Operator: Good day, and thank you for standing by. Welcome to Silicon Motion Technology Corporation's Q3 2026 earnings conference call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question and answer session. At which time, if you wish to ask a question, you will need to press star one one on your telephone keypad. Please be advised that today's conference is being recorded. This conference call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include, without limitation, statements regarding trends in the semiconductor industry and our future results of operations, financial condition, and business prospects.
Operator: Although such statements are based on our own information and information from other sources we believe to be reliable, you should not place undue reliance on them. These statements involve risks and uncertainties, and actual market trends and our results may differ materially from those expressed or implied in these forward-looking statements for a variety of reasons. Potential risks and uncertainties include, but are not limited to, continued competitive pressure in the semiconductor industry and the effect of such pressure on prices, unpredictable changes in technology and consumer demands 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.
Operator: We assume no obligation to update any forward-looking statements, which apply only as of the date of this conference call. With that, I will now hand you over to Mr. Tom Sepenzis, Vice President of Investor Relations and Strategy. Please go ahead.
Tom Sepenzis: Good morning, everyone, and welcome to Silicon Motion's Q3 2026 financial results conference call and webcast. Joining me today is Wallace Kou, our President and CEO, and Jason Tsai, our CFO. Wallace will first provide a review of our key business developments, and then Jason will discuss our Q3 results and outlook. Following our prepared remarks, we will conclude with a Q&A session. Before we begin, I would like to remind you of our safe harbor policy, which was read at the start of this call. For a comprehensive overview of the risks involved in investing in our securities, please refer to our filings with the US Securities and Exchange Commission. For more details on our financial results, please refer to our press release, which was filed on Form 6-K after the close of the market yesterday.
Tom Sepenzis: This webcast will be available for replay in the investor relations section of our website for a limited time. To enhance investors' understanding of our ongoing economic performance, we will discuss non-GAAP information during this call. We use non-GAAP financial measures internally to evaluate and manage our operations. We have therefore chosen to provide this information to enable you to perform comparisons of our operating results in a manner consistent with how we analyze our own operating results. The reconciliation of the 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 will turn the call over to Tom Sepenzis.
Wallace Kou: Thank you, Tom. Hello. Thank you for joining us today. I am pleased to report that we delivered another quarter of strong growth with revenue of $560 million and gross margin of 53.7%, driven by the growth in Ferri for automotive, Edge AI, and BlueJay Storage, our eSSD business, and our emerging MonTitan controller for enterprise SSD. We drove another quarter of higher operation performance, delivering the second consecutive quarter of record earnings for ADS. We continue to capitalize on our product and market diversification strategy. We are on track to deliver record revenue in 2026, with over 100% top-line growth. Our strategy is simple, deliver real value to customers and focus where we are uniquely differentiated so we can generate strong ROI for shareholders. For our Edge controllers, we have become the de facto standard for mobile, IoT, and PC controller solution.
Wallace Kou: For NAND makers and virtually every module maker, outsourcing has become a much more meaningful portion of the market. Our matched controller technology and design expertise deliver solutions that are better performing, consume less power, and are more cost-efficient than either in-house or other merchant solutions. Our strong share gains are driving significant growth despite end market weakness, and we expect this to continue. Our MonTitan enterprise SSD controllers are winning across the ecosystem with leading NAND makers, hyperscalers, and CSPs, and with the module makers that supply AI server to hyperscale and enterprise customers. Our success is based on our unique combination of two decades of controller and firmware design experience and our history of managing more NAND than anyone in the industry. This has created an incredible, solid foundation for our leading enterprise controller products.
Wallace Kou: We expect our MonTitan revenue ramp to accelerate as we introduce our next generation PCIe 6 controller next year. Lastly, for our storage solution segment, our strategy has always been to focus in areas that are underserved by NAND makers, and we are rapidly growing share in these vital low density, smaller volume markets that require more design and customization work. We have spent more than a decade building one of the industry's broadest automotive-grade portfolio, supported by a dedicated quality and supporting team. Today, that foundation positions us to capture fast-growing compute and storage demand across cars, drones, and increasingly, robotics. For our enterprise BlueJay solution, our unique combination of broad controller platforms, best-in-class firmware, technical know-how, NAND suppliers relationship, and manufacturing capability put us in an ideal position to serve the growing need of AI infrastructure market.
Wallace Kou: As a result, we are rapidly evolving to a much more balanced and profitable company as new enterprise and AI products enhance our leading consumer controller share, strengthening our competitive position from AI infrastructure to the Edge to deliver long-term sustainable revenue and earning growth. I would like to take a moment to address the current market environment. The AI super cycle has driven robust demand of HBM, DRAM, NAND, HDDs for the past several quarters, with no sign of slowing down. Prices have risen sharply over the past year and the strained substrate supply across memory and storage. Enterprise market remain relatively insensitive to price. But PC, smartphone, and other consumer device OEM are struggling to bring affordable product to market, given today's memory and storage cost, and the consumer unit volume are declining as a result.
