Operator
Good day, and thank you for standing by. Welcome to the Silicon Motion Technology Corporation Second Quarter 2026 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be question and answer session, at which time, if you wish to ask a question, you will need to press star 11 on your telephone keypad. Please be advised if today's conference is being recorded. This conference call contains forelooking 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 forelooking statements include without limitations statements regarding trends in the semiconductor industry and our future results of operations, financial condition, and business prospects. Although such statements are based on our own information and information from other sources, we believe to be reliable. You should not place undue reliance on them. These statements involve risks and uncertainties and actual market trends and our results may differ materially from those expressed or implied in these following statements for a variety of reasons. Potential risks and uncertainties include but are not limited to continued competitive pressure and the semiconductor industry and the effect of such pressure on prices, unpredictable changes in technology and consumer demand for multimedia consumer electronics, the state of and any change in our relationship with our major customers, and changes in political, economic, legal and social conditions in Taiwan. For additional discussion of this risk and uncertainties and other factors, please see the documents we filed from time to time with the Securities and Exchange Commission we assume no obligation to update any follow-up statements which apply only as update of this conference call. And with that I'll now hand you over to Mr. Tom Sabancis, Vice President of Investor Relations and Strategy. Please go ahead.
Good morning everyone and welcome to Silicon in motion to install in webcasts. And Jason Sattis. Wallace will first provide a review of our key business developments and then Jason will discuss following our prepared remarks. We would like to remind you of our State of Harbor policy which was read at the start involved in investing in our securities. Please refer to our filings with the U.S. security details on our financial results. On Form 6 will be available for replay in the investor relations section of our website. 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, and thank you for joining the call today. We deliver another outstanding quarter, achieving record revenue of $451 million and growth margin above 50%, driven by continued growth across our core markets. Stronger operation performance in Pre-ADS, reflecting our ongoing solution from the leading nanosite controller makers into a diversified supplier of controller and solution, spanning AI infrastructure to the edge. During the June quarter, we grew our embedded EMC UFS portfolio, delivered both sequential and year-over-year group games in HSD controllers, began the initial commercial ramp of our Mount Titan Antiby CD product, and posted strong growth in our ferrite for automotive and Antiby boot drive solution business. With expanding consumer market share and rapidly broadening suite of Antiby and AI controller and solution, our competitive position keeps threatening. We expect to deliver record revenue in 2026, up more than 100% year-over-year, setting the foundation for sustained growth in the years ahead. With the right product in the right market at the right time, we have never been better position to capitalize on the accelerating demand for intelligent storage from the data center. We would like to take a moment to address the current market environment. SuperCycle has a few significant demands for HBN, DRAM, NAND, and HDDs, driving substantial price increases over the past year, and creating mounting substrate and supply pressure across memory and storage technology. difficult to build an affordable consumer product, such as smartphone and PC, and supply back to reduce supply-demand gap. While the NAND environment will stay challenging through 2028, we have a clear path to delivery significant top- and bottom-line growth. Silicon Motion is in the early inning of a complete transformation to a diversified supplier of a NAND flight controller and infrastructure to the edge in demand. We will now discuss our embedded EMC and UFS business, which improve controller for smartphones. Business continues to thrive and grow significantly. Our paid income performance were driven primarily by market share gains, but NAND makers de-emphasize these market makers customers. across the many market where we sell our embedded EMC UFS, rising costs while we share gains. In strong results, the seed business improves sharing from PCIe-4 to PCIe-5 in fact in NAND with PCIe-4 SAD. Despite the slower pace of PCIe-5 transition, our 4-channel during the PCIe-5 controller Therefore, expect to further provide you with your production in the second quarter with two Tier 1 customers. Exceptional strong start to market using TLC NAND, which is in growing demand for high-speed leveraging Montitan to talk to this market, and will be ramping production throughout the remainder of Montitan solution TLC-based TLC NAND, High-capacity, one-star SD leveraging QLC NAND remains a larger transfer market for Untiton for long-term growth, and we expect the QLC-based solution well-being hyperscaler and CELC. The QLC and QLC Mountiton controller are ready in customer qualification and clear roll-out plan in the target this year, 27, and well-positioned to try a meaningful revenue growth and update of an enterprise boot drive storage business is NAND makers are leaving the demand. I think likely successors have the infrastructure. The market side chain supports three of the NAND makers are success in automotive and market. Conversation, the opportunity in robotics by boot drive storage business. We are fundamentally a much stronger company today than we were just a year ago. challenge. I'm extremely proud of our team for building a durable, diversified business and long relationship. I'm more confident than ever that we will deliver broad base. Turn the call to Jason to cover our financial performance.
