Good day, and thank you for joining us. Welcome to the Silicon Motion Technology Corporation's Q2 2025 Earnings Conference Call. This call contains forward-looking statements as defined by relevant securities laws. These statements may include projections regarding trends in the semiconductor industry, as well as our future performance, financial health, and business opportunities. While we believe the information we provide is reliable, you should not place excessive reliance on these statements. They carry risks and uncertainties, meaning that actual market conditions and our performance may vary significantly from what we discuss. Risks include ongoing competitive pressure within the semiconductor sector and its impact on pricing, unpredictable shifts in technology and consumer demand for multimedia electronics, our relationships with key customers, and changes in the political, economic, legal, and social landscape in Taiwan. For more detailed discussions on these risks and other factors, please refer to our filings with the Securities and Exchange Commission. We do not undertake any obligation to update these forward-looking statements, which are valid only as of the date of this conference call. Please note that today’s call is being recorded. I will now hand the conference over to Mr. Tom Sepenzis, Senior Director of IR and Strategy. Thank you. Please proceed.

Good morning, everyone, and welcome to Silicon Motion's Second Quarter 2025 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 second 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 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. With that, I will turn the call over to Wallace.

Thank you, Tom. Hello, everyone, and thank you for joining us today. I'm pleased to report that we exceeded our revenue and operational margin guidance for the second quarter that we further benefited from the introduction of new controller that drives higher market share, and our continuing expansion and growth into new markets. As we further scale and shift to high-end UFS PCIe controllers, and grow our automotive and MonTitan products in the second half of this year. We expect our revenue growth to remain strong and profitability to further improve. We are excited by the progress and foundation for growth we are building. And based on our backlog diversification strategy and design win momentum, we are well positioned for a strong second half, and remain confident that we will exit the year with our target of a $1 billion revenue run rate. Let me start by discussing our view of the broader NAND flash environment, and how it's positively affecting our business today and opening new opportunity longer term as well. The NAND industry experienced improvement in the second quarter, with flash prices increasing as the inventory level in the PC and smartphone market declined further, given a modestly better demand environment. Enterprise storage demand remained strong in the quarter with AI expanding into nearly every industry. NAND flash makers have reduced capital expenditures for big growth and continue to increase prices as enterprise and AI growth are limiting NAND supply. Our module maker partners continue to build inventory ahead of an expected increase in NAND prices in the second half of 2025. We will remain flexible and are very well positioned with both NAND flash makers and module makers to fulfill their growing requirement. With NAND prices as expected to increase demand for more cost-effective QLC NAND expanding in clients SSD, smartphones and enterprise storage increasing QLC production is a lower-cost way to rapidly grow for flash makers, while QLC-based solutions deliver high-density storage at a significantly lower cost. We are the only controller company partnered with all flash makers, giving us a significant advantage and insight into current and future NAND technologies. We believe this partnership and our unmatched experience in managing QLC NAND will allow us to maintain our industry leadership and drive long-term sustainable revenue and earnings growth for many years. In addition, the demand for memory and storage solutions expands into new end markets in consumer, commercial, industrial, automotive and enterprise. Memory makers are constrained in where they allocate R&D resources and capital resources between NAND, HBM and DRAM. The demand from each of these markets continues to rise, and as the new generation of NAND evolves, the need for next-generation controllers for these different applications is expanding. Our flash maker partners are turning to Silicon Motion as their primary merchant supplier to help build comprehensive portfolios, expanding our market share and building the foundation for strong multiyear growth with an increasingly