Good day, and thank you for standing by. Welcome to the Silicon Motion Technology Corporation's Q3 2024 Earnings Conference Call. 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 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 relationship with our major customers and changes in political, economic, legal and social conditions in Taiwan. For additional discussions 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. With that, I'd now like to turn the call over to Tom Sepenzis, Senior Director of Investor Relations and Strategy. Thank you. Please go ahead.

Thank you, and good morning, everyone, and welcome to Silicon Motion's third quarter 2024 financial results conference call and webcast. Joining me today is Wallace Kou, our President and CEO; and Jason Tsai, our CFO. Wallace will first provide a review of our key business developments, and then Jason will discuss our third quarter results and outlook. Following our prepared remarks, we will conclude with a Q&A session. 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 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 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 consistent with how we analyze our own operating results. The reconciliation of the GAAP to non-GAAP financial data can be found in our earnings release issued yesterday. We ask that you review it in conjunction with this call. With that, I will turn the call over to Wallace.

Thank you, Tom. Hello, everyone, and thank you for joining us today. We delivered another quarter of sequential revenue growth and gross margin in the high end of our guided range, our sixth consecutive quarter of gross margin expansion. Revenue strengths were driven by our NAND flash maker customers as they continue to source controllers externally rather than develop them in-house as they focus on long-term profitability and reduce their operating expenses. Our strategy of deepening our partnership with the leading flash makers and investing in new technology is driving success across our business. We are winning more programs in mainstream PC, smartphones, automotive, industrial, and other markets, and we expect this effort to accelerate as we move into high-end PC through the introduction of our first PCIe 5.0 controllers. Silicon Motion is best positioned to capture increasing share in the markets we serve, further strengthening our position as a leading merchant controller vendor in the world. In the third quarter, our NAND maker revenue grew more than 60% year-over-year as we continue to increase share gains through new product introductions and effective strategies. Both SSD and eMMC/UFS controller strengths from our OEM programs more than offset continuing weakness in the retail aftermarket for SSD, which has been impacted by high NAND prices and lower consumer spending driven by inflationary pressures. Despite these near-term macro challenges, I'm pleased with our team's execution throughout the year and the building momentum as we continue to gain share across the markets we serve. We believe that our ability to capture increasing shares through our NAND flash maker partners and OEM channels will continue to allow us to outpace the market. Our unrivaled technical and financial strength to build next-generation controllers has and will continue to enhance our position through the introduction of multiple new products and our ongoing drive to provide world-class customer service. Combined with the initial ramp of our new MonTitan enterprise-class solution and our first PCIe 5 controller in the current quarter, along with the expected introduction of our new UFS 4 controller next year, Silicon Motion is in the best position for long-term growth and share gain in our history. Our opportunities are growing significantly as we deliver products and solutions that match our competition, and we remain focused on driving additional revenue and profitability across our platform of leading NAND controller solutions. Now I would like to provide you with an overview of the current NAND market dynamics. Overall, consumer-grade NAND price increases have slowed, and in some cases, we are beginning to see modest declines. Despite the modest improvement in NAND prices, the PC and smartphone markets, as well as the aftermarket for client SSDs, are all experiencing near-term weakness, reflecting the industry-wide demand slowdown for consumer electronics this holiday season. Enterprise-grade NAND pricing remains stable as the demand for AI storage solutions stays strong. Looking into 2025, we are encouraged by growth drivers in the PC market, including an expected replacement cycle and the increase in storage density from AI-at-the-edge, enabled by next-generation processors from Intel, AMD, and Qualcomm for PCs. In the smartphone market, the introduction of more AI-capable processors from Qualcomm, MediaTek, and others could drive an upgrade cycle in 2025. Given these tailwinds and ongoing strength in the enterprise storage market, we continue to expect NAND supply to tighten by mid-2025, driven by storage demand and density growth. Gartner recently published its outlook on NAND, highlighting the growing importance of QLC. They expect QLC production to increase to more than 25% of total NAND output by 2028, up from less than 10% today. As a result, interest in QLC NAND is increasing as density demands grow rapidly with the rise of artificial intelligence. Silicon Motion stands to be one of the biggest beneficiaries of the growth and adoption of QLC NAND over the next several years, given our unmatched experience and expertise in the technology. We are currently engaged in discussions with all the major flash makers and module makers for the development of QLC NAND across multiple markets, including enterprise