Silicon Motion Technology CORP Q3 FY2020 Earnings Call

Ladies and gentlemen, thank you for joining us for the Silicon Motion Technology Corporation's Third Quarter 2020 Earnings Conference Call. We would like to inform you that this call is being recorded. This conference call includes forward-looking statements as defined in the Securities Act of 1933 and the Securities Exchange Act of 1934. These statements may encompass various aspects regarding trends in the semiconductor industry as well as our anticipated performance, financial status, and business outlook. While these statements are based on our views and reliable information from other sources, we advise you not to place excessive trust in them. Such statements are subject to risks and uncertainties, and actual market trends and results may significantly differ from those indicated or suggested by these forward-looking statements due to several factors. Risks may involve continued competitive pressures in the semiconductor sector, fluctuations in technology and consumer demand for multimedia electronics, shifts in our relationships with key customers, as well as changes in political, economic, legal, and social conditions in Taiwan. For further details on these risks and uncertainties, please refer to the documents we periodically file with the Securities and Exchange Commission. We do not undertake any responsibility to update forward-looking statements, which are valid only as of the date of this call.

Thank you, everyone, and welcome to Silicon Motion’s Third Quarter 2020 Financial Results Conference Call and Webcast. As mentioned, my name is Chris Chaney, Director of Investor Relations. And joining me today on the call are Wallace Kou, our President and CEO; and Riyadh Lai, our CFO. Following my comments, Wallace will provide a review of our key business developments, and then Riyadh will discuss our third quarter results and our outlook. We will then conclude with a question-and-answer period. Before I get started, 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 U.S. SEC. For more details on our financial results, please refer to our press release, which we filed on Form 6-K after the close of market yesterday. This webcast will be available for replay in the Investor Relations section of our website for a limited time. To enhance our investors' understanding of our ongoing economic performance, we will discuss non-GAAP information during this call. We will 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 similar to how we analyze our own operating results. For more consistent year-over-year comparisons for this quarter and our upcoming fourth quarter, we are internally measuring our performance based on non-GAAP less FCI, which was divested in May of 2019. 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. And now with that, I’d like to turn the call over to Wallace.