diversified range of products and end markets. Now, let me share some updates for each of our business segments, beginning with eMMC and UFS. Our mobile business significantly outperformed our expectation in the second quarter, as we benefited from several positive trends for our eMMC and UFS controllers. We continue to see strong booking momentum from both flash maker and module maker customers entering the second half of the year. Module makers, in particular, are experiencing strong growth in mobile as they are benefiting from the trend towards discrete eMMC and UFS solutions, driven by the increasing availability of low-cost mobile DRAM. Flash makers have also adopted our controllers as they continue to embrace outsourcing to stay competitive, improve their time to market, and prioritize their own internal R&D resources for other technologies and end markets. Our family of UFS controllers for smartphones and other mobile and IoT devices grew meaningfully in the quarter as demand from both our flash maker and module maker customers accelerated, driven by strong end market demand. The increasing share of UFS in smartphones is driving stronger demand for our new high ASP UFS controllers in mainstream and high-end devices. In addition, our new engagement with handset OEMs for QLC UFS solutions are also expanding and diversifying our market penetration. We expect this trend to continue in the second half of this year. For eMMC, our increasing share and robust demand in the quarter also delivered strong sequential growth for our controllers. Demand is accelerating in multiple existing and emerging markets, including IoT, smartwatches, smart TVs, set-top boxes and emerging consumer products such as AI glasses. The market for eMMC accounts for over 800 million units per year and the non-smartphone market accounts for much of this market. We believe our eMMC business will remain a strong contributor for many years to come as these additional markets further scale. Now, I would like to move on to our SSD business. The PC market appeared to be bottomed out in the first quarter of 2025 and stabilized in the second quarter. We believe that market will grow in the low single digits in 2025, and we are expecting a stronger second half, given typical seasonality, which benefits from back-to-school and holiday sales. This year, we'll also see further benefit from some setting of Windows 10 in October, and we are beginning to see more widespread adoption of AI as Edge in consumer and commercial PCs, which is increasing demand for high-performance solutions, including SSDs powered by our PCIe5 controllers. As we have discussed previously, we expect to drive significant market share gains in client SSD over the next few years, especially in the high end, driven by our leading position in PCIe5. Sales of our 8-channel controllers launched in December of last year continued to grow quickly in the second quarter, increasing by more than 75% sequentially and already account for more than 10% of our client SSD controller revenue driven by strong share gains and higher ASP. We expect additional momentum with our PCIe5 controllers throughout this year as OEMs increase sales at the high end. Additionally, we will start initial ramp of our 4-channel DRAM-less PCIe5 controllers at the end of this year and have already won design wins with 4 of 6 flash makers and nearly all the module makers. This new controller will target the broader segment of PC and aftermarket SSD sales, and we believe that this introduction will help us achieve 40% of the SSD market by 2028, up from 30% today. I will now provide an update to our automotive and other business. As I mentioned earlier, we continue to experience tremendous design win activity in our Automotive segment. Vehicle capacity is increasing with a growing demand for high-speed and low-latency storage. We support automotive storage needed across nearly all our product lines, including PCIe, eMMC, and UFS. We were the first company to achieve ASPICE Level 3 certification for our PCIe4 solution, and we are on track to tape out our new automotive PCIe5 controller in 2026. Demand for more storage solutions is increasing in conventional cars as well as with next-generation electrical vehicle makers. Our controllers power increased storage density, speed, and reliability for diverse needs including smart cockpit, ADAS sensors, cameras, navigation and other applications. We are now seeing increased demand for storage solutions to support AI and multiscreen integration to help automakers drive differentiation and customer loyalty. We are currently shipping to many of the largest automotive brands in the business, including Mercedes, Tesla, BYD, Xiaomi, Toyota, Honda and many others. As we enter the second half, we