Silicon Motion Technology - Q4 2025

Transcript

Operator (participant)

Hello, everyone. Welcome to Silicon Motion Technology Corporation's Q4 2025 earnings conference call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question, you will need to press star one one and wait for your name to be announced. I must advise you that today's call 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 limitations, 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 on these risks and certain 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. With that, I would now like to turn the call over to your first speaker today, Mr. Tom Sepenzis, Senior Director of IR and Strategy. Thank you. Please go ahead.

Tom Sepenzis (Senior Director of IR and Strategy)

Good morning, everyone, and welcome to Silicon Motion's fourth quarter 2025 financial results conference call and webcast. Joining me today is Wallace Kou, our President and CEO, and Jason Tsai, our CFO. Wallace will first provide a review of our key business developments, and then Jason will discuss our fourth 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 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 the call today. I'm pleased to report that we delivered another excellent performance in the fourth quarter, exceeding our revenue and near the high end of our margin guidance and positioning us for a record-breaking year in 2026. We benefit from strong demand across our market and through the introduction of compelling new controller and solutions. We increased market share in existing and new markets and expect the momentum to continue throughout 2026. We remain focused on delivering long-term growth while investing heavily in next-generation products, increasing our engineering resources to support new product in markets, and further positioning Silicon Motion for long-term market share expansion.

While our 2026 memory and storage industry dynamics are challenging, given the supply tightness of NAND and DRAM and rapidly increasing prices of these components, we believe our resilient operation strategy and our matched NAND and maker relationship will allow us to deliver strong growth across our business. Given our current backlog and sales plan, we believe that first quarter 2026 revenue will be the lowest of 2026, and expect sequential growth throughout the remainder of the year. As we continue to introduce these compelling new eMMC and UFS controller, PCIe Gen5 controller, MonTitan enterprise SSD controllers, enterprise boot drive solution, and expansion FerriSSD portfolio, we expect to deliver broad-based growth and to deliver the highest annual revenue in the history of the company in 2026. As we capitalize on multiple new products and execute on our continuing diversification strategy.

I would like to start by addressing the current market environment. The rapid adoption and growth of AI has introduced significant demand across all memory and storage technology, including HBM, DRAM, NAND flash, and even hard drives... The new and growing demand has led more recently to supply constraint, tight market condition, and increasing pricing pressure across multiple markets, including AI and enterprise storage, boot drives, PC, smartphone, and most other markets that use NAND flash. AI CSPs have attempted to lock up all the DRAM and NAND supply through 2026, which has made it increasingly difficult for other market players to get product, and they're driving significant intra-quarter price increases. Given the growing supply constraint in DRAM and NAND, industry analysts are beginning to take a more cautious approach regarding smartphone, automotive, and PC unit growth in 2026.

Silicon Motion, however, remains extremely well positioned in the consumer market despite the tight conditions, given our long-standing partnership with all the major flash vendors. Our expanding market share within our existing market and the introduction of a new higher ASP product. We are leveraging our strong relationship with flash makers, OEMs, and module makers to help secure NAND supply for our smartphone and PC OEM customers, and ensure steady access to NAND, even in the tight times. We are delivering greater value add to both our NAND maker partners and OEM customers, driving stronger partnerships that will lead to sustainable long-term growth. As a result, despite the expected market headwinds, based on our existing backlog, we expect growth in all our major product lines in 2026, including automotive, mobile, PC, enterprise SSD, and boot drive storage solutions, giving us strong and growing market position and leading product portfolios.

I would now like to discuss our highlight in eMMC and UFS. Growing AI demand in forcing a more disciplined CapEx approach by memory and storage market to prioritize resources across multiple technology, product, and market. Increasingly, we are seeing additional opportunity for Silicon Motion to supply controller as NAND makers shift their internal resources to focus on DRAM, HBM, and customized memory technology for high-performance AI requirements. The mobile market is a prime example of this trend, as NAND makers are actively exiting mobile in favor of DRAM, HBM, which has led our mobile business to outperform in 2025, as our eMMC, UFS business grew 25% for the full year, far outperforming the smartphone and embedded market. Module makers are seeing great success by using local NAND supply.

