Silicon Motion Technology Corporation (NASDAQ:SIMO) Q2 2025 Earnings Call Transcript

Silicon Motion Technology Corporation (NASDAQ:SIMO) Q2 2025 Earnings Call Transcript July 31, 2025

Operator: Good day, and thank you for standing by. Welcome to the Silicon Motion Technology Corporation’s Q2 2025 Earnings Conference Call. [Operator Instructions] This conference call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 as amended. Such forward-looking statements include, without limitation, statements regarding trends in the semiconductor industry and our future results of operations, financial condition and business prospects. Although, such statements are based on our own information and information from other sources, we believe to be reliable, you should not place undue reliance on them. These statements involve risks and uncertainties and actual market trends and our results may differ materially from those expressed or implied in these forward-looking statements for a variety of reasons.

Potential risks and uncertainties include, but are not limited to, continued competitive pressure in the semiconductor industry and the effect of such pressure on prices, unpredictable changes in technology and consumer demand for multimedia consumer electronics, the state of — and any change in our relationship with our major customers and changes in political, economic, legal and social conditions in Taiwan. For additional 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 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.

I would now like to hand the conference over to Mr. Tom Sepenzis, Senior Director of IR and Strategy. Thank you. Please go ahead.

Thomas Andrew Sepenzis: Good morning, everyone, and welcome to Silicon Motion’s Second 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 second 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 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.

Chia-Chang Kou: Thank you, Tom. Hello, everyone, and thank you for joining us today. I’m pleased to report that we exceeded our revenue and operation margin guidance for the second quarter that we further benefited from the introduction of new controller that drive higher market share, and our continuing expansion and growth into new markets. As we further scale and shift to high-end UFS PCIe controllers, and grow our automotive and MonTitan products in second half of this year. We expect our revenue growth to remain strong and profitability to further improve. We are excited by the progress and foundation for growth we are building. And based on our backlog diversification strategy, and design win momentum, we are well positioned for a strong second half, and remain confident that we will exit the year with our target $1 billion revenue run rate.

Let me start by discussing our view of a broader NAND flash environment, and how it’s positively affecting our business today and opening new opportunity longer term as well. The NAND industry experienced improvement in the second quarter, with flash prices increasing as the inventory level in the PC and smartphone market declined further, given a modestly better demand environment. Enterprise storage demand remained strong in the quarter with AI expanding into nearly every industry. NAND flash makers have reduced capital expenditures for big growth and continue to increase prices as enterprise and AI growth are limiting NAND supply. Our module maker partner continue to build inventory ahead of an expected increase in NAND prices in the second half of 2025.

We will remain flexible and are very — and are well positioned with both NAND flash maker and module maker to fulfill their growing requirement. With NAND prices as expected to increase demand for more cost-effective QLC NAND expanding in clients SSD, smartphone and enterprise storage increasing QLC production is a lower cost way to rapidly growing big growth for flash maker, while QLC-based solution deliver high-density storage at a significantly lower cost. We are the only controller company partnered with all flash makers, giving us significant advantage and insight into current and future NAND technologies. We believe this partnership and our unmatched experience in managing QLC NAND will allow us to maintain our industry leadership, and drive long-term sustainable revenue and earnings growth for many years.

In addition, the demand for memory and storage solutions expand into new end markets in consumer, commercial, industrial, automotive and enterprise. Memory makers are constrained in where they allocate R&D resources and capital resource between NAND, HBM and DRAM. The demand from each of these markets continue to rise and new generation of NAND evolves, the need for next-generation controller for these different application expanding. Our flash maker partner are turning to Silicon Motion as their primary merchant supplier to help build comprehensive portfolios, expanding our market share and building the foundation for strong multiyear growth with an increasingly diversified range of products and end markets. Now, let me share some updates for each of our business segments, beginning with eMMC and UFS.

Our mobile business significantly outperformed our expectation in the second quarter, as we benefited from several positive trends for our eMMC and UFS controllers. We continue to see strong booking momentum from both flash maker and module maker customers entering the second half of the year. Module maker, in particular are experiencing strong growth in mobile as they are benefiting from the trend towards discrete eMMC and UFS solution, driven by the increasing availability of low-cost mobile DRAM. Flash makers have also adopted our controller as they continue to embrace outsourcing to stay competitive, improve their time to market and prioritize their own internal R&D resources for other technologies and end markets. Our family of UFS controller for smartphone and other mobile and IoT devices grew meaningfully in the quarter as demand from both our flash maker and module maker customers accelerated, driven by strong end market demand.