are seeing greater-than-expected demand from our partners in China as brands are successfully taking worldwide market share for low-cost automobiles and leading electrical vehicles. Given the strength in China and increasing design win activity globally, we are increasingly confident that automotive will account for at least 10% of our revenue by 2026 to '27. During the second quarter, we also experienced strong growth in our memory card business due to the highly successful launch of Nintendo Switch 2. We started ramping with the leading South Korean flash maker with direct attach to the Switch 2 games as well as partnering with leading brands like ADATA and Knowles for retail expandable storage with PCIe SSD level performance in a microSD form factor. For the first half of 2025, our memory card revenue more than doubled year-over-year, and we expect to see continued success in the second half of the year as the Switch 2 demand remains robust and as we enter the holiday season. The SM270A delivers the high-density, high-speed required by modern portable gaming devices, and we are pursuing other opportunities with this exceptional controller to drive diversified long-term growth. Finally, I would like to provide highlights on our enterprise business. Both memory and storage needs are evolving rapidly in the AI era, and the opportunity for Silicon Motion are expanding. AI application requires access to data more quickly, driving increased adoption of SSD throughout the data center. The current infrastructure comprises high-performance memory, near GPU storage, compute storage, warm storage and cold storage. Our MonTitan platform is ideally suited to manage high-density, high-performance SSD that are both cost-effective and power-efficient to serve the warm storage market with our leading controller when paired with QLC NAND. The warm storage market has traditionally been served by HDD, but storage performance requirements have increased due to AI application and the price disparity between HDD and QLC SSD converge. We expect more hyperscalers and CSPs will adopt high-capacity QLC eSSD for warm storage, while near-line HDD moves to support the growing cold storage need. Recently, we have been receiving interest from customers to expand beyond warm storage into compute storage market with our MonTitan. The new product will pair MonTitan with up to 16 terabytes of TLC NAND to target the high-performance near CPU market and represent an exciting new opportunity for MonTitan. Longer term, we are also beginning to work with our industry and flash maker partners to support the development of a new JEDEC standard for near-line flash that will likely come to market in the next 3 to 5 years to further drive adoption of SSD in one storage application, especially as the need to access more data more quickly grows with AI. The near-line flash requirement will allow for more relaxed specifications for QLC with lower cost driven by higher yield. This should drive even greater adoption of QLC NAND in one storage and, by extension, should create a bigger market opportunity for MonTitan. At the upcoming FMS conference next week, we will be cohosting a demo with VAST Data to demonstrate how our MonTitan SSD can deliver a compelling solution for the insatiable growth in AI application. The collaboration will showcase the VAST DATA storage class memory for its new Seres V2 platform, which leverages NVIDIA BlueField-3 DPU platform for AI storage. The Seres intelligent story platform is used by system integrators and architects and deployed at hundreds of large enterprises around the world, including banks, data centers, retailers, multinational conglomerates and other leading companies that are leveraging or are developing AI applications. We invite you to join us at FMS to see how our MonTitan solution will drive the next wave of AI solutions for the next several years. In conclusion, the second quarter of 2025 has delivered a significant rebound in our business, and we are beginning to see returns on the investments we have made over the past few years. This includes our leading 6-nanometer product, our new UFS and PCIe5 controllers, our new MonTitan eSSD, and boost storage solutions. Our market-leading automotive portfolio and our new microSD product for multiple applications, including Nintendo Switch 2. We are in a better position to expand our market share across each of our markets in 2025 than ever before, but we continue to capture additional share with the flash makers across our product portfolio. Given the current customer demand in our legacy business and the growing success with our new products, I'm increasingly confident that we will achieve our goal of exiting 2025 at a $1 billion revenue run rate and grow further in 2026.