Coupled with our controller, just as many other NAND flash makers have looked to exit the mobile market in favor of the enterprise. We will continue to benefit, given that we are the only meaningful embedded controller maker for the eMMC and UFS. While the overall smartphone market expected to decline this year due to higher DRAM and NAND component cost, we expect a continuing shift from NAND flash makers to module makers to continue in 2026, and further benefit our eMMC, UFS controller business. Leveraging our strong relationship with local NAND makers and helping to align supply with handset OEM and module makers will lead to continuing outperforms for our business. In addition, the market for eMMC is vast and growing, with over 900 million units shipped annually. We are shipping eMMC into automotive, industrial, commercial, IoT, smart device, streaming device, and many other markets.

As flash makers have all but exited the eMMC market, the competition has diminished significantly, and we are experiencing strong revenue contribution from this segment. Given our current backlog and customer outlook for 2026, we expect to see significantly outpace the market and deliver another strong year of growth of our eMMC and UFS business, despite the difficult market environment. I will now discuss our client SSD business. 2025 marked a turning point of our client SSD business, given the success of our new PCIe 5 controllers. We introduced our 8-channel PCIe 5 controller at the end of 2024, with 4 flash maker partners and nearly all module makers, setting us a clear path to grow our client PC market share from 30% today to 40% over the next few years.

We expect our new DRAM-less four-channel PCIe 5 controller that we introduced last quarter to ramp significantly throughout 2026, targeting the mainstream market and driving higher adoption of PCIe 5, given that it is DRAM-less, making it easier for our customer to create SSD despite DRAM shortage. We have secured design win with four NAND flash makers, including the two from South Korea, for YMTC and QLC SSDs... and nearly all the module maker for this controller, and we expect to benefit from higher ASP and profitability as this new controller enters the mix. Until the memory and storage makers increase their big production capacity to alleviate the current shortage, the PC market will likely experience some difficulty driven by both shortage and demand destruction from higher prices. Silicon Motion, however, remains in excellent position to grow its PC business in the near to long term, given market share gains.

ASP increases and growing decision by the NAND flash maker to walk away from the consumer business in favor of AI, and we expect continued growth from our client SSD business in 2026. I will now provide an update on our enterprise business. The opportunity of Silicon Motion in data centers and AI infrastructure expanding daily. Current expectations are for data center and AI infrastructure investment to exceed $1 trillion by 2030, and the number of applications of NAND technology expanding rapidly to help store and process large volume of data quickly. The need for increased speed and lower latency has driven greater adoption of SSD in the data center. The industry is increasingly looking to adopt NAND solution in zoned storage, compute storage, and eventually near GPU storage as well.

Interest in our growing portfolio of MonTitan controller is increasing, as they are ideally suited to address the evolving requirement of AI workload for both compute and storage. In the December quarter, we began end user qualification of TLC-based high-performance compute SSD, using MonTitan with multiple customers. This qualification will progress throughout the first half of calendar 2026, and will begin to ramp commercially in second half of the year. High-capacity QLC-based storage SSD represents the largest addressable market for MonTitan, and we remain on track with multiple customers to begin qualification this year. Our MonTitan QLC-only storage solution offers significant advantage over HDD for AI inferences, including speed and power. Additionally, demand for QLC storage solution has accelerated in recent months given the current supply shortage of HDD.

Over the next few years, we expect the QLC SSD will become a compelling alternative to HDD, as they, they offer unmatched economies of scale, which will lead to lower prices over time, in addition to the inherent speed and power advantage. During 2026, we plan to tape out our first 4 nm chip, a PCIe 6 version of MonTitan, that is targeting hyperscalers, NAND flash maker, storage system provider, CSPs, and other Tier 1 customers. We have been developing the chip in association with multiple partner and customer, and expect this new controller to drive additional success for MonTitan beginning in the 2027-2028 time frame. I'm pleased to announce that we have already secured design win with multiple Tier 1 customer for this new controller, which is expected to ramp significantly in 2028.

We remain confident that MonTitan will ramp to represent at least 5%-10% of revenue exiting 2026, and should experience further success in 2027 and beyond, as our entry into enterprise market scale meaningfully in the near to mid-term. Finally, I would like to discuss our enterprise-grade boot drive storage business, which is rapidly evolving into a significant new era of growth for our company. We are collaborating with multiple customers to develop an enterprise boot drive solution that can work across multiple platforms. In the fourth quarter, we started volume shipment to the leading AI GPU maker for their current DPU product. We are currently working with this customer to qualify the next generation version of their DPU, as well as therefore several NVLink and Ethernet switches of their new GPU-CPU platform.