The increasing share of UFS in smartphone is driving stronger demand for our new high ASP UFS controller in mainstream and high-end devices. In addition, our new engagement with handset OEMs for QLC UFS solution are also expanding and diversifying our market penetration. We expect this trend to continue in the second half of this year. For eMMC, our increasing share and robust demand in the quarter also delivered strong sequential growth for our controllers. Demand is accelerating in multiple existing and emerging markets, including IoT, smartwatches, smart TV, set-top box and emerging consumer products such as AI glasses. The market for eMMC accounts for over 800 million units per year and the non-smartphone accounts for much of this market.

We believe our eMMC business will remain a strong contributor for many years to come as these additional markets further scale. Now, I would like to move on to our SSD business. The PC market appeared to be bottomed out in the first quarter of 2025 and stabilized in the second quarter. We believe that market will grow in the low single digit in 2025, and we are expecting a stronger second half given typically seasonality, which benefit from the back-to-school and holiday sales. This year, we’ll also see further benefit from some setting of Windows 10 in October, and we are beginning to see more widespread adoption of AI as Edge in consumer and commercial PC, which is increasing demand of high-performance solutions, including SSD powered by our PCIe5 controllers.

As we have discussed previously, we expect to drive significant market share gains in client SSD over the next few years, especially in the high end, driven by our leading position in PCIe5. Sales of our 8-channel controller launched in December of last year continued to grow quickly in the second quarter, increasing by more than 75% sequentially and already account for more than 10% of our client SSD controller revenue driven by strong share gains and higher ASP. We expect additional momentum with our PCIe5 controllers throughout this year as OEMs increase sales at the high end. Additionally, we will start initial ramp of our 4-channel DRAM-less PCIe5 controllers at the end of this year and have already won design with 4 of 6 flash makers and nearly all the module makers.

This new controller will target the broader segment of PC and aftermarket SSD sales, and we believe that this introduction will help us achieve 40% of the SSD market by 2028, up from 30% today. I will now provide an update to our automotive and other business. As I mentioned earlier, we continue to experience tremendous design win activity in our Automotive segment. Vehicle capacity is increasing with a growing demand of high-speed and low latency storage. We support automotive storage needed across nearly all our product lines, including PCIe, eMMC, UFS increasingly. Our Ferri embedded solution, we were the first company to achieve ASPICE Level 3 certification for our PCIe4 solution, and we are on track to tape out our new automotive PCIe5 controller in 2026.

Demand of more storage solution is increasing in conventional cars as well as with next-generation electrical vehicle makers. Our controller power increased storage density, speed and reliability for diverse need including smart cockpit, ADAS sensors, cameras, navigation and other application. We are now seeing increased demand for storage solution to support AI and multiscreen integration to help automaker drive differentiation and customer loyalty. We are currently shipping to many of the largest automotive brands in the business, including Mercedes, Tesla, BYD, Xiaomi, Toyota, Honda and many others. As we enter the second half, we are seeing greater-than-expected demand from our partner in China as brands are successfully taking worldwide market share for low-cost automobiles and leading electrical vehicles.

Given the strength in China and increasing design win activity globally, we are increasingly confident that automotive will account for at least 10% of our revenue by 2026 to ’27. During the second quarter, we also experienced strong growth in our memory card business, due to the highly successful launch of Nintendo Switch 2. We start ramping with the leading South Korea flash maker with direct attach to the Switch 2 games as well as partnering with leading brands like ADATA and Knowles for retail expandable storage with PCIe SSD level performance in a microSD form factor. For the first half of 2025, our memory card revenue more than doubled year-over-year, and we expect to see continued success in the second half of the year as the Switch 2 demand remains robust and as we enter the holiday season.

The SM270A delivers a high-density, high-speed required by modern portable gaming devices, and we are pursuing other opportunities with this exceptional controller to drive diversified long-term growth. Finally, I would like to provide highlights on our enterprise business. Both memory and storage needs are evolving rapidly in the AI era and the opportunity for Silicon Motion are expanding. AI application requires access to data more quickly, driving increased adoption of SSD throughout the data center. The current infrastructure comprises high-performance memory, near GPU storage, compute storage, warm storage and cold storage. Our MonTitan platform is ideally suited to manage high-density, high-performance SSD that are both cost-effective and power efficient to serve the warm storage market with our leading controller when paired with QLC NAND.