Thank you, Wallace, and good morning to everyone 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 otherwise specifically noted. A reconciliation of our GAAPs and non-GAAP data is included in the earnings release issued yesterday. Our second quarter performance was even stronger than expected. Sales increased 32% sequentially and 127% year-on-year to $451 million, coming in well above the high end of our guided range of $393 to $411 million, delivering our third consecutive quarter record revenue. We experienced strong growth across all our businesses in the second quarter with standout growth in FairEye for automotive, enterprise boot drives, and embedded EMMC and UFS. Gross margin was 50.2%, exceeded our guided range of 48.5% to 49.5% as we capitalized on new product introductions. Operating expenses increased sequentially to $122.1 million, given increased investments in new controller and solution developments, new tape-out-related expenses, and higher headcount. Operating margin was 23.1% and exceeded our guided range of 21 to 22%, driven by higher than expected revenue and gross margins during the second quarter. Our earnings for ADS was $2.43. cents. Total stock-based compensation, which we exclude from non-GAAP results, was $3.4 million in the June quarter. We had $181.8 million in cash, cash equivalents, and restricted cash at the end of the second quarter, compared to $210.9 million at the end of the first quarter. Cash decreased in the second quarter through a combination of dividend payments of $16.9 million and an increase in inventories to support our growing business. We continue to navigate the memory and storage supply challenges effectively. Investments in new advanced geometry products for both our established markets and our emerging enterprise markets are ongoing, and we are building a balanced and resilient portfolio of products that target everything from AI infrastructure to the edge. These investments will continue throughout 2026 as we support the growing demand for our new enterprise portfolio and fuel our growing market share across our consumer portfolio. For the third quarter of 2026, we now expect revenue to grow 15% to 20% sequentially to $519 to $541 million. We expect growth across nearly all our product segments, led by Ferrari for Automotive, Enterprise Blue Drive Solutions, and our new Montyton Enterprise SSD controllers. Gross margins are expected to increase sequentially to 50% to 51% in the September quarter, given the product mix, assisted by greater contribution from Mount Titan and our PCI-E5 controllers. Operating margin is expected to grow substantially to 27.5% to 28.5% as strong revenue growth drives leverage to the bottom line. Our effective tax rate is expected to be 22%. Stock-based compensation and dispute-related expenses is expected to be in the range of $14.9 to $15.9 million. 2026 is on track to deliver record revenue for Silicon Motion, with Topline expected to more than double this year. While we continue to invest heavily in R&D this year to expand our portfolio with leading-edge solutions, we're confident that along with much higher revenue and improved gross profitability, our operating margins can exceed 30% exiting this year. We're navigating today's memory and storage supply constraints and elevated pricing with remarkable success, a direct result of the relationships we spent more than two decades building with NAND flashmakers. At the same time, our leadership in the merchant controller market and our multi-year investments in enterprise and AI SSDs are starting to pay off, with Montitan and our enterprise boot drive storage business now ramping in volume. Our diversification strategy to expand beyond consumer-centric applications into automotive and enterprise is beginning to yield outsized results. Our wins in these new markets are for solutions that bring much better visibility, much longer product cycles, and much higher barriers to entry that ensure strong long-term revenue and profitability growth for SiliconOcean. We will be less subject to consumer cyclicality as these new wins scale in a diverse range of end markets, and our visibility and predictability will further improve significantly. Together, these drivers are the foundation of the transformation Wallace spoke about earlier and will set the stage for significant revenue growth at Silicon Motion in 2026 and well beyond. I look forward to sharing more on our progress next quarter. This concludes our prepared comments. I'd like to open it now for questions.
