Good day and thank you for standing by. Welcome to the Silicon Motion Technology Corporation’s Q4 2023 Earnings Conference Call. At this time, all participants are in a listen-only. After the speaker's presentation, there will be a question-and-answer session. 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 conditions, 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 pressures on prices, unpredictable changes in technology and consumer demand for multimedia consumer electronics, the state of and any change in our relations 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. Please be advised that today’s call is being recorded. I would now like to hand the call over to Mr. Jason Tsai, Vice President of IR and Finance. Please go ahead.

Thank you and good morning everyone. Welcome to Silicon Motion’s fourth quarter 2023 financial results conference call and webcast. Joining me today is Wallace Kou our President and CEO. Wallace will first provide an overview of our key business developments and then I will discuss our fourth quarter results and outlook. Following our prepared remarks, we will conclude with a Q&A session. Before we get started, I'd like to remind you of our Safe Harbor policy which was right 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. 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 market yesterday. This webcast will be available for replay on 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 GAAP to non-GAAP financial data can be found in our earnings release issued yesterday. As we have previously shared, Silicon Motion filed its Notice of Arbitration against MaxLinear for the willful 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, substantial damages, interest, and costs. The company filed its Notice of Arbitration claim against MaxLinear in the Singapore International Arbitration Center on October 5, 2023. 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. We are pleased by the steady recovery across our business throughout 2023, with fourth quarter revenue and gross margin exceeding expectations. We benefited in the quarter from stronger demand from both our SSD and eMMC+UFS controllers and saw pricing and mix improve to drive stronger gross margin improvement for our business than originally expected. More importantly, our technology leadership in controller and our unwavering engagement with our customers, both flash makers and module makers, has laid the foundation for strong 2024 growth despite only modest growth expected in the PC and smartphone device markets, driven largely by our ongoing share gains with our customers. Over the past six months, we have been busy making organizational changes to better position Silicon Motion for the future. We restructured our business to better engage in new opportunities in the market and spent a lot of time re-engaging with customers to win back their confidence in us as a long-term partner. As you saw, we formed two new business units, Client and Automotive Storage (CAS), and our Enterprise Storage and Display Interface solution (SDI Groups). Our new organizational structure allows us to be more focused on each segment, have dedicated industry veterans as the leaders, enable our team to be more agile and responsive to the market, and better engage with customers and anticipate their needs with truly differentiated high-performance and classified solutions. We are already seeing the successes of this as our CAS Group has been increasing share by winning significant new designs with both flash makers and module makers for the PC, smartphone, automotive, industrial, and other markets. Our ASDI Group has also made incredible progress with some untitled products in a short amount of time, securing more than a dozen sampling customers. With these changes, we are better positioned than ever before and look forward to demonstrating the ongoing strength of our business to our investors each quarter. Now let me move into our business and give you an update on the NAND market dynamic we are seeing today and what we expect for 2024. Pricing for NAND Flash has been steadily increasing and is expected to continue to improve throughout 2024 and into 2025. NAND makers are being disciplined in their production and limiting output, resulting in higher NAND flash prices. Demand is also expected to pick up this year as both the smartphone and PC markets will grow modestly after two years of meaningful declines in unit shipments. While higher pricing may limit the activity we typically see from our module maker customers, many have pre-bought low-cost NAND in the second half of last year, and we have secured significant wins with them for upcoming products this year. We believe our business with module makers will grow this year despite the headwinds created by higher NAND flash prices. For flash makers, while higher flash prices over the past few months have improved their profitability, most are still facing negative or very low margins, and this is why we are seeing them increasingly focus on profitability. Flash makers need to prioritize their investments from developing new generations of NAND to developing storage solutions to satisfy a wide range of end-market requirements. These solutions range from high performance to value-oriented using DRAM and utilizing TLC or QLC to serve a broad range of end-market needs in eMMC+UFS, client SSD, embedded enterprise, and industrial applications. We are seeing flash makers focus on their own efforts on leading-edge, high-performance solutions where margins and profitability tend to be highest, and they are turning to us as a partner of