Yahoo Finance Silicon Motion Technology Corporation (NASDAQ:SIMO) Q1 2024 Earnings Call Transcript
Silicon Motion Technology Corporation (NASDAQ:SIMO) Q1 2024 Earnings Call Transcript May 3, 2024
Silicon Motion Technology Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Goo day and thank you for standing by. Welcome to the Silicon Motion Technology Corporation’s first quarter 2024 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, at which time if you wish to ask a question, you need to press star-one-one on your telephone keypad. This conference call contains forward-looking statements within the meaning of Section 27(a) of the Securities Act of 1933 and Section 21(e) 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 discussion of these risks and uncertainties and other factors, please see the documents we file from time to time with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements, which apply only as of the date of this conference call. Please be advised that today’s call is being recorded. It is now my pleasure to hand you over to the interim Chief Financial Officer, Mr. Jason Tsai. Please go ahead.
Jason Tsai: Thank you and 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. Wallace will first provide a review of our key business developments and then I 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 U.S. Securities and Exchange Commission. For more details on our financial results, please refer to our press release which was filed in Form 6-K after the close of the market yesterday.
The 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 similar to how we analyze our own operating results. The reconciliation of 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: Thank you Jason. Hi everyone and thank you for joining us today. We had a good start to 2024. We delivered sequential revenue growth ahead of expectations, achieved gross margin in the high end of our guidance range, and exceeded our operation margin outlook. Our SSD controller business was better than expected, primarily driven by demand from two of our flash maker customers. We continue to improve our pricing in the quarter, which is driving the steady improvement in our gross margin and profitability. Our results this quarter reinforce our leadership position in controller technology and our product continues to be in high demand as some customers recognize how important our technology innovation and service are to their business.
[Indiscernible] macro environment remains uncertain, I’m pleased by our team’s execution this quarter. We are taking the right steps to efficiently navigate market dynamics, remain steadfast in delivering the products and solutions our customers need, and focus on continuing growth and improving profitability across our platform. Let me start now with an overview of the NAND market and dynamics we are seeing today. We have seen NAND flash prices continue to increase since late last year and more recently have seen flash makers gradually increase utilization in their fabs, but a more meaningful capacity increase from the build-out of next generation NAND flash isn’t expected until next year. Demand remains robust, especially with Chinese handset OEMs as well as with enterprise and data center storage markets.
while PC demand has been steadily increasing. All of this will continue to drive NAND flash prices higher throughout this year. We are seeing some near term pricing fluctuations in [indiscernible] market that may cause some uncertainty with our customers that are more focused on the retail aftermarket, but demand for our controllers for [indiscernible] remains robust, especially with our flash maker customers. Our leadership in controller technology continues to drive stronger demand across the board with our customers. It is becoming clearer each day that our experience and expertise with QLC NAND is a defining differentiator that has resulted in significant wins with flash makers and other customers across all our product categories. As 3D NAND layers continue to increase, managing QLC NAND becomes even more challenging and continues to require more sophisticated controller technology to ensure high data retention and reduce [indiscernible] issues.
Our advanced LDPC and 3D [indiscernible] technology are best in class to protect data during high speed data transfer between the controller and the NAND, and operate under wide temperature range. We can deliver controllers that enable a no-compromise high performance and low cost solid state storage solution incorporating the latest generation of QLC NAND, especially with the rapid adoption of AI, whether it is in edge devices like PC and smartphone or in data center and enterprise storage. QLC storage devices are becoming increasingly central to AI applications and growth going forward. OEMs no longer need to choose between high performance and lower cost. With QLC’s [indiscernible] QLC NAND, they are able to have high sequential read performance, high density, and lower cost solutions to meet their ever-increasing AI compute and storage requirements.
Now let me start with our SSD controllers. We are seeing strong traction with our new PCIe Gen 5 8-channel controller we [indiscernible] last year. This is the first 6 nanometer 8-channel PCIe Gen 5 controller available in the market and we are winning with virtually every top module maker in addition to our three flash maker customers. The result from our early testing has been very good. This is a premium product that will be ideally suited for high end notebook and desktop AI PC, as well as for gaming and workstation PC that offer unparalleled performance with ultra-low power consumption. In addition, we have a strong pipeline of design activity with several flash makers for PCIe Gen 4 SSD, building their next generation QLC and QLC NAND.