Operator
Thank you. To ask a question now, please press star 11 on your telephone keypad and wait for your name to be announced, to withdraw your question please press star one one again one moment for this question we will now take our first question from the line of Neil Young of Yetham and Company please ask your question Neil your line is open hey everyone uh thanks for letting me ask your question uh so it sounds like there's some bigger contribution from fairy that fair eye that I think people have expected.
So I was wondering if you could give us the approximate boot drive revenue contribution in 2Q or maybe some idea of the percentage split between the boot drives, enterprise boot drives, and Sarai, and, you know, maybe what's embedded in the 3Q guidance between the two of those. I'm going to have a follow-up thing.
Yeah, you know, we're not giving out that level of granularity. I can tell you, though, that we are seeing tremendous growth across. So this isn't really driven by one or the other, it's driven by both. For Q3, again, we're not going to be providing that much detail, but certainly from the backlog that we've talked about, that we've seen, that we have in building, and the order of patterns that we're seeing, we're seeing very strong contributions across all of these SSD solution products.
Okay, great. Thanks. That's helpful. And then, you know, I'm fighting you obviously to give you update on the customers and production, sort of what you're expecting for the rest of the year. Are you still guiding to that 10% revenue run rate exiting 2026? And then maybe helpful if you could distinguish the timing of the TLC Compute and the KV Cash programs from the TLC Warm Storage programs, just what you're seeing there.
Yeah, we're still on track. I think Wallace had mentioned that we're well on track to achieve that 5% to 10% of our overall revenue coming from Untightened exiting this year. So we are confident that we can achieve that. In terms of where we're seeing more contribution, certainly initially we're seeing more contribution from TLC-based solutions. But we are seeing early QLC shipments that will begin late this year. But we don't expect QLC to become more meaningful until probably late 27 into 28 as two terabit dies become more affordable.
Operator
Thank you. We will now take our next question. And the next question comes from the line of Manny Hosseini of SIG. Please ask your question, Manny. Your line is open.
Yes, thanks for taking my question. I think it's for the team. I think it will be very helpful for us and the investment community if you guys could elaborate on a revenue mix in market, like enterprise, consumer, and auto, and how it would map to a specific product. And I understand you don't want to be specific, but any kind of a qualitative view on how end market and products are mapping will be great. And I have a follow-up.
2026, because the PC market, 50%, compared with the last year's first half, And for Ferrari and for Automotive and Bujai, we do have multiple major customers supporting our growth trends. So we expect to see continued growth through the 2026.
I think another way to look at it also is, you know, the majority of EMMC and UFS is really going to be consumer-centric. Today, SSD controller sales, the majority of that is going to be consumer-centric, going to edge SSD controllers, but certainly as we exit the share, getting to that 5% to 10% coming from untightened contribution. FairEye and boot drives, FairEye for automotive and enterprise boot drive solutions, again, you can imagine those are going to be more – less consumer-centric.
Moving on to my next question, the two terabit dye and the timing of the QFC ramp, it's been more than a year of waiting, and I'm just wondering if Wallace could share with us, is there the qualification as an issue, is there the capacity, or is there something else? And I'm asking this question in the context of would this actually provide an opportunity for controller suppliers like Silicon Motion or is it just a manufacturing event that is Any color would be great.
QLC is supposed to be the thing for the main industry and to drive the QLC-based storage HSD shortage, I think high capacity is attractive because the price is too high. It's definitely putting more focus and KPAG into the DRAN, HBM. That's why the development for 2 terabit of the fine-tune the quality to the next level is going to take a much longer time. So this is why it's the current market situation that means I think the DDR5 HBM is more attractive and driving more high profit. But it just takes some time, we believe, because we have high demand for these through the AI inference and supply. In K-Pass, we see the arrangement. We see all the NAND makers should have a two-target big QLC.
And I want to make it clear, Mehdi, that, you know, the delays here are on availability of NAND side. We're going to be starting to ramp, early ramp, of some of the QLC-based solutions with our customers by the end of this year. So this isn't something that's a controller issue. This is an industry availability issue of the NAND.