choice to help bolster their portfolio with high-performance, lower-cost solutions, utilizing their latest generation of high-performance, high-density NAND to serve a broader range of market requirements. Our progress with our flash maker partners over the past year has resulted in a strong backlog of new wins across all our product groups that will drive meaningfully higher share and faster growth this year and lay the foundation for strong long-term growth. We continue to grow our customer relationships and are on track to grow our business with every NAND flash customer we have this year. Our revenue from flash makers is expected to grow approximately 50% this year, with design wins across our controller program meaningfully increasing throughout 2024. Turning to our SSD controllers, we took our first PCIe Gen 5 channel controller last quarter and have already secured three flash maker wins in this product as well as several module maker wins. This is the first time that flash makers have adopted our controller for high-end notebook models. We expect sales of this high-performance controller to begin late this year. We are engaging with other flash makers as well as numerous other module makers and expect to win more designs through 2024. Our second PCIe controller will be taped out early in the third quarter this year, and we already have significant interest from both flash makers and module makers for the mainstream Gen 5 solution that is expected to ramp in late 2025. While we are excited about our progress with PCIe Gen 5, it's important to point out that we continue to win significant new programs with several flash makers with older generation interfaces as well, including two new starter SSD programs, several PCIe Gen 4 SSDs, including one using next-generation QLC flash targeting the value-oriented PC OEM market and several USB 3.2 portable SSD projects. Our QLC controller with our proprietary 3D array and more advanced LDPC for better error correction and data protection offers a no-compromise solution that maintains high performance and reliability while utilizing the most cost-effective flash to further improve affordability. We are seeing strong traction of QLC controllers with both our flash makers and module maker customers, with more widespread adoption by PC OEMs as well. Moving on to our eMMC+UFS controller solution, we are rolling out our UFS 4.0 solution this quarter and remain on track to ramp with a flash maker customer later this year, as well as several module makers targeting the smartphone market. UFS 4 remains a flagship and premium solution this year and is expected to expand into the high-end mainstream handset market in 2024 and beyond. Aligned with wins, our solution with our flash maker and module maker customers is expected to ramp. UFS 3.1 and 2.2 remain primary solutions for mainstream smartphones this year, and we are seeing continuing strong demand for our current UFS controller with additional flash makers and module makers. We are seeing flash makers focusing on their own internal controller development on the latest flagship generation of UFS, where they get the highest premium for their higher-performance solution. As each UFS generation moves from flagship to mainstream, we are seeing flash makers turning to us to utilize our controller paired with their newest NAND that offers high performance and lower cost, ideal for the mainstream smartphone market. It is a symbolic relationship that has driven our strong partnership with flash makers and is driving more wins and long-term growth for our eMMC+UFS controller business. Now let me give you an update on the progress of our MonTitan Enterprise State Development platform. We started sampling MonTitan to customers at the end of last year, and we are excited to announce that more than a dozen customers, many of them Tier 1 companies ranging from NAND flash makers, hyperscalers, storage solution providers, enablers, as well as module makers, are in the process of evaluating the solution. MonTitan’s highly differentiated storage solution provides support for both high-performing TLC SSDs as well as high-capacity QLC SSDs. We are finding that this ideal balance of performance and features is appealing to customers across all enterprise and data center market segments. Based on our ability to support a wide range of customer engagement models from the turnkey to layered firmware stack development, MonTitan has raised the asset to an extensive amount of data processing speed ideal for a variety of applications, including high-performance edge computing, AI inference, and machine learning. We are confident that we will continue to grow during the Gen 5 transition into the AI era and expect to secure a first design win in the next few months and generate significant revenue by the end of this year. Overall, I'm excited about the opportunity ahead of us in 2024. Our team is dedicated to maintaining our technology leadership, and our unwavering commitment to our customers has enabled us to continue winning socket after socket and positioning us for strong share growth this year and beyond. Our position with our flash maker customers has never been stronger, with new design wins expected to ramp since the beginning of this year. Our module maker customers are entering 2024 with strong inventories of low-cost NAND and choosing us to help them bring competitive SSD and embedded solutions to market. We are well positioned to continue to further strengthen our design pipeline in 2024 to drive growth in 2025. Now let me turn the call over to Jason to go over our financial results and outlook.

