Earnings Call Transcript - SIMO Q1 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to Silicon Motion Technology Corporation's First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. This conference call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 as amended. Such forward-looking statements include, without limitation, statements regarding trends in the semiconductor industry and our future results of operations, financial conditions and business prospects. Although such statements are based on our own information and information from other sources, we believe to be reliable, you should not place undue reliance on them. These statements involve risks and uncertainties and actual market trends and our results may differ materially from those expressed or implied in these forward-looking statements for a variety of reasons. Potential risks and uncertainties include, but are not limited to, continued competitive pressure in the semiconductor industry and the effect of such pressures on prices, unpredictable changes in technology and consumer demand for multimedia consumer electronics, the state of and any change in our relationship with our major customers and changes in political, economic, legal and social conditions in Taiwan. For additional discussions of these risks and uncertainties and other factors, please see the documents we file from time-to-time with the Securities and Exchange Commission. We assume no obligations to update any forward-looking statements, which apply only as of the date of this conference call. Please be advised that today’s conference is being recorded. It is now my pleasure to hand you over to Mr. Tom Sepenzis, Senior Director of IR and Strategy. Please go ahead, sir.

Tom Sepenzis, Senior Director of IR and Strategy

Good morning, everyone, and welcome to Silicon Motion's first quarter 2024 financial results conference call and webcast. Joining me today is Wallace Kou, our President and CEO; and Jason Tsai, our CFO. Wallace will first provide a review of our key business developments, and then Jason will discuss our first 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 US 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, everyone, and thank you for joining us today. I'm pleased that we delivered revenue at the high end of our range for our first quarter, as the market for PC and smartphone began to rebound. Additionally, we delivered another quarter of gross margin expansion through the successful introduction of a new product and the mix shift towards higher-end PCIe and UFS products. We continue to invest in the next-generation technologies that we expect will drive long-term sustainable top and bottom-line growth for our company. We are also benefiting from the increased controller outsourcing by our NAND flash maker customers, a trend that should continue as the controller capacity increases and the design cost continues to rise. Flash makers remain focused on profitability while managing their investment to serve the increasingly diverse end market memory requirements. Despite the macro uncertainties, we are excited by the progress we are making securing strong design win momentum and market share gains across all our end markets as we launch several new products, including an exciting new win with NVIDIA's BlueField-3 DPU platform, which I will discuss in greater detail shortly, as well as new solutions for the PC, smartphone, enterprise and automotive markets. I would like to spend a moment discussing the current business environment. The current global economic picture is increasingly difficult to navigate, and it changes day-to-day due to ongoing tariff and geopolitical challenges. Regarding the current climate, we believe the impact on our business should be limited given that the US only accounts for 10% of the global smartphone market and about 25% of the PC market. For smartphones, the US market is dominated by Apple and Samsung, which account for nearly 85% of the market where we have historically had little to no share. Our overall exposure to US consumer electronic sales is significantly lower than many other semiconductor companies in the PC and smartphone space. While the escalating tariff environment creates uncertainty in demand in the near term, we will remain focused on what we can control: delivering market-leading products with superior performance, expanding our market share with the flash makers that are increasingly resource-constrained, supporting multiple memory technologies and diversifying our business through expansion into new and growing markets including enterprise, AI storage, automotive, industrial, and more. I would now like to discuss the broader NAND flash environment. The NAND industry experienced improvements throughout the first quarter as inventory levels in consumer markets, including smartphones and PCs, appear to have bottomed out and demand for enterprise storage remains strong. NAND flash makers have begun to raise prices recently given reduced flash production and inventory levels. We will continue to focus our resources on our flash maker partners as they will be the customers with the greatest access to NAND in 2025 if prices continue to rise. Our business with module makers remains steady as they are starting to build inventory ahead of increasing NAND prices and restocking low channel inventory for aftermarket SSDs. One area where we are benefiting from both increasing NAND costs and the potentially negative pricing impact of tariffs is a rapidly growing interest in QLC NAND. QLC allows server and device makers the ability to significantly increase memory density in a cost-effective manner, giving OEMs the opportunity to deliver higher density storage solutions at a more reasonable price. As we have discussed during the past few investor calls, we believe we are best positioned