Operator
Thank you. We will now take our next question, and the next question comes from the line of Matthew Bryson of Wettbush. Please ask your question, Matthew. Your line is open.
Congratulations on the great results. Just with gross margins, given how strong the embedded piece was, and that's typically a lower gross margin segment for Silicon Motion, I would have expected a little bit about Edwin there. Can you talk a little bit about the puts and the takes, the effect with the gross margin line in Q2? Yeah.
So, you know, I think what we've always said is that, you know, our Montaigne controllers are margin accretive. And so as those have begun to ramp, that's been able to help offset and drive strong gross margins for us here in the second quarter, as well as, you know, in the back half of the year. The back half of the year, we're also going to benefit from additional growth in our PCI-5 controllers, for example. So all of these things are going to be margin accretive. That's going to offset some of the margin pressure that we see from the solutions business.
And, Jason, just when we're thinking about things moving forward with MonTitan seemingly being as successful as it's been, I know longer term you talked about kind of gross margins being a little bit below 50. should we be rethinking that if Montyton's going to ramp like this any commentary there would be really helpful yeah I think we're still comfortable with the 48 to 50% as I think we've said in the past that depending on mix in any given periods so we're still targeting 48 to 50%
certainly in certain periods above that to take advantage of some of these mix benefits in the near term, but long term, we still expect to be in that 48% to 50%.
Operator
This question now comes from the line of Sebastian Naji of William Blair. Please ask your question, Sebastian. Your line is open.
Good morning, and thank you for taking the questions. Congrats on another quarter of record results here. First, I just wanted to ask about what you're seeing in the mobile market and specifically at the Chinese smartphone makers. Last night, Qualcomm reported and posited that Calendar Q2 will be the trough for China handset demand in their business. And given your exposure to some of those vendors, could you maybe just comment on whether you're saying the same signals that point to a potential recovery in the second half or if you're seeing anything different?
Smartphone market is very challenging due to the price increase of both LPDDR5 and also the storage product. And especially by the line, I think they're suffering much more because if you're looking for the DRAN and the NAND, almost 50-60% of the total bond cost for the low-end smartphone. So this is a challenge. But, however, because we work with the NAMMaker also into us in certain models, and the model maker continue to gain market share, and we balance the fund, collaborate with the smartphone maker directly to the QLC development. So we see our demand for smartphone for our UFS and EMC to continue to grow from Q2 and also moving to the next quarter. I think we do not have a single market share in the low end. That's why the impact for our business is relatively small.
Got it. That's helpful. And then maybe for my follow-up just on the boot drive business, can you comment on whether you're starting to see the benefit of Bluefield 4 sales in either Q2 or your Q3 guidance as NVIDIA starts to ramp their Vera Rubin platform, or has much of the growth so far been tied to the first-generation Bluefield 3 program?
We cannot comment specifically regarding the time, but I think the Bluefield 4 definitely will go with the customer's announcement, right? We do have a pretty large share for Bluefield supply for the Blue Drive, so we're very happy when it ran up in the second half of this year.
Operator
And our next question comes from the line of Craig Ellis of B. Riley Securities. Please ask your question, Craig. Your line is open.
Yeah, thanks for taking the question. And, King, congratulations on the AI solution evolution that you're engineering with the business. Wallace, I wanted to start by seeing if you could characterize the growth that we could expect to see in the Farai and DPU business over the next few quarters versus what we've just seen, that 110% rise. and similarly help us frame the right expectations for MonTitan. And I wanted to see if in so doing you could also help us understand if you thought the MonTitan business could over time rise to the size of what you're seeing with their INTPU.
Yeah, we cannot comment specific, but what I can tell you, our bull drive business is going to grow very strong, not just through one customer, it's through multiple customers. But we said last time, our boot drive not only waiting for DPU, also waiting for DPU and the telco company, and we see we're engaged with the leading server maker too. So our boot drive will grow very broadly. But definitely with the leading GPU company, it will grow even much stronger and even for next year. Our Mount Titan is very exciting. We have two Tier 1 customers renting for the second quarter. We added five more customers coming in the second half. And we believe next year we're going to rent much more revenue growth than this year. And we saw our PCIe Gen 6 had much broader design win even before we even take out. So we have very, very high confidence in our Montyzen Gen 5, Gen 4 going to carry significant growth for the company, for long-term growth and their profitability.