Thank you, Wallace, and good morning, everyone. I will discuss additional details of our fourth 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 fourth quarter, we grew sales 17% sequentially to $202 million. SSD controller sales grew 15% to 20% sequentially. eMMC and UFS controller sales grew 25% to 30% sequentially, and SSD solution sales decreased 5% to 10% sequentially. Gross margins in the fourth quarter increased to 44.1%, reflecting both better mix and higher ASPs. Operating expenses in the fourth quarter were $61.5 million, $12 million higher than the prior quarter due to higher R&D expenses to support our technology leadership. Operating margin in the fourth quarter was 13.8%, flat from the third quarter. The effective tax rate in the fourth quarter was 2.3%, a decrease from the 22.8% tax rate in the third quarter, primarily due to a tax reversal in the quarter. Excluding this, the tax rate would have been 28%. Earnings per ADS were $0.93, 48% higher sequentially. The stock-based compensation in our operating expense, which we exclude from our non-GAAP results, was $5.7 million, and we had $369 million in cash, cash equivalents, restricted cash, and short-term investments at the end of the fourth quarter, compared to $350.3 million at the end of the third quarter. Inventory increased sequentially in the fourth quarter to $217 million from $199 million in the third quarter. Now let me turn to our first quarter and full year 2024 guidance and forward-looking business trends. For the first quarter, we expect revenue to be down 10% to 15% sequentially to approximately $172 million to $182 million. We expect SSD controller sales will decline slightly in the first quarter, and eMMC and UFS controller sales will decrease. First-quarter gross margin is expected to be in the range of 44% to 45%. First-quarter operating margin will be in the range of 10.5% to 11.5%. First-quarter effective tax rate to be approximately 19%, and in the first quarter, we expect stock-based compensation and dispute-related expenses to be in the range of $6 million to $7 million. For the full year 2024, revenue will increase 20% to 25% to $765 million to $800 million. Gross margin is expected to be in the range of 45% to 47%. Operating margin should be in the range of 14.7% to 16.7%, and our effective tax rate for the year is expected to be approximately 19%. Full-year stock-based compensation dispute and related expenses will be in the range of $31 million to $33 million. Let me provide some additional color on our first quarter and full-year expectations. As Wallace mentioned, we are making strong progress with our flash maker customers. We have a strong pipeline of design wins and are positioned to gain meaningful share this year. We expect our revenue from all of our flash maker customers to grow in 2024 and to increase approximately 50% this year. In addition, we have high visibility that two additional flash makers will be ramping new projects with us this year in eMMC and UFS and in SSD controllers, and we will be able to grow revenue from each of these flash makers very meaningfully. We expect normal seasonality to impact our business in the first quarter but are confident that we are well positioned to grow sequentially throughout the rest of the year based upon our strong backlog of wins and project ramps. We expect to see consistent improvement in our gross margins this year driven by better mix towards newer generation interfaces in our eMMC and UFS and SSD controller sales, a number of new projects ramping, and overall pricing starting to normalize and improve. For operating expenses, we’ll continue to invest in maintaining our technology leadership in the market, including the tape-out of two 6-nanometer controllers, one in Q1 for UFS 4 and one in Q3 for a second PCI Gen 5 SSD controller. This will lead to elevated operating expenses in those quarters. This concludes our prepared remarks. We’ll now open the call for your questions.

The first question comes from Mehdi Hosseini from Susquehanna International Group. Please go ahead with your question.

Yes, thanks for taking my question. I have two. Wallace, can you help me understand what you're seeing in the SSD solutions business segment? I understand that your continued traction with flash makers and new product ramps are more focused on SSD controllers and the smartphone, but could you give us a feel for SSD solutions and whether you would be able to actually slow down the decline in revenues here? And I have a follow-up.

I think our SSD solution in Ferri has been stable, and we are seeing a strong pipeline of wins. I think for Q4 revenue decline due to some multi-customers seeing the inventory pile-up and we do see 2024; we have accumulated more designs. But we see we have stronger growth in 2025 from an automotive customer for our Ferri product.

Okay, great. And your 2024 guide is very encouraging. You are also ramping a 6-nanometer takeout. I understand what's driving the OPEX increase. I also look at your cash; you have almost $10 of net cash per share. Your just operations should help with additional cash generated, you sound very confident, why not revisit the capital return, especially with the buyback, especially with the investors that have been patient, any thoughts, any color here would be appreciated?