to benefit from the increased adoption of QLC given that we have more experience managing QLCs than any other controller maker. We are experiencing significant interest for developing QLC products across the enterprise market and the consumer market for both SSDs and smartphones. We expect to deliver multiple new products in the coming months that will capitalize on this interest and help us deliver long-term sustainable revenue and earnings growth for many years to come. Now let me share some updates for each of our business segments, beginning with client SSD controllers. While there has been much discussion around the 2025 outlook for PCs given the current geopolitical uncertainties, as of today we believe the market is still expecting PCs to grow in the low to mid-single digit range. We have seen some motivation from customers to purchase ahead of NAND price increases and any potential economic effects of tariffs and potential supply disruptions, but we believe inventory levels remain healthy based on our current customer forecasts and continued market share gains in the mid-range and high-end PC markets. We are increasingly confident in our client SSD business for this year and our pipeline of new programs for next year to deliver long-term growth. We are seeing stronger than expected demand for our new PCIe 5 8-channel controller. This controller is the world’s first 6-nanometer PCIe 5 chip, and we have design wins at four of six NAND flash makers and nearly all module makers given its superior performance and lower power requirements. Introduced in the December quarter, this controller already accounts for over 5% of our client SSD business, and we expect it to continue to grow rapidly over the next several quarters as PC OEMs, NAND flash makers, and module maker customers ramp up their high-end PCIe 5 projects to full scale. In addition to the success we are experiencing with our 8-channel controller, we have already secured four flash maker wins with our upcoming PCIe 5 4-channel DRAM-less controller, which targets the mainstream market. This 4-channel controller was taped out in Q3 last year and is expected to begin shipments later this year. We are also actively engaged with virtually every module maker for this new controller, and we anticipate that they will help us continue to drive share growth in client SSDs in 2026 and beyond. In the first quarter, we began to see demand for our new PCIe 5 8-channel controller increase as our flash maker partners secured additional PC OEM wins, and our module maker customers saw significant demand from the consumer aftermarket. Additionally, there is a new market developing for this controller as the white box server market builds a lower-cost hardware platform for AI inference that can leverage more mainstream components. Given the early strength in our 8-channel PCIe 5 controllers in addition to the multiple wins with our upcoming 4-channel DRAM-less controller and our strong competitive position in the mid-range PC market, we believe we are increasingly well-positioned for unit and revenue growth in client SSDs over the next several years, barring significant headwinds from the broader economic environment. Now I would like to move on to our eMMC and UFS business. Like the PC market, the smartphone market showed signs of bottoming and recovery in the March quarter. This was driven in part by increased smartphone subsidies in China post the Chinese New Year holiday and from the increased inventory restocking ahead of any disruption from geopolitical actions. While it is difficult to know how tariffs will impact smartphone sales in 2025, we have had a promising start to the year. During the March quarter, we experienced strong booking momentum from both flash maker and module maker customers for UFS 3.1 and UFS 2.2 controllers as well as for our eMMC controllers. As we mentioned during our last conference call, the market is shifting away from eMMC and UMCP solutions in the smartphone market, which have historically been dominated by flash makers. With the introduction of less expensive mobile DRAM solutions, module makers are gaining share using our controllers and selling UFS/eMMC solutions to smartphone OEMs. It is also leading to the adoption of third-party controller solutions by the flash makers to compete in the value line market to reduce development costs. With our new high-end eMMC 5.1 controller and our broad-based eMMC product portfolio, we are well-positioned with both flash makers and module makers to serve the automotive, IoT, smart TV, set-top box, and other markets that account for more than 800 million units a year. Overall, we are delighted by the long-term opportunity we see in eMMC and UFS to further grow our share in the embedded smartphone memory market, as well as make significant inroads into automotive, IoT, and other high-volume markets. I will now provide an update on our MonTitan business. MonTitan is one of the most exciting opportunities for Silicon Motion given the large addressable multibillion-dollar market for enterprise class controllers. As we have discussed, this is a new opportunity for our company, and we continue to expand our product portfolio, customer engagement, and technology as we enter the market for data centers, enterprise storage, and AI solutions. Interest in MonTitan is driven in part by emerging demand for QLC NAND solutions. With AI, given its ability to deliver high density at lower costs, we have more experience than others and support more QLC NAND than anyone else in the industry. MonTitan also offers greater flexibility than competing solutions given our wide range of firmware capabilities with which we can meet the unique needs of different customers' applications and use cases. Our flexibility is opening opportunity across multiple fronts in the enterprise and AI