Silicon Motion Technology CORP Q3 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to the Silicon Motion Technology Corp. Third Quarter 2023 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. 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 customers, and changes in political, economic, legal, and social conditions in Taiwan. For additional discussion of these risks and uncertainties and other factors, please see the documents we file from time to time with the Securities and Exchange Commission. We assume no obligations to update any forward-looking statements which apply only as of the date of this conference call. And now, I'd like to hand the conference over to Mr. Jason Tsai, VP of Investor Relations and Finance. Please go ahead, sir.

Thank you. And good morning, everyone, and welcome to Silicon Motion's Third Quarter 2023 Financial Results Conference Call and Webcast. Joining me today is Wallace Kou, our President and CEO. Wallace will first provide a review of our key business developments, and I will discuss our third quarter results and our outlook. Following our prepared remarks, we will conclude with a Q&A session. Please note that Riyadh Lai, our CFO, will not be joining us on today's call. Riyadh worked intensively on the merger with MaxLinear over the last 15 months, while continuing to manage all the CFO responsibilities. He is now devoting his time to prepare for the arbitration against MaxLinear. As a result, I was asked to lead our investor-related activities. We will then conclude with Q&A. Before we 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 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 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 own operating results. The reconciliation of the GAAP to non-GAAP financial data can be found on our earnings release issued yesterday. We ask that you review it in conjunction with this call. As we have previously shared, Silicon Motion filed its Notice of Arbitration against MaxLinear for its willful and material breaches of the merger agreement that was signed on May 5, 2022. The company is seeking payment of the termination fee of $160 million, further substantial damages, interest, and costs. Please note that the arbitration process is confidential, and we will therefore not be commenting further on this matter today. With that, I will turn the call over to Wallace.