I'd also point out, Greg, that our reminder, it's controller plus NAND. So ASPs are going to be naturally much higher than what you're going to see on a controller only. So while certainly we're excited about the scale and opportunity of Mont-Titan, just keep that difference in mind where ASPs are going to be certainly lower on Mont-Titan than relative to the boot drive side.
Yeah, and that really relates to my follow-up question, Jason, so thanks for the color. And the question is this, given the company's unusually long and broad expertise with NAND makers as a controller designer, and given the evolution we're seeing in the memory industry where customers really want full solutions, to what extent are customers asking for more of a full solution beyond what you're providing today in businesses that may be auto-related or associated with MonTitan, and to what extent would that look attractive for you as a way to further evolve the business model? Thank you.
I think today, Mount Titan controller business are totally independent of food dry business. However, I think in certain cases, we see they add value together as their package itself and penetration. And because we do see our food dry solution business have very unique position, because, first of all, NANDMAKER does not have a zero-less enterprise D controller. Second, they have less interest in that because it's a rather smaller market compared with enterprise D solution. So we are in a very unique position to grow the enterprise blue drive business. At the same time, we can also offer the Mount Titan controller business together to support the Tier 1 customers who don't get enough supply from NAMMAKER directly. So that is how we play in because we already have very, very strong momentum, and we don't even have enough R&D resources to support so many projects. It's very exciting to see the position we are today, but we're continuing that much stronger growth.
Thank you very much, Wallace. Good luck, team.
Operator
Thank you. Our next question now comes from the line of Shubham Figanya from JPMorgan. Please ask your question, Shubham, your line is open.
Hi, this is Gukul. Can you hear me, Jason?
Yeah, so hi, this is Gukul from JPMorgan. So first question on the boot drive market. Wallace, could you help us kind of size this market a little bit? because it feels like this market is growing much faster and become much larger than what you would have expected or even you would have expected maybe a year back when you outlined this market for us. And secondly, could you also address how the market share and competition you're expecting to shape up here, given it looks like right now, so the motion is kind of a large majority of the market, do you feel like there will be some competition entering this market in the next maybe one or two generations?
Okay, I've seen the wide range opportunity. First of all, near CPU boot drive, that's with the conventional enterprise controller with DRAM together. But because with DRAM, you have a much better random write performance and with low latency. So that's for servers, CPU, Intel, AMD, or even VRAM. They have a boot drive with DRAM. That business belongs to NAMMaker. It's conventional, traditional. We don't complete that sector. However, I think some of the server maker comes with second motion, they will have a solution. So we do provide some controller to either NAMMaker or to Multimaker to support that portion with DRAM for boot drive. But for the rest of the other sector, like GPU, like TPU, NPU, like BGIE switch, like NVLink switch, like Ethernet switch, There is the boot drive they need, and today they favor DRAN because the cost is better without DRAN, and we have a supply. That portion is stronger because the capacity... Any thoughts on competition, Wallace, from either regular NAND makers or any of the other module makers that you do see come into this market, or you think you've got this largely locked down for the next couple of generations so far we see we are comfortable in current position we do not see more competition and the really to NAND maker because the density is really 256 FITEL gigabyte compared with enterprise drive 16 terabytes 30 terabytes much more smaller so we don't see competition from NAND maker come here and we are largest on merchant company we also don't see the competition from some market maker either understood that's clear
my second question is on mon titan and could you talk a little bit about your market opportunity especially as you migrate to pti 106 with your next generation mon titan platform what is the competitive landscape looking like because i can remember several enterprise controller companies are kind of terminating or slowing down their development in PCI Gen 6. So, can you help us understand, like, your market opportunity when it comes to when it comes to one-time with PCI Gen 6? I mean, originally, it was mostly about QLC, but it definitely seems like they have kind of expanded beyond just the QLC opportunity to TV cache offloading and some of the TLC opportunities as well.