storage solution business. Many of our early customers are focused on delivering solutions for storage system architectures, but we are now expanding our addressable market for MonTitan. We have been working with the NVIDIA team for over a year to qualify our new MonTitan server boot storage solution for use with the BlueField-3 data processing unit, or DPU architecture, and we have been designed into the platform. BlueField-3 is a network-accelerating solution that helps deliver peak AI workloads effectively, ensure end-to-end security, and provide high-performance cloud networking using NVMe over fibers. Our boot storage solution will be used to power BlueField-3 DPU beginning later this year, adding a significant new revenue and unit growth opportunity for Silicon Motion. Additionally, each BlueField-3 DPU will be paired with multiple high-density enterprise class QLC SSDs through PCIe switches. Currently, Solidigm is the only company shipping a high-density 122-terabyte QLC enterprise SSD in the market, and we expect to be the second to provide a 128-terabyte QLC MonTitan SSD turnkey solution to our customers later this year. We are thrilled to be a growing part of NVIDIA's storage ecosystem, providing enterprise boot storage and high-density 128-terabyte MonTitan enterprise data storage solutions for AI. These solutions deliver ASPs that are significantly above our current corporate average with accretive gross margins. As our MonTitan product portfolio evolves, we look forward to engaging with new customers to expand our addressable market in other areas as we are currently doing with BlueField. To that end, we are currently focused on delivering a more complete family of MonTitan products, including controllers for SATA and PCIe server boot drives, and higher density and performance 8-channel and 16-channel controllers for AI storage applications. With MonTitan supporting the upcoming 2-terabit monolithic die QLC NAND, we will be able to deliver high-density, high-performance 128-terabyte SSDs with a best-in-class bandwidth of 3.5 million IOPS, putting us in a great position to rapidly expand our market share in the large and growing market for AI storage solutions. And finally, we are also engaged with multiple partners with next-generation PCIe 6-controllers targeting the NVIDIA Rubin GPU platform, which is expected to begin ramping in 2027. We are confident that MonTitan will begin to ramp in the second half of this year and more meaningfully in 2026 as multiple customers enter production. Finally, I would like to provide highlights on our automotive and other business. Our automotive market position has continued to improve as we add new products to our growing portfolio. We continue to support automotive across all our product categories, including SATA, PCIe SSD, eMMC, UFS, and our ferrite embedded solutions across a wide variety of use cases. We are the first company to receive ASPICE Level 3 certification in our PCIe 4-controller, and we are on track to deliver a PCIe 5-controller for automotive later this year. Vehicle capacity continues to increase along with the need for faster, more dense storage solutions given the increase in processing capability, ADAS, sensors, cameras, and other advanced systems. We continue to expand our presence in the automotive market and are increasing our market share with existing and new customers alike, including Samsung, which we have added recently. We are currently shipping to many of the biggest names in the business, including Mercedes, Tesla, GM, BYD, Xiaomi, Toyota, Honda, and many others, and are well on our way to achieving our large target of 10% revenue contribution from automotive by 2026 to 2027. Additionally, we recently introduced our 2708 microSD Express controller and have already secured a major design win with a leading South Korean flash manufacturer, supporting one of the most anticipated next-generation handset gaming platforms announced this year, the Nintendo Switch 2, by delivering PCIe SSD-like performance in microSD form factor. The SM2708 is designed to meet the high-density, high-speed needs for modern portable gaming and other demanding applications. In conclusion, the start of 2025 has been challenging given the geopolitical headwinds driven by the tariff crisis. Silicon Motion is well-positioned to expand its position across the market in 2025 as we continue to gain market share with the flash makers. These partnerships increasingly look to outsource controller solutions given their need for operational expense discipline while managing significant investment in other technologies, including DRAM and HBM memory. Our position is also improving through the introduction of new products, including our PCIe 5 client SSD controller, which is experiencing strong demand. In addition to our new UFS and eMMC products, as we progress through the year, we will also benefit from the introduction of our UFS 4.1 controller in the smartphone market, as well as the ramp of MonTitan for storage system solutions and the boot storage in BlueField-3 DPU in the second half of the year. Additionally, we are well-positioned for continued share growth in each of our other markets, including automotive. Longer term, as our MonTitan automotive business continues to scale over the next several years, and our broad portfolio of solutions for IoT, industrial, commercial, and smart devices applications continue to gain share, I'm confident that our strategy to diversify beyond the maturing PC and smartphone market will be successful. I continue to believe that we could generate more than 20% of our business in 2027 from these new opportunities. I look forward to sharing more about our successes with these products and new markets throughout this year. Now let me turn the call over to Jason to go over our financial results and outlook.