Thank you, Chris. Hello, everyone, and thank you for joining us today. In our third quarter, we delivered $126 million in sales, 5% more than the high end of our guidance. Revenue declined 8% sequentially and increased 11% year-over-year. Earnings per ADS for this quarter were $0.76, down from $0.81 in the second quarter and up from $0.69 the same quarter last year. For the first 9 months of this year, our revenue grew 33%, and earnings per ADS are 45% higher compared with the same period last year. Our third quarter results exceeded expectations due to stronger sales of SSD controllers. As expected, our eMMC+UFS controller sales declined significantly due to temporary customer inventory adjustments, while our SSD solutions sales were softer than anticipated. Our stronger-than-expected SSD controller sales in the third quarter is a solid reversal of softer sales in the second quarter. Our second quarter SSD controller sales were affected by our NAND flash customers redirecting NAND away from client SSDs to meet the surge procurement of data center SSDs by the hyperscalers due to unexpected working and learning-from-home demand. Hyperscalers' surge procurement is now over. In the third quarter, we saw hyperscaler procurement of data center SSD drop off, which frees up NAND flash for client SSD. This quarter, with better availability of NAND, we delivered about 20% sequential SSD controller sales growth, with solid growth in both our NAND and module maker customers and solid growth to both PC OEMs and for channel markets. The growing availability of the lower-cost NAND is favorable for facilitating further growth in the adoption of SSD by PC OEMs and new usage cases for game consoles and external storage. Based on our SSD controller sales growth during the first 9 months of this year, we are likely growing roughly twice as fast as the market, and we expect momentum to continue through next year. Last quarter, we announced several new PCIe Gen 4 SSD controller design wins with 5 NAND flash makers. We continue to make solid progress with our engineering work in bringing these design wins with our 5 NAND flash customers into production beginning in the middle of next year. Four of our 5 Gen 4 NAND customers are existing Gen 3 customers. One of the 5, however, is new, a Korean NAND flash customer, a partner with whom we have a long, well-established and deep relationship. Furthermore, we have already secured multiple PCIe Gen 4 SSD controller design wins with this Korean customer. Recently, we announced the rollout of a broad range of PCIe Gen 4 SSD controllers, SM2264 for high-performance applications, SM2267 for the mainstream segment and SM2267XT for the value line DRAM-less client SSD. We believe the rollout of these Gen 4 controllers is well-timed with Intel's current and upcoming launch of the new series of 11th generation CPU that are designed specifically for faster PCIe Gen 4 connectivity. In addition to our design wins with 5 NAND flash makers, we also have extensive design wins with most of the leading module makers. For example, ADATA, one of our largest module maker customers, began commercial sales of a new PCIe Gen 4 SSD last month using our controller. This is one of the first Gen 4 SSDs available today that's optimized specifically for notebook PCs and other energy-efficient applications. Previously, our Gen 4 SSDs were power-hungry and only suitable for desktop PCs and other devices always connected to electricity. As CPUs from both Intel and AMD that support PCIe Gen 4 become more widely available, you should expect to see more of our customers release products with our new Gen 4 controllers. And as some of you know, the performance of our new Gen 4 controller based on key metrics are the best of breed versus other similar merchant and captive solutions. Our broad slate of design wins with 5 NAND flash makers and leading module makers is a testament to our very competitive value proposition to customers. Three years ago, we shipped a little over $150 million of SSD controllers. This year, we are tracking towards roughly doubling that. Based on our current pipeline of design activities, we are confident that more robust SSD controller sales growth lies ahead. Separately, we are excited about the design work that our team has been planning and executing relating to our upcoming state-of-the-art enterprise-grade PCIe Gen 5 SSD controllers. This product is designed specifically for the enterprise market and includes many technological breakthroughs; and we believe will be well received by target data center customers. I look forward to sharing more about this next year. Let me now talk about our eMMC+UFS controllers. This quarter, as previously communicated, our eMMC+UFS controller sales declined sharply as our large UFS customer has had to temporarily digest its elevated inventory. We believe this customer benefited from the strong rebound in smartphone shipments in the third quarter and made good progress depleting its excess UFS inventory. With smartphone shipments expected to continue growing in the fourth quarter and with positive booking trends, we believe our UFS controller sales are making good progress toward recovery in the fourth quarter. Earlier this year, we mentioned that this customer was sampling the industry's first LPDDR5 uMCP, a UFS 3.0 product that is well-positioned with OEM for high-volume sales. We are, therefore, delighted with their recent announcement that commercial production has started. Previously, for several years, we had been shipping UFS 2.0 controllers to this customer in volume, and we are now excited to add a new UFS 3.0 controller to our sales to them. Similar to our UFS 2.0 program, our UFS 3.0 program also has a multi-year roadmap. We expect our UFS 3.0 program to take advantage of our customers' upcoming generation of NAND flash as well as incremental UFS 3.0 enhancements. Separately, we are making good progress with our other NAND customers' UFS 3.0 project, which continues to target initial production by mid-2021. Similar to that of our first UFS customer, this program will also span multiple NAND flash and UFS generations. The legacy eMMC market has surprised us with its resilience even with the smartphone transition to UFS. Several years ago, we supported a half-dozen Chinese module makers interested in eMMC embedded storage for emerging smart set-top boxes, speakers, TVs, game consoles, and a host of other IoT devices. The volume of these devices has grown to be one-fourth to one-third the size of the smartphone market. These module makers have also started shipping eMMC to Tier 2 and Tier 3 smartphone OEMs and for low-cost smartphones of Tier 1 OEMs. Recently, we also expanded our module maker customer base to include Kingston and a specialty module maker from elsewhere in Asia, North America, and Europe for automotive and boot code storage applications. In the first 9 months of this year, even with our customers' large third-quarter inventory adjustment, we were able to grow our eMMC+UFS sales 70% year-over-year. The smartphone industry is roughly halfway through the UFS technology transition, up from roughly one-third last year. We expect further strong growth next year, with strong continued growth from our first UFS NAND customer, growth from our second UFS NAND customer, and further growth from our broad set of module maker customers focused on bringing eMMC+UFS embedded storage to non-smartphone devices. Turning to our SSD solutions. Sales were softer than expected due to more competitive market conditions and slower hyperscale spending in China. Our sale of a customer design, Open Channel SSD, to Alibaba was in line with our internal plan, with our Shannon standard NVMe SSD facing both more intensive competition from flash makers as well as further weakening of demand for SSD by data center operations in China. These unfavorable market conditions affected both our sales and gross margins. We are, however, optimistic about next year. Our Alibaba Open Channel SSD project for next year remains on track, and we expect to be shipping to 3 programs next year compared to 1 program this year. Alibaba increasingly appreciates the enhanced performance of its operation from using Open Channel technology and is keen to expand the rollout and continued upgrade of this technology in its data center infrastructure.