Wallace Kou: We expect conditions to stay difficult until bit supply come back into balance with demand. New NAND fabs are planned for 2028, and NAND maker continue to add bit through higher layer count. But we do not see this changing the current supply-demand imbalance to any great degree. Flash may continue to prioritize enterprise and high-capacity solution, creating new and expanding opportunity for Silicon Motion. Our growth is benefiting from more outsourcing and larger opportunity in enterprise and the storage solution market that we are uniquely positioned to win. We are at the beginning of the journey in the enterprise and AI market, and our early success will drive accelerating demand for our next-generation storage technologies. Let me now detail our embedded eMMC and UFS business, which include controller for smartphone IoT connected devices.
Wallace Kou: Our eMMC, UFS business was up over 100% year-over-year in H1 2026, as the NAND maker are shifting their resources toward DRAM and HBM solutions, allowing module maker to take share in the mobile market. This has helped drive our market share gains, as module maker look to third-party controller partner to make their mobile solution. In Q3, eMMC and UFS revenue declines modestly from the prior quarter, reflecting customer launch timing and the challenging smartphone OEM face in offering affordable device amid the higher NAND and DRAM prices. We expect the having to persist in the near to mid terms until additionally memory and storage supply comes online. Across the markets that we sell our eMMC, UFS controller, OEM are reducing specification to try to offset the rising memory and storage cost.
Wallace Kou: We expect our eMMC, UFS business to remain relatively flat in the near term given the current market challenging, but I do believe we can return to growth next year and beyond. As our new UFS 4.1 controller and UFS 5.0 controller ramp and driving higher ASPs. Now turning to our SSD controller business, which include Edge and MonTitan enterprise SSD controllers. This business delivers strong sequential and year-over-year growth. In Edge SSD, our PCIe 5 investment continue to pay off. With growth in both our four-channel and eight-channel controllers, PCIe 5 currently represent approximately 10% of the PC market, and we expect this will grow to 20% to 25% of market by the end of 2027, providing a strong runway for further growth. Our leading position in PCIe 5 is driving greater market share gains within the PC market.
Wallace Kou: As the industry transitions from PCIe 4 to PCIe 5, we expect to see further top-line improvement given the higher ASP associated with these next-generation products. We are currently working with all the major NAND makers and most of the leading module makers to deliver compelling SSD solutions that leverage PCIe 4 and PCIe 5 controllers. We are tracking well ahead of expectation to achieve our market share goals of 40% through Apple by 2028 and believe we will continue to improve our position. While PC unit headwinds associated with the higher memory and storage prices present challenges, we believe we will drive further top-line growth through the market share gains and ASP increases as the market shift to PCIe 5 continues. I would now like to provide you with an update on our new MonTitan enterprise SSD business.
Wallace Kou: NAND remains a critically important technology across enterprise and AI storage ecosystem, and MonTitan is positioned for rapid growth in the coming years. This eSSD solution delivers high speed, low latency storage that targets compute and data storage applications for enterprise AI platforms. Our first two customers began shipping TLC eSSD for compute that leverage our MonTitan controller in Q2. All seven of our announced customers are on track to begin commercial ramp in 2026 with both TLC-based compute and QLC-based data storage products. TLC-based compute eSSD using MonTitan are expected to grow more quickly than QLC-based data storage eSSD in the near term, until a greater supply of 2 terabit die becomes available.
Wallace Kou: Encouragingly, four of our six NAND makers have started production of 2 terabit QLC die to date, and we expect all NAND makers to begin shipping 2 terabit QLC by end of 2027. Momentum will accelerate throughout next year. During Q3, we taped out our next-generation 4 nanometer PCIe 6 MonTitan controller targeting hyperscalers and CSP and expect to begin sampling in Q1 2027. We have one design with multiple tier 1 customers, including NAND flash makers, hyperscalers, and CSP. The new controller was designed for both compute application using TLC and data storage using QLC NAND as a performance shaping and multiple aging service architecture extremely well suited for a Gen AI infrastructure. We continue to see increased inbound interest in our MonTitan controllers and expect this new enterprise controller segment will help us deliver long-term sustainable top and bottom line growth.
Wallace Kou: Finally, I would like to provide an update on our Ferri Automotive, Edge, and Enterprise boot drive storage business. Our solution business, which includes Ferri and boot drives, delivered the strongest result in Q3, with revenue up over 75% sequentially, representing over 40% of our revenue. Our automotive business has been a particular source of strength, delivering better than expected top-line results and higher gross margins. We continue to scale this business quickly as we know the automotive market, its customers, and the supply chain extremely well, which has driven significant backlog for long-term growth as we accelerate our share gains. We have since spent more than a decade developing our automotive products and certifications. Today, our storage controller and firmware offer the broadest portfolio of solutions to serve every part of the automotive market.