Jason Tsai, CFO

Thank you, Wallace, and good morning to everyone 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. A reconciliation of our GAAP to non-GAAP data is included with the earnings release issued yesterday. In the March quarter, sales decreased 12.9% sequentially to $166.5 million, coming at the high end of our guided range despite weak end-user demand for PCs and smartphones at the start of the quarter. Gross margins increased again in the quarter to 47.1% as we continue to benefit from an improved product mix as we shift customers to newer products. Operating expenses increased sequentially to $63.6 million as we continue to invest in new enterprise storage products and given the timing of new product tape-outs. Operating margins decreased sequentially to 8.9% but were within our guided range. We had a one-time tax benefit due to the reversal of a tax accrual that we had in the previous year, which resulted in a tax benefit of $2.5 million in the quarter. Earnings per ADS were $0.60. Total stock compensation, which we exclude from non-GAAP results, was $4.8 million in Q1 '25. We had $331.7 million in cash, cash equivalents, and restricted cash at the end of the first quarter compared to $334.3 million at the end of the fourth quarter of 2024. Cash declined slightly in the first quarter, primarily due to a dividend payment of $17 million and $24.3 million in stock repurchases. In the first quarter, we repurchased $24.3 million of the $50 million six-month repurchase program that the Board authorized on February 6, with an average price of $56.96 per share. The first quarter was challenging given the geopolitical impact of the US election and its effect on global trade. While market uncertainty remains high, our team executed well and delivered revenue at the high end and operating margin within the upper half of the guidance range while investing heavily in advanced geometry products and our emerging MonTitan platform for enterprise and AI markets. We continue to build upon our strong foundation for long-term growth. Now I will discuss our second quarter outlook. Revenue is expected to increase 5% to 10% to $175 million to $183 million, driven by the success of our PCIe Gen5 products as well as continuing strong demand for our UFS 3.1 and 2.2 controllers. Gross margin is expected to expand to the range of 47% to 48% as we continue to transition customers to newer platforms. Operating margins are expected to be in the range of 8.9% to 10.9% as we benefit from higher revenue and gross margins. Our effective tax rate is expected to be approximately 16% to 17%. Stock-based compensation and dispute-related expenses are expected to be in the range of $3.1 million to $4.1 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, barring an overly negative impact from tariffs affecting end-user demand. As such, we are not changing our annual outlook currently and target revenue growth that is in line with our achieving a run rate of approximately $1 billion as we exit the year. Additionally, we expect to continue to improve our gross margins as we transition customers to new products and enter the enterprise market in the second half of the year. We remain confident that we can drive gross margins towards the higher end of our historical range of 48% to 50% by the end of this year. We'll continue to invest in advanced geometry products that will allow us to grow our market share across our businesses in the long term and help us diversify our product portfolio into new markets. Despite these higher investments, we are 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 deliver stronger revenue growth, better gross profitability, and improved operating profitability. Overall tax rate for this year is expected to be approximately 15%. Stock-based compensation and dispute-related expenses for this year are expected to be in the range of $27 million to $29 million. As we enter the second quarter, we are experiencing increased design win activity and an improved outlook from our customers. We see strong demand for our new PCIe Gen5 products, including the 8-channel controller that's currently shipping, as well as for our UFS 3.1 and our new UFS 2.2 and eMMC 5.1 controllers in the smartphone and automotive markets. For our upcoming 4-channel PCIe 5 controller and our UFS 4.1 controllers, our teams have been actively securing new wins and growing our backlog meaningfully as these advanced platforms expand into mainstream PC and smartphone markets next year. Lastly, the momentum behind our one-time family of enterprise controllers continues to grow as enterprises and CSPs around the world continue to invest in next-generation data centers that require high performance, low-cost QLC storage solutions that we are uniquely positioned to provide. While we are seeing a small degree of pull-ins ahead of NAND price increases, we do not expect this to impact our ability to grow sequentially throughout the year. Our teams continue to execute well, are growing our product portfolio, winning new projects and customers, and expanding our addressable markets, positioning Silicon Motion for sustainable long-term revenue and profitability growth. This concludes our prepared remarks. We will now open the call to questions. Operator, please go ahead with the first question.