Thank you, Jason. Hello everyone and thank you for joining us today. It is good to speak with you again after such a long break to provide an update on the progress we have made over the past year and a half. Since our founding nearly three decades ago, the strengths of our business and the fundamental drivers of our growth have always been our technology leadership and the quality and depth of our customer partnerships. Today, this statement has never been truer. Silicon Motion's technology leadership continues to enable us to win sockets and grow our share as NAND makers. At the same time, it drives them to rely on us more each day to outsource more in order to target a wider range of end markets that their own R&D did not have the bandwidth to support. Our relationship with our module maker customers continues to deepen, and our broad portfolio of solutions enables them to be the most competitive in their respective end markets. Our technology leadership also paves the way for us to expand into additional markets like enterprise and data center storage, automotive, commercial, industrial, and IoT. Now that it is clear that we will remain a standalone company, our engagement with our customers has been steadily increasing as well. Our unwavering focus on technology leadership will continue to drive our growth longer term and ensure our partnerships with both NAND makers and module makers alike remain strong. Now, I will turn to our results for the third quarter. Our business continued to gain momentum with revenue growing 23% sequentially to $172 million and earnings per ADS growing 67% sequentially to $0.63. We saw inventory levels begin to normalize across the majority of end markets, and OEM order activity picked up in the third quarter, leading to a strong revenue growth in the quarter. We expect this trend to continue and are confident it will lead to strong sequential growth in the fourth quarter. While the first half of 2023 was challenging due to global macroeconomic weakness and excess inventory in the channels, the inventory levels across our end markets are normalizing and OEM demand continues to improve. Today, I am pleased to say that we are shipping to more customers than ever before, working with all the major NAND makers on multiple engagements across several end markets, and expanding our footprint among market-leading module makers with innovative solutions for smartphones, PCs, automotive, industrial, commercial, and enterprise markets. We continue to invest in our technology leadership, and in the coming quarters, we expect to introduce several industry-leading solutions for SSD and embedded markets that will drive sustainable long-term profitable growth for our business. QLC NAND is essential to further improve affordability of solid-state storage but also poses greater challenges to overcome, leading to worsened endurance reliability, data integrity, and performance. As flash makers continue to roll out next-generation higher-density 3D QLC NAND with 200 to 300 plus layers, controller technology requirements are scaling up significantly requiring the use of more sophisticated LDPC as well as our proprietary 3D RAID technology for better error correction, recovery, data protection, and reliability. These next-generation controllers will require final design and manufacturing processes to deliver a much higher performance while maintaining the same low-power consumption as previous generation solutions. We invested early in supporting QLC NAND, and Silicon Motion has more experience managing the technology than any other company in our industry. Our leadership in these areas is second to none, especially in the merchant market. We expect to continue to maintain our leadership in the market with these next-generation solutions and win meaningful share of new products with all NAND flash makers as well as all leading module makers. From an end market standpoint, excess inventory in the PC and smartphone markets has plagued the industry since late 2022 when the global economy weakened and demand lowered. It has taken nearly a year, but we believe that the inventory levels in both the PC and smartphone markets are normalizing. We are seeing more consistent order patterns from our customers and better visibility that are more closely aligned with end market demand. We are optimistic that this trend will continue and that the industry is well-positioned to return to growth in 2024. Now, let me discuss our SSD controller business. Our SSD controller business grew 5% to 10% sequentially in the third quarter. We are beginning to see the PC market rebound and believe that the replacement cycle of corporate PCs initiated during the early days of COVID is beginning again. This should lead to stronger PC demand in the coming months. For the current PCIe Gen4 SSD market, we just began shipping our Gen4 controller to our newest Korean NAND maker customer for their PC OEM customers. We are now supplying our SSD controller to all but one of the major NAND makers. Our large expanding NAND flash customer base and our strong share with all leading module makers continue to position us well in the PC OEM and channel market for SSD. We expect Gen4 SSD to continue to be the majority of the PC SSD market through 2025, and PC OEMs will begin the adoption of PCIe Gen5 SSDs for high-performance PCs in 2025, when Intel and AMD adopt the standard in notebooks. This PCIe Gen5 SSD will enable much higher data bandwidth and performance that will be critical for next-generation PCs and will also enable new capabilities such as AI at the edge, and will eventually become standard. We have already secured design wins with other flash makers that are outsourcing controllers to merchant suppliers and expect to begin shipments in late 2024. Our first Gen5 controller is being taped out in this quarter and will serve the high-performing market with an 8-channel solution using TSMC's 6-nanometer technology that will deliver unparalleled performance and low-power consumption. PC OEMs expect significantly higher performance with Gen5 SSDs, but at the same time, power consumption in Gen4 SSDs requires us to move to 6-nanometer process technology to achieve both high performance and low-power consumption requirements. This new SSD controller will have a performance nearly double that of our comparable 8-channel Gen4 controllers. We expect to tape out our second PCIe Gen5 controller, a full-channel solution, in the second quarter of next year, and begin sampling in the second half of next year. We expect this solution to help expand the adoption of Gen5 SSDs into more mainstream PCs in 2026. For the enterprise market, we will sample our MonTitan PCIe Gen5 SSD controller this quarter. We are working with several enterprise and data center customers around the world and expect to generate initial revenue in late 2024, with more meaningful revenue in 2025 and beyond. Now moving to our eMMC and UFS business. Revenue from these products rebounded strongly in the third quarter and more than doubled as demand ramped ahead of the holiday season and inventory levels in the channel and smartphone OEMs are normalizing. Our