Silicon Motion Technology CORP Q3 FY2021 Earnings Call

Good day, and thank you for standing by. Welcome to the Silicon Motion Technology Corp. Q3 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. Kindly note that 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. 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 demand for multimedia consumer electronics, the state of and any change in our relationship with our major consumers, and changes in political, economic, legal, and social conditions in Taiwan. For additional discussion of these risks and uncertainties and other factors, please see the documents we file from time to time with the Securities and Exchange Commission. We assume no obligations to update any forward-looking statements, which apply only as of the date of the conference call. I would now like to hand the conference over to our first speaker today, Mr. Chris Chaney, Director of Investor Relations and Strategy. Please go ahead.

Thank you, Rohit. Good morning everyone and welcome to Silicon Motion's third quarter 2021 financial results conference call and webcast. As Rohit mentioned my name is Chris Chaney. I'm the Director of Investor Relations at Silicon Motion. Joining me today on the call are Wallace Kou our President and CEO; and Riyadh Lai, our Chief Financial Officer. 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'll then conclude with a question-and-answer period. Before we get started, I'd like to remind you of our safe harbor policy, which was read at the start of this call. For a comprehensive overview of the risks involved in investing in our securities, please refer to the 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. 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 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 results. The reconciliation of GAAP to non-GAAP financial data can be found in our earnings release issued yesterday. And 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 the third quarter, sales and earnings reached another quarterly company record. Revenue grew 15% sequentially and over 100% year-over-year to $254 million. Earnings per ADS more than doubled from $0.76 a year ago to $1.70. Our sequential revenue growth last quarter and this quarter was driven by upselling of a richer product mix, allocating more product to higher-margin accounts, and repricing products to cover higher manufacturing costs. As previously communicated, we have not received any incremental foundry wafer supply since early this year. Demand from our customers for our products continues to exceed our supply capacity due to foundry wafer allocation limitations. Our business is now affected by end-market seasonality patterns and other market condition changes, such as those relating to smartphone RPCs. We expect this demand-supply imbalance to persist through next year, as foundry capacity is likely to start improving only in 2023. Our order book remains strong and continues to be well above $1.5 billion for next year. However, we are observing some adjustments in our order book, with softening orders for channel market products and strengthening orders for OEM customers. For instance, demand for SSDs from global PC OEMs continues to strengthen, while client SSDs for retail markets, especially in China, are softening. Since we are supply constrained, we have been evaluating our revenue run rate for annualized sales targets. In the third quarter, we achieved a $1 billion revenue run rate, a quarter ahead of our previous expectations, and we anticipate our revenue run rate to increase further in the fourth quarter as we manage our product mix, customer allocation, and pricing. We have already received additional foundry wafer allocation for 2022 and are confident in our ability to grow our sales next year as we work towards our $1.5 billion order book. We believe demand will continue to exceed supply next year, and even in this scenario, our revenue growth will remain robust. Now, let me discuss our major product lines. SSD controller sales were approximately flat sequentially in the third quarter, as we allocated more production towards eMMC and UFS controllers for that period. This will reverse in the fourth quarter, with production and sales shifting back toward SSD controllers. Year-to-date, our SSD controller sales have grown about 70% to 75% year-over-year, significantly outpacing market growth and allowing us to gain share. In the third quarter, our SSD controller sales more than doubled year-over-year. We are on track to gain five to 10 percentage points of market share this year. We believe it is crucial to maintain diversified exposure to various customers and end markets, ensuring a good balance between our OEM and channel markets, as well as a diversified portfolio of NAND flash and module maker customers. Currently, we are seeing very strong sales to OEMs through both our NAND flash and module maker customers, while the channel market has been soft. We have been shipping our PCIe Gen 4 SSD controllers in the third quarter of 2020 for SSDs sold in the channel market. In this recent third quarter, we started ramping our Gen 4 portfolio for PC OEMs, with two customers, and are on track to expanding from two to eight customers beginning early next year. Much longer time is required to bring OEM projects to production versus channel market products because of extensive OEM qualification and testing. When our PCIe Gen 4 OEM projects are fully ramped towards the end of 2022 or in the first half of 2023, we expect to be in approximately half of all PC OEM PCIe Gen 4 SSD sockets, unchanged from what we had previously communicated. Next year, we will likely pick up 5% to 10% additional points of market share on top of this gain this year. Our upcoming flagship enterprise-class PCIe Gen 5 SSD controller remains on track; we continue to expect pilot production to begin in the second half of next year and volume production in the second half of 2023. Now I will discuss our eMMC and UFS controllers. Our third quarter eMMC and UFS controller sales grew 60% to 65% sequentially. As we focus production and sales of both our classic eMMC and next-generation UFS controllers. Sales of eMMC controllers approximately doubled sequentially as our module maker customers continued expanding their opportunities with OEMs in low-cost smartphones and the large fragmented IoT and smart devices markets. Our eMMC controllers are benefiting from NAND flash vendors beginning to exit this low-density segment of the storage market. Additionally, our primary UFS NAND flash customer continues to be very aggressive in the mobile storage market and we are benefiting from their strong procurement momentum. We believe the mobile storage industry is about to enter another major technological shift not just to one that we experienced almost a decade ago with a transition from 2-bit-per-cell MLC to lower cost, higher density but much more difficult to manage 3-bit-per-cell TLC NAND flash technology. Today we are working with both NAND flash makers and smartphone OEMs to begin the transition from TLC to 4-bit-per-cell QLC NAND flash. The push to use QLC NAND stems from the growing focus of smartphone OEMs to reduce cost and size and increase features, performance, and capacity. For the same small storage footprint inside a smartphone, gigabit capacity from the use of QLC can be much larger than TLC. Also for that same footprint, the use of QLC is much cheaper than TLC on a dollar-per-gigabit basis. The trade-off is QLC technology is much harder to manage than TLC because of worse endurance, worse write, and random read/write speed, and worse data integrity issues. Much more sophisticated controller technology is necessary to overcome these issues and provide consumers with the same level of trust and user experience. We have clear controller technology leadership and more experience in managing QLC NAND technology than any other company in our industry. Several years ago, we developed a controller that enabled the first commercialized SSD, using QLC NAND, and today we continue to supply all the controllers using SSD built with QLC NAND. Because of our QLC controller leadership, we have also been working extensively with both NAND flash makers and smartphone OEMs on UFS embedded storage that enables the use of lower cost, high-density QLC NAND, and we expect product introduction in the 2023 to 2024 time frame. Generally, the smartphone industry adoption of new NAND technology like the PC industry has several years. The adoption of QLC technology in UFS solutions using smartphones and other applications will further strengthen and expand our position in the mobile storage controller market. To recap, we have already received our purchase orders for 2022 sales and are busy working with TSMC and other suppliers to plan and schedule production for next year's sales. The emphasis of our business development and R&D efforts is now for beyond 2022. We are working to further expand our clients, the market share, introduce and scale our innovative enterprise-class PCIe Gen 5 SSD controller, solidify our merchant market share leadership in class eMMC, bringing QLC technology to UFS mobile storage, and expand our growing presence in the automotive storage market which I had discussed last quarter. Now I will turn the call over to Riyadh to discuss our financial results and our outlook.