Yes, thanks for the question, Mehdi. Look, that's a good question. If we look at our capital allocation program constantly, that's something we review with our Board regularly. We have the dividend policy that we've been paying for a very long number of years with the exception of when we were in the acquisition process. The strategy behind the dividend, as you know, has always been to set it at a level that's comfortably affordable, and we'll continue to evaluate going forward whether to increase the dividend in a future time as business continues to scale and cash flow increases longer-term. In terms of things like a share repurchase, as you know, our share repurchase program in the past has been opportunistic. 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 they'll continue to look at.

Thank you.

Thank you for the questions. One moment for the next question. Next question comes from the line of Quinn Bolton from Needham. Please go ahead.

Hey guys, congratulations on the results and outlook. Thanks for taking my questions. I wanted to follow up, Wallace on your comments. Very encouraging to hear that you'll grow with every NAND manufacturer in 2024. But I think one of the concerns we've heard from investors is that as UFS 4.0 becomes mainstream, that one of your customers that has insourced, UFS 4.0 may be a headwind more in 2025 than in 2024. And so I'm not trying to get you to give guidance for 2025. But overall, would you expect your business in aggregate with NAND vendors to continue to grow in 2025 as UFS 4.0 becomes more mainstream? And then I got a follow-up.

Yes, we believe we can definitely continue to grow from our mobile controller for both UFS and eMMC. As you know very well, the UFS 4.0 will still remain high-end for 2024 and 2025 and probably will go to mainstream up to the second half of 2026. We have a very strong UFS 3.1, 2.2 today, not only for existing NAND partners but also winning one to two additional NAND maker businesses that are ramping in 2024 and 2025. In addition, we also see NAND makers focusing on their new product developments. So when UFS 4.0 becomes mainstream, their R&D is focused on UFS 5.0 development and sometimes outsourcing the new UFS 4.0 projects to Silicon Motion because our new laser controller can capture the latest new generation high-performing I/O NAND with higher density NAND. So that will become much more attractive and value added to our NAND partners, extending the product life cycle. So we see our position very well with NAND makers as well as growing module makers who are moving from eMMC to UFS.

And I think also that it's becoming a much more diversified business. It's no longer really driven by one customer. We have a multitude of flash makers and module makers that address the smartphone market all very effectively. And so as we ramp up with these new flash makers and module makers, we're confident that we can continue to grow this business long-term.

Great. My second question is more of a clarification about the two new NAND vendors that ramp this year. Can you give us any color? Is that specifically on the eMMC UFS business? Is it across both mobile as well as the SSD business? Just any color? And then, Jason, just a quick looks like OPEX for the full year probably comes in at about $240 million or on average about $60 million a quarter. I know there's some tape-outs in Q1 and Q3 that will probably increase R&D in those quarters. But is that sort of $240 million not the right range to be thinking about for OPEX in calendar 2024? Thank you.

The two NAND makers, I think, really one is for UFS, one for eMMC, but we are continuing looking for engagement with the NAND makers.

Yes, I believe the correct range for OPEX is between $230 million and $240 million.

Thank you for the questions. One moment for the next question. Next question comes from the line of Gokul Hariharan from J.P. Morgan Chase. Please go ahead.

Yeah, hi. Thanks for taking my questions. First question is on enterprise, given that you are getting pretty good traction with your new product, and you also reorganized the organization to focus more on enterprise. Wallace, could you give us a little bit more color on how big is the enterprise addressable market for Silicon Motion, and what is something that you can really achieve over the next maybe three, four years in terms of the enterprise traction? And could you also give us a little bit of color in terms of what kind of design wins are you getting? Are you getting more design wins on core storage products, or is it more towards OEMs and hyperscalers? Is there any mix in terms of where you're getting the payments? Maybe you will give us a little bit more color on the enterprise addressable market?

So it's a very good question. I think that we are seeing very good traction today as we continue to sample and go through the qualification process with these Tier 1 customers and by a dozen customers from the U.S. and to Taiwan, China. And I cannot give you the quantifiable number, I think by end of 2024, we'll have meaningful revenue. We have much bigger revenue in 2025 and 2026. The reason we are gaining traction is not only the standard B&G; we are gaining momentum because of the high-performance and all the number index that exceed expectations, but also we get traction due to the QLC SSD coming into the data center. This is for twofold. One is FTP standard for QLC, also Zone NAND safety for QLC in China. I think one U.S. customer is also very interested in the space. So that makes us distinguish ourselves compared with conventional solutions. Due to the AI server demand and AI demand, I think Gen 5 SSD becomes much more attractive. This is similar to our demand, and that's why many customers will qualify our Gen 5 solution.