AI, PC, smartphone, IoT, and others. Gartner is projecting significant adoption of QLC across all markets over the next five years. QLC adoption in the PC market is expected to increase from about 20% today to over 55% in 2028. For smartphones, QLC will be especially important in mainstream and low-end devices, with adoption expected to grow to about 15% from virtually 0 today. In the enterprise, QLC is expected to account for nearly 35% of the server storage market and nearly 65% of the enterprise storage SSD market by 2028. While QLC NAND provides low-cost storage density, it is significantly more challenging than its predecessors to manage and requires sophisticated technology in controllers and firmware. Our QLC NAND experience has become a key differentiator in the market, resulting in multiple wins with flash makers and module makers across all our product categories. Our proprietary advanced LDPC, 3D RAID technology, and leading firmware algorithms have positioned Silicon Motion to benefit from the emerging push to deliver QLC-based storage solutions, and we expect to be one of the primary winners in the growth of this new technology. Now I would like to discuss each of our major product segments, beginning with our SSD controllers. Demand remained robust from our flash maker customers in the September quarter, driven by PC OEMs, which represented approximately 75% of our client SSD controller sales — significantly higher than normal third-quarter seasonality, as high NAND prices and weaker consumer demand continue to pressure the retail aftermarket for SSD. Despite the near-term challenges, this is an exciting quarter for Silicon Motion as we introduced our new PCIe Gen5 8-channel controllers. This is a premium product, ideally suited for high-end AI notebooks, desktops, gaming, and workstation PCs that offer unparalleled performance and best-in-class power consumption. Our controller is the first 6-nanometer 8-channel PCIe Gen5 controller in the market and has led to four flash maker design wins and multiple engagements with nearly all of the module makers. The controller delivers 20% to 30% lower power consumption than competing controllers, including internally developed controllers from the major NAND makers. This new PCIe Gen5 product is extremely important for Silicon Motion as it marks our entry into the high-end PC market for the first time. High-end PCs account for approximately 10% to 15% of the overall PC market, representing a significant opportunity for market share gain and top and bottom line growth for our company. The high end of the market delivers the added benefit of high average selling prices and accretive margins, and we are entering the market from an incredibly strong position. With our four NAND flash maker partners and a growing number of module maker customers, we believe we can grow our share of the high-end PC market rapidly. I would also like to share another significant achievement by our team involving the automotive market. Our new PCIe Gen4 automotive-grade controller has recently received ASPICE Level 2 certifications. This is the first PCIe Gen4 controller in the market to achieve this level of certification, and we are engaged with multiple customers and design into several new automotive platforms. Level 2 is the most critical step in ASPICE's certification, as it validates that development is complete and fully managed and ready for release. We expect to achieve ASPICE Level 3 certification with the controller with the same controller in 2025, and we remain on track to deliver our new PCIe Gen5 automotive-grade controller in the second half of calendar 2025. While the automotive market has experienced a challenging year, we continue to experience growth. Automotive already accounts for approximately 5% of our revenue today, and we expect to reach 10% of our total revenue by late 2026 or early 2027. Our pipeline of design activity for next-generation PCIe Gen4 controller using both TLC and QLC NAND remains strong. These new SSDs deliver high performance and high density at a lower cost than PCIe Gen5 platforms and are increasingly ideal for multiple applications that require low-cost solutions. We are growing our SSD market share in the PC, game console, automotive, industrial, IoT, and other markets and will continue to diversify our customer base and market moving forward. Now I would like to discuss our eMMC and UFS business. Our eMMC and UFS business continues to be a strong growth area for us as we capture more share. We have a significant new product ramp in UFS and eMMC next year as we capture more opportunities in low-end to mainstream handsets and through continued expansion in automotive, IoT, and other growing markets. Our complete family of UFS and eMMC controllers, in conjunction with our strategy of customer diversification through collaboration with NAND makers, module makers, and handset OEMs directly, is enabling us to become the preferred controller maker across multiple markets. This includes the important market in China, where our module maker customers can deliver solutions that comply with increasing localization standards. Our ability to support the broadest range of NAND, including QLC, gives our customers the greatest flexibility to support a wide range of performance features and sourcing requirements. UFS 2.2 and 3.1 remain the largest portions of the smartphone market, and we expect this will continue through 2026. As UFS 4 expands from the high end to more mainstream handsets, our new 6-nanometer UFS 4 controller is well positioned to benefit from this growing adoption. We continue to receive positive feedback from our partners and are in qualification with multiple handset OEMs, flash makers, and module makers ahead of our