Wallace Kou: Our success in automotive has drawn interest in Ferri for other large growing markets, including robotics, drones, and advanced networking. In the emerging robotic market, we are actively engaged with several companies that want to use our storage product. We are seeing multiple opportunities in humanoid robots and other physical AI systems, including vision, lidar, and compute storage. Our early conversations suggest robotic opportunity may be larger than automotive, and we believe Ferri is ideally suited to address it. Our fast-growing boot drive business is also gaining momentum. We estimate that the market will be approximately $3 billion in 2026, growing to over $5 billion by 2030. In Q3, we won designs with several new tier 1 customers for networking and AI infrastructure products. These programs are expected to ramp over the next 2 years and will substantially improve our backlog visibility.
Wallace Kou: As the average capacity of enterprise boot drives is much smaller than compute and data storage SSD drives, the NAND makers no longer prioritize this market. Additionally, our DRAMless controller delivers the performance, reliability, endurance these drives need with lower power consumption requirements, smaller form factor, and the lower cost than DRAM-based design. Boot drive handles the operation system, logging, and system management rather than heavy data workloads, so they do not need the expense of onboard DRAM for DPU, router, and switch products. As AI infrastructure builds out at large numbers of servers, the networking and DPU equipment shipments are increasing rapidly, each needing reliable boot storage, driving the growing demand for DRAMless boot drives. We have been the primary supplier for DRAMless boot drive controllers to the NAND makers that have historically served this market, as they are moving on the higher density opportunity.
Wallace Kou: Silicon Motion is uniquely positioned with the right technology, the right support, the leading security firmware, and proven ability to procure NAND, making us the best partner for those needing a boot drive solution. Looking ahead, however, we are seeing significant new opportunity for boot drive with onboard DRAM. Given the strong demand of AI inference and generative AI, near CPU boot drive with DRAM provide lower latency and Open Compute Project features that are in increasingly high demand. As the NAND makers have shifted their resources toward HBM, DRAM, and high capacity compute and data storage SSD, there is a growing shortage of near CPU boot drives with DRAM. We estimate that this market will reach over $10 billion by 2030, making a significant new opportunity for Silicon Motion.
Wallace Kou: We are already in discussion with multiple potential customers for boot drives that leverage our industry leading eight-channel and PCIe 5 controller that can serve the near CPU market to further expand our market opportunity and expect to begin ramping product for this market in H2 2027. Our Ferri for Automotive, Edge AI, and Boot Drive Solution business are performing especially exceptional well, and these are many large and growing opportunity for our product in the segment. Our backlog has increased significantly in just the past 3 months, and we expect many additional customer design wins in Automotive, Edge AI, and Boot Drive Solution to deliver significant future growth. We continue to benefit from our proven ability to secure NAND in a difficult environment from multiple NAND suppliers, and this continues to be a powerful differentiator for our company.
Wallace Kou: In conclusion, Silicon Motion delivered its fourth consecutive quarter of record revenue as we executed across a rapidly diversifying business. We are a fundamentally stronger company today with a stronger balance sheet, broadest range of solution and product, and more opportunity ahead than at any time in our history. Our broad portfolio serves surging AI demand from the data center to the edge. The breadth gives us balance across our market and the flexibility to seize growing opportunity while navigating challenge like those we face today in PC and smartphones. I am extremely proud of our teams. Together, we have built a durable, diversified business powered by best-in-class technology, expanding share and new end markets, strengthened by two decades of relationship with OEMs, module makers, and NAND makers. I am more confident than ever that we will continue to deliver broad-based sustainable growth long term.
Wallace Kou: Now let me turn the call to Jason to go over our financial performance and outlook.
Jason Tsai: Thank you, Wallace, and good morning to everyone joining us today. I will discuss additional details of our Q3 results and then provide our outlook. Please note that my comments today will focus primarily on our non-GAAP results, unless otherwise specifically noted. A reconciliation of GAAP to non-GAAP data is included with our earnings release issued yesterday. Before I get into the results, I would like to comment briefly on our convertible bond issuance on 13 August. We raised an aggregate $1.15 billion, with net proceeds to the company of $1.127 billion. This successful raise was increased from the initial offering of $800 million. This new CB at 0% interest and initial conversion price of $380.50 represents a conversion premium of 65% over the last reported sale price of SIMO on 10 August, the day the deal was announced.
Jason Tsai: This additional capital significantly strengthens our balance sheet and will help fuel our growth and enhance our working capital to scale our business. Now, turning to our results. We delivered an outstanding Q3, surpassing our expectations, driven by stronger execution and demand trends. In the September quarter, sales increased 24% sequentially and 131% year-on-year to $560 million, coming in well above the high end of our guided range of $519 to $541 million, delivering our fourth consecutive quarter of record revenue. We experienced strong growth across most of our businesses in Q3, with standout growth in Ferri for Automotive, Enterprise Boot Drives, and SSD controllers, including Edge and MonTitan for Enterprise. Gross margins of 53.7% was significantly better than guidance as we capitalize on new product introductions and benefited from better mix and better than expected margins in our Ferri Automotive products.