The warm storage market has traditionally been served by HDD, but storage performance requirement have increased due to AI application and the price disparity between HDD and QLC SSD converge. We expect more hyperscalers and CSPs will adopt high-capacity QLC eSSD for warm storage, while near-line HDD move to support the growing cold storage need. Recently, we have been receiving interest from customers to expand beyond warm storage into compute storage market with our MonTitan. The new product will pair MonTitan with up to 16 terabytes of TLC NAND to target the high-performance near CPU market and represent an exciting new opportunity for MonTitan. Longer term, we are also beginning to work with our industry and flash maker partner to support the development of a new JEDEC standard, for near-line flash that will likely come to market in the next 3 to 5 years to further drive adoption of SSD in one storage application, especially as the need to access more data more quickly grow with AI.

The near-line flash requirement will allow for more relaxed sophistication for QLC with lower cost driven by higher yield. This should drive even greater adoption of QLC NAND in one storage and by extension should create a bigger market opportunity for MonTitan. At the upcoming FMS conference next week, we will be cohosting a demo with VAST Data to demonstrate how our MonTitan SSD can deliver a compelling solution for the insatiable growth in AI application. The collaboration will showcase the VAST DATA storage class memory, or SCM, for its new Seres V2 platform, Seres V2 leverage NVIDIA BlueField-3 DPU platform for AI storage. The Seres intelligent story platform are used by system integrator and architects and deployed at hundreds of large enterprises around the world, including banks, data centers, retailers, multinational conglomerate and other leading companies that are leveraging or are developing AI application.

We invite you to join us at FMS to see how our MonTitan solution will drive the next wave of AI solutions for the next several years. In conclusion, the second quarter of 2025 has delivered a significant rebound in our business, and we are beginning to see return on the investments we have made over the past few years. This includes our leading 6-nanometer product, our new UFS and PCIe5 controller, our new MonTitan eSSD and boost storage solutions. Our market-leading automotive portfolio and our new microSD product for multiple applications, including Nintendo Switch 2. We are in a better position to expand our market share across each of our markets in 2025 than ever before, but we continue to capture additional share with the flash maker across our product portfolio.

Given the current customer demand in our legacy business and the growing success with our new product, I’m increasingly confident that we will achieve our goal of exiting 2025 at a $1 billion revenue run rate and grow further in 2026. Now, let me turn the call over to Jason to go over our financial results and outlook.

Jason P. Tsai: Thank you, Wallace, and good morning, everyone, for joining us today. I will discuss additional details of our second quarter results and then provide our outlook. Please note that, my comments today will focus primarily on our non-GAAP results unless specifically noted. A reconciliation of our GAAP to non-GAAP data is included with the earnings release issued yesterday. In the June quarter, sales increased 19.3% sequentially to $198.7 million, coming in well above the high end of our guided range as we experienced a strong rebound in mobile demand and strong growth in our PCIe5 client SSD business. Gross margin was at the higher end of our guidance range and increased again in the quarter to 47.7% as we continue to capitalize on new product introductions and improving mix.

Operating expenses increased sequentially to $69.3 million as we continue to invest in new enterprise storage products and as additional resources to support our significant pipeline of new projects. Higher operating expenses in the second quarter were also impacted by the stronger Taiwan dollar as most of our compensation expenses are paid in Taiwan dollar. Operating margin increased sequentially to 12.8%, well above our guided range, resulting from improved gross margins and higher-than-expected revenues during the quarter. Our earnings per ADS was $0.69. Total stock-based compensation, which we exclude from non-GAAP results, was $0.2 million in the second quarter. We had $282.3 million cash, cash equivalents and restricted cash at the end of the second quarter compared to $331.7 million at the end of the first quarter of 2025.

Flash cash declined in the second quarter, primarily from the combination of the dividend payout of $16.7 million and an increase in inventory to support our expected strong business ramp. We did not repurchase any shares in the second quarter. Our team executed well and delivered significant outperformance despite ongoing global macro uncertainty and continuing investments in new advanced geometry products and our MonTitan platform for the enterprise and AI markets. Now, I’ll discuss our third quarter outlook. Revenue is expected to increase 10% to 15% to $219 million to $228 million, driven by growth across all segments of our business as newer products continue to ramp in PCIe5, UFS, eMMC and the enterprise. Gross margins are expected to be in the range of 48% to 49% as we continue to transition customers to newer platforms, and we return back to our historical range.