expected product ramp in mid-2025. Our highly differentiated 2-channel solution supports the latest generation 3.6 gigabits per second I/O speed for 3D NAND, offering higher performance and lower-cost solutions that will be increasingly in high demand as UFS 4 adoption moves to mainstream smartphones. Compared to the current UFS 4 4-channel controllers in the market today that only support 1.6 gigabits per second and 2 gigabits per second I/O speed NAND, our solution requires less complicated substrate, has lower power usage, better performance, higher signal integrity, and a lower overall BOM cost. One of the most important growth areas for our eMMC and UFS business involves QLC. I would like to update you on our project with our first customer. As we have discussed previously, we have been working directly with a handset customer to develop a QLC NAND memory solution for mobile smartphones. I'm pleased to report that our customer has already begun shipping handsets with our QLC UFS controller and will ramp more meaningfully next year as they expand QLC into additional models. We are in early discussions with additional Tier 1 handset OEMs for QLC solutions for mainstream to low-end smartphones to effectively increase density without significantly increasing costs. Flash makers continue to be resource constrained, but we are seeing them move their existing UFS controller development toward next-generation UFS 5.0 and opening new opportunities for outsourcing for mainstream solutions. We are confident that we can continue to grow our share in this market as our product roadmap and strategy align with our customers' internal plans. As the adoption of eMMC and UFS controllers grows, we believe our opportunity to gain share will accelerate. With our complete family of solutions and a growing customer base, we are well positioned for continued growth. Now I would like to turn to our MonTitan platform. MonTitan represents a significant opportunity for Silicon Motion, given the large addressable market and expected growth in QLC NAND within the enterprise storage and AI server market in the coming years. While we are newcomers in the enterprise market, our experience in QLC and TLC NAND, coupled with our dominant position as the leading merchant controller maker, have driven strong interest in MonTitan. We continue to see more inbound interest in our enterprise-class solution given our unique differentiation. We believe we are well positioned to scale with flash makers and storage solution enablers, as well as directly with data center and enterprise customers in the coming years. As we announced early this year, we have secured two initial Tier 1 customers that will receive initial orders this quarter, and we expect to announce two additional design wins by the end of this year. MonTitan has several advantages that we believe put us in an excellent position to grow significant share in this market and allow us to achieve our target of generating 5% to 10% of our overall revenue from this business by calendar 2026 to 2027. Some of these advantages include our unmatched experience managing QLC NAND, a flexible ramp-up approach, our unique architecture, high-capacity capability, and leading performance. With MonTitan, customers can choose either our turnkey firmware solution or they can develop their own firmware using our SDK. Most of our competitors only offer one or the other option, but not both. We also offer unique capabilities, including performance shaping, which allows on-the-fly adjustment targeting either battery read performance, write performance, or lower power, while our competitors require a one-time setup without the ability to change dynamically. MonTitan also includes the upcoming 2-terabit mono-die QLC NAND, the ability to deliver 128-terabyte SSDs that will be ideally suited for AI servers and applications. Finally, MonTitan has delivered best-in-class random read of 3.5 million IOPS, significantly better than most other options that are limited to 2.8 million to 3.0 million IOPS. This performance delivers faster training in AI applications, saves power, and lowers the total cost of ownership. We continue to achieve both our internal milestones and our customer milestones regarding the introduction of MonTitan. We are on track to begin early production in the current quarter and ramp up more meaningfully in the second half of calendar 2025. It is becoming increasingly clear from customer feedback that our MonTitan solution will be a key addition to next-generation data center and storage build-out plans, especially for delivering faster and more accurate AI capabilities to the market. As we have mentioned on previous calls, given our record of managing more QLC NAND than anyone over the past decade, we believe that this new product platform will drive multiple years of growth for Silicon Motion. Overall, despite the near-term headwinds in the retail SSD aftermarket and the expectation of muted holiday sales this year, I'm pleased with our strong execution in 2024 and the meaningful wins and pipeline our team has delivered. Looking forward to 2025, we have much to be excited about with the new product transition, including PCIe Gen5, UFS 4, and our new enterprise-class MonTitan, which opens multiple new avenues for growth for Silicon Motion. Additionally, we continue to diversify our end markets beyond the PC and smartphone segments, with many new exciting growth opportunities in automotive, industrial, commercial, IoT, game consoles, and other markets. I believe this new product pipeline and design win will help Silicon Motion grow in 2025, and I look forward to sharing more about our progress in future updates. Now let me turn the call over to Jason to go over our financial results and outlook.

