Earnings Call Transcript - SIMO Q1 2026

Operator, Operator

Good day, and thank you for standing by. Welcome to the Silicon Motion Technology Corporation's First Quarter 2026 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 condition and business prospects. Although such statements are based on our own information and information from other sources we believe to be reliable, you should not place undue reliance on them. These statements involve risks and uncertainties, and actual market trends and our results may differ materially from those expressed or implied in these forward-looking statements for a variety of reasons. Potential risks and uncertainties include, but are not limited to, continued competitive pressure in the semiconductor industry and the effect of such pressure on prices, unpredictable changes in technology and consumer demand for multimedia consumer electronics, the state of and any change in our relationship with our major customers and changes in political, economic, legal and social conditions in Taiwan. For additional discussion of these risks and uncertainties and other factors, please see the documents we file from time to time with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements, which apply only as of the date of this conference call. And with that, I'll now hand you over to Mr. Tom Sepenzis, Senior Director of IR and Strategy. Please go ahead.

Tom Sepenzis, Senior Director, Investor Relations and Strategy

Good morning, everyone, and welcome to Silicon Motion's First Quarter 2026 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 first quarter results and outlook. Following our prepared remarks, we will conclude with a Q&A session. Before we begin, 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.

Wallace Kou, President and CEO

Thank you, Tom. Hello, and thank you for joining our call today. I'm pleased to report another quarter of better-than-expected results, highlighted by record revenue of $342.1 million. Growth and operating margin both exceeded our guidance as stronger-than-anticipated revenue drove improved overall profitability. We saw strong performance across embedded eMMC and UFS as well as our Ferri and boot drive solutions, driving solid growth this quarter. Given our current pipeline of wins across all our markets, I'm confident that we will deliver meaningful growth throughout what should be a record revenue year for Silicon Motion. Now let me first address the current market environment. The memory and storage market continues to create significant challenges across the markets in which we operate. NAND prices continue to rise sharply with a sequential increase of about 55% to 60% in the first quarter of 2026. AI adoption has driven significant demand across all memory and storage technologies, including HBM, DRAM, NAND and HDD. Growing demand from hyperscalers and cloud service providers for AI infrastructure deployment, combined with low NAND bit growth and insufficient DRAM capacity, have led to significant scarcity, negatively impacting many markets including smartphone and PC, particularly in the low end. Despite these challenges, we executed well in the first quarter. With our backlog, design wins and new opportunities ramping throughout the year, we are confident in our ability to deliver solid growth. We have spent many years developing deep relationships with the NAND flash makers, which have allowed us to gain share as NAND makers outsource more of their controller requirements. These strong relationships have also allowed us to secure NAND in this difficult environment as we ramp our Ferri and enterprise boot drive business and help our module maker and AI smart storage system customers secure NAND, making us an even more valuable and strategic partner. While we expect the NAND shortage will remain challenging throughout 2026 and '27, we have never been better positioned. We have and will continue to benefit from the fundamental shift by the NAND makers toward higher-end and high-capacity enterprise and data center solutions, driving a greater reliance on Silicon Motion to serve the consumer market and opening new opportunities in automotive and lower density storage solutions. As a company, we are at the start of a wholesale transformation as we scale our new cloud AI opportunity with our enterprise MonTitan controller and boot drive storage products, which will drive meaningful growth to both our top and bottom line going forward. We are also benefiting from our edge AI opportunity, including smartphones, PC, automotive, IoT and other applications where we are seeing a rapid shift toward next-generation storage capabilities. Silicon Motion is playing a pivotal role with an expanding pipeline of products spanning edge AI and cloud AI platforms in 2026 and beyond. Given our current backlog and design win pipeline, we expect sequential growth across our product portfolio in 2026 as we capitalize on our investments, gain share in existing markets and benefit from our diversification strategy, starting with another strong sequential quarter of growth of 15% to 20% in June. I will now discuss our embedded eMMC and UFS business, which includes controllers for smartphones and other IoT and connected devices. AI is fundamentally reshaping how memory and storage makers are allocating capital. Memory and storage makers are increasingly redirecting internal resources towards DRAM, HBM and other high-performance memory technologies for AI workloads and stepping back from edge markets, including phones and other smart devices. For the first quarter, our mobile business was up between 30% to 35% sequentially and over 140% year-over-year, significantly outperforming the industry as share gains further fueled strong growth for our business. The mobile market is undergoing a rapid shift as NAND manufacturers accelerate the outsourcing of controllers to third parties, especially Silicon Motion. Some NAND makers are also finding it increasingly attractive to monetize wafers