manufacturing costs and these all initiatives that we were already executing and we will continue to execute throughout the rest of the year and into next year. So.
Very good about them about our gross margins at todays levels extending to 2 the 2 this year and and into next year and possibly is there opportunities were lost we'd love to take up our gross margin, even and even more and where we are indicating but that theres a lot of work to do and for what we're doing right now are the.
And we feel margin guidance that we just talked about those are numbers that we feel fairly comfortable about.
[noise].
Okay.
Gross margin.
Yes.
Next question is from the line of Anthony Stoss of Craig Hallum.
And is open. Please go ahead.
Okay.
Hello, Craig Hallum your.
Your line is open. Please go ahead.
Tony are you on mute.
No I'm not on mute.
Yeah.
And you hear me.
Yes.
Okay, great violent.
Riyadh, probably for you can you give us a breakdown of our you're not kind of notebook business what percentage of revenues that might be you know the Iot bucket. If you will what kind of growth rates, you're seeing and then I had a follow up.
After that.
Right. So for the non books notebooks, our products are primarily related to our E and M. C. Plus are you I bet as are our SSD controllers are very T. C. Notebook PC oriented now for the E and M C plus U S. As they were.
The 25 to 30 per cent of sales last year and we expect this to a 2 inch up this year, given the very strong growth and within that bucket and.
A large part of it and smartphone, but we also have a lot of E. M M C going into non smart applications.
And what was that I mentioned.
About <unk> of those applications are very popular with consumers, including Smart Tvs are you know and and other applications smart speakers.
These are products that are still growing and we expect this part of the market to AR to continue to grow.
Grow modestly.
Lee over the foreseeable future.
Okay.
And then just as a follow up the question that I get asked most from investors.
And increasing amounts recently is a share buyback.
You have incredible visibility you're talking about a.
Order book of over.
And long 5 billion and heading into next year 3 years worth of worth of visibility you Gotta stock trading at and 8 P ex cash.
And just Astounds me and investors that you guys have and initiated a share buybacks and I'm, hoping your board is listening to this call and and love to hear your thoughts on why you have and initiated a share buyback.
And Tony our primary means of returning capital to shareholders and from our dividend payments and historically, we paid up to half of our free cash flow.
Given our very strong operating performance and good visibility into 2022, it is likely that our board during the next.
And 1 point from a dip.
And decoration and October are they.
It could consider something.
And I E a dividend and higher than what we paid last year.
Alright, Thanks Riyadh.
Thank.
Next question is from the line of Craig Ellis.
B Riley's acuity.
Okay.
Okay.
Yeah. Thanks for taking the question guys. Congratulations on the very strong performance and the business I wanted to start with a question for wireless and wireless what I want to do is kind of pick.
Right and left off on the last quarter's call, where I inquired about.
Really the trends youre seeing and <unk>.
And as more of your customers look to outsource Ian and she controllers and you wind up with a dominant share of the market like you talked about again today and in the course.
And so little bit different and it focuses on the SSD controller.
<unk> opportunity given the very robust outlook you have for Pcie Gen..4 do you get the sense that more of the the NAND Oems are starting to outsource more of their controller work.
And to the extent that they are to what extent do you think you are going to benefit or benefit disproportionately.
From such a move.
So very good question in general, we've seen NAND maker and they all want and maximize their NAND day solution profitability.
For UMC has a very natural of EMC. The every day out. These are small maximum and has a 64 gigabyte.
If you want and need gigabyte, we see a lot of and <unk> been through 2 gigabyte application. So NAND maker. They also see the wafer supply constrained. So they move all the way from a variable wafer and move to higher density and started product. That's why we see tremendous demand from EMC controller.
And as of our company that don't measure from NAND maker.
Leading module maker, we have a much more than we can supply and support but we will continue the answer and tried to another industrial breakdown for UMC solution to many many and consumer electronic devices.
It's a D.