Thank you, Wallace, and hello, everyone. I will discuss additional details of our third quarter results and then provide our guidance. My comments today will focus primarily on our non-GAAP results less FCI, unless otherwise specifically noted. A reconciliation of our GAAP to non-GAAP is included with the earnings release issued yesterday. In the third quarter, revenue was $126 million, 8% lower sequentially but 11% higher year-over-year. Year-to-date, revenue of $396 million is 33% higher than for the same period a year ago. Earnings per ADS in Q3 were $0.76, 6% lower sequentially and 10% higher year-over-year. Year-to-date, earnings per ADS are $2.38, 45% higher than for the same period a year ago. Now some details starting with the performance of our 3 key products. SSD controller sales increased about 20% sequentially due to improved availability of NAND supply and strong demand by PC OEMs and channel markets. Year-to-date, sales are up over 20% year-over-year and growing roughly twice as fast as the market. eMMC+UFS controller sales declined about 50% sequentially and about 10% year-over-year due to a large customer's temporary UFS inventory adjustment. As discussed last quarter, this large but temporary drop was expected. Year-to-date, sales are, however, up about 70% year-over-year, as smartphone embedded storage technology transitioned further from legacy eMMC to newer UFS, and our U.S. NAND customer gained market share. SSD solutions sales declined about 10% sequentially because of continued softness in demand by Chinese hyperscalers and more intense competition from NAND flash makers in the standard enterprise NVMe SSD market. Year-to-date, sales are up about 80% year-over-year, with similar growth from both our Shannon and Ferri products. Shannon sales are up this year because our first-generation Open Channel SSD only started sales in Q3 last year. This year, we have the benefit of a full year of Open Channel sales. Ferri sales are up this year because last year, NAND prices fell sharply; while this year, NAND prices are more stable. Gross margin in Q3 declined to 49.1% from 50.0% in the prior quarter due to much lower SSD solutions gross margin. Gross margin uplift from a slightly higher mix of controllers and gross margins that were unchanged sequentially was more than offset by much lower SSD solutions gross margins, primarily because Shannon standard NVMe SSD gross margins contracted more than expected. Operating expenses in Q3 were $32.9 million, $5.1 million lower than the prior quarter, primarily due to temporarily lower R&D tape-out expenses. Operating margin in Q3 was 23.0%, an increase from 22.2% in the prior quarter, due to lower operating expenses. Our effective tax rate in Q3 was 10.5%, towards the low end of our 10% to 15% guidance range. We currently enjoy a tax benefit that will expire in Q4. Without this tax benefit, our Q3 tax rate would have been slightly higher than 15%. Stock-based compensation in our operating expenses, which we exclude from our non-GAAP results, was $3.1 million in Q3, within our $2.7 million to $3.7 million guidance range. We had $368 million of cash, cash equivalents, restricted cash, and short-term investments at the end of Q3 compared to $380 million at the end of the prior quarter. We paid $12.3 million in dividends to shareholders, the fourth quarterly installment of our $1.40 per ADS annual dividend that was announced in October of last year. Our Board recently declared dividends for the next 4 quarters, with quarterly installment payments of $0.35 per ADS, unchanged from the previous 4 quarters. We repurchased $25 million of ADS during the third quarter, 626,000 ADSs at an average price of $39.91. Since the beginning of the share repurchase program 2 years ago, we have repurchased $84.8 million of ADSs, 2.4 million ADSs that is equivalent to 7% of total shares outstanding, at an average price of $35.38. Since this 2-year share repurchase program will expire in November and $115.2 million remains unused, our Board recently authorized a 12-month extension to allow for more time to complete the program. Now let me turn to our fourth quarter guidance and forward-looking business trends. For the fourth quarter, we expect revenue to increase in the range of 3% to 10% sequentially to approximately $130 million to $139 million. We expect higher SSD controller sales as current positive momentum continues, higher eMMC+UFS controller sales after 1 quarter of UFS customer inventory adjustment and lower SSD solutions sales, as our 2020 Alibaba project seasonally ended at the end of Q3 and our other solution products faced less favorable competitive dynamics. Fourth quarter gross margin should be in the range of 48% to 50%. We expect that further contraction in SSD solutions gross margin will offset the higher sales mix and stable margins of our controllers. We expect fourth quarter operating margin to be in the range of 19.5% to 20.5%. Operating expenses will increase meaningfully in the fourth quarter due to timing of R&D tape-out expenses. Our fourth quarter tape-out expenses were lighter than normal, while our fourth quarter tape-out expenses will be heavier than normal. Our overall second half tape-out expenses are at levels consistent with the first half of the year. In the fourth quarter, we expect stock-based compensation of $8.6 million to $9.6 million, higher than in previous quarters this year but at a consistent pattern with past years due to seasonal timing of RSU grants. With the expiration of certain tax benefits, we expect our effective tax rate for the fourth quarter to be higher in the 15% to 20% range. Next year, we expect our effective tax rate to stay within this 15% to 20% range. We have cash disbursement authorization to opportunistically repurchase our ADSs in the fourth quarter. Amounts ultimately repurchased will depend on the market price of our ADSs. This concludes our prepared remarks. We will now open the call to your questions.