That expected to launch in the second half of 2026. This next generation DPU and switch product require higher capacities with much higher ASP and unit volume, creating a significant new growth opportunity for Silicon Motion. We are also working with other potential customers, including a leading search engine company, to develop enterprise-grade boot storage drive based on our leading controllers. But the enterprise boot drive are complete SSD product. This business will face greater exposure to our NAND scarcity and the high pricing environment, placing greater emphasis on sourcing NAND to supply our customers. While this has become more difficult, given the supply constraint and recent price increases, we remain confident that our relationship with the NAND flash maker developed over the past 20 years will help us succeed with these significant new opportunities.

For our Ferri storage solution, we are seeing strong demand from our automotive and the industrial customers. Especially in the tight NAND environment, our customers are relying more on us for steady and consistent supply to ensure smooth supply chain dynamics. We will continue to play a more strategic role and partner to our Ferri customer, but we'll also look to balance revenue growth with margin stability to drive profitability growth. In conclusion, the fourth quarter of 2025 delivers significant growth for our business and accelerated our boot drive storage business.

In 2026, beginning in the first quarter, we expect to continue to reap the reward of our investment in MonTitan, our 6-nanometer client SSD controller, and our new portfolio of eMMC and UFS products that are experiencing rapid growth, and the ramp of automotive business to about 10% of total business by the end of this year. We have never been better positioned as a company, given our expanding product portfolio and scaling in a large new market, including the AI and enterprise storage market. I'm increasingly confident that we will deliver strong, broad-based, sustainable sequential growth throughout that 2026 and beyond, as we scale multiple existing and new opportunity. Now, let me turn the call to Jason to go over our financial performance and outlook.

Jason Tsai (CFO)

Thank you, Wallace, and good morning to everyone joining us today. I will discuss additional details of our fourth quarter results and then provide our outlook. Please note that my comment, 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 in the earnings release issued yesterday. In the December quarter, sales increased 15% sequentially and over 45% year-on-year to $278.5 million, coming in well above the high end of our guided range and surpassing our $1 billion target run rate set at the start of the year, as we experienced continued strength in mobile demand and strong growth in our PCIe 5 client SSD business.

Gross margins was at the higher end of our guidance range and increased again in the quarter to 49.2%, as we capitalized on new product introductions and benefited from mix shift towards client PC products. Operating expenses increased sequentially to $83.2 million, given increased investments in our emerging AI and enterprise SSD and boot drive storage businesses. Operating margin increased sequentially to 19.3% within our guided range, driven by the higher-than-expected revenue and gross margin during the December quarter. Our earnings per ADS was $1.26. Total stock compensation, which we exclude from non-GAAP results, was $15.8 million in the fourth quarter.

We had $277.1 million cash, cash equivalents, and restricted cash at the end of the fourth quarter, compared to $272.4 million at the end of the third quarter of 2025. Cash increase in the fourth quarter from improved operational performance, offset by a combination of dividend payments of $16.7 million and an increase in inventories to support expected strong business ramp. Our team is executing well despite the difficult NAND and DRAM pricing environment. During the fourth quarter of 2025, we continued to invest in new advanced geometry products for our existing markets and for our emerging enterprise markets, including MonTitan SSD and enterprise boot drive solutions. These investments will be ongoing in 2026 as we support new growing interests for our new enterprise portfolio.

For the first quarter of 2026, we now expect revenue to grow 5%-10% to $292 million-$306 million, up sequentially and counter to typical seasonality. We expect continued strength across nearly all our product segments, with a particular emphasis on mobile, where we expect significant outperformance due to continued market share gains. Gross margins are expected to be slightly lower sequentially at 46%-47% in the March quarter, given the product mix. But we expect overall margins to recover back to our target range of 48%-50% throughout the year, as a mix of newer products increases, including our PCIe 5 controllers and our SSD enterprise SSD solutions. Operating margin is expected to be in the range of 16%-18%. Our effective tax rate is expected to be 19%.