Got it, thank you very much. My next question is more near-term. For 2024, you have a 20% to 25% revenue guidance. Could you give us some color on how you expect client SSD to grow and mobile to grow? And within mobile, recently, we are hearing some concerns about the end of restocking for some of the Chinese customers. Are you seeing the Chinese smartphone customers being a little more conservative in terms of procurement in the near term?

Yes. I think for Client SSD, last year, our global market share was around 25% to 26%. We believe this year we will grow to 30% to 32% range because the total overall SSD number will overall grow probably another 10 million to 20 million for global unit shipments. For mobile, we will grow faster and stronger because we have more customers in the pipeline not only the existing NAND makers, who continue to grow compared to last year, but also we have two additional NAND makers joined the group to grow. And module makers, we see they will grow even stronger. We also have a platform development with both Qualcomm and MediaTek. We also have direct engagement with smartphone makers to strengthen our position and technology, paving for 2025 growth.

Thank you for the questions. One moment for the next questions. Our next question comes from the line of Anthony Stoss from Craig-Hallum. Please ask your question.

Thank you. Jason, I was trying to write as fast as I could. On the tape-out commentary, could you just break that out again by quarter and kind of the cost that you expect for the quarter? And then I had a follow-up for Wallace.

Yes. So we're expecting to tape out our UFS 4 6-nanometer controller here in the first quarter, and then we'll tape out our second PCI Gen 5 controller early in the third quarter. So that's going to result in more elevated OPEX kind of similar to what you saw here in the fourth quarter for each of those two quarters. And then in Q2 and Q4, that should revert back down to a more normalized level because those periods don't have the tape-out. Those tape-outs, as we have said in the past, are typically north of $15 million in terms of total development and investment cost for us. So during the quarters where they're taping out, it's certainly a big step up on the OPEX.

Okay. Got it. And then Wallace, I'd love to hear a little bit more last quarterly conference call. You talked about a new Korean NAND maker coming on as a customer. I'm curious to your view on how quickly they could ramp and could they be a, let's say, a top three customer in 2025?

We cannot comment on individual NAND maker customers about the revenue, but we definitely look forward to stronger engagement and broadening our product line and design wins. I think we would start looking forward to embrace the NAND maker who really can outsource more projects to Silicon Motion, and that will add value to them. I think that 2024, and 2025, they are really good timing for us to show our technology and serve our NAND makers, select their R&D extension and looking forward to more exciting results. And we will definitely rollout this year.

Okay. And if I could sneak in one more on your MonTitan, so you talked about having secured one design win. Can you give us any color on if it's a data center hyper scaler, NAND maker, and then how quickly do you think you can secure additional out of those 12 that have sampled?

We cannot comment on the customer and the type, but I think with Tier 1 customers and with that, we believe we will secure the second one in the second half of 2024. So I think we're confident to win at least two Tier 1 customers by the end of 2024.

Thank you for the questions. Next question comes from Craig Ellis from B. Riley Securities. Please ask your question.

Yeah, thanks for taking the question. Wallace, I wanted to start with you and follow up on some of the outsourcing questions from the call, but also really continue the conversation that you and I have had over the last couple of years. So I think we both expected that there would be an increase in outsourcing from NAND customers. And the question is this, as you look across the increase in activity that you've observed over the last 12 months or so, can you characterize how extensive that is from OEMs that are maybe just doing one or two new products to much more wholesale changes? What's happening on the continuum, a little bit to a lot, and how much of that is baked into the guidance that you and Jason have given for calendar 2024? And then I had a couple of follow-ups. Thank you.