Jason Tsai: Operating expenses slightly decreased sequentially to $120.7 million, and operating margin increased 32.1%, well exceeding our guidance, driven by higher than expected revenue and gross margin in the quarter. Earnings per ADS was $4.35, a 79% increase sequentially and a 333% increase compared to the same quarter last year. Total stock-based compensation, which we exclude from non-GAAP results, was $17.3 million in the September quarter. We had $953.6 million in cash equivalents, and restricted cash at the end of Q3, compared to $181.8 million at the end of Q2. Cash increased in Q3 due to the successful $1.15 billion convertible notes offering that we executed in the quarter, offset by the increase in working capital, dividend payment, and the repayment of the short-term bank loan.
Jason Tsai: Our strategy, as Wallace outlined at the start of this call, continues to drive growth and expand our opportunities. Our experience, our customers and partners, and our unmatched technology and development of NAND controllers and solutions has driven a significant transformation of the company. While the NAND market continues to be dynamic, our investments across consumer, enterprise, data center, and AI applications are the foundation for our rapidly growing business. As a result, we believe the momentum in our business will continue in Q4 and now expect revenue to grow 5% to 10% sequentially to $588 to $616 million, with growth across nearly all our product segments, led by Ferri for Automotive- Enterprise Boot Drive Solutions, and MonTitan enterprise SSD controllers. We believe our SSD controller business will be flat to slightly down given the current memory and storage environment and typical seasonality.
Jason Tsai: Gross margins are expected to increase sequentially to 54% to 55% in the December quarter, given the continuing improvement in product mix. Operating margin is expected to grow to 36% to 37% as continued strong revenue growth and higher profitability drives the leverage to the bottom line. Our effective tax rate is expected to be 20%, and stock-based comp and dispute-related expenses are expected to be in the range of $34.6 to $35.6 million. 2026 is on track to deliver record revenue for Silicon Motion, with top line expected to more than double year over year. While we continue to invest heavily in R&D this year to expand our portfolio of leading-edge solutions, we are confident that along with the higher revenue and improved gross profitability, our operating margins will exceed 30% exiting this year. We expect this momentum to carry into 2027.
Jason Tsai: Our strong backlog across all of our businesses gives us confidence that we can grow revenue by at least 40% next year, with gross profitability to be in the low to mid 50% range. Our mix is improving. With more contribution from enterprise controllers and Ferri Automotive Solutions, we should be able to sustain this higher margin level. It is also worth emphasizing that these new enterprise opportunities represent larger addressable markets than our consumer segments. Because they are greenfield opportunities for Silicon Motion, we can grow significantly by gaining share without depending on further market growth. Any market expansion would only add to our potential upside. We set out to diversify beyond consumer applications into automotive and enterprise, and that strategy is now producing outsized results. Our longstanding leadership in merchant controllers and our multi-year investments in enterprise and AI SSDs are beginning to bear fruit.
Jason Tsai: The solutions we are winning in these markets offer far greater visibility, much longer product cycles, and significantly higher barriers to entry, which together underpin sustained growth in revenue and profitability. As these wins ramp across a broad mix of end markets, consumer cycles will have less influence on our results. Our visibility is improving significantly, and our business will become meaningfully more resilient and predictable. Our balance sheet has never been stronger, and we are well-positioned to capitalize on the fundamental drivers that are foundation of the transformation that Wallace spoke about earlier. I look forward to sharing more on our progress next quarter. This concludes our prepared comments. I would like to open up the questions now. Operator?
Operator: Thank you. To ask a question now, please press star 1 1 on your telephone keypad and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Star 1 1 for questions. A moment for our first question. Our first question comes from the line of Neil Young of Needham & Company. Please ask your question, Neil. Your line is open.
Neil Young: Hey, good morning, guys. First question, just given that you just gave us the expecting revenue to grow by at least 40% next year and gross margin in the low 50% range, curious if you could sort of dive into maybe the main drivers of that. I mean, given that gross margin, you expect sort of resetting the long-term target, it sounds like now I would expect more of the growth to be driven by sort of the higher margin business like Ferri and MonTitan. Any comments that you can add further on to 2027? Thanks.
Jason Tsai: Yeah, I think that's right. I think we are seeing significant traction with MonTitan. We are seeing the Ferri for automotive ramping very aggressively as well. A lot of these Ferri projects, especially in automotive, these are multi-year engagements where once we are qualified in, we have got a really long-standing position with that socket, with that customer. We are working with virtually every automaker in the world for a variety of solutions going into a significant amount of their portfolio, but significant room for growth still. Based upon our backlog, based upon the growth we anticipate from MonTitan, as well as other SSD controllers and Ferri for automotive, we believe that we can sustain these low to mid 50% gross margins.