Yes. Congrats on good results in the third and fourth quarter. Question, Wallace, regarding the acquisition of Intel's NAND business by SK Hynix. Wanted to get your thoughts on that. I know that Intel is a large customer for you on the controller side. Wanted to see what management is thinking in terms of would there be any impact as SK Hynix acquires Intel's NAND business on your business? And how we should think about that?

Well, thank you for the question. We are excited that our NAND trade partners are taking steps to consolidate and ensure their long-term economic viability. Our relationship with both are long and well-established and stronger than ever. It is in our interest to see them more profitable and cover their opportunity costs so they are incentivized to continue investing in NAND into the future. As everybody knows, Intel leads the industry in QLC NAND technology and supplies significantly more QLC than any other NAND maker. This is a significant technology edge, and Hynix will be acquiring the QLC leadership. In terms of controlling QLC NAND today, our QLC controller technology is likely the best in the industry. All of Intel client SSDs use QLC NAND and our controller technology. Given our unmatched QLC controller leadership and track record, we are confident we will likely continue supplying controllers to them after the acquisition closes.

Okay. And the rebound that you're seeing in SSDs going into Q4, how would you characterize kind of NAND pricing environment now? You mentioned that there's more availability of NAND as hyperscalers have started recruitment. I wanted to get a sense in terms of what the NAND pricing is looking like in Q4 and how should we think about that in terms of calendar '21. And along those lines, how do we think about the attach rates for client SSDs but also kind of movement into desktops and gaming?

I think, first, regarding the pricing, NAND pricing is showing some signs of stabilization. We believe the fourth quarter price may be down in the mid-single-digit percentage range. We are hearing about plans for stronger CapEx spending by the NAND flash maker next year, which could lead to stronger industry supply growth and larger supplies of lower-cost next-generation NAND supply. We have been seeing for many years and consistent with our thesis, client SSD sales benefiting from increasing NAND supply, lower NAND prices and the related price elasticity of demand. And we believe next year, NAND price should also be stabilized. But we don't have a really clear picture regarding NAND price trend in 2021.