Operating margin is expected to be in the range of 12.3% to 14.3% as we benefit from higher revenue and gross margins, partially offset by higher operating expenses from higher R&D development and headcount expense and the continuing strength of the Taiwan dollar. Our effective tax rate is expected to be approximately 18%. Stock-based compensation and dispute-related expenses are expected to be in the range of $6.5 million to $7.5 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, driven by the strong ramp of new products and project wins.

We continue to target an annual revenue run rate of approximately $1 billion as we exit the year. We expect to continue to improve gross margins as new products scale and our enterprise business begins to ramp in the second half of the year. We remain confident that we can drive gross margins towards the higher end of the historical range of 48% to 50% by the end of this year. Our pipeline of new design wins continues to grow and we are committed to investing in next-generation, advanced geometry products that allow us to enhance our market share and business long term and help us diversify our product portfolio and enter new markets. We will also continue to add additional R&D resources to address the growing range of customer projects that will drive long-term growth.

Despite these higher investments, we’re 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 drive stronger revenue growth, better gross profitability and improve our operating profit. Our overall tax rate is expected to be approximately 15% for the full year and stock-based comp and dispute-related expenses will be in the range of $32 million to $34 million. As we enter the second half, our pipeline of new projects continues to build and position us for strong growth for the rest of this year and into 2026 and beyond. The investments we have made in client SSD and eMMC and UFS controllers are beginning to scale, driving better ASPs and higher margins.

The momentum behind our enterprise business driven by strong progress in our MonTitan development and expanding opportunities in enterprise boot drives will deliver a new avenue of high-margin growth for the company in longer term. We’re confident that our leading controller products paired with our unmatched customer relationships with all the flash makers and virtually every module maker will drive significant long-term revenue and profitability growth for the company. This concludes our prepared remarks. We’ll now open the call to questions from the investment community. Operator, please go ahead with the first question.

Q&A Session

Operator: [Operator Instructions] Our first question come from Craig Ellis from B. Riley Securities.

Craig Andrew Ellis: Congratulations on a very strong quarter of execution and the momentum you have here at midyear. I wanted to just start with a clarification question on some of your operating expense comments, Jason. So, we’ve all seen that there’s been exchange rate fluctuations at unusual degrees as we’ve gone through the last 3 months and before we stand here early in the third quarter. I’m wondering, if you can quantify what the new Taiwan dollar exchange impact was to 2Q and 3Q expenses versus the impact of some of the growth-related R&D expenses that you also talked about, just to help us calibrate the currency dynamic in the middle of the income statement.

Jason P. Tsai: Yes. The NT dollar strengthened meaningfully and quickly in the second quarter, and it was up by over 10% sequentially. So, while our revenue, cost of goods sold and most of our development costs are all denominated in U.S. dollars, our compensation is primarily denominated in Taiwan dollars given that the majority of our employees are based here in Taiwan. And the Taiwan dollar and the U.S. dollar exchange rate stayed stable, assuming kind of we state similar exchange rates to what we saw in Q1, our operating margin in the second quarter and for our outlook would have been about 1-plus percentage points higher than what we had reported for the second quarter and what we’re guiding to in the third quarter.

Craig Andrew Ellis: Yes, absolutely. The second question is for Wallace. Wallace, you’re clearly seeing robust engagement on the enterprise side of the business. And I’m hoping what you can do is talk about this year’s exit momentum along 3 parameters with respect to Enterprise One, what’s happening with the initial customer ramps with MonTitan 2? Can you update us on the status of the NVIDIA BlueField DPU program and what you’d expect there exiting the fourth quarter? And then we’ve just seen great engagement from the supply chain pulling in your PCIe Gen 5 controllers into lower end, more efficient AI-related scale-up, scale-out configurations. Just help us understand what you see there and what all that means as we look to 2026.

Chia-Chang Kou: Okay. Let me address the MonTitan status. I think the MonTitan’s design momentum is very strong. Now, we believe we’re going to start to initial ramp in the fourth quarter and will be more meaningful than strong momentum in 2026. So, we have four 2 Tier 1 customers for other designs. Actually, we have more coming, but we just don’t have enough resource to supply. The most important is known number of customers because each of customers need some custom-made tailored firmware to feed certain category and workload. So, we are focused on delivering the robust finalized firmware and expect production in late this year. So, I think the momentum is coming, but also with both QLC high-capacity enterprise SSD, as well as the TLC base for compute storage.