Thank you, Wallace, and good morning everyone. I will discuss additional details of our third quarter results and then provide our guidance. Please note that my comments today will focus primarily on our non-GAAP results unless otherwise specifically noted. A reconciliation of our GAAP to non-GAAP data is included with the earnings release issued yesterday. In the third quarter, we grew sales 15% sequentially to $254 million. SSD controller sales were approximately flat sequentially, as we temporarily allocated more wafer supply towards eMMC and UFS controllers for third quarter sales. In the fourth quarter, this will change as more wafer supply will be directed towards SSD controller sales. eMMC and UFS controller sales grew 60% to 65% sequentially because of temporary quarter-by-quarter supply planning decisions. SSD solutions sales increased zero to 5% sequentially. Gross margin in the third quarter declined slightly to 50.2% from 51%. This slight sequential decline is primarily caused by a significant decline in the gross margins of our SSD solutions. Operating expenses in the third quarter were $53 million, $4.5 million higher than the prior quarter, primarily from higher R&D expenses. Operating margin in the third quarter was 29.4%, a slight increase from 29.2% in the second quarter and up significantly from 23% a year ago. Our effective tax rate in the third quarter was 19.6%, in line with our 20% tax rate guidance. Earnings per ADS were $1.70, 13% higher sequentially and 124% higher year-over-year. Stock-based compensation in our operating expenses, which we exclude from our non-GAAP results, was $5.1 million in the third quarter within our guidance of $4.5 to $5.5 million. We had $419.5 million of cash, cash equivalents, restricted cash, and short-term investments at the end of the third quarter compared to $412.3 million at the end of the second quarter. We paid $12.2 million in dividends to shareholders, the fourth and final quarterly installment of our $1.40 per ADS annual dividend that was declared last October. Earlier this week, our Board declared a new annual dividend of $2 per ADS, 43% higher than the prior one. The first $0.5 quarterly installment will be paid in November. Now let me turn to our fourth quarter guidance and forward-looking business trends. For the fourth quarter, we expect revenues to be flat to up 5% sequentially to approximately $254 million to $267 million. Due to production scheduling, SSD controller sales will increase in the fourth quarter while eMMC and UFS controller sales will decline. Fourth quarter gross margin is expected to be in the range of 48.5% to 50.5%. Fourth quarter operating margin should be in the range of 28.5% to 30.5%. In the fourth quarter, we expect stock-based compensation in the range of $9.2 to $10.2 million. In summary, we are quickly approaching the close of the best year in our corporate history from a revenue growth, profit, and cash flow perspective. We expect to gain five to 10 percentage points of market share in client SSDs this year, which should continue to expand next year as we ramp PCIe Gen4 shipments to more NAND and module maker customers for OEMs. By improving our product sales and customer mix, we have reached our goal of $1 billion in revenue run rate earlier than planned, without any incremental wafers from our foundry partners. And next year, with healthy storage market demand and continued market share gains by us and our customers, we expect to continue our growth. We have already secured incremental wafers for 2022, necessary for us to deliver higher volume across our three key product lines: SSD controllers, eMMC and UFS controllers, and SSD solutions. We will continue to add R&D resources to develop high-value controller technology for the computing, mobile, data center, and automotive markets, maintain stable gross margin, and deliver operating leverage. While we have already secured our foundry wafer supply allocation for next year, which is materially more than this year and have already received customer purchase orders for next year, we are unable to provide 2022 revenue guidance at this time, because we still need to confirm product mix, customer allocation, and prices, and plan in detail the scheduling of our product fabrication. Based on current estimates, we believe demand for our products will continue to exceed our ability to supply through 2022. This concludes our prepared remarks. We will now open the call to your questions.