Regarding your second question about our market opportunity in client SSDs, the PC OEM SSD market was approximately 160 million units last year and is projected to grow around 15% this year, with SSD adoption rising from 60% to 75%. Adoption tends to be higher in notebook PCs compared to desktops, but both segments are increasing, indicating potential for further replacement of hard disk drives with SSDs. Additionally, the channel market for SSDs is estimated at about 120 million units, although it is more volatile and harder to predict. In the third quarter, we experienced solid demand from both OEMs and channel customers, surpassing our expectations. Overall, we anticipate the client SSD market will grow about 5% to 10%, while our own growth year-to-date has exceeded 20%.

Two questions, if I may. Just first one is a clarification. I was hoping you could provide a little bit more color on your commentary, Riyadh, about the expectation for your Ferri solutions business. I think you said it was going to perhaps decline in the fourth quarter. I was hoping you could expand a little bit about that, both in the fourth quarter and as you think about calendar 2020. And I have a follow-up.

For the fourth quarter, we're anticipating a sequential decline in our SSD solutions. This decline is largely due to the conclusion of our Alibaba project on the Shannon side at the end of Q3, which means we won't have that revenue in Q4. Furthermore, in addition to Shannon, we're also encountering increased competition with our Ferri products, contributing to the overall downturn in SSD solutions for the fourth quarter.

Okay. As a follow-up, one of your merchant SSD controller peers has spoken quite extensively about winning designs for custom SSD controllers to U.S. hyperscale providers. What are your plans to drive towards leading-edge silicon for your enterprise SSD controller designs? And do you think your capability to support PCIe 4.0 creates greater opportunity for you to address the merchant market for enterprise SSD controller designs beyond the programs you spoke about with Alibaba?

Yes. We are currently actually engineering the next generation of enterprise SSD controller PCIe Gen 5. This will have a very unique architecture with many technological inventions into the design. We have a dedicated ASIC team, dedicated firmware team, and we have dedicated architecture for both ASIC and firmware. We have a complete modeling team. This really will be a state-of-the-art technology and will position us to be the leading product for PCIe Gen 5, which will be available in 2022. And I think in the meantime, we're also seeing good traction in our current enterprise SSD controller, which is using our Ali Open Channel SSD, and in Kingston data center and other major enterprise customers. They're going to be ramping very sharply in 2021. Our U.S. customers have been using our controller to build enterprise-grade SSD for leading U.S. server OEMs since late last year. So we are in good progress, and we believe our new product will be stronger and take a leading position.

Nice execution. A couple of questions here. You're talking about your returning Korean customer, and Wallace, I think you mentioned multiple design wins. Can you help quantify that a little bit more and maybe put a number on the number of design wins or how big you think the opportunity is? Moreover, do you think that they could also return like they had in the past on the smartphone side? And then maybe two for you, Riyadh. Can you maybe put a more of a timeline on the 3 Alibaba projects? Do they all kick off at once? Are they spread over March, June, and September? And then lastly, Riyadh, can you just give us the Q4, the expected tape-out expense?

Yes. For the UFS project, just for our first UFS NAND customers, and really that's because of some multiple generation of NAND and with a different controller, for example, UFS 2.1; and we have 2 different generation, UFS 3.1, for this customer to implement with 2 different generation technology of NAND. For our second UFS customer's NAND customer, is a similar trend because UFS 3.1, just like UFS 2.1, is going to ramp for the next 3 to 4 years. That's why we're going to adopt for different generation NAND and for different generation mobile DRAM and create a different multiple project. That's why we position this relationship in business is going to last for multiple years.