rather than investing in development of complete eMMC and UFS solutions for smartphone. Module makers have stepped in to fill this gap, and they rely heavily on Silicon Motion controllers and firmware. Our relationships with the NAND suppliers and our ability to assist our module maker customers in securing NAND put us in the best position to benefit from the rapidly shifting landscape in the mobile market. Looking ahead, the smartphone market is likely to stay pressured due to ongoing NAND and DRAM supply constraints. Chinese handset OEMs are expected to face greater headwinds than Apple, given Apple's purchasing scale, and Samsung given its captive memory supply. At the start of the year, we projected global smartphone unit volume would decline by 5% to 10% in 2026. However, recent estimates suggest the decline could be more than 10% year-over-year with a greater weakness concentrated in China. Importantly, much of this unit pressure is occurring at the low end of the smartphone market, where we have limited exposure. Elevated memory and storage costs make it increasingly difficult to produce low-cost smartphones, a dynamic we expect to persist through at least the end of '26 to '27. Our eMMC business remains stronger than expected, driven by multiple markets, including automotive, smart TV, AI glasses, smart watches, next-generation set-top boxes that demand higher capacity storage and many others. The market for eMMC is large and growing at over 900 million units sold every year. With major flash makers essentially gone from this segment, competition is decreasing and our revenue contribution from this market is growing. Based on our current backlog, customer forecasts and continuing share gains, we expect another very strong year of growth in our embedded eMMC and UFS business with share gains dramatically outpacing the macro pressure on smartphone unit sales. Moving on to our SSD business, which includes edge SSD and enterprise controllers. In the first quarter, our overall SSD controller business revenue declined approximately 10% sequentially, in line with the seasonal trend, but was up approximately 45% year-over-year as we benefited from the early impact of PCIe 5 on our mix and the early ramp of our MonTitan controllers. For our edge SSD business, our client SSD controllers are utilized in a variety of products, including PC, gaming consoles and workstations. The PC market has been a challenging area so far this year given supply constraints and high prices associated with both NAND and DRAM. PC manufacturers are lowering specifications for new computers and passing on higher NAND cost to consumers, which we expect will contribute to overall unit decline in the PC market in 2026, especially at the low end. Fortunately for Silicon Motion, our products span the market from value line to the high end, and we continue to gain share across the range of devices as the NAND makers exit the consumer segment. 2026 will be a defining year for our client SSD business. PCIe 5 began to displace older technologies. Our 8-channel PCIe 5 controller leads the market in performance and ramped steadily throughout 2025. While we expect a DRAM supply constraint could limit growth of this high-end controller in 2026, it is still highly sought for its unmatched power and performance. In December, we launched our 4-channel DRAMless PCIe 5 controller aimed at the mass market, and we expect this to become the volume-leading PCIe 5 chip in our portfolio this year. This controller brings PCIe 5 performance to a broader audience at a more accessible price point and removes a significant component hurdle for our customers at the time when DRAM availability is constrained and costs are elevated. We have NAND flash maker customers for each of our PCIe 5 controllers as well as nearly all the module makers and expect to drive higher ASP and improve margin in our client SSD business throughout 2026 as PCIe 5 grows as a percentage of our sales mix. Entering this year, we estimated that the PC market would experience unit decline of 5% to 10% in 2026, given the tightening NAND and DRAM supply and increased prices. Current expectations are a bit lower with anticipated unit decline now in the 10% plus range. Despite this, we expect to grow our edge SSD business through a combination of increased market share and higher ASP as our PCIe 5 controllers continue to ramp and as NAND flash makers retreat from the edge market in favor of enterprise and cloud AI. For our MonTitan enterprise controller business, our cloud AI opportunity in the data center and AI infrastructure is growing rapidly, and we are in the early innings. NAND is a central part of enterprise and AI infrastructure deployment spanning warm storage, compute storage and increasingly near-CPU and near-GPU storage applications. The need for speed, lower latency and greater power efficiency is driving a technological shift in the data center, and MonTitan is squarely in the middle of the transition. MonTitan, when paired with TLC NAND, powers high-performance CMX, KVCache and compute SSD in near-CPU and near-GPU environments. When paired with QLC NAND, MonTitan enables high-capacity, high-performance enterprise and AI data storage. During the December quarter, end-user qualification of TLC-based and high-performance compute SSD powered by MonTitan began with multiple customers. These qualifications have been progressing well, and end customers are now expected to begin volume commercial ramp in the current quarter, one quarter earlier than expected. Currently, we see greater demand for TLC-based compute and KVCache SSD controllers than for QLC given a slower rollout of 2-terabit NAND than initially expected. While we anticipate more initial revenue contribution to come from TLC-configured MonTitan solutions, we believe QLC-configured solutions will begin contributing more meaningfully later this year and long term. High-capacity storage SSD leveraging QLC NAND will represent the largest addressable market for