Stock-based compensation and dispute-related expenses is expected to be in the range of $10.8 million-$11.8 million. We're well positioned for growth this year and expect 2026 to be a record revenue year for Silicon Motion, with sequential revenue growth each quarter. We anticipate additional tape out and development costs, especially from our upcoming 4-nm tape out in the second quarter, will drive higher operating expenses in the second and third quarters of the year. Our focus has always been growing profitably, and 2026 is no exception. We anticipate full year 2026 operating margins to improve as compared to 2025, despite our higher investments this year. While the current supply shortages and resulting component increases are creating headwinds, our pipeline for growth in 2026 and beyond remains stronger than it's ever been in the history of our company.

We remain focused on our market and product diversification strategy, which has already begun to deliver results. We have successfully entered the enterprise market with our boot drive storage solutions, and are currently in the end customer qualifications with our MonTitan Enterprise SSD products, which are expected to scale in the second half of 2026. Our leading position in the merchant controller market and unmatched NAND maker partnerships will drive higher share in eMMC and UFS, client SSDs, enterprise, automotive, boot drive storage, high performance and high capacity enterprise and data center storage markets. I look forward to sharing our progress in greater detail when we report again in three months. This concludes our prepared remarks. I'd like to open it up to questions now. Operator?

Operator (participant)

Thank you. As a reminder, to ask question, please press star one, one, and wait for your name to be announced. First question comes from the line of Mehdi Hosseini from SIG.

Mehdi Hosseini (Managing Director and Senior Equity Research Analyst)

Yes, sir. Thanks for taking my question. Two for me. How should I think about the mix of eMMC, UFS revenue, especially in the back half of the year, ending this year? And I'm asking you that because I'm under the impression that there is a diversification by end market. It used to be a smartphone driven, and now there's auto, and I want to better understand how that diversification is going to play out towards the end of this year. And I have a follow-up.

Wallace Kou (President and CEO)

Our UFS controller, majority is smartphone. eMMC controller, majority is in IoT devices, smart device, streaming device, and set-top box and our automotive. So the combination, I think around probably 40% controller, but probably is similar, 50% for smartphone, 30% for non-smartphone area.

Mehdi Hosseini (Managing Director and Senior Equity Research Analyst)

Okay. And then, on BlueField, how will revenue contribution play out? I think your commentary implied that there could be some revenue contribution later this year. And how would it impact your gross margin? I'm under impression that for BlueField, the COGS is going to change. You actually have to go procure NAND. And if you could just comment on it and let me know if it's a wrong assumption, or if it's correct, and how procuring NAND would actually impact the overall gross margin.

Wallace Kou (President and CEO)

Yes, BlueField, our boot drive is a solution for BlueField and also several other switches, platform. We need to procure the NAND, and NAND price is the market price, so we had to work out with the customer. We can pass through the cost increase to the end customer. So this is challenging, but there's ongoing process quarter by quarter. It definitely will impact some of our gross margin, but we manage the margin pass through. So, I think that because even the customers, they have at least a two to three supplier, so they're based on the price and based on the supply and depends the percentage.

We believe BlueField-3, BlueField 3 is for primary for this year, but BlueField-4 and the NVLink and the Ethernet features is for second half and really more volume in 2027.

Mehdi Hosseini (Managing Director and Senior Equity Research Analyst)

Okay, thank you.

Operator (participant)

One moment for the next question. Next question comes from the line of Neil Young of Needham & Company. Please go ahead.

Neil Young (Associate Analyst)

Hi, thanks for taking my question. My first question is, I wanted to understand how you're segmenting revenue from the boot drive opportunity, and same question for MonTitan. Are they both in SSD solutions, or is just the boot drive? Are you placing that in SSD solutions? And then, you know, at what point, I think you'd sort of just answered this, but just for clarification, what point do you anticipate revenue from the next-gen boot drive and those other switch opportunities that you talk about, the leading GPU maker, when do you expect revenue for those to begin to ramp? Thanks.

Jason Tsai (CFO)

Yeah. So you're right. For the boot drive, that's going to be part of our SSD solutions, that we talk about each quarter. Enterprise controllers, MonTitan, is part of our controller business. We will give you guys more color as it's appropriate.

Wallace Kou (President and CEO)

I think that we when we talk about 5%-10% for our company revenue, does not include the boot drive solution. So currently, that's only count MonTitan controller, but boot drive solution is part of our enterprise business. We, we cannot comment regarding what percent about the boot drive. I think this year is relatively still small, but I think next year will be much bigger. But number one is we're trying to secure the NAND supply. Currently, we have two NAND suppliers. One is secure, but the other is not. So we're working with our NAND partner continually to support the major, major project.