Tony, regarding your questions about our tape-out expenses, our Q3 tape-out expenses were much lower than in Q1 and Q2, and they will also be lower in Q4. In Q1 and Q2, our tape-out expenses were around $7 million to $8 million per quarter. In Q3, we did not have any new tape-outs, which led to significantly reduced operating expenses compared to the previous two quarters. However, we expect our tape-out expenses to increase in Q4. Overall, our tape-out and related expenses for the first half of 2020 will be similar to what we anticipate for the second half of this year. To your other question, Tony, if you could, could you repeat your second question again?

Sure. Do all three projects with Alibaba start at the same time, or are they staggered throughout 2021? Additionally, could you clarify your response regarding the returning Korean customer for SSD design wins? You mentioned multiple design wins; can you provide more details on that?

Yes. This is our Korean customer for SSD, also including 1 or 2 different PCIe Gen 4 controllers with a different type of NAND, including both TLC and QLC.

The revenue growth will be realized over several years. Our products are set to enter production in the middle of next year, and we expect even greater scaling the following year. Therefore, you can anticipate positive outcomes from our partnership with this Korean customer. Regarding Alibaba, we still lack a sales procurement forecast from them. However, we are currently engaged in three projects, which is two more than the one project we delivered this year. This year’s project accounts for less than 5% of Alibaba's total petabyte procurement related to their SSDs. We expect that petabyte procurements will continue to increase next year. Based on these three projects, we are confident that our share of Alibaba's overall procurement will be significantly greater than it was with just one project.

Yes. My first one is for Wallace. I'm looking at your guide for the December quarter. And next calendar year, revenue is up 18% on a year-over-year basis, but no leverage in operating margin. If I just take the midpoint of Q4 operating margin guide, for the whole year, you're actually going to be right around 21% operating margin despite 18% revenue growth. I look back at 2018, and when I compare 2020 to 2018, same trend, revenues up 6% and actually margins down 500 basis points. And this is something that we have been trying to better understand when all of these new tape-outs are going to ramp, when Shannon is going to have opening leverage. I believe that 1 or 2 years ago, you did write down some assets within a Shannon organization, but I still don't see any leverage. And help me understand how you're thinking about forward and the actions taken to bring some more leverage?

Yes. Our operating expenses compared to sales growth are contingent on when we conduct the tape-out. Currently, we primarily use TSMC’s 16 or 12 nanometer technology, and we plan to transition to 7 nanometers in 2022. For 16 or 12 nanometers, the initial wafer costs start at about $3.5 million, which is influenced by the timing of the tape-out. For instance, our operating expenses in Q3 were lower than usual, but we expect Q4 to be more expensive due to the 16 or 12 nanometer project tape-outs at TSMC. Therefore, we are optimistic about future sales revenue growth, which should lead to improved operating margins as our operating expenses stabilize.

But I guess what I'm asking is, help us understand what gives you confidence that you're going to be able to scale revenue to the point where there will be operating leverage.

We have strong confidence in 2021. As we mentioned earlier this year, our RSU product line is expected to grow. Although the COVID-19 pandemic has created unpredictability, we anticipate that our mobile business will see significant growth next year due to new UFS design wins and a recovery in the smartphone market. Our client SSD design win pipeline is also robust, and we are confident in the growth of our client SSD controller. Additionally, our SSD solution is likely to benefit from data center customers in China, including Alibaba and other major clients. We also expect our Ferri business to grow in 2021. Overall, we feel optimistic about achieving strong growth in our total sales revenue next year.

Okay. And my follow-up is for Riyadh. Given the confidence there is with all the new product ramp and your very strong net cash per share, why not distribute more of the cash to investors if there is such confidence that both revenues and operating profit would scale in 2021 versus 2020?

Mehdi, that's a great question. As you know, last week, our Board decided to keep our annual dividend at $1.40 per ADS. Although we are very optimistic as well as I kindly shared just a second ago regarding our growth prospects for next year, we're also very conservative in how we deploy our free cash flow. We don't want to get ahead of ourselves right now. With the uncertainties of the U.S. elections, resurgence of COVID-19 in the U.S. and Europe, escalating U.S.-China geopolitical tensions, broader global unemployment, and economic issues and many other issues, we believe it's important to be more conservative and stay financially flexible and have more liquidity.