Neil Young: Okay, great. That's helpful. Just in this quarter, bringing it back, looking at the Ferri and Boot Drive, obviously the growth continuing is really great. Could you, by any chance, give us some more detail? It sounds like Ferri might have outgrew Boot Drive in the quarter. Obviously, beyond automotive, I should say, in Ferri, curious to learn more about the robotics and where you guys play in that. Thanks.
Wallace Kou: I think because of Ferri for automotive, it's been for a long time, so we see the custom base are very strong. For this year, definitely it's Ferri for automotive, it grows stronger. However, our Boot Drive also gaining momentum with the diversified customers, more than just GPU customer and the TPU customer. We recently winning all the networking and several customers. We see our enterprise Boot Drive will grow even much faster next year. Robotics, I think it's still very early stage, and the total volume is still very small, but we try to make sure we'll be in when the market take a boom.
Jason Tsai: Keep in mind, a lot of the features within the Ferri for automotive products are the same features that the robotics requires, right? Which is high temp, vibration, all of the things that go into a car largely go into the robotics as well. So having that certification already, having those products already, puts us in a significant advantage to penetrate this market as it grows.
Neil Young: Thank you.
Operator: Thank you. We will now take our next question from the line of Craig Ellis of B. Riley Securities. Please ask your question, Craig, your line is open.
Craig Ellis: Yeah, thanks for taking the question, and team, congratulations on the tremendous momentum that it seems you have in the business. I wanted to start with a question for you, Wallace. Very exciting to hear about the engagement that you have got with near CPU boot drives, because the performance gains, given reduced latency with the way that can implement, are really quite profound, and it seems like that could be a very significant market. The question is this: do you see this implementing on more of a custom basis across customers, or is JEDEC going to move super quickly and get standards out here in another quarter or two? Then, can you just talk a little bit more about how you would see the early part of the ramp for Silicon Motion?
Wallace Kou: Now we see opportunity come from the early Q3, because conventionally, this near CPU boot drive with DRAM belong to NAND makers. Because all NAND makers are busy and try to produce at least 8 terabyte, 16 terabyte compute SSD. So they have less interest of resource on NAND allocation for the low capacity near CPU boot drive. The near CPU boot drive primary density is about 1 terabyte to 2 terabyte, and some also 512 gigabyte. 4 terabyte is very, very few. So I think because we can see it will be probably a very, very big gap of shortage supply for 2027. Many, many customers come to Silicon Motion and we are preparing discussion, and I think the solution, definitely to have a customized some feature and tailored for individual server and leading hyperscalers. So, this is not a simple work.
Wallace Kou: We will try to focus on select the NAND and make sure we follow the OCP requirement and provide the firmware. I think we will be ready for the firmware and solution by early Q1, and production ramp will be H2 2027.
Craig Ellis: That is really helpful. The second question is really a higher level question for you and Jason. The team has done a phenomenal job operationally this year, putting the business in a position to grow 100% plus year-on-year. Can you help us understand the positioning that you feel like you are in with wafer supply, packaging, et cetera, to support the 40% growth? If demand is greater, given some reports that things like agentic AI CPUs could grow 47% next year, can you just help us understand if there is upside potential in the supply chain to meet greater demand than that 40%? Thank you.
Wallace Kou: As you know very well, in semiconductor industry today, everything is in shortage. From substrate, from material, from wafer, from NAND, from memory, from even test capacity. But I think our manufacturing operating team did a very good job, and we secured our 2027 wafer with TSMC primarily, and also, we also secured the test capacity and assembly capacity and the substrate material. So we believe we are able to support our growth for 2027. Jason mentioned we see we definitely can grow minimum 40% year-over-year. I think in next quarter earning call, we will provide more meaningful guidance for our 2027.
Craig Ellis: Thank you.
Operator: Thank you. We will now take our next question from the line of Sebastien Naji of William Blair. Please go ahead, Sebastian, your line is open.
Sebastien Naji: Yeah, thank you, and good morning. Thanks for taking the questions and congrats on another record quarter here. My first question is maybe a little bit higher level and strategic. As your SSD solution business continues to grow as a share of revenue, it hit over 40% in Q3, it is driving greater NAND pricing exposure into Silicon Motion's model, and that is a little bit of a shift for a company that was largely tied to volume growth historically. So maybe just how do you think about managing this new pricing dynamic and how it could impact your growth and margins, particularly as NAND pricing starts to come down?
Wallace Kou: Yeah, you asked a very good question. I think we definitely manage the NAND price increase and negotiate with the customer to pass through the cost to customers, so we benefit from the sale revenue growth. But we believe the NAND price increase will come to moderate because the spot price for module maker now has become challenging. We see the Q3, Q4 NAND pricing are rather similar. For next year, we also see the Although will be a single-digit growth quarter, but it will be moderate. For our business, why we focus on automotive and boot drive, because the end customer want to have a long-term contract and support and supply. So our contract with customers and price will stay with least 2 quarters, and we negotiate price every 6 months.