MonTitan, and we expect to begin ramping with multiple customers as broader availability of the next-generation 2-terabit QLC NAND die becomes available from nearly all NAND makers and as supply returns to more normal levels. Our QLC solutions offer meaningful advantages over HDD for AI inference workloads: faster access, higher speed, lower power consumption and improving cost-to-capacity. I'm excited to announce that our MonTitan customers plan to begin ramping at three Tier 1 Asian cloud service providers and two U.S. Tier 1 cloud service providers later this year with both TLC compute and QLC storage SSD solutions. In the third quarter, we expect to tape-out our first 4-nanometer controller, a PCIe 6 MonTitan controller targeting hyperscalers and CSPs. It has been developed in close collaboration with multiple partners and customers, and we expect it to drive the next phase of MonTitan growth beginning in the 2027–2028 time frame. Importantly, we have already secured design wins with multiple Tier 1 customers with volume expected to ramp meaningfully in 2028. Given the traction we are seeing and the progression of end-user qualification for both TLC and QLC implementations of MonTitan, we are increasingly confident that the business will grow rapidly throughout this year and reach our target run rate of 5% to 10% of our now-expanded 2026 revenue expectation, with further growth anticipated in 2027 and beyond as our entry into the enterprise market scales meaningfully over time. And finally, I would like to provide an update on our Ferri and the boot drive storage business. Our Ferri and boot drive storage business delivered exceptional performance in the March quarter as we began scaling several new projects in Ferri for automotive as well as in our emerging enterprise boot drive business. These businesses are growing rapidly this year. Sourcing NAND is becoming more critical to our long-term success. Our unparalleled relationship with the NAND makers has become a key differentiation and has enabled us to secure NAND from three different makers, which will ensure we remain a resilient supplier of Ferri solutions and boot drives for our customers despite increasing supply constraints. NAND supply allocation for 2026 was largely finalized by all flash makers by mid last year. Our ability to secure NAND has given us a meaningful competitive advantage as we are one of few suppliers globally able to consistently source NAND to support our customers' accelerating requirements. Ultra storage is rapidly becoming one of our most exciting growth opportunities as we are actively engaged with multiple customers to build solutions that operate across a variety of platforms. This includes leading DPU, Ethernet and NVLink switches and other opportunities across different AI infrastructure architectures. In the fourth quarter of 2025, we began volume boot drive shipment to a leading AI GPU manufacturer for their current DPU product. In the first quarter, we worked with that customer to qualify a next-generation DPU design as well as Ethernet and NVLink switches of their new GPU-CPU platform to be launched in the second half of this year. As our customers transition to the next-generation GPU-CPU platform, our opportunity is increasing rapidly with a much broader footprint beyond the DPU boot drive and with density that has increased 2x to 4x from the previous generation. We anticipate strong revenue contribution and growth with this customer this year and throughout 2027. In addition to this customer, we have recently won a design with a leading telecommunication infrastructure provider and will be ramping initial scale with them later this year. We are also sampling with a leading search engine company for its TPU architecture as well. We will continue to develop new boot storage devices built around our leading controllers to drive future growth. Our Ferri business is experiencing strong demand from automotive and industrial customers as the NAND makers continue to shift away from lower-density solutions to focus on higher ASP, higher-density enterprise solutions. Our more than 10 years of developing automotive-grade solutions provides significant differentiation by offering reliable supply, proven technology, dedicated technical support and qualification expertise tailored to the automotive market. As a result of this investment, demand from global automotive OEMs and their subsystem suppliers continues to accelerate across the U.S., Europe, China and Japan. We are gaining meaningful share, creating a strong pipeline of near-term revenue and long-term sustainable growth opportunities. In conclusion, the first quarter was exceptional, delivering our highest quarterly revenue at Silicon Motion as we continue to drive meaningful share growth across our markets. Despite ongoing supply constraints and price increases associated with NAND and DRAM, we continue to expect that we will deliver sequential growth throughout 2026 as we reap the benefit from the investments we have made over the past few years. This growth was across all our major business lines, propelled by our growing cloud AI opportunity with our enterprise AI product, including MonTitan, and our emerging boot drive storage business that are just beginning to ramp. We are in the strongest position in our company history with a deeper product portfolio, growing foothold in edge and cloud AI with multiple opportunities growing in tandem in legacy and new markets. The successes we have made through our partnerships with all the NAND makers over the past many years have given us an unparalleled advantage as we leverage these relationships to gain access to NAND supply. This relationship is a strategic differentiation for our company, and I am extremely confident in our ability to deliver broad-based sustainable growth as we scale both established and emerging opportunities across the business in 2026 and beyond. Now let me turn the call to Jason to go over our financial performance and outlook.