diversified customer base of NAND flash makers and module makers has expanded our share with leading handset OEMs. UFS 3.1, as well as the UFS 2.2 solution, remains a dominant interface for smartphones, and we continue to win new programs with both flash makers and module makers. UFS 4 is only adopted by factory smartphones today, and we do not expect to see adoption of UFS 4 in mainstream smartphones until 2025. We are working on our own UFS solution, also using 6-nanometer process technology to deliver higher performance while maintaining the same power consumption as UFS 3.1. We expect to tape out the product in early January and start sampling in the first half of 2024, with mass production expected in early 2025. We are already engaged with flash makers as well as module makers targeting leading handset OEMs and are on track to meet their expected ramp for UFS 4.0 in 2025. We are also seeing expanding use cases of eMMC and UFS beyond smartphones and have significant wins already in the automotive, IoT, commercial, and industrial markets with NAND makers as well as module makers. We believe we are well-positioned to continue to see our eMMC and UFS business grow in 2024 and beyond. We have talked a lot about expanding use cases of solid-state storage, and I would like to highlight a particular end market as an example of our success in diversifying our business. In the automotive market, our embedded SSD controller as well as our FerriSSD are making significant progress with the flash makers and module makers, targeting storage for central vehicle control units, infotainment dashboards, and ADAS functions. We are shipping our controller to two flash makers already and are in development with two additional flash makers for solutions targeting this market. Our FerriSSD is already shipping to several top car manufacturers, including two of the largest Japanese automakers. As we said, we see a significant opportunity beyond just smartphones and PCs to continue to grow our business, and the success we are seeing in the automotive market across all our product groups is a good example of the traction we have been making. Overall, we are pleased with the progress we are making despite macroeconomic headwinds for the industry this year. Our focus on our technology leadership has yielded strong customer traction, strong market share in the markets we serve, and diversified the end markets our products are reaching. Combined, we expect all of this to drive growth in 2024 as the end markets and the NAND flash industry economies improve. Now I will turn the call over to Jason to discuss our financial results and 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 our earnings release issued yesterday. In the third quarter, we grew sales 23% sequentially to $172 million. SSD controller sales grew 5% to 10% sequentially. eMMC and UFS controller sales more than doubled sequentially, as we benefited from ramping holiday season builds and normalizing inventory levels. SSD solutions sales decreased 5% to 10% sequentially. Gross margins in the third quarter were stable sequentially and remained at 42.5%. Operating expenses in the third quarter were $49.5 million, $1.5 million higher than the prior quarter primarily due to higher R&D expenses to support our technology leadership. Operating margin in the third quarter was 13.8%, an increase from 8.3% in the second quarter. Our effective tax rate in the third quarter was 22.8%, an increase from the 12.7% tax rate in the second quarter. Earnings per ADS were $0.63, 67% higher sequentially. Stock-based compensation in our operating expense, which we exclude from non-GAAP results, was $3.8 million in the third quarter. We had $350.3 million of cash, cash equivalents, restricted stock, and short-term investments at the end of the third quarter compared to $305 million at the end of the second quarter. Inventory decreased again sequentially in the third quarter to $199 million from $251 million in the second quarter. Earlier this week, our Board declared a new annual dividend of $2 per ADS. The first $0.50 installment will be paid in November. Now let me turn to our fourth quarter guidance and forward-looking business trends. In the fourth quarter, we expect revenue to be up 10% to 15% sequentially to approximately $190 million to $198 million. We expect SSD controller sales to be stable in the fourth quarter while eMMC and UFS controller sales will increase. Fourth quarter gross margin is expected to be stable and be in the range of 42.5% to 43.5%. Fourth quarter operating margin should be in the range of 13.5% to 15.5%. Fourth quarter effective tax rate to be approximately unchanged from the third quarter. In the fourth quarter, we expect stock-based compensation in the range of $6.2 million to $7.2 million. Let me provide some additional color to our fourth quarter expectations. Our business will continue to rebound in the fourth quarter and sequential revenue growth is expected to be stronger than normal seasonality. Our gross margins are expected to be flat to up slightly. We expect our gross margins to improve gradually over the next few quarters as the financial health of the NAND makers and the memory market overall slowly improves. Most of our NAND maker and module maker customers have been selling NAND products below their cost since early this year. Even with the sharp increases in NAND prices we've seen lately, it is still challenging, especially for NAND makers. Our pricing is somewhat reflective of our customers' challenges, and as their financial conditions improve, we believe we can gradually improve our pricing and our margins, but it will take time. Our cost of goods, especially wafer prices, remain high, but we believe we can extract some additional manufacturing cost improvements over the next few quarters as well. Combined with an improving mix of new products, including our new PCIe Gen4 and Gen5 controllers, as well as UFS 4 solutions, we believe we can gradually return to our historical gross margin levels. For operating expenses, as Wallace mentioned, we will be taping out three new 6-nanometer controllers: our 8-Channel PCIe Gen5 controller this quarter, our UFS 4.0 controller in the first quarter, and our four-channel PCIe Gen5 controller in the second quarter. The total investments to get each of these products to market are more than $15 million. So we expect our operating expenses to be elevated for these three quarters and then come down a bit in the second half of next year, driving additional operating margin leverage. As Wallace mentioned our business is steadily improving as end market demand stabilizes and inventory levels normalize. We will continue to invest to maintain our technology leadership with best-in-class next-generation storage controllers. Our broadening product portfolio and diversified customer base will further solidify our strong foundation for continuing revenue and profitability growth. We are optimistic that industry conditions will improve and believe we are well positioned to benefit from these improving market dynamics. This concludes our prepared remarks. We will now open the call to your questions.