Wallace Kou: So we are able to manage the price and the cost, and that is why we can see through the demand, and we can manage our gross margin continually. We see the NAND wafer price will be more stable in comparison last year.
Jason Tsai: And one more thing, Sebastien. I think certainly there is a fear that, if NAND flash prices begin to come down, how does that affect our growth? I think one of the things that we are seeing in automotive, even in boot drives, is that there is some de-speccing going on. I think all things being equal, if NAND availability was better, if pricing was better, our customers would double their density or more, in some cases. So I think between a combination of respec'ing to normal specs as well as additional opportunities, additional customers that is coming online over the next 12, 18, 24 months, I think we are well-positioned to continue to grow even as the NAND market stabilizes over the next two years.
Sebastien Naji: Got it. Great. That is helpful. Then maybe just as a related follow-up around the funding that you raised and the working capital needs, I just wanted to get maybe a better sense for your ability to continue funding all of your working capital and inventory build with the cash that you have on hand. Can you maybe just talk a little bit about how quickly you expect inventory, particularly around NAND, to flow through the model and what it would take to maybe potentially need further capital down the line?
Jason Tsai: Yeah. So for us, we are targeting about two quarters turnaround time between when we get the NAND and when we generate the cash flow. So, our expectation is to be able to turn that inventory relatively quickly, and generate the cash flow to support ongoing growth of our business. But when we did the raise, we talked about the raise being sufficient to fund our working capital needs for the next couple of years, based upon today's expectations. Obviously, as the business continues to grow and hopefully as it exceeds expectations, we will continue to reevaluate that, but that is at least right now for our visibility, we believe we are in a good spot.
Sebastien Naji: Great. Thank you.
Operator: Thank you. Our next question comes from the line of Suji Desilva of Roth Capital. Please ask your question. Suji, your line is open.
Suji Desilva: Hi, Wallace. Hi, Jason. Hi, Tom. Congratulations on the progress here. The MonTitan product, the higher KV cache density you're expecting. Are there innovations coming from HBM and DRAM that might offset the opportunity for SSDs and KV cache? I'd love to get your thoughts there. What's a good concept of the number of MonTitan SSDs needed per GPU for KV cache?
Wallace Kou: I think the MonTitan demands from very wide range, not only from the AI server and for hyperscaler and also for the CSP, but also for NVIDIA ecosystem. I think we don't know the percentage how, but we see the demand for Compute SSD this year is bigger due to the NAND price is very expensive. We also see the momentum for high capacity QLC coming for next year. I believe, when Samsung, SK hynix said 2TB QLC can move to production, we'll see more QLC demand for data storage. MonTitan itself can handle both the Compute SSD and the storage SSD. For KV cache, particularly for CMX, for NVIDIA structure, I think they will redefine and try, because the price is very expensive, they try to reduce the minimum capacity for the each of where our
Suji Desilva: Okay. Thanks, Wallace. Very helpful. The other question's for Jason, perhaps. 40% plus revenue growth next year. You talked about an operating margin guide in the 30s. Just how are you managing the OpEx and R&D growth, given that you have so many different end markets and projects you're focusing on? What's a growth rate for OpEx versus revenue that would be a framework for us to think about?
Jason Tsai: Yeah. We will get into more specific guidance around 2027 in January. This year, we taped out a number of 6nm as well as 4nm products. So, we are spending a lot of money on tape-out and design this year already. We anticipate continuing to invest next year. Again, we will talk more about the specific OpEx guidance next year in January, but our expectation is that we will continue to be able to deliver operating margin leverage next year as well.
Suji Desilva: Okay. Thanks, Jason. Appreciate it. Thanks, guys.
Operator: Thank you. Our next question comes from the line of Mehdi Hosseini of Susquehanna International Group. Please go ahead, Mehdi, your line is open.
Mehdi Hosseini: Yes. Thanks for taking my question. A couple of follow-ups from me. Wallace, Jason, can you quantify what percentage of your total revenue were attributable to Ferri, boot drive, and PCIe SSD, and how each percentage will change into next year? I have a couple of follow-ups.
Wallace Kou: I would say we cannot party about detail, but about 40% of our total revenue is around the solution from boot drive and automotive, 60% from controller.
Mehdi Hosseini: Would those mixes change dramatically next year?
Wallace Kou: Next year, the solution boot drive automotive might grow to 50%, but so far we did not accurate. I think that we see probably will be balanced next year, 50/50 between controller and solutions.
Mehdi Hosseini: Okay. Given how your exposure to the consumer end market is less looking forward compared to prior years, should I assume that there is no more seasonality from Q4 to Q1?
Jason Tsai: Again, Mehdi Hosseini, we will get into more specific Q1 and 2027 guidance in January.
Mehdi Hosseini: Okay. I was hoping to get a preview. You mentioned you are more driven by enterprise, I am just trying to, maybe qualitatively you can help us to.