Thank you, Wallace, and good morning to everyone joining us today. I will discuss additional details of our third quarter results and then provide our guidance for the fourth quarter. 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 September quarter, sales increased 23% year-over-year to $212.4 million. SSD controller sales were approximately flat sequentially in Q3 '24 as our continued share gains were offset by weakness in SSD aftermarket sales and lower-than-expected holiday ramps from the PC OEMs. The weakness was exacerbated by continued inflationary pressure, high NAND flash prices, and a modest slowdown ahead of next-generation Intel, AMD, and Qualcomm platforms that support PCIe 5. eMMC controller sales were up slightly in Q3 '24 and up over 44% year-over-year, as our diversification strategy continues to work, with NAND makers, module makers, and handset OEMs directly driving strong growth. Gross margin increased for the sixth consecutive quarter to 46.8%, as we continue to benefit from improving product mix as we shift our customers to newer solutions. Operating expenses were $65.1 million in the September quarter, up from $62.1 million in the June quarter. The increase, as we discussed in our last call, was attributable to the expected tape-out expense for our new 6-nanometer 4-channel client PCIe Gen5 SSD controller, which is targeting introduction in early 2026. This ramp of this product is timed to coincide with PCIe 5 entering the mainstream PC market and can benefit from significant unit volume scaling. Operating margin was 16.1% in Q3 '24, down slightly from 16.5% in the June quarter given the PCIe 5 4-channel tape-out. Earnings per ADS was $0.92, down 5% sequentially due to the tape-out, but up over 46% year-over-year. Total stock-based compensation, which we exclude from non-GAAP results, was $3.7 million in Q3 '24. We had $368.6 million of cash, cash equivalents, restricted cash, and short-term investments at the end of the third quarter compared to $343.6 million at the end of the second quarter. Inventories decreased from $240.8 million at the end of the second quarter to $214.6 million at the end of the third quarter, a reduction of over 11%. Now let me turn to our outlook. As Wallace described earlier in the conference call, demand for retail aftermarket SSDs remains weak. Additionally, expected holiday PC and smartphone sales are muted, leading to lower than seasonal order patterns from OEMs and module makers in the current quarter. Despite near-term weakness, our increased OEM share gains will allow us to achieve our full-year 2024 guidance that we had raised earlier this year. We do expect current weakness to be short-lived as we are introducing a number of new products, including our new client PCIe 5 8-channel SSD controller and our MonTitan enterprise SSD controller, both in the current quarter, and our UFS 4.1 controller in the second half of next year. We have already secured significant wins and design momentum with these new products that will drive additional share gains in our existing markets and open up new greenfield growth opportunities in the enterprise storage market that will scale over the next few years. For the fourth quarter, we expect revenue to be down 5% to 10% sequentially, to be in the range of $191 million to $202 million, driven by weaker-than-seasonal smartphone and PC sales and continuing weakness in the SSD aftermarket. Gross margin is expected to be 46.5% to 47.5%, driven by continuing improvement in our mix towards newer products. Operating margin is expected to be in the range of 15.6% to 16.6% as operating expenses are expected to decline due to better expense control as well as no additional 6-nanometer tape-out this quarter. The fourth quarter effective tax rate should be approximately 18%. Fourth quarter stock-based compensation and dispute-related expenses are expected in the range of $13.4 million to $14.4 million. Despite the near-term weakness in the end markets, our increasing share of controller outsourcing is expected to drive significantly better than end market demand growth next year. As Wallace mentioned, we are in a better position for growth today than at any other time in our history. I am pleased with the progress our team has made this year in securing new opportunities that will be the foundation of strong growth for years to come. This concludes our prepared remarks. We will now open the call for your questions.