Our first question comes from Mehdi Hosseini from SIG. Please ask your question, Mehdi.

Yes, thank you for taking my question. I have two. First, I would like to understand how the increased adoption of QLC technology among NAND manufacturers is benefiting you and how we should compare this to the trends in end-market system unit sales. Specifically, how do smartphone and notebook unit sales relate to the migration to QLC? My second question is about the strong cash position. What would it require for the company and the Board to take a more aggressive approach to stock buybacks?

So let me answer your first question, Mehdi. Regarding QLC, we see the trends. All NAND makers are going to have QLC NAND products by late 2024. So we see QLC initially transitioning to client SSD. We believe by 2025, probably more than 80% of value line SSDs will adopt QLC. We have seen the QLC trend into mobile phones, which will take time. I believe the leading smartphone maker will try to adopt QLC, but when it will be in mass production and create meaningful volume, we don't know yet. All the NAND makers are trying to explore the opportunity. We also believe QLC will enter the data center sometime in 2026 or 2027. That's why QLC becomes very, very important and is a major offering for the NAND makers after 2026 and 2027.

And Mehdi, to answer your second question about the share repurchase; as you know, our share repurchase program has been opportunistic in the past. We do not have a program in place today, but the Board is always evaluating ways of returning cash to shareholders, and share repurchase is something that they will continue to look at.

If I may just a quick follow-up to Wallace, let me rephrase my first question. Let's say, if units of smartphone and notebook were to go flattish next year, could the migration to QLC for client SSD drive growth? Is that something that could provide additional growth drivers?

I think that we believe our customers will gain market share in 2024, although the total unit for PCs might not grow very much, maybe just a single-digit of 2% to 3%, because our strong technology in QLC and support from our major controllers for both Gen4 and Gen5 will help us transition to take additional market share in 2024.

Thank you. Our next question comes from the line of Quinn Bolton from Needham & Company. Please ask your question.

Hey guys, congrats on the nice results and outlook. I guess maybe first, Wallace and Jason, can you just expand on your outlook for gross margins? I know you're looking for a gradual recovery as the market improves, but can you give a little bit of shape to that gradual? Is that 50 basis points a quarter? Is it 100 basis points a quarter? What trajectory would you see? And any thoughts on when you might get back to a 48% to 50% gross margin would be helpful?

Yeah. Look, obviously, as you know, there are still a lot of challenges in the NAND flash industry. NAND makers are still struggling economically. Our goal is to continue to gradually improve our gross margins and get back to where we historically were. As the industry's health improves, we believe our pricing and gross margins will also improve. As we roll out new products, the new products that we talked about, such as the new PCIe Gen4, Gen5, and UFS 4 controllers, will also uplift our gross margins. We haven't provided specific guidance for next year, and certainly as we move into January to report on the fourth quarter, we'll have a better view on what that longer-term gross margin profile looks like for next year.

Great. And then just looking forward to the eMMC and UFS market, can you give your thoughts on market share looking forward? I think one of your customers is trying to in-source UFS 4. Does that have a significant impact on your outlook? Or do you think it's just some puts and takes, but you still feel very confident about your overall market share position in UFS? Thanks.

Yeah. We believe one of our major customer partners, a NAND maker, has an internal solution for UFS 4 that they have known about for four years. But as you know, we're working closely with this particular partner because, for each NAND maker, their controller probably supports one to two generations of NAND. So when you have a new generation of NAND, that's the opportunity we've taken. We'll continue to discuss future opportunities with this customer and expand even to additional new legacy UFS 2.2, 3.1, as well as the potential newer generation, including UFS 5.0. In addition, we have engaged multiple NAND makers, not just one for UFS. We are targeting a new customer in production from late Q1 or early Q2. I think our technology expansion and the fact that more NAND enters the market will definitely benefit us compared to NAND makers who don't have internal resources on the third-party controllers like Silicon Motion to help engage with the smartphone market.

Got it. Thank you very much, Wallace.

Thank you. Our next question comes from the line of Anthony Stoss from Craig-Hallum. Please ask your question, Anthony.

Thank you. Wallace, you gave us some info on what you expect for PC growth and that you expect to grow faster by taking share. I'm curious if you'd offer something overall including smartphones, auto, et cetera where you think 2024 growth might be for Silicon Motion? Then I had a couple of follow-ups.

Well, I think it's a good question, but I think we will wait for our Q4 earnings call. We'll give you guidance. But we're definitely looking forward to continue growing in 2024. As for the scale, we will provide our guidance during the next earnings call.

Okay. And then following up on the comment about a large Korean NAND maker now back, and I believe you stated in Q3, can you give us a sense of the design activity you have with that customer for 2024? What percentage of their share do you think you'll have?

We're not able to comment regarding a particular customer. But overall, we see a significant growth opportunity with all flash makers. Although there may be some potential consolidation, we believe we'll continue to see opportunities open for Silicon Motion to grow our share with our customers.