And another story, because we do see NAND makers, they have a tendency to start to all source mainstream and value and mine project to serve coffee like a silicon motion because we have a strong track record with a long history with.
Oh, NAND makers that week becomes a day flow standard candidate to take the opportunity frankly speaking today, we have more project opportunity. Then we can we are resourcing and support. So this is very very important moment, where continue to growth.
Growth and recruit talent and R&D to join US and continue to work on are really new project to make US successful is a very very important is because the new generation of the technology for men beyond legacy basic layer or even beyond 200 layers Sac is very critical for.
Tool and maker have a deep and knowledge work closely with the NAND maker. So we can provide sufficient compensation for NAND endurance and retention.
Very very important and we can work closely with NAND maker cleaver, various profound solution to the OEM customer as well.
<unk>.
Consumer so there's a great opportunity we see the trend will continue and we are in very favorable position to take the opportunity from all source options from NAND makers.
That's really helpful color. Thank you and then for my follow up question I wanted to flip that corporates or beyond.
Very helpful framework that you provided and the policy is provided on the factors that are leading to higher gross margin and rehab and my question is for the change in gross margin and the back half of the year that we're seeing very significant improvement from prior expectations, what's the relative contribution.
Each of the 4 factors that were mentioned and as we look to calendar 'twenty, 2 which of those factors has the greatest potential and how significant would that be for further gross margin improvement. Thank you.
Greg the largest piece of it relates to our product mix.
From which also include.
Our allocation of products towards a higher accounts.
And the initiatives relating to these moves have been the biggest driver in terms of contributing to higher gross margin, but that said where possible.
Also seek to re price our products to better reflect.
The higher cost of our products that we're seeing are going into what we need to do to deliver.
Got it thanks, guys. Good luck.
Thank you and.
Next question is from the line of Karl Ackerman of Cowen and company.
And now open.
Hmm.
Hey, Hello, guys. This is Eddie for locker room.
And I have a couple of questions.
There have been reports that your largest foundry partner will increase 28 nanometer capacity from 40 to 100000 wafer per month and the good.
Sure.
Hello.
And that should enable us to fulfill existing customer order.
Have you seen any indication from them and reverse an earlier decision outflows and that's here.
And as incremental capacity comes online.
Thank you.
I cannot comment for Florida.
And ill be because they have they're pretty capacity guidance and.
And because some.
Factory expansion also relate to.
And some political issue and we really have no insight sorry, However, we do know.
And <unk>.
We do have many opportunity.
Come from NAND maker, all directly from major OEM customer and including the very large scale customer from automotive as well as.
And other sectors. So it's really how we really can manage so many opportunity and do see supply.
Supply shortage condition basically it has to be very careful to make a decision to go when we come meet we have put all the resource development IP from our development quality people everything and count and we have to make sure to use our R&D resources wisely and other to get us.
Sufficient financial return is a very very important we don't really worry about the business to date, we just.
Kind of trainees wafer supply and so this is and most important thing we should focus zone and to skew more supply in order to meet customers' demand for next year and 2023.
Eddie Let me also add with that and investments at TSMC has been announcing we do not believe it's going to change the direction of.
And our NAND partners outsourcing.
To us.
The reason why all of US had talked about earlier.
Mhm no that's good.
Right.
Thanks.
And.
Another question is not and demand appears to further outstrip supply and all and fieldwork indicates NAND Oems are prioritizing high capacity has to be.
And went to pass and man capacity is tight and Oems, probably with the large enterprises and sees and that became a cough.
And where you.
Maybe you addressed why that isn't it may not make sense and the current environment and.
And congrats on results.
This year it's.
The underlying condition that we're facing now for our business.
Culture is a is more about the supply picture, we have demand that is significantly outstripping our ability to deliver so the underlying conditions on the NAND flash dynamics side of Oh of industry conditions are whether they're their allocation.
And is it more towards enterprise oriented other other application.
Those decisions have.