Jason Tsai, Chief Financial Officer

Thank you, Wallace, and good morning, everyone, for joining us today. I will discuss additional details of our first 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. The reconciliation of our GAAP to non-GAAP data is included in the earnings release issued yesterday. This was an outstanding start to the year for Silicon Motion as our investments over the past several years are bearing fruit. We're gaining share across our entire portfolio in a difficult macro environment and rapidly expanding into new opportunities in edge and cloud AI applications, which should continue to drive significant top- and bottom-line outperformance. In the March quarter, sales increased 23% sequentially and 105% year-on-year to $342.1 million, coming in well above the high end of our guided range, delivering our second consecutive quarter of record revenue. Outperformance in the quarter came primarily from our embedded eMMC and UFS controllers and strong growth in our Ferri and boot drive storage business. Gross margin was 47.2%, above our guided range of 46% to 47% as we capitalized on new product introductions. Operating expenses increased sequentially to $99.2 million, given increased investments in our emerging MonTitan AI and enterprise SSD controller and boot drive storage solutions. Operating margin was 18.2%, above our guided range, driven by higher-than-expected revenue and gross margin during the March quarter. Earnings per ADS was $1.58. Total stock compensation, which we exclude from non-GAAP results, was $8.4 million in 1Q '26. We had $210.9 million in cash, cash equivalents and restricted cash at the end of the first quarter compared to $277.1 million at the end of the fourth quarter of 2025. Cash decreased in the first quarter due to a combination of a dividend payment of $16.9 million and an increase in inventory to support our expected strong business ramp. Our team is executing exceptionally well in this challenging NAND and DRAM pricing and supply environment. We continue to invest in advanced geometry products for both our established markets and our emerging enterprise markets, including MonTitan SSD and enterprise boot drive storage solutions. These investments will continue throughout 2026 as we support the growing demand for our enterprise portfolio. For the second quarter of '26, we now expect revenue to grow 15% to 20% sequentially to $393 million to $411 million. We see strength across nearly all our product segments with an emphasis on continuing market share gains and new cloud AI opportunities with our MonTitan and boot drive business as they ramp. Gross margins are expected to increase sequentially to 48.5% to 49.5% in the June quarter, given the product mix assisted by greater contribution from MonTitan and our PCIe 5 controllers. Operating margin is expected to be in the range of 21% to 22%, and our effective tax rate is expected to be 19%. Stock-based compensation and dispute-related expenses are expected to be in the range of $3.6 million to $4.6 million. 2026 is on track to deliver record revenue for Silicon Motion with strength across all of our major product lines. We expect sequential top-line growth for the remainder of the year with further improvements in profitability. We still anticipate additional development costs, which will drive higher operating expenses in the second and third quarters of this year, which will be more than offset by higher revenue and gross margin performance. We anticipate our full year 2026 operating margin to improve as compared to 2025 despite our higher investments this year. We are navigating the current memory and storage supply constraints and high pricing environment with remarkable success, driven by our relentless strategy of relationship building with NAND flash makers over the past 20-plus years. We are also beginning to reap the benefits of our multiyear investments in eSSDs for enterprise and AI with MonTitan and our growing boot drive storage business beginning to ramp in volume. Our leading position in merchant controllers, combined with unmatched NAND maker partnerships, will drive higher share across eMMC and UFS, client SSDs, enterprise, automotive, boot drives and the high-performance, high-capacity enterprise and data center storage markets. We expect this will lead to significant revenue growth for Silicon Motion in 2026 and the years to come. I look forward to sharing more detail on our progress when we report next quarter. This concludes our prepared remarks. I'd like to open up for questions now.