Jason Tsai (CFO)

We expect the next generation DPU revenue to begin for us sometime in the back half of the year.

Neil Young (Associate Analyst)

Okay, thanks. That's helpful. And then the second question, I just wanted to ask about the smartphone strength in 1Q. Maybe if you could just provide a little more details, you know, sort of what's driving that. I think it's predominantly market share gains, but if there's anything, you know, different customer behavior or anything that you guys are seeing, that would be great. Thanks.

Wallace Kou (President and CEO)

So first of all, as you know, probably, two NAND makers walked away from the mobile storage, and we see, but they're also still selling the wafer to module maker. And, and I think we benefit from majority module maker using Silicon Motion controller. They not only use the NAND maker from U.S. and, and, and Japan, but also use local NAND maker, China. That's why we continue to gain market share. And we see, we gain market share from, from mainstream and value line, and we expect to start to ramp the high end by end of 2026.

Jason Tsai (CFO)

Anything else, Neil? Next question.

Operator (participant)

Questions. The next question comes from Craig Ellis from B. Riley Securities. Please go ahead.

Craig Ellis (Senior Semiconductor and Capital Equipment Analyst)

Yeah, thanks for taking the question, and congratulations on the great execution, guys. I wanted to start out by going back to the comments on sequential growth through the year and just better understand some of the product level gives and takes as we go through the year. I think from what I've heard, it sounds like we'll see some real strength starting the year from eMMC and UFS and the color on MonTitan transition from sampling to revenue ramp up would suggest more of a back half of the year orientation towards SSD solutions. And I think that would leave SSD controllers plugging along. Along with that, if we have sequential growth in the 3%-5% range, we exit the year annualizing at a $1.3 billion-$1.4 billion run rate.

Is that the right level of growth we should be thinking about, or are you thinking about growth higher than that? Thanks for all the color there, guys.

Jason Tsai (CFO)

Yeah. So I think you're right on some of these things. I think, you know, certainly strength in the first half of the year is coming primarily from eMMC and UFS. We'll see client SSD controllers ramp throughout the year, but first quarter should be seasonally weaker. And then we'll see the MonTitan products begin to scale in the back half of the year. We do anticipate quarter-on-quarter sequential growth this year. We are not providing full year guidance, specifically beyond just, you know, sequential growth, and we expect this year to be a record year.

Wallace Kou (President and CEO)

So let me add some comment. I think we have very strong backlog and we have a very strong momentum for our product line. But because some of the product, like, automotive, Ferri and the boot drive, we require to procure the NAND. So the case by case, some business we probably just bypass, some business we, because strategic, we're going to take. So even potentially we have a much higher growth rate, but we might skip some of the business if the margin didn't meet our company target. So that's why we balance and the thing. But just from the backlog in the business, we decide to engage, we have a sequential growth quarter by quarter.

Craig Ellis (Senior Semiconductor and Capital Equipment Analyst)

That's helpful. And then the follow-up question is really a longer term question for you, Wallace. You and I have known each other a long time. I've seen you transition the business previously from a USB and memory card business to one that's more oriented to smartphones and PCs. And it seems like you're doing it again, transitioning the business to include a very significant enterprise quotient. The question, do you see a point in the 2027-2028 time period, where that enterprise quotient is actually bigger than the consumer business? Would love to get your views on that and how you see the longer term arc of the company playing out.

Wallace Kou (President and CEO)

I think enterprise segment definitely is a target we want to grow. But when we can, the enterprise portion exceed the consumer version, we cannot really relate to you. We target try to accelerate the momentum. But I think the boot drive is a really pretty strong business for us. We also have a multiple customer, not just one of the GPU customer. And in addition, automotive storage is also very strategic, and we believe if we can procure NAND stably, we can grow even much faster. So we have a multiple weapon to grow, but enterprise is a stronger portion, and we do have some new product coming in the next two years.

So we're very excited about the opportunity to grow, but be patient with us and hopefully can grow much faster, even in 2027.

Craig Ellis (Senior Semiconductor and Capital Equipment Analyst)

Will do. Thanks, guys.

Operator (participant)

Just one moment for the next question. Our next question comes from Suji Desilva of Roth Capital. Please go ahead.