No real material impact to our business as it relates to the shifting of all of the demand picture right. Now is a key focus for us is about that.
Supply side, how we can drive more.
And as such given the supply capacity that we have on hand.
Thank you.
Yeah.
Thank you next question is from the line of Ross.
Capital.
And is open. Please go ahead.
Hello, Hello, Wallets, and where we got congratulations on all the momentum here.
Given the NAND supply demand situation and I'm wondering if the mix of OEM versus module maker and gets higher historically, if you're running your shipment toward OEM and if that's 1 of the factors and the gross margin tailwind.
And that my correct back and module makers get allocation and go to the future.
I think it's a very good crushing and every company has to make a wise choice, but to keep it balanced both avenue OEM projects more important because we have to allocate sufficient and wafer and to supply.
The OEM projects, because that's where we come at the same time, we also want to balance our module maker, we don't want them and the majority of the margin and make a die because many of them being reserved for 16.17 18 years.
We're seeing we we really have to look at the product itself and importantly for the supply chain.
And if a customer is anxious and customary they have multiple source sometime we will try to redo their weight, but really we are sole supplier we have to make sure. We can meet to fulfill the supply is a pretty complicated.
<unk> and equation.
And through that and we also.
Well review all of the gross margin among all of the product and put it as a priority and so this is something we feel very comfortable because.
And during matches every customer I think they all face.
Small percentage is a large percentage of shortly from silicon motion.
We're very sorry for that situation.
While we look very hard to try to secure more wafer to meet the customer demand.
And Susan let me also add some of our module makers are now very large and very sophisticated and our ability to and <unk>.
Already engaged in and taking projects.
And with Oems.
Like the PC Oems and so for these large sophisticated module makers, we don't treat them any differently than and the NAND flash makers and the level of profitability. It really depends on the projects. It doesn't necessarily mean that the profitability is better with 1 class of customers or the or the other it really is the value added that we're.
We're bringing that matters.
And so there's been part and I play book coupled.
Helpful.
And then the S&P solutions business tires, and where the Shannon revenue level and now is that going to have a further step down as you kind of manage it manage away from that and what the margin implications there I imagine that.
Also a lower margin business that you'd be moving away from.
Regarding channel business are really main goal this year and metro and issue and it's really maintain the relationship with the customer because it's also channel. Some men procurement and also is challenging we do not want to grow Shannon business.
Due to lower margin to dilute overall gross margin, but however, we have maintained and surgeon important and project and gave with Alibaba Baidu and a major customer and make sure as our development and technology will continue waiting for are really Gen..5 major controller coming and 2.2 shine and the market pricing.
Seeing it also due to because we have a we have a wafer income trend and wafer allocation.
And why we have to allocate carefully because there's so many OEM demand from NAND maker, as well and PC OEM and smartphone customer.
Once again congrats guys.
Next.
Next question is from the line of Mehdi Hosseini of S. IAG 19th open let's go ahead.
Yes, Thanks for taking my question a couple of follow ups and.
And thanks for and also thanks for providing visibility into 'twenty 2 with minimum revenue.
With $1.5 billion and the question and I have here is.
What are the key growth assumptions for different sectors and its.
And you don't want to elaborate how should I think about the fastest growth versus the relatively lower growth segment.
And I wouldn't say, our clients and deep dive and you will continue to grow although P. J H N Street and next year grocery was the mother's day, but and P. J J and Paul with growth very strong.
To carry because we have a very large design sharing PC Oems we state is almost 80.
<unk> and a higher.
And over the next year, so that we have a deepen our customer FIFO NAND maker with our trees and 4 controller and ramping next year.
EMC plus USA as well so we'll grow very very strongly is also depend how many wafer we can.
We can secure we see as a green.
And to grow for a certain level, we guarantee is exceed $1 billion sell revenue next year, but we are seeing that backlog will continue to pile up by end of this year, but we will continue to work very hard to secure.