We have a question from the line of Rajvindra Gill from Needham. Please go ahead.

Yes. Thank you and congratulations on great momentum and success this year. Wallace, Riyadh, a question on the capacity that you're being allocated for 2022 and the purchase orders. I wanted to talk about those negotiations that you're having with TSMC in terms of getting the capacity and how secure that is? And the $1.5 billion kind of purchase orders that you have in hand, could you maybe elaborate a little bit further on kind of the makeup of those purchase orders next year relative to this year? How is it different? How is it the same? What are the customers asking in terms of product lines? Any color there in terms of the makeup of the demand funnel and then also some additional details on the supply funnel.

I think, based on the third quarter revenue and fourth quarter guidance, we are ready at a $1 billion sales revenue rate with our current wafer supply. We have already received foundry wafer allocation for 2022 as we stated. That's incremental to what we have this year and we are confident we can grow our sales next year to around $1.5 billion. We believe the demand will continue to exceed supply next year, but I think we definitely will continue to negotiate with TSMC to gain more wafer supply. Regarding the $1.5 billion backlog, I think our backlog remained very solid, with the purchase orders for 2022 continuing to be well in excess of $1.5 billion. Most of the backlog consists of SSD and eMMC and UFS controller orders for OEMs. An OEM order is strong because our customers have been gaining market share and we have been gaining share of wallet from these customers. We believe we have secured about 50% of all PC OEM and PCIe Gen 4 sockets for next year. But we have seen, however, some adjustment in our order book with the softening of orders for channel market products and strengthening orders for OEM customers. For example, we are seeing demand for SSD by global PC OEMs continue to strengthen, while our current client SSD for the retail market, especially in China, is softening.