Okay. And last question for me. Over the last year or so, with the MaxLinear proposed deal, do you think some of your customers were opting or thinking about moving to their own internal solutions or external? It seems like they have reengaged. I guess I'm trying to figure out if you lost share in terms of designs maybe for 2024 or something just based on the MaxLinear deal and the pause that it may have created.

Yes. From our legal counsel, we cannot comment on any of MaxLinear's related questions. But I think that as you know very well, for any conventional M&A, it definitely has a certain impact on customers. If customers don't understand the potential buyer, they have some fear and concern. I cannot give you specifics on how that really impacts our business, but overall, we will continue to gain market share with more opportunities. Especially after July 26, we see the momentum becoming stronger.

Thank you. Our next question comes from the line of Suji Desilva from ROTH MKM. Please go ahead, Suji.

Hi, Wallace. Hi, Jason. So, congrats on the progress here. The eMMC UFS market for smartphones had very strong results this quarter. You're guiding for that. Just can you give us a sense of the sustainability of the recovery in the end market from a demand perspective versus is channel restocking? And are channel inventories at typical levels now, or are they actually leaner than typical?

Yes. Let me comment on the smartphone market based on our view. The channel inventory has become normal, and we are in a healthy position. We definitely see a growth rebound for both eMMC and UFS products. We also expect to gain more share for UFS in 2024. Although I think in managing particular customers, they have internal controllers, but for UFS 4.0 next year, primarily for UFS 3.1 and also 2.2 for 4G smartphones. We believe more customers will enter the market, which is why we can gain market share. In addition, we are working directly with smartphone makers to tailor certain firmware and meet specific requirements that give us an advantage compared to even NAND makers in providing solutions for specific customers. So we're very happy with our position. I think in certain details, if we can, we will release more during the next quarter or two.

Okay, Wallace. That's helpful. And then my other question is on the operating expenses. Jason, I think you talked about the R&D being elevated for the next two to three quarters. Can you give a sense of what it comes back to after that in the second half of 2024? Is it back to sort of the $40 million level in the second quarter? Or are you just trying to understand what it reverts to after the elevated spend in the next three quarters?

Yes. We'll obviously provide more color on that in the next earnings call, but it will temper back a little bit. As we said, the total investment cost for each of these 6-nanometer products is north of $15 million. Obviously, the entire cost isn't all incurred in a single quarter. It does spread out over several quarters depending on the timeframe of the investment process into that new controller. So it will step back a little bit in Q3 and Q4 next year, but we'll provide more color on that in the next quarter's earnings call.

I can give you an additional reference. A 6-nanometer tape-out is typically about two to three times more expensive than a 12-nanometer tape-out. We believe after the three 6-nanometer tape-outs, we won't have any 6-nanometer tape-outs for a year. However, we will have additional 12-nanometer and 28-nanometer tape-outs quarter-by-quarter. Operational expenses will go down, but the exact level will depend on how many products are going to tape out. We'll give you more color when we have the next quarter or next year guidance.

Okay. Thank you, Wallace. Thank you, Jason.

Thank you. Our next question comes from the line of Gokul Hariharan from JPMorgan. Please ask your question, Gokul.

Yes, hi. Thanks for taking my question, Wallace and Jason, and congrats on the good rebound in the numbers. My first question is could you give us a little bit of a backdrop in terms of how your market share situation is right now for client SoC controllers? Just to get an update after almost a year or more than a year in terms of their market share? And you did allude to some of the design wins in enterprise and data center. Could you give us a little bit of insight on what the size of the opportunity there is? What is the nature of engagement you have? Is it still mostly the PCIe Gen5 controllers for the enterprise market? Or have you previously had open-channel controllers for certain segments of the market? I just wanted to understand what your approach is to tap into the enterprise and data center market size?

All right, Gokul. Thank you. Great to talk to you again. Regarding our client market share, we continue to maintain a stable market share of around 30%, maybe fluctuating a bit, but I think we're gaining market share for 2024. Regarding the data center, I think the major enterprise product we're shipping is still SATA, and our focus is on PCIe Gen5 because Gen4 controllers aren't showing meaningful financial results and aren't cost-competitive. But our PCIe Gen5 MonTitan position is very good, and we believe we will show meaningful financial results worldwide by the end of 2024 and more significantly in 2025.