Cure more wafers, especially and mature technology began many EMC are in page 540 nanometer and from your email media. These mature technology wafer and severe allocation from our foundry makers and sure. So it is.
Critical how fast we can putting work with TSMC as well as other.
Foundry maker that can grow overall, the UMC per U S business.
Walnuts are PCR he for though is used for.
Commercial.
Segment of the North book because that does.
Is that correct.
As he used.
Both commercial and consumer we have a 2 generation of mention P. J J and flow controller, 1 use 28 nanometer and 1 is tell nanometer this year, we'd ramping with.
Morris 28 nanometer and next year majority will be transitioning to 12 nanometer.
Sure I.
I think 1 of them.
What I was trying to highlight is there is a concern that.
Our consumer and notebook Chromebook may roll over and you can growth 20, some percent plus per year.
And the perpetuity, but I think.
Commercial segment, which has been relatively quiet.
It could turn on and that's a significant positive catalysts for silicon motion and my thinking about this the right way.
Let me just try to get a straight Crown book. This year. The total volume just say around 40 to 50 million units Israeli and small.
And majority use a M and see now is a day they using various b and we are in a very small portion the crown book today, and the chromebook going up and going down and have reality, no impact to our business and and.
And for ACD, and <unk> talked about really for mainstream notebook and.
Mutual both commercial for cooperate account for consumer notebook. So that is to use and <unk> and that portion I think will grow very strongly and consistently and consistently with all of the top 5 PC Oems.
Sure got it and then 1.
And the funnel for years.
Is it a product mix that is going to.
And put a lid on the gross margin and the back half of the year despite sequential revenue growth.
And.
And it seems like margins are going to come down and and I'm just trying to better understand.
And is it because of a higher base is that because of the mix or is it just your year and gross margin operating margin guidance is conservative.
And then he our gross margin expectations for the second half of year.
Is it going to be significantly higher than what we had.
Originally guided but obviously, we still have a lot of work to do we'd like to I'd love to take our gross margin, even even higher than what we've just talked about.
And so this is going to be coming from the continued execution of.
The initiatives that the 4 primary initiatives that Wallace had talked about.
Turning to to Upselling, our product mix to a richer product mix relating to how we allocate towards.
Higher margin accounts more profitable accounts relating to the ability to reprice, our products where possible to reflect the higher costs that we have and our <unk>.
<unk>.
We like all of them are we also working out of our operations team are also working very hard to see how we can better debottleneck our processes with our contract manufacturer for backend services. So all 4 of these are still in and execution and the more we are able to to to work our initiatives.
And the better our gross margin.
But as a baseline the gross margin that we talked about are or what we're guiding them and then if we can execute even better.
And we'd love to take up our gross margin higher than what we had guided.
Sure. Thank you and on the <unk>.
<unk> side.
And executing flawlessly on managing working capital your free cash flow margin for the June quarter was 25% you have grown cash and if I just take your base assumption for 'twenty 2 off of $1.5 billion of revenue your cash could go towards mid teens $15 and net cash per share.
And I know the question came up earlier, but I'm going to ask it again.
Is there something you can.
And offer us.
Why why not become more aggressive with buyback or why not consider strategic.
Options because the cash has gone up valuation not changing and I'm just trying to think how.
And the management team is thinking about it.
Reconciling execution free cash flow margin with the evaluation and the share price.
And I feel I seen let me just.
And so the question by saying you're looking for Silicon motion today.
Outstanding share total diluted.
7.5 million shares.
So really has not really and very meaningful for us to do share buyback. We have reassessed. We Daphne has bore when we have more free cash will either do more investment for Sarnia, MMA or we would have and potentially increase the dividend.
Lewis.
<unk> and try to provide to the shareholder by saying this is his direction.
We are seeing in net quarter is likely to happen that way for the net quoted after our board meeting.
Meeting.
And maybe let me add it quickly.