Suji Desilva (Managing Director and Senior Research Analyst)

Hi, Wallace. Hi, Jason. Congratulations on the progress here. Maybe stepping back on calendar 2026, you talked about it being a growth year. You talked about five segments, auto, mobile, PC, enterprise, boot drive. Maybe you can talk about which ones would have the highest % or dollar contribution to the growth in 2026, given some of the moving parts around NAND supply and so forth. Thanks.

Wallace Kou (President and CEO)

Percentage, I think the enterprise controller definitely grow much faster. BlueField also is new to us. The growth presenting much bigger. But from dollar-wise, I think the mobile controller, eMMC UFS, is a bigger one, and it will exceed probably about 35%-40% of our total company revenue. So I think that these are all strong momentum growth, but we also see the more balanced growth continually and moving to 2027.

Suji Desilva (Managing Director and Senior Research Analyst)

Okay. All right, thanks. And then specifically on the notebook SSD controllers, can you just talk about the puts and takes of how the year-over-year would trend, given there's obviously NAND tightness and PC, you know, demand impact because of the cost of the inputs going up versus your share or your mix shift to premium, how that would all net together into a year-over-year trend for notebook SSD controller?

Wallace Kou (President and CEO)

So this is a very good question. I think the, as you know very well, DRAM and the NAND supply is really very tied to PC OEM customers. So some can unable to secure the supply, some don't. So it gave a tremendous opportunity to Silicon Motion, because the NAND maker, they move all the resource allocation to CSP. So the last was not enough for all the PC maker to meet their demand. So the, because we have, four NAND maker using PCIe Gen5 eight-channel controller, four NAND maker also use a four-channel DRAM controller, that balance about the internal allocation to fulfill the demand for a NAND maker. In addition, because there's a shortage from NAND supply to PC OEM, module makers start to take it, take the opportunity.

Because we have majority module maker design win, that's why we fill the other gap. So even the total unit shipment for 2026 PC OEM will decline, but I think for 5%-10%, but we still have a pretty strong confidence to grow continually in 2026.

Jason Tsai (CFO)

And also, Suji, keep in mind, it's a combination of higher share, higher ASP products as we transition to PCIe 5.0, even in the 4-channel, even with the 4-channel PCIe 5.0 controller, it's still a much higher ASP than a comparable PCIe 4.O. So we're gonna get the benefit of both higher share and higher ASPs this year, in spite of any sort of macro issues around PC unit volumes.

Suji Desilva (Managing Director and Senior Research Analyst)

Okay. Thanks, Wallace. Thanks, Jason.

Operator (participant)

Our next question comes from Gokul Hariharan from J.P. Morgan. Please ask your question.

Gokul Hariharan (Managing Director)

Yeah, hi. Thanks for taking my question. So, just wanted to understand, again, on the client SSD controller, what, what is the conversations, you're having on the, from the PC OEMs, given many of them are already sounding a little bit more skeptical about overall demand? Is there any indication that the spec migration is slowing down because of the cost inflation, from PCIe Gen4-PCIe Gen5? Because the general commentary in the industry seems to be about some degree of despeccing of certain specs. I just wanted to understand, if you can give some indication of what is the baseline, like, PC market expectations that you have, and then how are you building on top of that, both for market share and units, and ASP to kind of get to growth in the client SSD business?

Yeah, that's my first question.

Wallace Kou (President and CEO)

Yeah, I think, Gokul, you have a very good question. It's, we cannot comment for each individual PC OEM, but overall, I think that 2026, PC unit shipment will decline 5%-10%, and, each OEM perform differently. Now, regarding the, the sharp NAND price and DRAM price increase, so PC OEM now face the price increase quickly. So I think from value line, and many would de-spec the storage product. So to do with 6 GB, go down to 120 GB. But for high-end, they need to increase the price. So from de-spec portion, I think they would lose, the demand and interest from value line customer. So that is a fact. So I think the, the impact for each PC OEM are different, and we see this as a current challenging situation for all the PC OEM.

And we work with our module makers and work with the NAND maker, because we also depend their internal allocation for the NAND quarter by quarter. So it's very challenging, but because we have a much better position, so we have a much stronger opportunity to grow continually in 2026.

Gokul Hariharan (Managing Director)

Got it. Any comments about, like, the PCIe Gen5 penetration? I think last year I remember it was, like, 5%-8% or 5%-6%. Are we expecting that this goes to, like, high teens, 20% by end of 2024?