It has been a challenging year for all NAND manufacturers due to weak demand and oversupply, resulting in a significant decline in NAND prices and negative margins for everyone. We have been able to grow our market share because we are respected for our long-standing relationships and our commitment to R&D. The focus for NAND makers has shifted from gaining market share to improving profitability, which means they are investing less in NAND capacity and concentrating on developing high-end, valuable products. In the mainstream market, they are also looking to partner with third-party companies like Silicon Motion to diversify and enhance their product offerings for end customers. We are seeing increasingly more outsourcing opportunities from NAND manufacturers, as they prefer to collaborate with companies like Silicon Motion for their business needs.

Got it. And then the follow-up question is just a continuation. What are the things that you're looking at that will indicate that this is not only a trough cycle reaction from NAND OEMs, but through the sweet spot of the cycle and towards the peak of the cycle, they would sustain this level of outsourcing or perhaps even grow it? And then the follow-up is for Jason. Jason, is MonTitan ramps in calendar 2024, how should we think of the gross margin implications relative to the corporate average?

We see this cycle because now NAND is experiencing a shortage. So NAND makers are being careful to value all the priorities inside the company. Every NAND maker may have a different strategy, and we cannot comment on that. But we believe this cycle will continue until mid-2025 or late 2025, when supply and demand reach balance and NAND makers start to invest more in CAPEX to meet the higher demand.

I believe that in response to your question about the nature of this outsourcing, whether it's temporary or indicative of a more structural change, we are making progress that extends into 2025 and beyond. This indicates that they are not simply utilizing our services as a short-term solution; rather, we are establishing more significant long-term partnerships with them. Regarding the MonTitan revenue growth and its effect on margins, we do not anticipate this will occur until late 2024, specifically in Q4. Therefore, it's premature to assess the impact it will have. A more substantial increase is expected in 2025, and as we gain better visibility into the timing and scale of wins, we will be able to share further details. For now, it is a bit early to discuss the effects on both revenue and margins.

Got it. And the gross margin color on the calendar 2024 guide was quite helpful. Can you talk about the visibility that you have, Jason, to gross margins ultimately reattaining that more normalized 50% level?

Yes. I think we're feeling pretty good about that just given the mix of new products, new projects, new technologies that are coming to market that we already have strong design wins and pipeline for. As each day passes, we're also seeing these new engagements bring with them healthier pricing levels at healthier margins, and we're certainly working on our own back end and production to also improve costs as well. So I think we're on a good track here, and the guidance that we provided, we believe that it's attainable.

Hi Wallace, hi Jason. Congrats on the good guidance here. You talked about the module makers securing lower-cost NAND in late 2023 that they're selling through now. Can you just talk about the behavior you'd expect as that lower-cost NAND gets worked through and how they respond? Would they then look to market conditions or just any thoughts there on how that might impact the financials after that gets worked through?

Most of our leading module makers, I think they have been in the market for a long time. So they understand NAND price trends. They procured a very large amount of NAND from last August to November, which has prepared them for NAND price increases. They understand that NAND pricing will be in shortage and that NAND prices will continue to rise throughout the entire 2024. So they're procuring in advance and to balance their costs, they will continue to buy some NAND this year. But product mix and NAND pricing variations make them more competitive compared to other module makers. I cannot comment on that, but I think the current demand is in a very wide range from the hyperscalers and from AI server, from all-flash arrays, and from conventional servers. So I think we're definitely looking forward to more opportunities, but the more important factor is a Tier 1 customer, who have a really good volume, and we believe we can secure them. We're looking forward to seeing our second one by the second half of 2024.

Yes, great, thanks for the follow-up. Jason, I understand the 6-nanometer tape-out is going to keep your R&D in the $47 million to $48 million a quarter this year. Should we expect additional tape-outs next year, or in other words, should R&D stay at these elevated levels into 2025, or would it taper off?

I think we'll continue to invest here. I think it's a little too early for us to comment about what 2025 OPEX looks like at this point. But obviously, it's important for us to continue investing to stay ahead. We taped out a 6-nanometer because it's what we need to do. The technology requirements for performance and power can only be achieved when you go down to this lower process geometry. I think there are options for us to look at ways of reducing tape-out costs and foundry costs longer term that we're exploring. So stay tuned; as we have more to share on that, we will. But certainly, our goal is to continue to invest, but invest responsibly and try to bring the cost down as much as we can while still maintaining our technology leadership.