Our first question comes from Mehdi Hosseini from SIG.

Yes. I want to look into early '25. And what gives you confidence that this kind of weakness that you're experiencing in Q4 is not going to sustain into early '25, especially since Q1 is typically a weak seasonally driven period? And I have a follow-up.

I think our current position, and our design pipeline, we are definitely confident to grow in 2025. But regarding the latest retail weak demand due to inflation, high NAND prices, and multiple reasons, we cannot guarantee whether Q1 will recover. However, we do see more meaningful progress from module customers, including industrial customers, who believe that from late Q1 or early Q2, end customers will start to do more bookings. So I think it's more challenging. We also see the PC cycle refresh and demand, and our smartphone customers are starting to have multiple new programs coming. So this is more exciting. We believe the worst situation will be gone, and we should look for a more exciting 2025.

Great. And one follow-up for you, Wallace. You're very excited about the new products that you highlighted in the prepared remarks. But as it relates to capital return, I feel like we have been here before. The stock is near 2x book. More than 1/3 of your book is liquid cash. And I understand you may not be a fan of buybacks. But why not step up and increase the cash dividend to illustrate how confident you are with all of these new products that you highlighted?

I think, as you know, our share repurchase program has always been opportunistic. Our Board also always evaluates when we should do share buybacks and how we return cash to shareholders fairly. This is very, very important. The strategy behind our dividend amount has always been to set it at a level that is comfortably affordable, and we'll continue to evaluate it going forward. As you know, we might still have legal expenses to pay, and there’s still a certain time to go. That's why we try to maintain our position and focus on growing the business.

Our next question comes from Craig Ellis from B. Riley Securities.

Yes. Wallace, thank you very much for all the details in your prepared remarks around what you see next year. What I wanted to do is see if you could give us more of a high-level summary view of what it all adds up to as we look at PCIe Gen5 coming in with its higher ASPs and higher margins, UFS 4 coming in, in the back half of the year, MonTitan after initial shipments in the fourth quarter, sounding like it's ramping up in the back half of the year, and then the strength you're seeing in the automotive market and eMMC. As you look at what's happening, one, do you feel like in the core PC SSD and UFS markets, you're tracking to another year of 500 basis points of share gain as we targeted for this year? And secondly, is there a way you could quantify the level of growth we could get next year? Are we looking at a mid-single-digit year-on-year growth, high single digits? Help us understand what all this adds up to.