Wallace Kou (President and CEO)

Yeah. So PCIe Gen5 is supposed to ramp much stronger in 2026, but for eight-channel, high-end, because of DRAM shortage, that's why eight-channel-

Gokul Hariharan (Managing Director)

Mm.

Wallace Kou (President and CEO)

Increase will slow down dramatically in 2026. However, the PCIe 5, four-channel DRAM-less, because no DRAM, has much more to build a SSD to ship. So we see the much stronger demand for during this, PCIe 5 controller, especially on second half to ramp more meaningfully.

Gokul Hariharan (Managing Director)

Okay, understood. Second question on the boot drive storage. Could you help us understand how big this business could be? Because you got the biggest CPU customer and looks like for the next platform, this is going to be mandatory. And I think this, you just mentioned, you're also getting the biggest EPYC program out there as well. So you're kind of locking up probably 80% or 90% of the market share, of the market already from the overall market. How sizable is boot drive storage business going to be? And are you still going to stick with the NAND bundle kind of model here, or is it going to be eventually, like, NAND pass through at higher margin?

Wallace Kou (President and CEO)

Yeah, first of all, let me talk about the TAM. I think, first of all, the DPU, the boot drive business, it depend on the several factor, right, including the success of DPU. But so far, we see the volume is very meaningful in 2026. And all the leading CPU and GPU maker, they use a multiple supplier, 2 or 3 supplier. So we're not the solely supplier for the, for the DPU program. We see this year, revenue relatively around $50 million, but I think next year will be much higher. So, we saw depend the NAND procurement from us. So it's a case by case, because we have multiple programs, not just one, one GPU customer. We have a multiple customer, and also some will ramp up from Q4, the new program.

So it depends how successful we secure the NAND, also whether we can pass through the incremental cost to the customer with a meaningful margin. So this is all the negotiations. So it's somewhat dynamic, and we just make a reasonable, meaningful forecast for this year. But it is a very strategic business for us for long term, so we work closely and build a partnership with our GPU partner. Hopefully, this will become a much larger business in 2027 and 2028.

Gokul Hariharan (Managing Director)

Got it. Thank you.

Operator (participant)

A reminder to ask question, please press star one one. Our next question comes from Matt Bryson from Wedbush Securities. Please go ahead. Mr. Bryson, your line is open. You may unmute locally. And if you would like to ask question, please dial star 1 1. We have a follow-up question. Just a moment, please. Follow-up question is from Craig Ellis from B. Riley Securities. Please go ahead.

Craig Ellis (Senior Semiconductor and Capital Equipment Analyst)

Yeah, thanks for taking the follow-up question, team. Wallace, I wanted to just talk about something and ask about something that we've started to see much more broadly with NAND flash and DRAM OEM supply, and the topic is long-term supply agreements, LTAs or LTSAs. Is that something that would make sense for SIMO? If so, where would that be? Would it not make sense for SIMO? Just talk about the gives and takes with any move in that direction.

Wallace Kou (President and CEO)

We currently did not have the LTA agreement, but I think based on partnership and relationship. See, because in the past, we never want to build a much bigger revenue from storage solution. And for automotive, because automotive sector, they are the lowest priority from NAND and DRAM maker. That's why many, many major Tier 1 supplier come to Silicon Motion, ask for help. That's why we work case by case to make decision whether we can support them. If we are able to pass through the incremental cost to the automotive supply chain, and we'll do the business. On the other hand, for boot drive, it's more strategic business. So some, in certain case, we might have to sacrifice the margin lower than our corporate average margin, because more strategic.

So balancing, I think in the long term, because we cannot use a multiple NAND NAND selection, it take a time, and the customer didn't, doesn't want—does not want to change the NAND solution either. So we just have to work out the with our NAND partner to get a stable supply. The challenging situation is much more severe than anybody can imagine, because CSP really demand much more than the current supply can support. And that's why even leading smartphone maker have a tough time to procure their NAND and LPDDR5 and supply. So this is the fact, and it's just not what NAND maker cannot supply us, because just they... They really have tough time to do allocation, and there's so many big Tier 1 customer ask for help and ask for supply.

This is a challenging situation right now.