I think our Mount Titan Gen 5 has already set a foundation for our customer. So when we developed Gen 6, not only Gen 6, Gen 5 customer all sign in, but that we attract many Tier 1 customers from NAND maker in the CSP. So there's more than a dozen Tier 1 customers waiting for Mount Titan PCIe Gen 6 And this will have a very unique architecture we have, we offer a particular focus zone and either AI inference, the CMX architecture, but also particularly for the data storage. So we have a multiple dimension and support, and support multi-host, and also it will be very efficient under the new AIE rut. And as we work closely with the NAMMaker and also leading server maker as well as the CSD. And so this particular sound feature is closely designed for certain customers. We believe when monetizing PTI Gen 6 starts to run, it will be much stronger and faster and quicker than our PTI Gen 5.
Operator
Any idea about how much of the market can you address with the PTI Gen 6 solutions? do you think you can address maybe 30 40 percent of the market already with that or that is too high an expectation well we set a market just a minimum 15 to 20 percent at the beginning hopefully you can grow faster got it yeah thank you very much thank you as a reminder before we take our next question if you wish to ask a question now please press star 1 1 on your telephone keypad we will now take our next question and next question comes from the The line is Suji DeSilva of Ross Capital, please. Go ahead, Suji.
Hi, Wallace. Congratulations on the progress here. Maybe the first question for Jason, with the mix that's steadily shifting, would we think that seasonality would be more muted in the 27 timeframe or 28, perhaps, and linearity be greater, more steady, or would that still be kind of a further out trend?
Yeah, we're not going to comment on 27 yet at this time. You know, we're only guiding one quarter out, so stay tuned on that. To your point, there are a lot of moving pieces, depending on how quickly certain businesses scale. That could certainly limit the seasonality that we historically would see. But right now, given how much we're in the early stages of some of these businesses ramping and some of these new customers coming on, it's hard for me to say right now, and we're not guiding that far out.
Fair enough, Jason. And then maybe the second question for Wallace, perhaps, the ferry roadmap, how are you evolving that to support newer end markets like robotics? And when might that be a meaningful contributor? How far out could that be?
And it's a very good question. And we have been constantly monitoring the survey and engage with the robot developers on China and U.S., also including the drones. And so we see the drone was coming earlier with a high volume and robot was probably coming later. But however, the Diversify is so many new opportunities for the storage and not just one solution per robot. It's multiple. So there's many. We would like to engage and also provide certain reference as well as the custom design to show the differentiation with the robot maker. And now I think the initial is about next year is a volume still pretty small, but we believe 29, 30, 20, 30 will be a much higher volume, and we want a star in the early stage and make sure we can occupy the higher market share.
Operator
Next is a follow-up question from the line of Mayday Hoseni from SIG.
Please ask your question, Mayday. your line is open yes sir thank you a couple of follow-ups first one um would it be would it be possible if you could just elaborate on the mix of EMMC and UFS either the mix of the specific product or mixed by like a smartphone versus other consumer electronics and I do have another follow-up majority of revenue comes from UFS, just given that it's a much higher ASP product.
Unit volumes in EMMC are, you know, given the much lower ASPs in EMMC, it's a smaller contributor to our overall revenue. The vast majority of our UFS business is going to smartphones. The majority of our EMMC business is going to really more IoT consumer-centric connected devices.
Gotcha. And then I'm not asking for a guide, but when I look into 2027, your commentary and excitement around new product ramp suggests to me that FairEye and WoodDrive could at least be a third of your revenue mix. Is that in the ballpark?
In the pipeline with our customers and new customers ramping, I think that's certainly a possibility.
Operator
Thank you. We have now reached the end of the question-and-answer session. I'll now turn the conference back to Mr. Wallace-Carrus for our closing remarks.
And for your continuing interest in second motion, the schedule of these events will be posted on the Investor Relationship section of our corporate website. And we look forward to speaking with you at these events.
Operator
Thank you for your participation. In today's conference, this concludes the program. You may not disconnect your lives.