Got it. So given those dynamics that are happening in the PC market, the retail versus the OEM, could you remind us kind of your split, as it stands this quarter, between OEM and retail/module maker? And how are you adjusting your order book and your capacity to reflect this dynamic next year? I think that's one of the main concerns that folks have, just broadly, is that more capacity comes online next year, but growth rates start to decelerate, order patterns start to decelerate, and we get into kind of a potential overbuild situation. I'm not saying it's going to happen, but that's the concern. So I'm wondering how you're adjusting to these changes in your order book with some aspects of the business starting to soften a bit?

Let me start with the numbers and then I'll hand over to Wallace for the more qualitative stuff. In terms of our split between our sales of SSD controllers to the channel market versus the OEM market, last year was roughly one-third for OEMs and the rest for the channel market. By next year, we're going to be well in excess of 50%. More than half of our products are going to be going into OEM. And so we're right now in the process of crossing over more to OEMs and with that let me hand over to Wallace for more color.

Yeah, since we also discuss with TSMC and our customers constantly. So I think TSMC and we also recognize there's also overbooking from the end customer, but they just don't know where it's overbooking in the semiconductor supply chain. But to prevent overbooking, we not only chat with our customers, but also chat with our customers' end customers. We want to make sure the product use in the application-specific end customer and market sector. That's why we handle allocation carefully; we want to make sure all the products will sell through. Because of our really demand, MPL is much larger than the wafer allocation to us. So really, I think there will be room for us to make a better judgment and we really feel very comfortable with our next year's backlog and the sales revenue target.

Let me also add that right now we have a very lean, extremely lean inventory on our hands. And on our customer side, our customers are also operating at very lean inventory levels. And so from a perspective of what we see at least on our side of the business, our customer side of the business, there doesn't seem to be overbuilding as far as we can see.

That's great to hear. For my last question, regarding gross margins, you mentioned they are holding steady around 50% in Q4. How do you see gross margins shaping up next year? I understand you are still assessing the allocation and mix of business, but considering the purchase orders you have and your backlog, should we anticipate a similar range? Is there potential for upside if there's a shift to higher-margin PCIe Gen 4 products? Any insights into gross margins would be appreciated. Thank you.

Right now, based on what we see with our business going into next year, we're very confident we should be able to maintain our gross margin around 50%.

Yeah, I think it's a very complicated question because, as you all know, TSMC has increased wafer prices by 20% in all technology nodes. UMC and SMIC also increased wafer prices twice so far this year, and we definitely have to manage how to pass through the manufacturing costs to the end customers. It's a pretty complicated, challenging work, but we are confident to really achieve an average of about 50% gross margin next year.

Got it. It's helpful. Thank you.

Thank you. We have the next question. This is coming from the line of Craig A. Ellis from B. Riley Securities. Please go ahead.

Yeah. Thanks for taking the question and guys congratulations on the strong execution in the business. Wallace, I wanted to start off with a question that goes back to your prepared remarks on QLC versus TLC. These transitions, whether from 2-bit-per-cell to TLC or now TLC to QLC, have been significant for industry. And so the question is as you look at what's playing out in the smartphone market as it gets ready to go to QLC for all its increased density advantages and the advantages you can bring with a much more sophisticated controller. Is the proper analogy for us as observers and investors something like the transition from PCIe Gen 3 to Gen 4 where the QLC transition should lead to higher ASPs for CMO? And if not so, can you give us some color on how that might play out as we look for this QLC transition in your UFS and eMMC business?

Okay. I cannot share more detail, but I can give you a pretty clear example to understand where the trigger point is. I think when iPhone 13 Pro announced the one terabyte integrated NAND density model, I think that really drives quite a lot of the players to look for how to provide similar density models, as well as how to reduce the cost. As you know, for one terabyte density into the one BGA package, you need around 15, 512-gigabit model dyes tied together. And that is very expensive and has a lower yield. And so that's much better if you can stack 8, 1 terabit QLC mono dyes which gives you a better yield and also a much lower cost. So this is what started for almost a couple of months in the past because we believe some leading smartphone players start to survey and drive the momentum and explore all different solutions. Since we are the leader in the market for QLC development in the industry, we work with a couple of NAND vendors and smartphone makers to explore all kinds of different solutions. It's not just by controller makers, we also need input from smartphone makers and certain software enhancements. This will become a very exciting approach in technology because this is going to reduce storage solution costs dramatically and also increase the capacity for consumers to embrace all different new applications for 5G. So this is very important for us, also expanding our opportunity not just to one terabyte; it could even go lower to 512 gigabytes. So this is a very, very important project for us, and we put together a pretty decent R&D team to work together and look forward to the future transition from 2023 to 2024 timeframe, we're going to see the solutions in the market.