Craig Ellis (Senior Semiconductor and Capital Equipment Analyst)

That's really helpful. The follow-up somewhat relates to the way you concluded that, and it's an inquiry on some of the inside baseball, not asking for customer names. But, if we go back to January fifth or sixth, when NVIDIA said that, "Okay, look, the bottleneck in inference is all around the DPU, it's all around the storage. We've got to find a way to drive a 5x increase in inference processing time. We're gonna do it with much more NAND-intensive architectures." The question is: what have you seen from existing and new enterprise customers following that? Have you seen that catalyze new levels of engagement, and what does it mean for how you think about R&D and just how you're looking at opportunities going forward?

Wallace Kou (President and CEO)

Because in AI, inferencing is growing much faster than anybody can anticipate. There are so many new technology, so many new storage technology around, right? For KV Cache, to how you can improve the latency, how you really... And capacity also increase dramatically because so many new content, new data need a storage device to keep it. So this is a huge momentum and need as a NAND maker to increase capacity. But because there's a limitation for land, for clean room, for equipment build, it all take time, and you need a tremendous CapEx. So a lot of the several NAND DRAM maker, their preference is definitely DDR and HBM, right? So the leftover, the CapEx for the NAND, is limited.

But we see the demand is very strong and so many variable technology, and it just much more, and all need MonTitan to fill the role. And just hopefully, I think that our customer and ourselves can secure the NAND, and we can play our duty to fill our obligation to be part of the AI game.

Craig Ellis (Senior Semiconductor and Capital Equipment Analyst)

Thanks for that color, Wallace.

Operator (participant)

I would like to invite once again, Matt Bryson from Wedbush, to ask the question.

Matt Bryson (Managing Director and Senior Equity Research Analyst)

Hey, can you hear me now?

Jason Tsai (CFO)

Yes, we can.

Matt Bryson (Managing Director and Senior Equity Research Analyst)

Awesome. Sorry about that. Great quarter. One question, one follow-up for me. So you have the large fabs seemingly shifting allocation away from handsets and PCs, to support that cloud demand. And that, at least to me, seems like it creates significant room for share gains, for SMI over a multi-year period, particularly in the Chinese handset market. But we also know that China tends to prefer Chinese production when it's a viable alternative. At the same time, it also seems like the Chinese controller vendors have really struggled to compete, technically. So would you mind just talking a little bit about competitive dynamics, whether anything is changing in that market, and some of the structural dynamics that might make it hard, for the domestic Chinese players to compete?

Wallace Kou (President and CEO)

I think the Chinese controller maker, they will have a tough time to secure TSMC advanced technology now. I think that to go beyond 12 nm, like 7 nm, 6 nm, you have to be applied and to be approved by TSMC or Samsung in order to fabricate their advanced technology product. For mature technology, for 22 nm, 28 nm, China local fab can fabricate, but that is a really legacy product. I think this is a tougher part, and we don't even need to mention the technology, how good they are or whatever, but that is a manufacturing point of view. We see, due to the NAND supply shortage, I think, create another dilemma, so that will probably give even tough time for China local supplier.

But, to say that, I think that both YMTC and CXMT, they also try to increase capacity as much as they can, but just take time.

Jason Tsai (CFO)

Another thing, Matt, is that, you know, our controllers manage everybody's NAND, right? And so working with a lot of the module makers, especially in China, that does, you know, qualify as a lot of local production there because we're using... The module makers are building a lot of these solutions for the Chinese handset OEMs as well.

Wallace Kou (President and CEO)

Using our controller, not only can sell China locally, can sell to internationally.

Matt Bryson (Managing Director and Senior Equity Research Analyst)

Makes sense. And so, just one more quick question. With regards to the lower gross margins in Q1 on mix, Jason, can you just talk to whether that's lower margins on controllers or whether it's you're shipping more modules and so the NAND weighs on the gross margins?

Jason Tsai (CFO)

Yeah. As we've talked about before, eMMC and UFS, our mobile controller tends to be a little bit below corporate average. So as that business is a little bit stronger here in the first quarter, that's going to have some pressure on our gross margins in the near term. But as we have, you know, MonTitan and more PC client SSD products ramping in the back half of the year, we do expect to see improvements in our gross margins as we go into the back half of the year.

Matt Bryson (Managing Director and Senior Equity Research Analyst)

Awesome. Thank you.

Operator (participant)

Thank you. At this time, there are no further questions on the line. I'd like to hand the call back to the management for closing.

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 this event will be posted in the Investor Relations section of our corporate website, and we look forward to speaking with you at this event. Thank you everyone for joining us today.

Operator (participant)

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