Now, let me address to the NVIDIA BlueField. See, NVIDIA qualification is in the final stage. We believe we will enter production in the Q4. Actually, frankly, the solution we are controller and firmware we had been with NVIDIA in the past 2 years with other NAND maker, which is we cannot say. So, this is a transition naturally we’re winning with our own solution with different NAND type to supply for the long term. But we believe this is helping us to grow in 2026 and ’27. In addition, they also open the door for us to engage with NVIDIA in other BU and other product line. So, this is very great for us to be in NVIDIA supply chain. And hopefully, that will expand much more opportunity in the future.

Operator: [Operator Instructions] Allow me to move on to the next question from Mehdi Hosseini from SIG.

Mehdi Hosseini: The first one for Wallace. Congrats on increasing the annual revenue run rate. I see there’s about a $55 million of incremental revenue increase from Q4 ’24 to Q4 ’25. And I’m assuming the majority of this is driven by the new PCIe projects. As I look into next year, let’s say, Q4 of ’26, this is where I think BlueField is going to kick in and add incremental revenue. So, you have a baseline of Q4 ’24 and then you overlay $55 million of the new products, especially driven by storage and then the BlueField would drive or sustain that growth into Q4 of ’26. Am I thinking about this transition the right way and feel free to modify, then improve that thought process?

Jason P. Tsai: Yes. I think — Mehdi, it’s Jason here. In terms of your comparison between Q4 ’24 and Q4 ’25, that incremental revenue that we’re talking about here is a result of really strength across the board, increasing share and new products in eMMC and UFS, increasing share in new products in PCI, especially in PCIe5 for SSDs and then the initial ramp of the MonTitan products as well as the initial ramp of BlueField. Now, we haven’t guided into 2026. So, you have to bear with us for a little bit. So, I’m not going to comment on kind of how this goes into 2026. But certainly, we still expect to be achieving that 5% to 10% revenue run rate with MonTitan in that 2026, ’27 time frame. Nothing’s changed there. And certainly, the strength that we’re building, the designs we’ve won, the pipeline that we have to support growth longer term continues to get stronger and stronger each day.

Chia-Chang Kou: So, I think, let me add a comment. We have a very strong backlog in the second half of 2025. That’s why we have confidence to reach our financial goal.

Mehdi Hosseini: Okay. And then moving on to OpEx, there’s a significant step-up in ’25, as Jason highlighted, investment for future. Should I expect OpEx intensity to decline into ’26 as the new product ramp and this is going to give you some OpEx leverage?

Jason P. Tsai: We certainly expect to see operating margin leverage as our gross margins improve and our revenue scales. We do continue — we will continue to invest. As Wallace pointed out, we have a number of new projects that we actually don’t even have enough resources today to support that we have to turn away. So, we will continue to invest. We’ll continue to hire. We have a number of new projects that we’re going to be taping out next year, especially in the enterprise and some of the more advanced geometry. So, these are things that we’ll continue to invest in longer term. But we believe you’ll see operating margin leverage. A lot of the investments that we have made over the last 2 years are now just starting to come to market, and they haven’t scaled yet. That should drive the significant amount of operating margin leverage going into action as well.

Operator: Our next question comes from Suji Desilva from ROTH Capital.

Suji Desilva: Curious with the trends you have in the revenues, whether the gross margin would continue to potentially expand maybe above the target range given the auto coming in, enterprise, some of these other areas or whether we should think about there being offsets to that keeping it in the range intermediate term?

Chia-Chang Kou: Yes. I think it really depends on product mix and depends on which quarter for certain products because it’s a high volume is — I think the margin is a little below our corporate average. For some high-end product, definitely margin is better. So — but I think we cannot — just I cannot comment right now, we were above the upside of our guidance margin, but definitely will meet our gross margin. And I think we should have a better result in 2026.

Suji Desilva: Okay. That’s helpful. And then on the MonTitan firmware efforts and the customer efforts and the R&D you’re investing, Jason, is there a point in time where you think you get on top of that? Or is that going to be a persistent challenge of sort of having to turn away programs? Or is there some kind of leverage after you do a few of these that you can kind of pull that forward?