Thank you, Wallace, and good morning, everyone, for joining us today. I will discuss additional details of our second quarter results and then provide our outlook. Please note that my comments today will focus primarily on our non-GAAP results unless specifically noted. A reconciliation of our GAAP to non-GAAP data is included with the earnings release issued yesterday. In the June quarter, sales increased 19.3% sequentially to $198.7 million, coming in well above the high end of our guided range as we experienced a strong rebound in mobile demand and strong growth in our PCIe5 client SSD business. Gross margin was at the higher end of our guidance range and increased again in the quarter to 47.7% as we continue to capitalize on new product introductions and improving mix. Operating expenses increased sequentially to $69.3 million as we continue to invest in new enterprise storage products and as additional resources to support our significant pipeline of new projects. Higher operating expenses in the second quarter were also impacted by the stronger Taiwan dollar as most of our compensation expenses are paid in Taiwan dollars. Operating margin increased sequentially to 12.8%, well above our guided range, resulting from improved gross margins and higher-than-expected revenues during the quarter. Our earnings per ADS were $0.69. Total stock-based compensation, which we exclude from non-GAAP results, was $0.2 million in the second quarter. We had $282.3 million cash, cash equivalents, and restricted cash at the end of the second quarter compared to $331.7 million at the end of the first quarter of 2025. Flash cash declined in the second quarter, primarily from the combination of the dividend payout of $16.7 million and an increase in inventory to support our expected strong business ramp. We did not repurchase any shares in the second quarter. Our team executed well and delivered significant outperformance despite ongoing global macro uncertainty and continuing investments in new advanced geometry products and our MonTitan platform for the enterprise and AI markets. Now, I'll discuss our third quarter outlook. Revenue is expected to increase 10% to 15% to $219 million to $228 million, driven by growth across all segments of our business as newer products continue to ramp in PCIe5, UFS, eMMC and the enterprise. Gross margins are expected to be in the range of 48% to 49% as we continue to transition customers to newer platforms, and we return back to our historical range. Operating margin is expected to be in the range of 12.3% to 14.3% as we benefit from higher revenue and gross margins, partially offset by higher operating expenses from higher R&D development and headcount expense and the continuing strength of the Taiwan dollar. Our effective tax rate is expected to be approximately 18%. Stock-based compensation and dispute-related expenses are expected to be in the range of $6.5 million to $7.5 million. For the full year, PC and smartphone growth targets remain in the low to mid-single-digit range with an above-average second half weighting. We believe that our business will reflect the broader industry with significant growth expected in the second half, driven by the strong ramp of new products and project wins. We continue to target an annual revenue run rate of approximately $1 billion as we exit the year. We expect to continue to improve gross margins as new products scale and our enterprise business begins to ramp in the second half of the year. We remain confident that we can drive gross margins toward the higher end of the historical range of 48% to 50% by the end of this year. Our pipeline of new design wins continues to grow and we are committed to investing in next-generation, advanced geometry products that allow us to enhance our market share and business long term and help us diversify our product portfolio and enter new markets. We will also continue to add additional R&D resources to address the growing range of customer projects that will drive long-term growth. Despite these higher investments, we're confident that we can return to our historical operating margin range of 25% plus in the midterm as the investments we have made over the past 18 months begin to scale and drive stronger revenue growth, better gross profitability and improve our operating profit. Our overall tax rate is expected to be approximately 15% for the full year and stock-based compensation and dispute-related expenses will be in the range of $32 million to $34 million. As we enter the second half, our pipeline of new projects continues to build and position us for strong growth for the rest of this year and into 2026 and beyond. The investments we have made in client SSD and eMMC and UFS controllers are beginning to scale, driving better ASPs and higher margins. The momentum behind our enterprise business driven by strong progress in our MonTitan development and expanding opportunities in enterprise boot drives will deliver a new avenue of high-margin growth for the company in the longer term. We're confident that our leading controller products paired with our unmatched customer relationships with all the flash makers and virtually every module maker will drive significant long-term revenue and profitability growth for the company. This concludes our prepared remarks. We'll now open the call to questions from the investment community. Operator, please go ahead with the first question.