Wallace, Riyadh, I wanted to understand the current market share of your SSD controllers and your perspective on the potential for your share in SATA compared to the emerging PCIe opportunities moving forward.

Yes. So we calculate internally, and with some analysts, we believe we're around 1/3 of the market share today. SATA controller, and it's going to stay, but the PCIe controller is going to grow rapidly next year. 2021, the major driver for client SSD is PCIe Gen 3. Initially, from mid-next year, PCIe Gen 4 will start to ramp, but the volume is still relatively small. But we believe in 2022, our PCIe Gen 4 program will all ramp up and will align with the Intel Alder Lake platform, which will create even much stronger momentum to grow our client SSD due to the higher ASP and better picture for the growth momentum. So we think we'll continue and expand. We might gain more market share in 2021 and 2022.

Okay. And then my other question perhaps for Riyadh. The SSD ASP, has that been stable with the mix of OEM and channel moving around here versus the higher-channel products versus the lower-priced ones? Any color there would be helpful.

Our average selling prices have remained consistent. We are launching newer products like the PCIe Gen 4, which are premium offerings, resulting in attractive ASPs and margins. In contrast, our older products, such as those using SATA 3 technology, have experienced declining ASPs and this trend is expected to continue. However, by balancing our range of new and older products, we've managed to maintain our overall blended ASPs at a stable level, which helps support our gross profitability.

I just wanted to first follow-up on the eMMC+UFS business. So it's nice to see your customer working through an inventory issue. But if my model is correct, it seems like fourth quarter revenue could still be about 1/3 lower than what we were seeing before the inventory correction issue. So the question is, with 5G units very strong and with UFS penetration increasing significantly next year, do you feel like you have visibility for that business to get back to prior highs? And if so, do you feel like you then can exceed this next year just given UFS adoption trend? So the question is really the calendar '21 outlook for UFS.

We observed a widespread recovery in smartphone shipments during the third quarter, both from major and minor manufacturers, and this positive trend has continued into the fourth quarter. Our discussions with suppliers indicate a promising recovery for smartphones next year. As for our U.S. NAND UFS customer, they have benefitted from the surge in smartphone shipments in the third quarter. They are successfully reducing their UFS inventory and have placed significantly larger orders for UFS controllers from us in the fourth quarter. Our UFS and eMMC controller sales are progressing well towards recovery, although we may not completely return to previous levels yet. However, we are making considerable strides towards our former performance, and in the coming quarters, we expect to grow even beyond the levels we achieved in the past.

We have received a complete forecast for 2021 from the customer, and it appears very promising. If everything goes as planned, we expect to fully recover in 2021. With additional NAND manufacturers increasing production in the middle of 2021, we anticipate a much more favorable outlook for UFS revenue that year.

Ladies and gentlemen, that concludes today's question-and-answer session. Now I'd like to hand the call back to Mr. Wallace Kou for closing remarks. Please go ahead.

Thank you, everyone, for joining us today and for your continued interest in Silicon Motion. I would like to leave you with some final thoughts. This year has been challenging and unpredictable from the perspective of managing our business. The pandemic sharply reduced our sales visibility, as China went to lockdown in Q1 and the rest of the world followed in Q2. Unexpected demand from the working and learning from home temporarily affecting our client SSD controller business in Q2 unfortunately led to our large UFS customer to temporarily overbuild inventory, which affected us in Q3. Nevertheless, we managed our business flexibly and continued to deliver solid results. Our Q3 year-to-date sales are up 33% year-over-year, and earnings per ADS are up 45% year-over-year. We believe these are good results despite the challenging environment. We continue to build our foundation for further growth and look forward to next year. We will be attending several virtual investor conferences through year-end, the schedule of which will be posted on our Investor Relations website. Thank you for your continued interest and for listening to our call. Stay safe. Goodbye for now.

Thank you. Ladies and gentlemen, that concludes our conference for today, and thank you for participating. You may now all disconnect.