Operator, Operator

We will now take our first question from the line of Neil Young of Needham & Company.

Neil Young, Analyst, Needham & Company

So it obviously sounds like everything is supposed to grow quarter-on-quarter throughout the year. But maybe specifically looking to 2Q, could you sort of rank the segments on what you think should grow the most and what you think should grow the least?

Jason Tsai, Chief Financial Officer

We anticipate growth, as I said, across all of our business segments. I think, obviously, we've had some very strong growth in eMMC and UFS early on in the year. If you take a look at our automotive, Ferri and our boot drives, we're just in the early stages of that ramping. So we do anticipate stronger growth from those products. And then certainly, the rest of the other products continue to grow as well throughout the quarter.

Neil Young, Analyst, Needham & Company

Okay. And then I have a follow-up. So within the eMMC and UFS business, it sounds like it's diversifying a little bit away from handsets. Could you maybe update us on the mix of handset revenue in the business versus sort of the broad markets that you talk about?

Wallace Kou, President and CEO

So for our eMMC and UFS controller business, UFS majority is in handset. I think eMMC majority is in smart devices such as smart glasses, IoT devices, smart TV, new set-top boxes, smart door locks and many others and also going to automotive. So although smartphone unit shipments will decline, our overall eMMC and UFS controller shipments will continue to grow throughout the year.

Jason Tsai, Chief Financial Officer

Neil, we also anticipate MonTitan to begin to ramp more meaningfully starting in the second quarter as well. So that will be another growth vector for our second quarter.

Operator, Operator

We will now take our next question from the line of Mehdi Hosseini of Susquehanna Financial Group.

Amy, Analyst, Susquehanna Financial Group (filling in)

So this is Amy filling in for Mehdi. The first one is with the new SM8008 product launch in March, can you give a bit more color on the boot drive revenue trajectory? I know the contribution of revenue is small this year. So how should we frame the ramp from here? And what does a more meaningful contribution year look like? And I have a follow-up.

Jason Tsai, Chief Financial Officer

We don't break out those segments specifically. But as I said before, we do anticipate boot drives and Ferri to be more meaningful contributors of revenue in the second quarter as well as throughout 2026. SM8008 is a boot drive controller that was introduced, and that will be part of the portfolio of solutions that we have in this category of products, but we have other solutions here as well that have been ramping.