Thank you, but you have a pretty big question. So let me just answer the products one by one, especially for the PCIe Gen5 8-channel controller. We are in a unique position today to launch the PCIe Gen5 8-channel high-end controller with DRAM. We have won four major NAND flash makers. We have almost won every module maker today. For PCIe Gen5 high-end next year, we are going to ramp in alignment with the Intel, AMD, and the CPU and chipset by late Q1 and early Q2 for notebooks. Initially, I think this will take about 5% to 10%. The high-end will be overall 10% to 15% above the market. We believe when it reaches the fully 10% to 15%, we should own a minimum 50% to 60% of high-end market share by 2026. So this is a very exciting revenue growth for us opportunity for top line and bottom line because we never had a high-end PC market before. Second, regarding UFS 4. This is also a very unique product we launched, targeting to launch with one NAND maker in the middle of next year, and this will be high-end. We are going to launch in early 2026 with another NAND maker at the high-end. The majority of the current NAND makers with UFS 4 is a 4-channel legacy controller that only supports the NAND interface to go to 1.6 gigabits per second to 2 gigabits per second per NAND, which is very limited. You can see our mainstream 2-channel UFS controller with 6-nanometer is much more compelling and positioned than the NAND maker’s existing solutions. We believe the majority will come back to SMI, even though we only have 2 committed customers to ramp in the next year. So this is a very exciting product we launched. We support up to 300-plus stack new NAND for TLC and QLC. So we're ready to grab the market and grow. In addition to MonTitan, our current sales revenue forecast from 2026 to 2027 to become 10% of total revenue is based on just two Tier 1 customers. We have confidence to ramp because the Tier 1 customer in China will have multiple end customers to grow. This is a very, very exciting program. We see we're going to win two more Tier 1 customers, and we have multiple Tier 2 customers using our ecosystem for MonTitan because our technology provides high-density QLC base with FDP firmware that will be ideal for AI servers and AI data centers. Many customers have approached us, and we are really short on resources. We are not able to handle all the needs. We believe through product maturity and firmware, we will be able to begin the initial ramp this quarter. I think the second half of 2025 will provide meaningful revenue, and we have confidence to reach 10% by 2026 or 2027 of our total revenue.

And Craig, in terms of guidance for next year, it's a bit early. Obviously, we normally put that out on our next earnings call when we report our fourth quarter results. So stay tuned for that. But as Wallace pointed out, there are a number of new products and new opportunities that we're scaling, which we are really confident about for next year.

Yes, regarding automotive, automotive today accounts for about 5% of our total revenue, but we have confidence to grow to 10% by late 2026 or early 2027. Pricing has been very challenging this year; we have not aggressively pursued any designs because margins have been very low. But we continue to develop new products and win over new NAND makers alongside our Ferri product line. We believe next year, we are going to launch with the Toyota global model, which will bring meaningful revenue with company growth, and we have multiple new projects to announce in the second half of next year, so please wait and see.

And that sounds very encouraging, Wallace. And I get the point on the specific guidance, Jason. I'm hoping that you could help us on a 2025 set of items related to gross margins. Without providing guidance, can you just talk about some of the gives and takes with gross margins? Clearly, there's a lot happening with new products that should be a tailwind. Are there any pressures we need to be aware of in OpEx? Help us level set with what we should expect with mask set cost intensity versus 2024? And do you expect to increase R&D intensity in areas like enterprise SSD just given the demand you're seeing?

Yes, we expect our gross margins to get back to historical levels of 48% to 50% by early next year. We're still on track for that. We have a good mix with PCIe 5 on the client side, higher ASPs, and higher gross margins, as well as MonTitan on the enterprise side, which also has much higher ASPs and margins. As these continue to become bigger portions of revenue, we could see that being additive to our overall gross margin picture in the long term. In terms of OpEx, we are planning to have two more advanced controller tape-outs for next year, and we expect that to maintain a steady state from where we are this year. We taped out two 6-nanometer controllers this year. We expect to tape out an equivalent number next year. So I think from an OpEx standpoint, we expect some inflationary growth in wages and headcount, but also maintaining the same level of tape-out activity for next year.

Our next question comes from Suji Desilva from ROTH Capital.

So on the client side, the PCIe 5 wins on any of four flash makers, are those ramps going to be staggered? Or are they all hitting in a timeframe where the new PC processors are available to support PCIe 5?

For PC OEMs, they definitely align with the PC OEM requirement. For retail, two of them have a retail business, so they're going to start to ramp by late this year and Q1 next year. It depends on retail demand. I think by 2026, they're going to reach a maximum around 15% level. However, we do see we might have an opportunity to gain more customers, with one more NAND maker in the high-end by late next year. So hopefully, we can hit a home run with the 6-nanometer, given the very great power efficiency and data efficiency to transition into mainstream notebooks.

Okay. And then on the MonTitan side, I'm curious, the use of QLC, is that, Wallace, by application workload or is it across the board opportunities? And are the customers initially going for their own firmware or more using Silicon Motion's turnkey? I'm curious which direction they're going initially.