Sure, that's fair. Ultimately, we're just trying to figure out if the company is still targeting mid to high 20% operating margin and OPEX is a factor here. So any thoughts on the longer-term operating margin target since?

Yes, that hasn't changed. I think if you take a look at our business in the past, we are typically a 48% to 50% plus gross margin company and operating margins in that 25% to 30%. There's nothing fundamentally different about our business today that says that, that's not an achievable target for us longer term.

Thank you for the questions. One moment for the next questions. We also have a follow-up question from Craig Ellis from B. Riley Securities. Please go ahead.

Thank you for taking the follow-up. Wallace, you mentioned the company has a collaboration with both MediaTek and Qualcomm. And I was hoping you could comment a little bit further on that, both on the duration of those two partnership engagements and two, the nature of them. Are you a reference design partner for those solutions, and if so, to what extent, and to what extent have those been part of UFS revenues in the past, and are they expected to be in 2024 and 2025? Thank you.

It's important for our new products to qualify on leading SoC providers like Qualcomm and MediaTek for the mobile platform. We have direct engagement also through our customer, joint qualification. They help us to resolve some issues during the pre-production qualification. This is a joint prequalification and helps us to gain confidence for our quality for firmware as well as ASIC. We also serve Qualcomm for automotive platform qualification. So they extend our product line like Ferri and MediaTek and other NXP. So this is the platform engagement to help accelerate our product readiness and also help our customers to production sooner. I cannot quantify the numbers, but I tell you, it's very helpful, and our company puts in a big effort for platform qualification and the team dedicated to help our product line.

Thank you for the questions. Next up, we also have a follow-up question from Gokul Hariharan from J.P. Morgan Chase. Please go ahead.

Yeah hi. I had one question on AI. Thanks Wallace, you did highlight the AI adoption on the enterprise side. Could you also talk broadly about what happens when you have more adoption on edge devices, especially most of your PC and smartphone customers are launching AI-enabled PCs and smartphones this year and probably more next year. What does it do to NAND flash content and what does it do to your controller ASPs or controller specs?

These are important questions. Both we and other NAND manufacturers have been exploring how AI will affect storage solutions for at least six months, focusing on what controller makers should do to enhance our value in AI applications. There are many exciting uses for AI in PCs, with contributions from Intel, AMD, Qualcomm, and NVIDIA providing solutions. While third-party AI SoCs are available for desktops and workstations, they are not currently designed for notebooks. Our company is actively participating in enterprise AI, where SSDs are crucial since servers for AI are key for computing power. This means that the system's role is vital. Regular latency and sequential performance are critical for meeting AI server demands. However, AI PCs present different challenges; HBN cannot be used, and high-density DRAM is not practical. Therefore, effective memory swapping is essential. Several technologies and requirements must combine SSD controllers and solutions to make Edge AI more viable. While I can't go into specifics, I can say that we are focusing on this area to add value and conduct further research. All NAND makers and leading controller manufacturers are striving to offer solutions and participate in the Edge AI movement.

Okay, thank you very much. And second, on PCIe Gen 5, could you talk a little bit about the pricing uplift you're expecting as you go from PCI Gen 4 to PCI Gen 5? I remember you talked about a significant premium in the last call. Could you talk a little bit about what you're seeing in the market for the flagship products and how that is likely to shape out as we get into more mainstream PCI Gen 5 products towards next year as well?

I think, I cannot give you an exact number, but our high-end PCI Gen 5 channel controller is about two times that of the PCIe Gen 4 controller today. We are very excited to see our high-end PCIe Gen 5 controller adopted by three NAND makers. We believe there will be additional wins later this year. This is very important for us to expand our market share for notebooks, for PC OEMs, and as we see the increase in our sales revenue as well as margin. This is a very important milestone. The PCIe Gen 5 and the high-end controller can also be adopted by the server for boot storage. And I think there is a trend we're seeing, and not just for notebooks, but for PCs for workstations and gaming PCs that will be our top high-end PCIe Gen 5 channel controller.

Thank you for the questions. With that, I would like to hand the call back to the management for closing remarks.

Thank you, everyone for joining us today and for your continued interest in Silicon Motion. We will be attending several investor conferences over the next few months. The schedule of these events will be posted on the Investor section of our corporate website. Thank you, everyone for joining today. Goodbye for now.

That does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.