That's really helpful, Wallace. The second question I had is related to the eMMC market, and it seems that there's some very encouraging supply side dynamics taking place as Silicon Motion really takes advantage of a situation where Samsung and Hynix are exiting the market. So the question is this: if the company is able to provide us with market share data on the SSD controller side and 5 to 10 percentage points of gains this year and expected next year, is there some similar color that you can provide on the eMMC market so we can get a better grasp of the magnitude of share that you're picking up there as the supply side consolidates to your favor?

Okay. Let me just put some color. So you understand where we are in our position in eMMC controller. For 2021 this year, unfortunately, we have wafer allocation. Our eMMC backlog is much bigger than what we can supply. Because in the past, eMMC controllers were designed with the legacy technology node, primarily with the 55-nanometer and 40-nanometer. These mature technology nodes give us much less phase allocation from TSMC and other foundry suppliers. So this year, we're busy porting a new product into 28-nanometers. To expand our eMMC criteria because our backlog, frankly speaking, for eMMC is even higher than 500 million units today. But through the wafer allocation to us, we can probably only support 60% of the backlog. And we do see an increasing demand from multiple customers, not just from China, Taiwan, or Korea but also from the US and Europe and really very, very strong demand in multi-market applications, not just the low-end smartphone but also in all the smart family like Smart TVs, smart speakers, smartwatches, all the IoT devices, and Chromebooks. So this is a very strong demand even from some NAND makers because they ask for eMMC, but they still want to provide solutions. All this will come to SMI. So we really have the obligation to expand our wafer supply to support these customers to avoid any potential market segment breakdown. So this is our obligation and we will try to really increase all the available technology wafer to us to make it more cost-effective and also prepare for upcoming new TLC NAND as well as the legacy NAND support. I just really cannot say what market share we have, but we are definitely more than 30%, and if we can have sufficient wafer support, we can easily achieve more than 50% of market share next year.

That's really helpful, Wallace. And then I'll follow up with one to Riyadh so that I don't ignore you and then I'll hand it off to others. So the question is this, Riyadh. So given that the company year-to-date has talked about four drivers to executing on gross margin, richer mix allocations to more profitable accounts, recovering manufacturing costs, and then doing things on the back end and with things like transition from much more mature nodes to 28-nanometer for eMMC, it seems there would be significant momentum to keep the trajectory on gross margin moving higher next year. So why would we not see gross margin moving up next year versus something that's at 50%, admittedly a good point relative to the target range, but it seems there's momentum in the business for something that would be higher.

Unfortunately, TSMC has increased wafer prices by 20%. As you all know, eMMC is supposed to be a lower-cost product due to its lower density, which is suitable for consumer electronics and automotive devices. We are carefully working on transitioning the manufacturing costs from wafers and testing to the end customers. We aim to achieve a gross margin of 50%, which is our target for the upcoming months in 2022, though there is potential for exceeding that target.

Got it. It's helpful. Thank you.

Thank you. We have the next question. This is coming from the line of Mehdi Hosseini from Susquehanna International. Please go ahead.

Yes. Thanks for taking my question. A couple of follow-ups. Based on your guide for the December quarter, it seems to me that 2021 revenues are on target to increase by 70%. Can you help me have a feel for how blended pricing has changed in 2021 versus 2020, and how unit shipment is tracking? I think it's very important for us to understand the mix and improving ASP? And any color you can provide would be great. And just to extend that into 2022, how do you see a better mix improving your blended pricing without even raising prices on your customer? And I have a follow-up.

Well, our prices this year, our blended prices have been going up, which is quite a good momentum that we have this year, which is a little bit different. I mean generally in the past, we would keep our blended ASPs versus this year; our blended ASPs have been going up. And this is coming from the factors that we had previously talked about—everything from selling a richer mix of products focusing since our wafers are limited. We're focusing on manufacturing products, allocating to higher ASP higher-margin products right. And it’s also giving us an opportunity to be more focused about how we allocate products to customers. Where possible, we are also readjusting our prices and being more disciplined as the cost side, for example wafer cost and substrate costs, those have been going up, and so we need to recover those costs in order to preserve ability. So all these three factors, as well as focusing on improving our manufacturing operations—that's the fourth leg—all of these are leading to strong gross margins. But obviously, the first three factors are what's keeping our blended ASPs going up and we expect this trend likely to continue into next year since wafer supply will still be very tight next year.