And hopefully we've been pretty good about returning capital.
And shareholders, we typically and return up to half of our free cash flow and we've been doing that and returning half of our free cash flow to shareholders over the last few years and we expect to continue that.
And for US the primary means of returning capital to.
To shareholders is through our dividend pay.
Payment and so with our our upcoming.
We just paid our third third installment of our quarterly dividend and the last 1 will be will be coming soon and so by by October of this year, we will have to decide on our dividend.
For the upcoming 4 quarters and.
And at that time and October given the strong performance of our business and good visibility and and into next year and likelihood of a higher dividend.
And being being declared is a good 1 and so back to your question about what do we do with our cash and and the answer to you is we will continue.
And to return to our shareholders and for US the primary means to our dividend payments.
Thank you and thanks for taking all my questions.
Thank you and.
Our next question is from the line of vocal and how they haven't J P. Morgan Please call the Hudson and I was hoping.
Yeah.
Yeah, Hi.
Congrats on the great results.
Thanks for taking my questions first of all and <unk> could you talk a little bit about the SSD controller market.
Growing and almost 100 per standard first off looks like the growth rate of silicon and continue around the same pace of how much of that is the volume growth how much of that is pricing roughly.
So are you still looking at average A&P, but SSD controller, and the Florida half to $5 range and could you also give us a bit of context in terms of how much market share do you have of your addressable market and SSD controllers, and especially the consumer book.
So we will continue.
Our clients a day controller business.
We will outperform the market growth.
But we cannot comment regarding a C. Dollar is but we can assure you. The pcie Gen..3 is higher than south and controller. The PCI Gen..4 also the higher than pizza and each industry.
Grill, and we Dove and and we expect next year because of strong growth from our Pcie Gen..4 so every ASC for clients and controller should go higher regarding the market share. We believe for last year were around between 2020, 230% market share this year with growth, 5% to 10% so.
Certainly.
Rounds, and 35% to 40% range.
And we have ambition to growth beyond 40% and just depend it's really not dependent it depends how quickly we can build and more R&D team and to serve more demand, especially all sore thumb NAND makers.
Okay. So is it is it fair to assume that most of the growth this year and it's coming from units and a little bit of it is coming from mix improvement and not be pricing and so also from the mixed price improvement.
Okay.
Maybe 1 second question and thank you.
Talked about M&A.
It feels like 1 of the problems I think.
And that the market has in terms of evaluating and.
Silicon motion is that the addressable market and it's still primarily.
I don't know.
I think at least isn't limited time and number of units, but obviously there is a and b upgrade.
Could you talk about any of the and initiative that silicon motion is doing to potentially address from newer and addressable market, either and I guess and fee.
And so it'd be kring hours that you have in mind.
Given that you expect.
And you did extremely well in the and the current cut and SSD controller and imminently market.
Gogo, but.
But we're doing really well and and.
And the client device market right, so and as part of our market.
And Ssds already account for 60, and 65% last year will probably be up to 75% and clearly you know there is a cap in terms of what's addressable.
And same thing with our with the FSA and and smartphones.
And there's still a lot of upside opportunity there, but again.
And natural cap the opportunities that are coming are incremental to our to the client device and to the smartphone for US includes a couple of pieces. The first piece is our enterprise SSD controller market.
And we've year to day, we were just getting too.
Our first 1 million.
Milestone and we have our upcoming Gen..5 we're still executing with our enterprise class and before so this is a huge blue sky opportunity for us that will be a big piece of how we continue to grow rapidly beyond now and when our client based devices start plateauing.
There is.
But additionally in addition to the enterprise class of SSD controllers. We also have our EMC products square with the NAND flash makers are well.
Exiting and beginning to exit the low density applications. This creates opportunity for us to step in and we're talking about 1 billion.
Totally and plus opportunity with EMC and so this is another interesting area for us to step into additional well. It's also talked extensively about the automotive applications.