This delivers high performance, high density and low cost SSD ideal for the rapidly growing AI PC market. Beyond the PC market, we also had automotive-grade PCIe Gen 4 controller wins with two of our flash maker customers that will ramp with a leading electrical car platform next year. We also expect to [indiscernible] for PCIe Gen 5 controller for the automotive market next year for several of our flash maker customers to further our leadership in the market. We are confident that our broad-based SSD controller solution will continue to scale this business meaningfully this year and into 2025 as many of these new products and platforms begin to ramp up. Moving to our eMMC plus UFS controllers, we have successfully [indiscernible] our first UFS 4.0 controller in the first quarter and are on track to start qualification with this new controller in second half of this year.
We also continue to see stronger than ever demand for our UFS 3.1 and 2.2 controllers, especially to support a new generation of low-cost NAND. In addition to several top module makers serving the smartphone market, we started ramping up a new flash maker customer for UFS 3.1 and 2.2 this quarter, and this customer is expected to ramp with our UFS 4.0 controller next year. While the smartphone market has predominantly used TLC NAND, we are now seeing increasing interest of QLC NAND, especially in mainstream handsets where an OEM can offer higher density without significant increase in cost. We are collaborating with one of the leading handset OEMs directly for a QLC UFS solution that is expected to come to market later this year for their mainstream smartphone.
We expect the demand for QLC UFS products, especially in mainstream and entry-level 5G smartphones will continue to increase as this higher density, low cost UFS solution will be required to drive adoption of AI beyond the premium segments of the smartphone market over the next few years. In addition, we have seen significant traction with our eMMC and UFS controllers in the automotive market, as well as in commercial, industrial, and other connected and smart devices. This non-smartphone application accounts for more than 40% of the overall eMMC plus UFS market today, with the market for automotive applications growing faster than the smartphone market. We are working with several flash makers and building eMMC and UFS controllers for this customer specially for the automotive market and expect this to scale meaningfully in the next years to come.
Now let me turn to our MonTitan platform. As we have talked about before, the enterprise data center storage market is a tremendous opportunity that we believe we now have a truly differentiated solution with MonTitan to scale with flash makers and storage solutions enablers, as well as directly with data centers and enterprise customers. Based on market data from [indiscernible] and IDC, as well as our own analysis, we anticipate the market for enterprise [indiscernible] for both enterprise storage and data centers will grow by more than 50% to approximately 35 million units by 2027, but more importantly the market for PCIe Gen 5 [indiscernible] is expected to increase more than five times to more than 50 million units in 2027. QLC [indiscernible] are expected to account for nearly 30% of the total petabytes in 2027, up from less than 10% in 2023, representing a huge growth opportunity that we are uniquely positioned to lead.
Our first MonTitan PCIe Gen 5 controller will manage TLC or QLC NAND on the single platform, enabling the seamless transition and adoption of QLC NAND with enterprise and data center storage applications long term. I am excited to announce that we have won two Tier 1 customers in the first quarter for the MonTitan PCIe Gen 5 controller, one in the United States and one in China, and I expect to begin ramping later next year. We continue to sample with more than a dozen additional customers and expect to secure more wins throughout this year. We are on track to begin mass production later this year and ramp more meaningfully next year. Our early success here has been our ability to [indiscernible] with our high performance and power efficient controller that supports more NAND, including TLC and QLC for high capacity [indiscernible], than any other platform in the market today.
Building on our patented performance and power shaping technology, we enable our customers to dynamically adjust for peak performance with low power consumption, depending on the various workload requirements to achieve the best result. We are seeing inbound interest from the world-leading data center providers because of our ability to give a high density, high performance, low cost TLC and QLC SSD for the increasingly data-hungry AI compute and storage needed. Given our proven track record of managing more QLC NAND than any one other vendor in the market over the past decade, we can leverage our unparalleled experience and expertise with QLC through the MonTitan controller platform to build an SSD solution that can effectively displace a portion of the new line HDD with high capacity main line SSD.
This solution offers a lower [indiscernible] compared to legacy HDD due to their smaller form factor, higher storage densities, lower power consumption and higher reliability and resiliency. We see an incredible market opportunity here to differentiate with our MonTitan platform and deliver solutions that are critical to the further build-out and adoption of AI in the enterprise and data center, driving a multi-year growth cycle for the company. Overall, I am excited by our strong start to 2024 and the [indiscernible] opportunity on the horizon for the rest of the year. Beyond our strong results, our underlying business momentum continues to accelerate as we add more products and more wins to drive the sustainable long term growth of our business.