That's fair. So, on all those four legs or four drivers for 70% revenue growth which has the highest impact?

The impact is coming from all three elements, from product mix, from customer allocation, and also from increasing our prices to recover our costs.

Yes, the other point is I think mathematically, if we want to achieve higher sales revenue growth, we should ship everything as a component with the packaging right? That is, each wafer we can maximize the sales revenue. It doesn't mean you have the best gross margin, but they have the best sales revenue and best profit. However, we cannot do that because we have obligation to support for UFS for microSD and some automotive business, and we cannot just focus on ourselves to allow certain market segment breakdown. So, we have an obligation because we are the largest controller supplier. So we have to be very cautious to balance where we can achieve the sales revenue and maximize profit while avoiding market sector breakdown.

Got it. Thank you. Thanks for the detail. And just to look forward, could the mix continue to improve? Richer mix, so even with a weak channel a richer mix and therefore higher blended ASP would be another thing that would help with another year of double-digit revenue growth. Is that richer mix sustainable into 2022?

Absolutely, Mehdi. Our wafer capacity is still going to be very tight next year. We don't expect foundry wafer supply to loosen up until 2023, and so with wafer capacity being limited, we're going to be working to optimize our scarce resources where we can deliver the strongest revenue and profitability.

Okay. Now, just—and one last item. Is the enterprise contribution still more of a 2023 target, or is there a chance that you can actually pull that in and then benefit earlier?

For enterprise controller, we already start to have sales revenue, although the volume is still very small, but we will continue to grow. But for our flagship product, our PCIe Gen 5 controller will be commercialized in the second half of next year but will be moving to mass production in the second half of 2023.

Thank you.

We have the next question. This is coming from the line of Karl Ackerman from Cowen. Please go ahead.

Yes. Thank you. A few questions from me as well. Maybe first off, Riyadh, you indicated that orders for client SSDs across retail markets are softening in China. But my understanding was that business is more opportunistic versus NAND OEMs and was instrumental to your $1.5 billion order backlog. And so my question is for NAND OEMs: do you have quarterly commitments from them that would limit risk from order moderation or pushouts?

Well, we're talking more about the current situation right now. Looking at our current sales in Q3 as well as in Q4, what we are seeing is on our client SSD business the strengthening of sales to OEMs into the OEM market versus softening of demand in the channel market, specifically the retail market in China.

The demand we have from PC OEMs and NAND makers is really rock solid, because we got a full year purchase orders from the major OEM customers.

Understood. That's helpful. I guess in your prepared comments, I'm not sure I heard much update on the progress you're seeing for PCIe Gen4 enterprise controllers, specifically for European and Chinese hyperscale providers. And so I'm wondering what sort of market adoption are you seeing from them today? I realize that I'm cognizant that Gen5 appears to be the primary product opportunity for you for enterprise controllers. But if you could just kind of bridge that timeline with what you're seeing with PCIe Gen4 enterprise controllers today, that would be very helpful? Thank you.

Okay. So regarding the PCIe Gen4 controller, we are sampling and developing really the solution through the Shannon product solution as well as through Kingston. Now because we have a wafer allocation, our enterprise SSD solution's gross margin is much lower, much lower than our corporate average. So we only focus on two to three major customer demands. We do not want the Shannon PCIe Gen4 SSD solution to really dilute our corporate gross margin. But we focus on the quality firmware development to ensure our forward capability and performance meets the industry and our customer expectations. The reason we put a focus on PCIe Gen5 is our PCIe Gen4 controller was late compared with other leading NAND makers, such as from Samsung and Intel. But our PCIe Gen5 will be ahead of many NAND makers' solutions. We believe our PCIe Gen5 will be a flagship in NAND early in the industry. So that's why we will focus more and prepare from Gen4 trending into Gen5, and we can ramp with a better position and with a better selling price because we can charge a premium in 2023.

Understood. Thank you. I’ll hop back in queue.

We have the next question. This is coming from the line of Anthony Stoss from CH. Please go ahead.