So, could you give us a sense of how big this enterprise and data center market size is? I think I remember a few years back when you started talking about it, you indicated that it was similar size to the client SSD market in terms of controller revenue size. Any updates on how big the market is given that data center demand has clearly grown since then?

Yes. Look, we're seeing good traction today. We're working with a number of data center and enterprise customers around the world. But it's still early. We're going to start sampling this quarter. It's too early to say how big that opportunity is at this point. As we get closer to launch and have more concrete and better visibility, we'll be able to provide more additional details at that point. But right now, it's just a little early.

Okay. Got it. And one question on pricing. Could you talk a little bit about how pricing has evolved in the last 12 months or so? Clearly, pricing seems to have come off from the $4 to $5 average client SSD controller ASP that you had? And do we need to wait for Gen5 to really come through on the client SSD controllers for you to start potentially seeing some price increases coming through? Do you need to wait for the next generation for price increases to manifest, or do you think that you can adjust prices as we go along once the market starts getting a little bit better?

As you know very well, this year has been very challenging for NAND flash makers as well as controller makers because before September, 90% of our customers were selling their products below cost. Thanks to the price increases in the last two months, many NAND makers' gross margins are still negative. As a leading controller maker, we have to share the pain. When NAND prices gradually recover to break-even and become profitable, certain controller segments will also gradually increase ASP. The PCIe Gen5 8-channel controller has an ASP two times that of the Gen4 8-channel controller, which will be much more competitive in helping our gross margin and ASP. We also believe that the PCIe and UFS 4.0 will help us gain mixing concerning both gross margin and ASP. We do have other new products coming that will create a more positive outlook regarding product mix to assist with our ASP and gross margin.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Matt Bryson from Wedbush Securities. Please ask your question, Matt.

Yes. Good morning, guys. Thanks for taking my question. First question is, I think in the prepared remarks you mentioned that there's still some inventory getting worked down at your customers. I guess in Q4 is the expectation with that guide that inventory is fully worked down? Or is there a potential that there's still some incremental revenue that you'll see in forward quarters because inventories are normalized in future periods?

Hey Matt, it's Jason here. I think we're very close to normalized inventory levels, if not there already. There may be, I mean, it varies by product and by customer, by end market. But by and large, we see inventory has normalized for the vast majority of end markets and customers that we work with.

Thank you. My second question is about new products. It seems that both the return of pricing and margins to traditional historic levels, as well as potential revenue growth linked to higher average selling prices for new products, are quite significant. Can you provide any insights on the timeline for these aspects, particularly how long it takes after tape-out for revenue to become substantial? Additionally, any information on when you expect customers to begin adopting either Gen5 PCIe or UFS 4.0 solutions would be greatly appreciated. Thank you.

Yeah. So our first 8-channel Gen5 controller is being taped out right now. We'll start sampling that here shortly, and then we expect to start seeing the first shipments in late 2024. UFS 4.0 is being taped out in the first quarter. We'll start seeing shipments of that late 2024 into 2025. As for the 4-channel Gen5 SSD controller, that's really more of a mid to late 2025 into 2026 type event for us.

Thanks. That's all I got.

Thank you.

Our next question comes from Craig Ellis from B. Riley Securities. Please go ahead, Craig.

Hi. This is Ethan Widell calling in for Craig Ellis. To start, you provided some good color on the near to intermediate term slope of OpEx as you focused on strategic investments. I was wondering to what extent the timing of those investments is sensitive to the slope of recovery in end market demand? Thanks.

I'm sorry. What's the slope of the OpEx? And how does it tie to the end market recovery? Is that what you asked?

Right.

Yes. Obviously, we're seeing strength in the end markets. The guidance we provided for Q4 is stronger than seasonal. We expect to continue to grow in 2024 as well. The OpEx should stay at these levels for Q4, Q1, and Q2, and then that will come down a little bit in the second half of next year, but depending on the number of additional tape-outs that we'll be doing, it can vary a little bit. So we'll provide more color around that in the next earnings call.

All right. Thank you. And then, given your cash position, I was hoping that you could just broadly speak to your cash deployment plans?

Yes. For cash deployment, as you may have seen earlier this week, we initiated our $2 per year dividend. That will be paid quarterly. The first quarterly payment will start here in November. Regarding share repurchase, it is something that historically we've been opportunistic about. We don't have a program in place today, but the Board is always looking at ways of returning cash to shareholders, and it's something they will continue to evaluate.

Thank you. That's all for me.

That concludes today's conference call. Thank you for participating. You may now disconnect.