Jason Tsai: No, I mean, certainly, I think there will be, I think the enterprise becoming a bigger portion of the mix, Ferri becoming a bigger portion of the mix. I think, certainly normal consumer seasonality will certainly be more muted going forward as consumer business becomes a smaller percentage of our business.
Mehdi Hosseini: Okay. Is there any update on arbitration? It would be great to tell us whether the key milestone and how we are tracking with those.
Jason Tsai: Yeah. We did the closing arguments in Singapore arbitration in March, and we are still anxiously awaiting the results. We do not have any other updates at this point, but certainly once the results come out, we will be talking about those things quite a bit. But right now, there is no additional comments we are going to give around arbitration.
Mehdi Hosseini: Okay. Thank you.
Operator: Thank you. As a reminder, before we move to our next question, if you wish to ask a question now, please press star 11 on your telephone keypad. Our next question comes from the line of Gokul Hariharan of JP Morgan. Please go ahead, your line is open.
Gokul Hariharan: Yeah, hi. Thank you very much. So first question is on the near CPU boot drive opportunity. Wallace, I think you said you will start in your solutions in H2 of next year. Could you talk a little bit about how big that opportunity can scale into, because your enterprise boot drive partnering with NVIDIA, it scaled up very rapidly. But could you talk a little bit about how the opportunity is and how fresh that opportunity is, given that there are already a fair number of incumbents there? I just want to understand the TAM is big, but how quickly can you scale this business?
Wallace Kou: I think that 10 will be a minimum $10 billion by 2030. Because the density is bigger than the DRAMless boot drive. Because the NAND maker did not pay attention, this business belonged to a NAND maker in the past because they have, especially the three NAND maker have DRAM. Because all the NAND makers, they focus on high capacity compute SSD, and the data storage SSD. So their lack of a resource and attention in the near CPU boot drive with DRAM. So that's why the supply becomes shortage and many tier 1 customer come to Silicon Motion. We see the great opportunity. We also work with the leading NAND maker to see how they want we can work together to resolve the issue.
Wallace Kou: Whether they will support more NAND and also we need to resolve manufacturing and also including some of the DRAM supply too. But we believe we will start to ramp in H2 this year. We also work with some module maker partner, because they will use our controller in the firmware, but we will have a different business model to work with them to benefit some financial results. Anyway, this is a new opportunity, and we just really don't have enough R&D resources. There's a great opportunity for Silicon Motion to grow, and they could be grow even faster in 2028 and 2029, because we have the great idea controller and fitting very well, and we have the firmware technology, and suddenly the controller, very lucky, have a certain OCP feature built in. So we don't need to redo the new ASIC.
Wallace Kou: I think a lot of the all NANDs, they don't have a certain controller today. So that's why we are in a great position to expand to the new market.
Gokul Hariharan: Got it. Just to follow up there, when you win business, do you have to win by individual server customer, or you just design into a chip platform and you kind of become the de facto in that chip platform, similar to what you do for the current enterprise boot drive?
Wallace Kou: All the near CPU boot drive today is M.2 form factor, 22 by 80.
Gokul Hariharan: Yes.
Wallace Kou: They need a low power, because our controller, 6nm controller, our SM8008, is ideal to fitting very well. This controller needs just a DDR4, or LPDDR4. Well-positioned into fitting this asserting. There is some NAND maker also want to work with us, but we have limited resources. We just have to make sure the firmware is ready. We will support two different NAND, by Q1 next year, and hopefully ramping smoothly in H2 next year.
Gokul Hariharan: As long as it is M.2 standard, you can start shipping. There is no additional qualification by individual server customer, et cetera, which takes time.
Wallace Kou: We already working with our module maker, our customer, and they will support the leading tier 1 server maker. They may be shipped earlier by Q2 next year. But it is only with our controller. But our own solution, total solution, will be probably ready shipping in H2 next year.
Gokul Hariharan: Understood. Second question is for Jason. Jason, first on gross margins. Historically, we have seen Ferri and any NAND solution business operate in the probably lower than 40% or 40% kind of gross margin levels. Now, obviously you have made a meaningful step up in gross margins for solution business as well. As NAND price starts to stabilize or not really go up a lot, how should we think about the margins? Are these the steady-state margins that you expect the solution business to earn, given it is more enterprise related? Secondly, could you also talk a little bit about, next year looks like based on Wallace's comment, the SSD solutions business will grow faster than 40%. What is the support that you need from an inventory perspective? Because inventory already has gone up to about $8 million or so.
Gokul Hariharan: Could you talk a little bit about how you think about how much working capital support you would need to support that kind of additional probably 50% growth in the solutions business?