Operator, Operator

Thank you. We will now take our first question from the line of Craig Ellis from B. Riley Securities. Please go ahead, Craig.

Craig Ellis, Analyst

Yeah. Thanks for taking the question. I wanted to start with an inquiry on the enterprise SSD MonTitan program. So, first of all, Wallace, congratulations on breaking into NVIDIA. That seems like a very significant intermediate and long-term development. The question is more longer term with that business line. It sounds like the business is strongly on track with the six customer wins you talked about last quarter to begin ramping up later this year. The question is, as we look out to 2026, if we've got six customers engaged now, where would you expect the business to exit '26 in terms of customer engagements? And how many of those might be in production? Not looking for specific guidance, but just color on the degree to which the pipeline is building out, especially as you get blue-chip customers into the mix.

Wallace Kou, President and CEO

Okay. Craig, thank you for the question. Let me answer your question. First of all, our previous six major customer engagements are not related to current NVIDIA BlueField DPU platform engagement. So, this is six customers we are on track to ramp from the second half of 2025 gradually, and by 2026 we will see more meaningful revenue growth. I think in '27, you will see much more significant growth. We are on track to achieve 5% to 10% from '26 to '27 as total revenue, which doesn't change. But the NVIDIA BlueField DPU design win has given us a better picture of the BlueField module for boot storage. In addition, the BlueField module with PCIe switches can connect to many, up to 30 PCIe enterprise SSD solutions. This will provide a new opportunity. So, we need to leverage the opportunity with the NVIDIA ecosystem provider such as VAST, DDN, Dell, NetApp, and their end customers. This gives us more opportunity to win and qualify within this ecosystem, allowing us to not only grow our boot storage on the NVIDIA platform but also to grow within the NVIDIA ecosystem for storage. We are working with many of our module maker and partner to deliver the high-density 128-terabyte QLC SSD by the end of this year. This will provide additional momentum to grow our revenue in the MonTitan family.

Craig Ellis, Analyst

That's really helpful, Wallace. Thank you. For my follow-up question, I wanted to turn to Jason. So, Jason, it's clear the trailing 18 months as the company has invested in 6-nanometer tape-outs. On the other side of that, the company has done extremely well in getting new design wins with NAND makers and module makers across the full range of products that the company offers. The question is this: where are we in the journey of upgrading the portfolio to 6-nanometer from a mass set cost standpoint? How much of that is now behind us looking through the current Q2? How much of that is ahead? And beyond 6-nanometer, can you talk about when we would see the next node transition for the company as we think about operating expense intensity over the next couple of years? Thank you.