You have a very good question. I think one of the Tier 1 customers has developed their firmware themselves. One of the other Tier 1 is kind of a joint development firmware. This is an attempt to accelerate time to market. We do see some OEMs prefer developing their own firmware, while others more favor turnkey, especially for time to market. For the AI data space, as you know there are four major stages, right? Like ingest to collect all the data, then go to preposition, which we call transformation, to tokenize and change for it to become AI GPU recognized language, and then the third stage goes to training, and the fourth stage goes to inference. During the process, because of MonTitan, our data shipping, program shipping, and power shipping technologies are ideal for customers to adjust when they want to reach the highest performance or reduce the overall power and improve power efficiency. So this is very attractive for our customers because it's very unique. We believe with FDP and QLC we can make the high-density SSD drive more interesting and valuable.

Next question comes from Matt Bryson from Wedbush Securities.

Jason, congrats on formalizing the role as CFO. I guess my first question is just looking at the QLC solution that you're shipping to a handset vendor. It's a slightly different path to market than we've typically seen, where normally you work with fabs and module makers. Is that something that you see becoming more common going forward where you're working with OEMs directly?

I think, as you know, smartphones have predominantly been using TLC NAND for memory solutions. But AI-at-the-edge is driving higher density demand for low- to high-end smartphone platforms. I think QLC is much more attractive because it provides higher density, but the cost can be managed meaningfully. That's why it attracts many smartphone makers that want to provide higher density storage without significantly increasing the cost. This is the motivation for them. The reason to work with the controller directly, instead of going to the NAND maker, is that a top 5 smartphone maker is choosing Silicon Motion to collaborate with us to conduct all the field tests and figure out all the issues to maintain the know-how within their company. They prefer to keep the know-how and decide on their expansions next year. We are very, very happy to have the opportunity to engage with this smartphone maker. I believe we’re going to have a second smartphone maker engaging in 2025. This helps us gain more knowledge on how to transition from QLC moving to smartphone storage and primary storage and increase the density while adding value to smartphone makers.

Just following up on Mehdi's question regarding Q1 seasonality. I mean, if you're not seeing the typical pickup into the holiday season, then shouldn't we expect the downtick in Q1 would also be muted, simply because you're coming off a higher comp? And then just with inventories being worked down within the client OEMs, shouldn't we also expect that you'll see a bump back up in demand when that process is completed sometime in the first half, I think you said?

I can only say that, as of today, the outlook for retail consumer electronic products is really weak, and the visibility is low because we are going to launch several new products, especially PCIe Gen5, which could change the dynamics in both retail and the PC OEM markets. That’s why I think it's too early to comment on the Q1 outlook, but I think we're focused on Q4. However, we are more optimistic about Q1 regarding whether it will be like conventional seasonally weak Q1; we might have a broader opportunity to sustain the growth.

Awesome. And just one more for me. In terms of gross margins, you're still running a little bit below what had been normal gross margins. Should we still expect that you get back to the roughly 50% or just below 50% range in 2025? And I guess, structurally, it sounds like you have a lot of opportunities to move into higher gross margin areas. Do you foresee in the future potentially being able to be above that kind of historic norm given those opportunities?

Yes, Matt. Our historic norm is 48% to 50%. We do anticipate getting back there in early next year. Regarding going above and beyond that, obviously with more enterprise and higher-end products ramping, there is an opportunity for that long term, but it's too early to say how that shapes up.

Our goal is definitely to reach back to 50% before the end of 2025. However, I think there are factors like seasonality and business strategy that play a role, given the mix of low-end and high-end products. Overall, though, I think the direction and the goal won't change.

It appears there are no further questions at this time. I'd like to hand the call back to Wallace for closing remarks.

Thank you, everyone, for joining us today and for your continuing interest in Silicon Motion. We will be attending several investor conferences over the next few months. The schedule of these events will be posted in the Investor Relations section of our corporate website, and I look forward to speaking with you at these events. Thank you, everyone, for joining us today. Goodbye for now.

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