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

Congratulations on a very strong quarter of execution and the momentum you have here at midyear. I wanted to start with a clarification question on some of your operating expense comments, Jason. So, we've all seen that there's been exchange rate fluctuations at unusual degrees as we've gone through the last three months and before we stand here early in the third quarter. I'm wondering if you can quantify what the new Taiwan dollar exchange impact was to 2Q and 3Q expenses versus the impact of some of the growth-related R&D expenses that you also talked about, just to help us calibrate the currency dynamic in the middle of the income statement.

Yes. The NT dollar strengthened meaningfully and quickly in the second quarter, and it was up by over 10% sequentially. So, while our revenue, cost of goods sold and most of our development costs are all denominated in U.S. dollars, our compensation is primarily denominated in Taiwan dollars, given that the majority of our employees are based here in Taiwan. And if the Taiwan dollar and the U.S. dollar exchange rate stayed stable, assuming we state similar exchange rates to what we saw in Q1, our operating margin in the second quarter and for our outlook would have been about 1-plus percentage points higher than what we had reported for the second quarter and what we're guiding to in the third quarter.

Absolutely. The second question is for Wallace. Wallace, you're clearly seeing robust engagement on the enterprise side of the business. And I'm hoping you can talk about this year's exit momentum along three parameters with respect to Enterprise: One, what's happening with the initial customer ramps with MonTitan 2? Can you update us on the status of the NVIDIA BlueField DPU program and what you'd expect exiting the fourth quarter? And then we've just seen great engagement from the supply chain pulling in your PCIe Gen 5 controllers into lower-end, more efficient AI-related scale-up, scale-out configurations. Just help us understand what you see there and what all that means as we look to 2026.

Let me address the MonTitan status. I think the MonTitan's design momentum is very strong. Now, we believe we're going to start the initial ramp in the fourth quarter, and will be more meaningful than strong momentum in 2026. So, we have four Tier 1 customers for other designs. Actually, we have more coming, but we just don't have enough resources to supply. The most important is known number of customers because each of these customers need some custom-made tailored firmware to meet certain categories and workloads. So, we are focused on delivering the robust finalized firmware and expect production in late this year. So, I think the momentum is coming, but also with both QLC high-capacity enterprise SSD, as well as the TLC base for compute storage. Now, let me address the NVIDIA BlueField. See, NVIDIA qualification is in the final stage. We believe we will enter production in Q4. Actually, frankly, the solution we have, our controller and firmware, we have been engaged with NVIDIA for the past two years with other NAND makers, which we cannot disclose. So, this is a transition naturally we're winning with our own solution with different NAND types to supply for the long term. But we believe this is helping us to grow in 2026 and '27. In addition, they also opened the door for us to engage with NVIDIA in other business units and product lines. So, this is very great for us to be in NVIDIA's supply chain. And hopefully, that will expand much more opportunity in the future.

Allow me to move on to the next question from Mehdi Hosseini from SIG.

The first one for Wallace. Congrats on increasing the annual revenue run rate. I see there's about a $55 million incremental revenue increase from Q4 '24 to Q4 '25. And I'm assuming the majority of this is driven by the new PCIe projects. As I look into next year, let's say, Q4 of '26, this is where I think BlueField is going to kick in and add incremental revenue. So, you have a baseline of Q4 '24 and then you overlay $55 million of the new products, especially driven by storage, and then the BlueField would drive or sustain that growth into Q4 of '26. Am I thinking about this transition the right way? Feel free to modify or improve that thought process.

Yes, Mehdi, it's Jason here. Regarding your comparison between the fourth quarter of 2024 and the fourth quarter of 2025, the additional revenue we're discussing stems from robust performance across various areas, including growing market share and new products in eMMC and UFS, as well as PCI, especially with PCIe5 for SSDs. This also includes the initial ramp-up of MonTitan products and BlueField. We haven't provided guidance for 2026 yet, so please be patient with us. I won't comment on how this will affect 2026. However, we do anticipate achieving a revenue growth rate of 5% to 10% with MonTitan in the 2026-2027 period. Nothing has changed in that regard. The strength we're building, the designs we've secured, and the growth pipeline we have continues to strengthen each day.

So, I think, let me add a comment. We have a very strong backlog in the second half of 2025. That's why we have confidence to reach our financial goal.

Okay. And then moving on to OpEx, there's a significant step-up in '25, as Jason highlighted, investment for future. Should I expect OpEx intensity to decline into '26 as the new product ramps and this is going to give you some OpEx leverage?

We expect to see operating margin leverage as our gross margins improve and revenue increases. We will continue to invest, and as Wallace mentioned, there are several new projects that we currently do not have enough resources to support, which we have to turn away. We plan to keep hiring and investing in new projects set to tape-out next year, particularly in the enterprise sector and advanced geometry. These investments will have long-term benefits, and we believe you will see operating margin leverage. Many of the investments made over the past two years are beginning to enter the market, and while they haven't scaled yet, they should significantly contribute to operating margin leverage going forward.