Wallace Kou, President and CEO

So, in the near term, we're going to have two more 6-nanometer tape-outs in the next three quarters and one 5-nanometer tape-out, which will be a cost reduction for mobile controllers. And next year, probably around the middle of the year, we're going to have a 4-nanometer tape-out for PCIe Gen6 enterprise SSD because we have a customer waiting urgently, and we do not want to miss the schedule and deliver the results. Frankly speaking, we are really in the full design pipeline and we have many customers, and we don't have enough R&D resources to support many new designs. We are very confident in our growth momentum in client SSDs, mobile controllers, as well as enterprise SSDs.

Jason Tsai, CFO

I would also point out, Craig, that we do not anticipate moving beyond 6-nanometer for the foreseeable future for client applications, whether for client PCs or smartphone applications. The 4-nanometer product that Wallace is pointing towards is for PCIe 6 for the enterprise. And historically, with the exception of very rare cases, we really don't retape-out an old controller into a new process geometry. We look at new designs supporting either a new generation of flash or a new generation of interfaces for new tape-outs. To Wallace's point, we've got two 6-nanometer tape-outs coming up here throughout this year, which is pretty flat compared to last year. But we're also looking at utilizing other foundry partners as well potentially to see if we can obtain better pricing longer-term.

Craig Ellis, Analyst

That's really helpful color, guys. Thank you.

Operator, Operator

Thank you. We will now take our next question from the line of Suji Desilva from Roth Capital. Please ask your question, Suji.

Suji Desilva, Analyst

Hi, Wallace. Hi, Jason. So, maybe following up on Craig's question about the NVIDIA product here. I appreciate the MonTitan guidance of 5% to 10% of revenues. How should we think about sizing the NVIDIA partnership with the ecosystem in terms of addressable market? Any framework or metrics there would be helpful.

Jason Tsai, CFO

Yeah. So, look, I think, obviously, the opportunity for BlueField, we're very excited about. I think there are a number of factors that could affect the total addressable market (TAM). We expect the BlueField-3 product to begin ramping late this year, and we see a meaningful ramp in '26 and beyond. With every successive win at MonTitan, it gives us more confidence around achieving our goals for 5% to 10% of revenue in '26. The TAM really depends on several factors including the growth in the enterprise storage market, global demand, tariff impacts, etc. We do anticipate this to be a meaningful part of our MonTitan business longer term.

Wallace Kou, President and CEO

Let me add a comment: we're very happy to see NVIDIA start to focus on storage. During the GTC 2025, they mentioned storage next. They have really put new specifications and performance requirements to build the storage, especially with compute storage and data storage. The BlueField DPU 3, the third generation, is really for data storage and is designed for much larger density storage systems. We're excited to see the momentum for design wins. I think we cannot comment on the total units yet, but we're gearing up to ramp from the second half of this year, and there will be minimum quarterly revenue. We are seeing momentum moving to many storage systems integrators. Additionally, many hyperscaler CSPs are looking for high-density QLC SSDs. In the past, many CSPs and service providers only needed 8 or 16 terabytes, but now they are shifting their demands. Several players have announced major design wins in the CSP space. This gives you an indication of the trend. We are excited about our MonTitan technology, not just for the NVIDIA BlueField-3 DPU design, but for many other areas including AI cloud services and requirements for storage.

Suji Desilva, Analyst

Okay. That's very helpful color, Wallace. Thank you. And then maybe switching over to the notebook market. Understanding the mix here, where is your traction in the premium notebooks? And what's your outlook for the 8 versus 4-channel product as the year progresses?

Wallace Kou, President and CEO

If you take a look at the PC OEMs this year, they're going to ramp up the 8-channel PCIe 5 from the July timeframe. I think all the top five PC OEMs will align at the same time. We're going to see 5% of total PC shipments in the second half. The 4-channel DRAM-less controller designed for 2027 means production will occur in 2026. So, I think we have design wins from four of six NAND makers and nearly all module makers for both 8-channel and the 4-channel DRAM controller. That's why we believe our 8-channel will have a minimum 30% market share through PC OEMs, and for the 4-channel, we expect a minimum 50% market share when PCIe 5 moves to mainstream full-scale production. We believe we can continue to gain market share in client SSDs, growing from 30% to 33% today and moving towards 40% in the next few years.

Suji Desilva, Analyst

Okay. Very helpful, Wallace. Thanks, guys.