Good morning, guys. Riyadh, I wanted to follow-up, just so I'm crystal clear on your comments as well as Wallace's. So if you have about $1.5 billion in order book and I think Wallace alluded to this, but again I want to be clear, based on your materially more wafers that TSMC has committed, could you get close to generating $1.5 billion in revenues in 2022? And then I had a follow-up.

We are working to get towards our goal. We continue to negotiate for more wafers. But based on the wafer supply commitment that we have today, it's very likely that demand will continue to be in excess of supply. But even with that scenario, we're still going to be generating very strong growth for 2022.

Okay. Let me ask in a different way. Do you think you'll get at least 50% more wafers in 2022 over 2021?

This is impossible because you can see TSMC's all technology nodes are overbooking. So with that means I've got a confirmation. We have incremental wafer increases compared with 2021, but it's impossible for anyone to get a 50% increase. But I think the increased sales revenue is not just by wafer numbers but by how you manage the product mix. And especially we have a new product, PCIe Gen4 and UFS 3.1 ramping sharply. And so we can transition this portion of high-end product and drive better profit and sales revenue. So it's not exactly mathematically that you need 50% wafer to create 50% sales revenue.

Got it. And then shifting gears, and I don't know if you guys will have this at your fingertips, but what percentage of your total revenue right now is in call it consumer IoT and/or auto and how quickly is this new market growing for you guys?

Well, we – I think that we really cannot count our customers, but I think we own a pretty large eMMC controller business. So customers in everywhere we have pretty decent smartwatch, smart speakers, and smart TVs, and set-top boxes, even cable modems in the US. So it's a very, very fragmented market sector with a very large potential. Just alone, we can continue to increase wafer supply from our foundry makers; I think we can continue to gain market share.

Tony, let me also add that Wallace had earlier talked about that we already have about 500 million units of backlog relating to eMMC for our module maker customers, 500 million units. Right now, we are not able to deliver all of that. We're delivering maybe 60% of that because of wafer limitations. But if we can deliver 500, that's equivalent to about half of the market.

Got it. Thanks, guys, nice job in the quarter.

Thank you.

We have the next question from the line of Suji Desilva from ROTH Capital. Please go ahead.

Hi, Wallace. Hi, Riyadh. I would like to add my congratulations on what's looking like a strong year. A question on the transition to QLC from TLC, are there any—which end markets or QLC most important for. Is there a share implication in terms of share gain opportunity as we transition to QLC in terms of the technology advantage that might garner you that?

I think for TLC enterprise SSD today, the SEARs are primarily preferred TLC. It probably takes a couple of years to adopt the QLCs into enterprise SSD. But for clients, it's moving quickly especially for the second half next year and 2023. We believe probably all of the aligned SSDs will transition to QLC SSD. For the consumer products, I think because QLC is much more attractive due to cost advantages. Now many, many consumers and customers are used to adopt and comfortable using QLC-based products. For mobile, as I said, we see the really trigger point is a higher density UFS product that needs to compete with iPhone 13 Pro. However, I think the technology is very challenging because the controller needs to have a much more unique algorithm as well as to meet performance during and obtaining everything you need to deliver the same user experience as a TLC-based solution. So, it will probably take two to three years to see the solution happening. So we see the potential launch market sector will be around the second half of 2023 to 2024, and we're going to see QLC-based UFS products in the market.

Okay. Thank you. That's very helpful. And then as you look at calendar 2022, I'm curious are there any additional new NAND flash customers that you'll be ramping either an SSD or eMMC+UFS? And if there are, in light of a tight wafer environment, how would you support additional customers coming online?

Yes, it's a very good question. I think we have five NAND customers today for SSD. Our target is to try to probably get one more in late next year or early 2023, but we cannot—it's our target and we cannot comment very too much right now.

Okay. Congrats again.

Pardon me. We do not have any further questions at this moment. I would like to hand the conference back to Mr. Wallace Kou for any ending remarks.

Thanks everyone for joining us today and for your continuing interest in Silicon Motion. Next week, we will be featuring our leading-edge technology and comprehensive enterprise solutions in person at the OCP Global Summit in San Jose. In addition, 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. Thank you everyone for joining today again. Goodbye for now.

Thank you. That concludes our conference call for today. Thank you all for your participation. You may disconnect now.