Our next question comes from Suji Desilva from ROTH Capital.

Curious with the trends you have in the revenues, whether the gross margin would continue to potentially expand above the target range given the automotive coming in, enterprise and some of these other areas, or whether we should think about there being offsets to that keeping it in the range intermediate term?

Yes, it really depends on the product mix and the specific quarter for certain products. With high volume, the margin tends to be slightly below our corporate average, while high-end products have better margins. I can't comment definitively right now, but we were above the upper end of our guidance margin and we will definitely meet our gross margin targets. I also believe we will see better results in 2026.

That's helpful. And then on the MonTitan firmware efforts and the customer efforts and the R&D you're investing, Jason, is there a point in time where you think you get on top of that? Or is that going to be a persistent challenge of sort of having to turn away programs? Or is there some kind of leverage after you do a few of these that you can pull that forward?

I believe that once we complete a few of these projects and successfully onboard a number of our customers, we will be able to offer a diverse array of firmware capabilities in the market. Some customers may prefer SDKs or hardware-only options to develop their own firmware, which will be relatively easy for us to support. However, those needing a full turnkey solution will necessitate more resources and support from us.

Our next question comes from Gokul Hariharan from JPMorgan.

Wallace, the first question is you seem to be sounding a lot more optimistic about the automotive engagements compared to maybe two quarters back. Could you talk a little bit about what is the incremental margin profile when it comes to automotive, both for gross margins as well as operating margins, given a lot of the R&D is fairly similar to what you do for client SSD controllers or client eMMC controllers? So, is there a meaningful operating leverage that we should expect as automotive starts to scale given it kind of just expands the scope of your revenue base on similar R&D?

All right. Let me try to address the automotive business. We feel more positive about our automotive business from the second quarter and moving to the second half of 2025 because through our design win pipeline, we also had a significant breakthrough in the China automotive market. As you know very well, China automotive is very competitive in pricing. I think, we found a very special way to position our value proposition to the leading customers like BYD and Xiaomi and several others. That's why we built a tremendous new pipeline and are moving into production from late '25 to 2026. Our major program in Toyota's global model will also start to ramp by late 2025. That's why we have a very, very strong momentum in automotive business. We are confident we will be above 10% of our total revenue from '26 to '27. Now, let me comment about enterprise and regarding the plan and roadmap. Our MonTitan today is 16 channel, the PGI Gen5 controller with performance shaping technology. We also tape out an 8-channel MonTitan, which is called 8388, and the product will be available by the end of this year. The U.S. has a demand for high-capacity enterprise SSD from 128 terabytes, and some even asked for 256 terabytes. But China also started a new momentum, asking for 64 terabytes from late this year to 2026. So our 8-channel lower-cost MonTitan, which perfectly fits the demand and provides decent performance as well as high capacity up to 128 terabytes. We will also develop our PCIe Gen 6 MonTitan family with TSMC 4-nanometer, which will tape out next year, and this will engage with at least 2 NAND makers in this program. So, this is very, very exciting. We're very busy. We built a design pipeline. We believe MonTitan will continue around and drive much bigger momentum beyond '26, '27.

Got it. Maybe one follow-up, Wallace there. I think you talked about potentially seeing some demand for the cold storage market as well for some of the AI data centers. Is there anything that you need to really change in your portfolio or the controller itself to address this market? Or is it kind of like an adjacency that you can address without too much change in the product?

No, the data storage today is primarily really one storage and some of the compute storage in conventional servers. I think for cold storage, we are looking at conventional near-line HDD. But I think Samsung has association with near-line flash and proposes to share as a standard, that's very interesting to drive a lower-cost QLC-based enterprise SSD to expand one data storage for SSD. I think we definitely will see that, and we absolutely will put a good effort to engage with that trend because that's a huge potential for the NAND makers and the data center for enterprise SSD opportunities.