Wallace Kou, President and CEO

Let me add some comments. For SM8000A, our PCIe Gen5 high-end boot drive controller, we're primarily selling the controller and the firmware to the customers who make boot drive solutions. For this year, most of our boot drive solutions were not based on the 8000A controller. This will ship specific to one major customer and will start to ship by late this year.

Amy, Analyst, Susquehanna Financial Group (filling in)

Got it. Really helpful. And my next question is regarding the revenue diversification. Do you remain on target to have 20% of your total revenue from a mix of MonTitan, boot drive and auto?

Wallace Kou, President and CEO

Yes. We will definitely reach the goal. I think quarter-by-quarter you will see the figures. We didn't give a full year breakdown, but wait for our next quarter results and the guidance for Q3.

Operator, Operator

We will now take our next question from Sujeeva De Silva of ROTH Capital.

Sujeeva De Silva, Analyst, ROTH Capital

Wallace, Jason, Tom, congratulations on the progress here. Perhaps you can give us some fundamental color here. Maybe understanding how the second half versus first half year-over-year revenue would be this year perhaps versus typical years? And is 50% gross margin potentially in the near future? Or any puts and takes there would be helpful.

Wallace Kou, President and CEO

I think, first of all, 50% gross margin is definitely achievable. We're confident for this year. Second, we cannot give you a full first-half versus second-half percentage breakdown right now. So we'll continue to grow quarter-by-quarter, but we cannot give you a specific percentage regarding first half versus second half today.

Sujeeva De Silva, Analyst, ROTH Capital

Okay. Jason, can you remind us what the typical year is? Or do you have that data?

Jason Tsai, Chief Financial Officer

Yes. I mean, typically, we're about 45/55, somewhere in that ballpark.

Sujeeva De Silva, Analyst, ROTH Capital

Great. And then my other question is around MonTitan. Can you give us an update on how many customers are ramping today that are going to ramp start near term and how many you have in the pipeline? Any update on MonTitan number of customers would be helpful.

Wallace Kou, President and CEO

So MonTitan, we are ramping today in production with two customers, but we are going to have five additional major customers from cloud service providers by late this year: three from Asia and two from the U.S.

Operator, Operator

We will now take our next question from Gokul Hariharan of JPMorgan.

Gokul Hariharan, Analyst, JPMorgan

Great results. So Wallace, I just wanted to dig in a little bit on your comment about having more interest on the MonTitan solution from TLC NAND and KVCache, especially for the CMX piece of the equation. Could you talk a little bit about what has changed there, given I think previously you were a lot more optimistic about the QLC NAND solution, and that was kind of the key selling point for MonTitan given Silicon Motion's experience in managing QLC NAND. And in addition to that, can you also talk a bit about how the adoption that you're seeing from a lot of these customers on the CMX solution or the previously called ICMS solution — is that largely the five customers or at least the two non-Asia customers that you're seeing ramping up among the CSPs? Is that related to the CMX solution?

Wallace Kou, President and CEO

Okay. You have a very long and good question. Let me try to answer one by one. First of all, because the NAND price increased dramatically and because the NAND supply is tight and much of the majority of output is taken by cloud service providers, customers who originally designed with QLC at very large capacities—128 terabyte and higher—face a drawback because NAND prices increased almost 5x to 10x compared with a year ago. That makes those large-capacity designs very unlikely today. So we see more demand where either the QLC capacity is reduced or customers are shifting more to compute storage. As everybody knows, compute storage—the compute SSD which is next to CPU—and the new compute SSD solution called CMX (content memory storage) used for KVCache for AI inference often uses TLC NAND because latency is very important. So we see more and more customers moving to TLC with smaller capacities like 4 and 16 terabytes. This benefits Silicon Motion because we ship more controllers. For QLC, we still have two customers that continue and will ramp later this year, and we can help them secure NAND supply because 2-terabit QLC today only has a few NAND makers in production. I think within 1 more year we will see broader QLC availability across NAND makers and then more demand for high-capacity QLC will return. Regarding the CSP customers, MonTitan includes a unique technology we call performance shaping, which is very good for AI inference because when AI inference goes to KVCache you need to manage multiple tokens. Our MonTitan architecture can handle multiple tokens simultaneously, which is why demand is very high from customers and CSPs from the U.S. to Asia.