Jason Tsai: Yeah. In terms of the gross margin question on the solutions business, as Wallace pointed out, we are negotiating six-month pricing contracts with our customers. We expect to turn our inventory here within that period as well. So maintaining very tight controls around working capital and price protection and margin protection for our products and our P&L. We anticipate that, certainly with the automotive, these are qualified products going into projects that are multi-year, three to five years of length. Pricing as well as supply agreements are agreed upon at the beginning of these engagements. So we are confident that we can maintain better margins, especially as the solution complexity, the design, the support becomes more onerous. So having the higher margin supports all of that.
Jason Tsai: In terms of the working capital, as I said, with the raise that we have done, we are confident that we can support the next couple of years' worth of business, based upon what current forecasts look like. So, we will continue to grow inventory, but obviously in anticipation of a 40% plus year, we have grown inventory now. We will continue to grow inventory in the next quarter, in the Q4, and then we will start seeing obviously the turns of that inventory come back into cash flow, as we progress.
Gokul Hariharan: Got it. Okay. Thank you.
Operator: Next question comes from the line of Daniel Yen of Morgan Stanley. Please ask your question, Daniel. Your line is open.
Daniel Yen: Thanks, Wallace and Jason, to take my question, and congratulations on a great result. I want to switch gears to a very different question. Wallace, you just mentioned about some opportunities, for example, for your boot drive, for example, enterprise SSD. I want to ask, what will be your strategy right now in China? I think China is still the important region, and I think in China, we also have CSPs. We have NAND supplier, NAND makers. We also have a lot of module houses there. At the same time, I think competition is still there. So, I want to consult you on Silicon Motion's strategy right now in China, both with the NAND makers, with the competitors, and also how should we address maybe the future demand from the CSP in China?
Wallace Kou: Okay, you asked a very good question, Daniels. I think that we really want a balance between China and also the rest of world. China have a YMTC NAND maker. They are very strong. They grow very fast. We also support and collaborate with the YMTC directly or indirectly with the module maker. I think the enterprise portion, we see they will become stronger in 2027. I think we definitely work closely for China CSPs, for hyperscaler. Believe us, and that is why we try to grow China local R&D. Eventually, when China, our local R&D, can support China customer, and Taiwan will support the rest of world, especially for US customers. Secondly, I think the China, they are growing enterprise controller company, but in the past, they also like to make enterprise SSD drive. But in the past, you know, NAND pricing is cyclical.
Wallace Kou: They have a downside, they have upside. The some enterprise controller company, they buy the NAND in the downside, they are selling the drive in the upside. But nowadays, there is no longer the cyclical. Its price are going up or stable, right? Very hard for enterprise controller company, you use it comparing to selling the whole solution if you don't win hyperscaler or even NAND maker or the CSP customer. I think our strategy is very simple. We are winning NAND maker business and designing directly. We win hyperscaler customer in both US and China. We also win the CSP directly. But we don't make enterprise solution. We only sell controller and our firmware. We enable the module maker and the NAND maker. They sell using our controller and the firmware, make enterprise solution and selling to the customer. This is where we are.
Wallace Kou: That is why building like Silicon Motion ecosystem, working together and supporting the growing opportunity in both China and US.
Daniel Yen: I see. Very clear. If I may follow up, how should we think about the overall competitive landscape on controller in China right now? I just want to get your opinion.
Wallace Kou: For enterprise, there is one or two basic company move to the IPO, but we don't see they are strong enough to compete in the long term. Not just one technology or business model, right? I don't really see any threat from them. Even some also want to go overseas. Today we feel pretty comfortable for our position and with our technology, and we have a very strong designing pipeline for both our PCIe Gen5 as well as Gen6.
Daniel Yen: I see. Yeah. Thanks for this. The second question from me is that, since right now I think you are issuing the convertible bond, I want to ask if there is any change on your dividend policy, potentially in the future. Also, yeah, I think, just overall, how should we think about your capital structure, going forward? Do you have a target, any ratio you are looking at? I think this question is actually coming from some of the investors who subscribe your convertible bond. Yeah. Thank you.
Jason Tsai: Yeah. So dividend and capital allocation certainly continues to be a priority. We increased our dividend just couple weeks ago, from $2 to $2.30 per ADS per year. So we have had a history of increasing our dividend over the last 10 years or so, and our expectation is that we can continue to look at that strategically over time and continue to look at opportunities to raise that. The three priorities for us on capital return is dividends, share buybacks opportunistically, and then M&A as it makes sense, and that is unchanged. But certainly right now, working capital needs continue to increase as well. The CB raise puts us in a much better position to drive growth in our business with better working capital as well.
Daniel Yen: Thank you, Jason. So that is all my question. Thank you.
Operator: Thank you. We have now reached the end of the question and answer session. I will now turn the conference back to Mr. Wallace Kou for closing comments.
Wallace Kou: Thank you everyone for joining us today and for your continuing interest in Silicon Motion. We will be attending several investor conferences over the next few months. The schedule of these events will be posted on the investor relationship section of our corporate website, and we look forward to speaking with you at these events. Goodbye for now.
Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect your lines.
