Matthew Bryson

Matt Bryson asked about the competitive dynamics in the Chinese handset market, considering large fabs shifting allocation away from handsets and PCs, which could create opportunities for Silicon Motion's share gains, versus the challenges faced by domestic Chinese controller vendors.

Answer

President and CEO Wallace Kou explained that Chinese controller makers face difficulties in securing advanced TSMC technology (7nm, 6nm) and are impacted by NAND supply shortages. CFO Jason Tsai added that Silicon Motion's controllers manage various NAND types, benefiting module makers in China who use local production. Mr. Bryson also inquired about the reason for lower gross margins in Q1, asking if it was due to lower controller margins or increased module shipments with NAND weighing on margins. Mr. Tsai clarified that eMMC and UFS (mobile controllers) typically have margins slightly below the corporate average, and their stronger performance in Q1 is putting temporary pressure on gross margins. He expects margins to recover in the second half of the year as MonTitan and PC client SSD products ramp.

Matthew Bryson began a question about the path to achieving the company's 25%+ operating margin target, noting the high revenue run rate required, especially if operating expenses continue to increase, before being cut off by a technical issue.

Answer

President & CEO Wallace Kou addressed the partial question by confirming operating expenses will increase slightly due to R&D and advanced node tape-outs. However, he expressed confidence that strong top-line revenue growth will provide operating leverage, targeting a return to the 20-25% margin range in 2026.

Matthew Bryson from Wedbush Securities questioned the path to achieving the 25%+ operating margin target, asking about the required revenue run rate to reach that goal given current and expected increases in operating expenses.

Answer

President and CEO Wallace Kou acknowledged that R&D expenses for advanced 6nm and 4nm tape-outs will increase slightly. However, he emphasized that strong top-line revenue growth will provide significant operating leverage, enabling a much faster improvement in operating margin. He expressed confidence in returning to the 20-25% range in 2026, with further improvement expected in 2027.

Matthew Bryson sought confirmation that Q1 would represent the revenue trough for 2025. He also questioned the M&A strategy, asking for assurance that the company would have a high bar for acquisitions compared to buying back its own undervalued stock, referencing past M&A outcomes.

Answer

CFO Jason Tsai confirmed the belief that Q1 will be the revenue bottom for the year, with sequential growth expected thereafter. CEO Wallace Kou assured that any M&A would be strategic, focused on acquiring core technology to grow the enterprise business where they have committed end-customer demand. Tsai added that the capital allocation strategy remains three-pronged, including dividends and the newly authorized share repurchase program.

Matthew Bryson asked if the direct-to-OEM sales model for the QLC handset solution represents a new, more common go-to-market strategy. He also followed up on Q1 seasonality, suggesting the downturn might be muted, and inquired if gross margins would return to the ~50% range in 2025 with potential for upside.

Answer

CEO Chia-Chang Kou explained the direct engagement with a top-5 smartphone maker was driven by the customer's desire to control the know-how for implementing QLC. He also stated it was too early to comment on Q1 outlook. CFO Jason Tsai and CEO Kou both affirmed the goal of returning to the 48-50% gross margin range by early-to-mid 2025, with potential for long-term upside from the new, higher-margin product mix.

Matthew Bryson questioned if the RF Mobile business had bottomed in Q1, the status of customer inventory reduction, and whether efforts by China to increase domestic RF production were impacting Tower's business.

Answer

CEO Russell Ellwanger confirmed that based on current forecasts, Q1 represented the lowest point for the RF Mobile business, with growth expected throughout the remainder of the year. He acknowledged that an inventory burn-off is occurring. He also noted that there has been an impact from a major Chinese customer moving to source more of its older-generation platforms domestically, partly due to local pressure.

Matthew Bryson asked if Tower achieved its $150 million annualized run rate for silicon photonics in Q4, inquired about the weakness in active copper cables, and asked about the financial impact of the shift from 200mm to 300mm wafers.

Answer

CEO Russell Ellwanger confirmed they hit the $150 million SiPho run rate in Q4 and that the target to double the 2024 full-year revenue in 2025 remains. He attributed short-term active copper cable weakness to a customer's architectural change but expects long-term growth. He noted that while 300mm wafers have higher ASPs, the margin impact is similar to 200mm due to higher substrate costs.

Matthew Bryson inquired about the drivers behind the strong Q1 order growth, whether tariff uncertainty accelerated customer orders, and the nature of the significant foreign exchange expense.

Answer

CFO Thomas Timko attributed the robust order entry to strong adoption of banking cash recyclers and improved retail self-service activity, which provides 80-90% visibility into full-year product revenue. CEO Octavio Marquez clarified that tariff talks did not accelerate Q1 orders, as they were announced after the quarter ended, and customers have not indicated changes to their investment plans. Timko explained the foreign exchange expense was a non-cash, non-operational P&L impact from intercompany loans, primarily with Brazil and Europe, due to currency fluctuations.

Matthew Bryson asked about potential business disruptions from geopolitical events, the financial benefits and adoption rate of the shift to ATM recyclers, the final year-end product backlog figure, and the expected cash flow linearity for 2025.

Answer

CEO Octavio Marquez and CFO Thomas Timko confirmed they see no material impact from geopolitical issues due to their regionalized 'local to local' supply chain, with less than 25% of components sourced from China. Marquez noted recycler shipments are growing from 45% in 2022 to a projected 55%. Timko added that the year-end backlog was approximately $800 million and that 2025 free cash flow is expected to be a use in H1 before turning positive in H2, with a strong second half.

Matthew Bryson requested specific figures on the revenue and margin impact from the retail services project delay. He also asked about the revenue opportunity, associated costs, and timing for the Asia expansion. Bryson followed up by questioning the implied sequential decline in Q4 EBITDA despite higher expected revenue and the reasons for the sharp drop in net income.

Answer

CFO Thomas Timko quantified the retail project pushout as impacting revenue by roughly $10 million and gross margin by 50-100 basis points. Regarding the Asia expansion, Timko and CEO Octavio Marquez stated it would create a near-term product margin headwind but would be accretive to margin dollars without significant CapEx, with revenue benefits starting in 2025. Timko explained the Q4 EBITDA outlook is a result of this geographic product mix shift away from Q3's record-high margins. He attributed the large sequential drop in net income primarily to a strategically higher non-GAAP effective tax rate of approximately 65% in Q3.

Matthew Bryson asked about the risk of losing indium phosphide customers due to shipping delays, sought clarification on the third factor that negatively impacted gross margins, and inquired about the pricing environment and the potential effect of new U.S. tariffs.

Answer

CEO Dr. Morris Young and Executive Tim Bettles stated a low risk of losing customers, citing the company's significant market share and the difficulty for customers to qualify new suppliers. CFO Gary Fischer clarified the third margin factor was that other product lines did not provide an expected lift to offset the InP decline, not a pricing issue. Regarding tariffs, Tim Bettles noted that while U.S. revenue is small (~8% in 2024), shipments will likely face a tariff, though the amount is still unclear.

Matthew Bryson asked why HDD pricing was relatively stable quarter-over-quarter despite a favorable mix shift to cloud and higher capacity drives. He also asked if the lack of new test equipment orders indicates more rational industry behavior.

Answer

CEO David Goeckeler clarified that there was a low single-digit increase in like-for-like pricing and that the business has seen significant margin improvement over the last four quarters. He suggested the business would take a 'breather' for a quarter before new products provide further tailwinds. On capacity, he reiterated that the company has set its manufacturing footprint and will only consider changes based on strong, long-term customer demand signals, implying a rational approach.