Gokul Hariharan, Analyst, JPMorgan

Got it. That's very clear. Just on the client SSD controller side, I do notice that the strength is still very robust even in a reasonably challenging PC market. Do you sense any pull-forward demand from some of these customers? Because this is something that we hear from some of the other vendors that even though end demand has been not that great, there's been some pull forward demand, customers trying to stock up inventory ahead of cost hikes and price increases. Is that something that you're seeing among your customers? And secondly, when you talk about NAND makers exiting this market, does it change the threshold in terms of what kind of market share you could eventually have of client SSD? I think previously, you've talked about maybe 40% to 50%. Is that threshold increasing given the industry trends we are seeing?

Wallace Kou, President and CEO

Okay. I think you asked a very good question. As everybody knows, NAND supply is tight and NAND makers allocate less SSD to PC OEM customers. But this trend benefits Silicon Motion because, first of all, we get more outsourcing projects from NAND makers for PC OEMs. Second, module makers step up to fill the gap because many module makers design with our controller for PC OEMs. That's why although we see the PC unit shipment might decline 10% or more, we will continue to gain market share, and we see the client SSD business continue to grow. As PCIe 5 moves from high end to mainstream and PC OEMs ship more PCIe 5, we benefit because ASP is higher and we currently dominate PCIe 5 with more than 50% share. So we see market share gains continue when PC OEMs start to ramp the 4-channel DRAMless PCIe 5 controller.

Operator, Operator

We will now take our next question from the line of Sebastien Naji of William Blair.

Sebastien Naji, Analyst, William Blair

On the strong results and guidance. My first question is on the share gain momentum that you're seeing, particularly in the mobile and PC markets. How do you think about the trajectory of those share gains? In other words, have you seen maybe more meaningful share gains front-loaded here in Q4, Q1, Q2 of this year? Or is there significantly more runway for you to keep taking share as we move into the second half and even into 2027?

Wallace Kou, President and CEO

Our goal is to continue gaining market share. NAND makers now have limited R&D resources and will likely outsource more projects to Silicon Motion. We reserve R&D resources and are very busy capturing these outsourcing opportunities. We expect to continue to gain in embedded eMMC and UFS controller business as well as client SSD for PC OEMs because retail for client SSD is very low now. We serve a broader set of customers for PC OEM SSD solutions, not just NAND makers, and more module makers are coming to work with us.

Sebastien Naji, Analyst, William Blair

Great. And then my follow-up is just on the boot drive opportunity. Can you remind us what the competitive landscape looks like? Who else might be in a position to provide these types of boot drive controllers? And then relatedly, how should we think about your share in that market? Should it be higher than in some of your other subsegments? Or should it be pretty similar? Any pointers there?

Wallace Kou, President and CEO

For our first engagement for the DPU BlueField 3, there will be three makers providing the solution. Two other NAND makers also use Silicon Motion controllers, but different controllers and different NAND. Through the engagement, the customer wants to focus on the new generation DPU and provide deeper NVLink and Ethernet switch integration. For the new generation boot drive, security becomes very critical. I believe today we are probably among the only vendors to have specific security in both our firmware and hardware in our controller. We also have a unique firmware to manage NAND in pseudo-LC mode and provide specific functions for the end customer. That's why we believe we will probably have a majority share of the new generation boot drive for this particular customer.

Operator, Operator

We will now take our next question from Tiffany Yeh of Morgan Stanley.

Tiffany Yeh, Analyst, Morgan Stanley

On the great results. Could you share with us your latest view on the TAM for MonTitan or the overall eSSD market and also your targeted market share in the overall market?