Do you have any timing on when this could open up? Is it in the next couple of years that you think it will open up or will take longer than that?

I think all NAND makers are working together and looking for how to define the right specs, and definitely, the purpose is the performance has to be a little better than near-line HDD. And so, they can relax the specs and make sure the performance meets AI applications in one data storage. But the time frame, as I said, about a 3 to 5 years range.

Our next question comes from Matt Bryson from Wedbush.

I just have one question. If I consider your target of operating margins exceeding 25% and look at the current operating expense levels, even if I assume gross margins rise to the 50% or 51% range, with a historical revenue run rate of $300 million, that could increase if operating expenses continue to rise, which I believe you are indicating will happen.

Matt, you're breaking up. We can't hear you.

Let me know if this is better.

No.

I will jump out and try dialing in again.

Okay. Let me answer your previous first question. I think definitely, we have a higher operation expense because we increased R&D, and also we have a 6-nanometer tape-out. Next year, we also have a 4-nanometer tape-out with the 6-nanometer tape-out. So operating expense probably will increase slightly. But when we grow strongly in the top line of our revenue, that will help much faster for our operating margin. And so we're definitely looking forward to move back to 20%, 25% margin in late '26, and you will see even better margins moving to '27.

Our next question comes from the line of Nick Doyle from Needham & Co.

I'm trying to understand the strength in the mobile sector and its sustainability. You mentioned that the growth is driven by unit sales and market share gains. Is a significant portion of this tied to the dynamics of the Chinese domestic market that you've talked about before? How should we be considering that growth for next year, and do you see it as sustainable?

Okay. I think it's a very good question. We have a very specific strategy to grow our mobile controller for both eMMC and UFS. Of course, the China market and because of the affordable low-cost mobile DRAM available, that's why most of the smartphone makers they like to adopt discrete eMMC or UFS that help the module maker customers to expand quickly. And that's why when they expand quickly, I think that also will impact some NAND makers for the value line. So, NAND makers – for NAND makers also turn to Silicon Motion controllers because they do not want to develop in-house, that will utilize our solution quickly to the market and you can either sell the wafer to module makers or make a lower-cost solution to come in the market. That's why we grow very quickly for the value line and the mainstream for both eMMC and UFS. In addition, we see the NAND makers also looking for the next generation, for example, UFS 4.1 is in high end, but UFS 5.0 will move to the high end by late '26 and '27. So, the 4.1 becomes mainstream. So, the NAND makers, they don't have enough resources to develop new firmware going to the new NAND. So, they come to outsource to third party, and SMI is in the right position to capture the outsourcing opportunity. So, all this pipeline together, you see so many opportunities. Actually, we have so many projects in hand, we don't have the resources to take. This is what we see the momentum. And we definitely see we're growing the market share in the mobile sector and hopefully we can reach 30% within 2 years.

And if I understand correctly, it sounds a bit like this transition to the 4.1 in the mainstream could help the sustainability into next year. Maybe also asking a bit of a different way, I mean, you talked about the module maker inventory and how they're pulling in orders in almost fear of price hikes later in the year. I mean, how do their inventories compare to historical? Does that make you nervous at all in terms of the future mobile business?

We haven't observed significant demand pullback from our customers, especially after early Q2 when concerns about tariffs settled down. Customers typically plan ahead and adjust their inventory to accommodate potential NAND price increases. This proactive approach has resulted in a stable pipeline, with a current backlog of about six months. Consequently, we are confident in achieving our billion-dollar run rate by year-end.

At this time, we appear to have no more further questions. I'd like to hand the call back to management for closing.

Thank you, everyone, for joining today and for your continued interest in Silicon Motion. We will be attending the FMS conference in Santa Clara next week, as well as several investor conferences over the next few months. The schedule of these events will be posted in our Investor Relations section of our corporate website, and we look forward to speaking with you at the event. Thank you, everyone, for joining us today.

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