We continue to see very strong traction across the board with controllers we are bringing to the market, and have greater confidence that our strategy to diversify beyond PC and smartphones into new opportunities in the enterprise and automotive markets will soon scale meaningfully with our Tier 1 customers. We are very proud of this, and it gives us good confidence in our pipeline and our ability to serve our current and new customers to drive long term growth. Now let me turn the call over to Jason to go over our financial results and outlook.
Jason Tsai: Thank you Wallace, and good morning everyone. I will discuss additional details of our first quarter results and then provide our guidance. Please note that my comments today will focus primarily on our non-GAAP results, unless otherwise specifically noted. The reconciliation of our GAAP to non-GAAP data is included with the earnings release issued yesterday. In the first quarter, sales increased--excuse me, sales decreased 6% sequentially to $189 million. SSD controller sales increased slightly by zero to 5% sequentially. eMMC and UFS controllers declined 10% to 15% sequentially. SSD solutions sales decreased 5% to 10% sequentially. Gross margin in the first quarter increased to 45%, reflecting both better mix and higher ASPs. Operating expenses in the first quarter were $62.5 million, $1 million higher than the prior quarter primarily due to higher R&D expenses to support our technology leadership.
Operating margins in the first quarter was 12%, down from 13.8% in the fourth quarter. Our effective tax rate in the first quarter was 16%, an increase from the 2.3% tax rate in the fourth quarter primarily due to a tax reversal benefit we had in the fourth quarter. Earnings per ADS were $0.64, down from $0.93 we reported in the fourth quarter. Total stock-based compensation, which we exclude from our non-GAAP results, was $3.2 million in the first quarter. We had 349.3 million of cash, cash equivalents and restricted cash and short term investments at the end of the first quarter, compared to $369 million at the end of the fourth quarter. Inventory increased sequentially in the first quarter to $253 million from $217 million in the fourth quarter to support revenue growth in the second quarter and the rest of the year.
Let me now turn to our outlook. As Wallace mentioned, the continuing success we are seeing with flash makers is providing more clarity around the improving fundamentals of our business. We are seeing strong demand in smartphones and, coupled with improving demand in PCs, our design wins for this year are well positioned to drive better growth than we had anticipated just three months ago. While the strength we are seeing with our current products, as well as the increasing interest in long time [ph] products, we are prudently increasing investment in R&D, primarily through higher headcount to support increasing programs we are engaging in with our customers. Now let me turn to our second quarter outlook. Revenue is expected to increase 5% to 10% sequentially to approximately $199 million to $208 million.
We expect eMMC and UFS sales to increase and SSD controller sales will be stable sequentially. Second quarter gross margin is expected to continue to improve and be in the range of 45% to 46%. Second quarter operating margin is expected to improve and to be in the range of 16.5% to 17.5%. Second quarter effective tax rate is expected to be approximately 19% and second quarter stock-based compensation and dispute-related expenses in the range of $2.5 million to $3 million. For the full year of 2024, we are increasing our outlook given the strong momentum we are seeing from our customers. Revenue is now expected to increase 25% to 30% sequentially to approximately $800 million to $830 million. Gross margin is expected to be in the range of 45% to 47%.
Operating margin is expected to be in the range of 14.7% to 16.7% as we further invest in our technology leadership, 2025 tax rate to be approximately 19%, and 2024 stock-based compensation and dispute-related expenses in the range of $30 million to $32 million. With the strong start to the year and the building momentum in our backlog, we expect to see sequential revenue growth and profitability improvements throughout the balance of the year. For operating expenses, we tape out our new 6 nanometer UFS 4.0 controller in the first quarter and expect to tape out our 6 nanometer PCIe Gen 5 four channel SSD controller in the third quarter. We expect our operating expenses to decline sequentially but to increase again in the third quarter to support the technology leadership investments we continue to make.
We have accelerated some R&D hiring, especially in our MonTitan enterprise controller group to support the opportunities we are seeing with our sampling customers, as well as the increasing amount of inbound interest. This concludes our prepared remarks. We’ll now open the call to your questions.
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