Operator, Operator

Thank you. Our next question comes from the line of Gokul Hariharan from J.P. Morgan. Please go ahead, Gokul.

Gokul Hariharan, Analyst

Yeah. Hi. Thanks, Wallace and Jason. So, first of all, on this BlueField-3 DPU engagement, can you talk a little bit about how this business engagement and product sale will work? So, you are already qualified by NVIDIA, and then customers such as DDN or Wadata or Dell will basically embed your controller into their storage solutions. Is that typically how that's going to work? And secondly, how many vendors have been qualified? I think you mentioned only Solidigm has been qualified so far. You're kind of the second vendor. How long do you think you can keep this kind of only two vendor status in this space? And maybe lastly, how do you size this market compared to the regular enterprise and data center controller market that you've been targeting with the original MonTitan target market?

Wallace Kou, President and CEO

Let me expand: the business model and certain details that we cannot share with you. I think we started to engage with NVIDIA about a year ago. Initially, we didn't fully understand the purpose of the application, but after three months of inquiries, we gained clarity. The BlueField-3 is designed for storage systems and has expanded its potential use case for enterprise storage solutions. The business model means we are engaged with NVIDIA, and we qualify with them. I believe there are only two suppliers who support the boot storage; we are one of those suppliers. We are in the final stages of qualification because they are ramping in the second half of this year, and we are in the process of qualifying our high-density QLC SSD through the ecosystem. This is just the beginning phase of the storage system's growth momentum in the AI storage sector, and we see more potential ahead. When the time is right, we will share more data with our investors.

Jason Tsai, CFO

And I would also point out, Gokul, that when we talk about the opportunity with BlueField, Solidigm isn't included in the opportunity for boot drives. Solidigm is focused on high-density 122-terabyte SSD; that opportunity is separate from what we're discussing related specifically to the boot drive with NVIDIA on BlueField-3.

Gokul Hariharan, Analyst

Got it. So, for the boot drive opportunity, according to what you know, you are currently the only one qualified. Is that fair?

Wallace Kou, President and CEO

There are only two suppliers, and we are one of them.

Gokul Hariharan, Analyst

Understood. Yes, that's very clear. For my second question, this might be directed to you, Jason, and also Wallace. How should we approach the expectation of reaching an exit rate of $1 billion by the fourth quarter of this year? This represents a significant increase compared to your Q2 guidance, which is about a 30% to 40% rise from that level. Historically, we haven't seen that kind of seasonality in the last five or six years, aside from 2019 when we observed something similar. Beyond that, there has not been such a notable increase in revenues going into Q4. I wanted to clarify if there are specific project wins or customer growth that you are counting on to support this guidance, especially considering the changes in the macro environment.

Wallace Kou, President and CEO

I think we will see momentum building towards the $1 billion run rate in Q4. We do not account for the enterprise business of BlueField design revenue. Instead, it is based on last year's design wins from mobile phones and PCIe Gen5. This design win pipeline will create sufficient momentum to drive our $1 billion run rate in Q4.

Jason Tsai, CFO

I would also point out that we do have a number of new programs that are scaling. The 8-channel PCIe 5 is expected to ramp meaningfully in the back half of the year as PC OEMs start ramping for the holiday season, enterprise replacement cycle, and the Windows 10 replacement cycle. These factors are expected to contribute positively to our results in the back half of the year. While there are uncertainties regarding the geopolitical environment, the numbers and forecasts we have seen today still indicate a very back half-centric growth profile for PCs and smartphones. Alongside, we have our new PCIe 8-channel ramping, the beginning of UFS 4.1 ramping, and the MonTitan boot drives and high-density 128-terabyte SSD controllers ramping. These programs will supplement the expected market strength as we prepare to meet our guidance for Q4.

Gokul Hariharan, Analyst

Got it. Yeah. That's very clear. Thank you.

Operator, Operator

Thank you. We will now take our next question from the line of Matt Bryson from Wedbush. Please go ahead, Matt.