Applications.
Relating to what we can play and and this is Phil.
At a pretty early stage, but already we're seeing a lot of them.
Design activities by the automotive Oems and their partners and we've been involved and a lot of these are these projects. So let me just add some come and is.
So do you see just from and visit motto traditionally when Sars product become mature and.
And <unk> NAND maker.
And moving to the new generation and Theyre moving to a higher density higher performance.
And you're looking for the EMC book Dumbo is a 1 of a great zambo today because of UMC. The maximum density probably ones on the and gigabyte majority of around <unk>, 2 and even 16 gigabyte and Theres less Angel.
Inches for the NAND maker become manufactured cause similar and.
But as a financial return and this is very limited however that is a huge because it is true that standard that's a huge demand from all consumer electronics and growing Iot devices, and we become the solar from merchant controller.
And can provide a solution.
And really backlog is.
2 time, there and whether we can suppliers today. So there's a quite a lot of the same because we continue to develop new controller supporting upcoming new <unk> net so that makes us very unique position and make a profit won't use their R&D.
R&D resources.
Kind of a trend because it's products and mature.
Same thing for clients being in the future and we also have some margin.
Important product to do beaker really sell revenue is very very small and we really do not want to talk about it when it becomes very mature and yield.
We.
<unk> bye to Tal, we said at the Investor and analyst because I think silicon motion and we are not come on just a few controller and we had a much big ambition and where we are today.
Yeah.
Understood. Thank you very much.
Thank you and that.
Next question is from the line of Matt.
And Redbreast Securities.
And please go ahead.
Good morning, Thanks for taking my question.
So the problem and the predominant pushback or concern I hear from investors around us and buy.
And tied to the cyclicality and.
And markets for now and so weather.
And whether it's Pcs handsets what have you.
Well, it's I think what you've described as and number of secular growth opportunities that are very company specific.
Whether it's new Gen 4 P J your customer wins.
Opportunities, you're just talking about and Iot with EMC.
New York.
Our best customers.
Is there any way you.
And we look at that order book of $1.5 billion per 2022.
You can talk to how much of that incremental.
How much of those incremental orders and tied to new business.
Versus either existing designs or follow on design and to this thing and designs like any characterization you could provide there would be very helpful. Thanks.
So I think in the past couple of years it looked like our business really not show growth considered.
And that's why a lot of industrial have come.
And concern regarding how stable and how fast and emotion can grill and all I think we are moving to the more.
Healthy business model, all ourselves revenues this year and design wins from last year.
7 years ago, and what we are working on today is working for next year and beyond next year and Tucson and 24. So that's why the book we have is very very stable, that's really doesn't need any new design and they already have them today.
And that's why is that.
To get to.
The order book is very rock solid and.
And I'm pretty sure they will pile up to you and higher number by and this year and are really main go to secure more wafer and such we can fulfill that demand from many many and customer.
Very very important project very very critical not just for PC not just for smartphone not just for consumer electronic devices.
And <unk>.
There's some new innovation and we do have quite a lot for automotive.
We really haven't really.
Speak for but I think we have a very diversified product portfolio. We have very strong very broad customer base. We had many many opportunity now we really want to leverage our base, our technology product and try to have a more and manufactured both capacity and.
And to fill the demand and then we're seeing our growth is very very solid and consistent and.
And the market trends favor silicon motion and our customer and gain market share.
That's a fact.
Thanks, Paul.
That's all from me.
Thank you.
And I'd like to hand, the conference back to Mr. Ballesteros for closing remarks. Please go ahead Sir.
Thank you everyone for joining us today and for your continuing interest like emotion will be attending several investor conferences over the next few months.
All of which we believe remains virtual events and the schedule of these events will be posted on the Investor day, and she's section of our corporate website.
Thank you everyone for joining us today and goodbye for now.
Thank you ladies and gentlemen, this concludes today's conference.
Thank you.
You may all disconnect.
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