Wallace Kou, President and CEO

We see MonTitan getting tremendous attention and a very broad set of design wins. We're pleased with our progress and expect we will continue to gain market share. We expect MonTitan to grow to at least 5% to 10% of our business aligned with our expanded 2026 revenue expectations and into 2027. Our PCIe Gen6 MonTitan is also gaining strong traction even before tape-out, and we have multiple design wins from Tier 1 customers, including two NAND makers and several CSP customers. PCIe Gen6 MonTitan includes unique technology with advanced LDPC and support for both TLC and QLC for next-generation QLC deployments. We have a broad customer base waiting for the product and will continue ramping PCIe Gen5 while building the Gen6 design win pipeline.

Tiffany Yeh, Analyst, Morgan Stanley

Very clear. And as we see elevated material costs and also OSAT costs, would you consider conducting price hikes on your product to pass through these costs to your customers?

Jason Tsai, Chief Financial Officer

I think we've developed a very good relationship with our back-end packaging and testing partners as well as our suppliers. Our goal is to maintain our gross margins in the 40% to 50% range, and we're comfortable through our existing relationships with our suppliers and our customers that we can maintain that pricing. We're not going to go into specifics about pricing changes with customers, but we're confident that we can maintain our margins.

Wallace Kou, President and CEO

Let me add a comment. At the moment, our concern is not manufacturing cost increases but the substrate material for BGA substrates because it's very tight and supply is limited. We have to compete with many Tier 1 customers. Our operations team is working very hard with suppliers in Japan and Taiwan to manage supply and ensure we can meet customer demand.

Operator, Operator

Do you have any follow-up question, Tiffany? We will proceed with our next question from the line of Craig Ellis of B. Riley Securities.

Craig Ellis, Analyst, B. Riley Securities

Congratulations on the great performance, guys. I wanted to ask an intermediate to longer-term question. Wallace, congratulations on what appears to be really significant MonTitan customer diversification through this year, and you've got a boot drive position that seems to be broadening out significantly in next-generation drives through the year and auto with Ferri expanding nicely as well. So the question is this: as we look at reports seeing that that memory-related order pipeline is happening deep into 2027, and as you exit this year with a much broader customer and program footprint, how do you feel about supply availability next year? And are you seeing from your customers extended order visibility? And if so, where is that happening?

Wallace Kou, President and CEO

I think for this year, NAND supply was challenging because allocations were largely finalized by August of last year. That affected many buyers. But through our strategic relationships and deep partnerships with NAND makers, we were able to secure the supply we need for 2026. For next year, we will start to provide our demand to our NAND partners in advance, so we are confident we can secure NAND for 2027 growth. I believe 2027 DRAM and NAND supply will continue to be tight, but DRAM should begin easing from late 2027 into 2028 as new fabs start to ramp. NAND supply improvements may begin in early to mid-2028, but shortages could persist. We will continue to secure supply in advance to meet customer demand and growth requirements.

Jason Tsai, Chief Financial Officer

Also keep in mind, Craig, we are sourcing from three different flash makers, so we have a diversified supplier base to work with.

Craig Ellis, Analyst, B. Riley Securities

That's really helpful color, guys. And then for the second question, thinking near term about how some of the hydraulics play out in the second half of the year with product-related investments: it sounds like there'll be some development costs for PCIe Gen6, but you're also looking for much higher revenue and higher gross margins. So can you talk a bit more about the gives and takes that we should be thinking about in the middle to back half of the year?

Jason Tsai, Chief Financial Officer

From an OpEx standpoint, our OpEx will be higher this quarter, and then it will probably tick up a little bit in the third quarter as some tape-out costs come in. Our expectation is those development costs should decline by the fourth quarter, and overall we expect to see margins and operating margins continue to improve throughout the year.

Wallace Kou, President and CEO

Let me add some comment. Procuring NAND as Silicon Motion is different from a normal customer. We are a strategic partner for NAND makers because we engage in their projects with many large-scale customers. They treat us as a partner, not just a normal buyer of NAND.

Operator, Operator

We have reached the end of the question-and-answer session. Thank you all very much for your questions. I'll now turn back to Mr. Wallace Kou for his closing comments.

Wallace Kou, President and CEO

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 on the Investor Relations section of our corporate website, and we look forward to speaking with you at these events. Thank you.

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect your lines.