Matthew Bryson, Analyst

Thank you for addressing my question. Initially, when I observed the performance of some of your customers and competitors in the first quarter, it seemed that there was a significant improvement in February and March, and that momentum appears to be continuing into the second quarter. While you exceeded your guidance, the level of momentum wasn't as strong. Additionally, looking at the seasonality or guidance for the second quarter, it seems to align with typical seasonal patterns. So my first question is why is there a guidance that appears to reflect more of the industry-wide pickup happening?

Wallace Kou, President and CEO

Because the tariff situation has really created many uncertainties. Based on where we are, although I believe we have almost no impact from tariffs at the moment. We try to be cautious, but our design win pipeline is solid and we are gaining market share continually. As we've mentioned, we have enough design win pipeline ramping in the second half of this year, which will bring the $1 billion run rate in Q4, and we are very confident in achieving it. There are many new projects ramping, including the global model for ADAS and IVI from Toyota. This includes a wide range of product mix, and I think the NVIDIA and the 128-terabyte enterprise MonTitan will bring more momentum into 2026 and beyond. But 2025 Q4, our current pipeline and design win opportunities should carry our sales revenue growth. However, we want to maintain conservative guidance to ensure we meet all the investor expectations.

Matthew Bryson, Analyst

Great. So, it sounds like you're just trying to embed some conservatism in your current outlook. And I guess, the second question is kind of following up on Gokul's last question. In terms of how we should think about the ramp in Q3 and Q4. It sounds like it's very project-based. I tend to think about new PC designs starting to build in June, July, while new handset designs, especially Chinese handset designs, being more of a late Q3, Q4 timeframe type opportunity. It sounds like a lot of the enterprise designs come in during Q4. Is that kind of how we should think about new programs layering into your revenue stream to get to that $250 million goal by Q4?

Jason Tsai, CFO

Yeah. That’s right, Matt. Just again, a little more commentary around Q1 and Q2. Given the broader economic environment and the potential impacts of changing tariff policies, we believe it’s prudent to err on the side of caution. While we're seeing some mild customer pull-ins, the amount is not material enough to change our near-term outlook. We’re experiencing increased interest in all the new products that we talked about; PCIe 5, UFS 4, etc. Our guide for the June quarter is pretty consistent with our peers and inline with our customer forecasts. Those are the key foundations of what we see in the market today in the first half of this year. Certainly, to your point, we do have some program-specific, market-specific things affecting growth in Q3 and Q4 that could be significant.

Matthew Bryson, Analyst

Thanks.

Operator, Operator

Thank you. We will now take our next question from Nick Doyle from Needham. Please go ahead, Nick.

Nick Doyle, Analyst

Hi. Thanks for taking my questions. Asking about the Switch 2 opportunity. Can you help size that at all what your market share attach rate is there? And maybe what kind of ASPs are those looking like? Thanks.

Wallace Kou, President and CEO

This is designed for the microSD Express C7.0; they use it for content cards for the Nintendo. So, I can only say we're about 80% of the share.

Nick Doyle, Analyst

Okay. Helpful. The importance of the boot storage application, could you just talk more about that? Like what exactly are you providing there? And does that help you get closer to providing the data storage part? Thanks.

Wallace Kou, President and CEO

I think what I can say is because of our collaboration with the NVIDIA team, we understand the full field module and the ecosystem better now. Through this ecosystem, we work with the star ecosystem together, and that's why we got an opportunity to get our product qualified in advance. Moreover, we see that many companies have announced their 128-terabyte QLC SSD, but no one can deliver the real product except Solidigm. We believe we could be the second player to provide a turnkey solution to the market to fill the demand for storage systems. This is a great opportunity, but we need to execute very well and deliver the results. We are very excited about this new opportunity and the engagement with NVIDIA. I believe it goes beyond just the BlueField DPU, but we cannot say too much; we do want to work because the storage system has a much bigger opportunity within AI cloud and server storage requirements. This is a significant opportunity for Silicon Motion.

Nick Doyle, Analyst

Thank you.

Operator, Operator

Thank you. I'm showing no further questions. I'll now turn the conference back to Mr. Wallace Kou for his closing comments.

Wallace Kou, President and CEO

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

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.