Jason P. Tsai: Look, I think after we do a few — to your point, once we do a few of these, once we get a bunch of — a few of our customers up and running, we’ll have a wide range of firmware capabilities that we can bring to market, right? Some folks are going to want SDKs, hardware only where they’re building their own firmware, and that’s pretty easy to support. But some folks that require full turnkey will require more resources, et cetera.

Operator: Our next question comes from Gokul Hariharan from JPMorgan.

Gokul Hariharan: Wallace, the first question is you seem to be sounding a lot more optimistic about the automotive engagements compared to maybe 2 quarters back. Could you talk a little bit about what is the incremental margin profile when it comes to automotive, both for gross margins as well as operating margins, given a lot of the R&D is fairly similar to what you do for client SSD controllers or client eMMC controllers, right? So, is there a meaningful operating leverage that we should expect as automotive starts to scale given it kind of just expands the scope of your revenue base on similar R&D? Second question is on enterprise. Could you talk a little bit more about the road map for MonTitan? I think what are we thinking about for future engagement, like the next generation of MonTitan? What are you planning in terms of the road map?

Chia-Chang Kou: All right. Let me try to address automotive business. We feel more positive about our automotive business from second quarter and moving to second half of 2025 because through our design win pipeline, and we also had a significant breakthrough in China automotive market, as you know very well, China automotive is very bloody and price very competitive. I think, we find a very special way to position our value proposition to the leading customers like BYD and Xiaomi and several others. That’s why we built a tremendous new pipeline and moving into production from late ’25 to 2026. And our major program in Toyota global model also start to ramp by late 2025. That’s why we have a very, very strong momentum in automotive business.

We are confident we will be above 10% of our total revenue from ’26 to ’27. Now, let me comment about enterprise and regarding the plan and road map. Our MonTitan today is 16 channel, the PGI Gen5 controller with performance shaping technology. We also tape out a 6 — an 8-channel MonTitan is called 8388, and the product will be available by end of this year. And as you — I don’t know whether you know very well, the U.S. have demand high capacity of enterprise SSD from 128 terabyte and some even asked for 256 terabyte. But China also started a new momentum asking for 64 terabyte from late this year to 2026. So our 8-channel lower-cost MonTitan, which perfectly fit in the demand and provide decent performance as well as high capacity up to 128 terabyte.

And we also will develop our PCIe Gen 6 MonTitan family with TSMC 4-nanometer will tape out next year, and this will engage with at least 2 NAND makers in this program. So, this is very, very exciting. We’re very busy. We build a design pipeline. We believe MonTitan will continue around and driving much bigger momentum beyond ’26, ’27.

Gokul Hariharan: Got it. Maybe one follow-up, Wallace there. I think you talked about potentially seeing some demand for the cold storage market as well for some of the AI data centers. Is there anything that you need to really change in your portfolio or the controller itself to address this market? Or is it kind of like an adjacency that you can address without too much change in the product?

Chia-Chang Kou: No, the — the data storage today, primarily really one storage and some of the compute storage conventional server. I think for cold storage really is a conventional near-line HDD. But I think the Samsung has added association with the near-line flash and propose to share as a standard, that’s very, very interesting to drive a lower cost QLC-based enterprise SSD to expand one data storage for SSD. I think we definitely willing to see that, and we absolutely will put a good effort to engage with that trend because that’s a huge potential for the NAND maker and the data center for enterprise SSD opportunity.

Gokul Hariharan: Do you have any timing on when this could open up? Is it in the next couple of years that you think it will open up or will take longer than that?

Chia-Chang Kou: I think all NAND makers are working together and looking for how to define the right specs and definitely the purpose is the performance has to be a little better than near-line HDD. And so, they can relax the spec and make sure the performance meet the AI application in the one data storage. But time frame, as I said, about 3 to 5 years range.

Operator: Our next question comes from Matt Bryson from Wedbush.

Matthew Stevens Bryson: I just have one. So if I look at your target of 25% plus operating margins and I work off kind of current OpEx levels, even if I assume gross margins move up into the 50%, 51% range, so at historical a little bit revenue run rate of $300 million, and that goes higher if OpEx continues to increase, which I think you’re suggesting it will because [Technical Difficulty]

Chia-Chang Kou: Matt, you’re breaking up. We can’t hear you.

Matthew Stevens Bryson: Let me — is this better?

Chia-Chang Kou: No.

Matthew Stevens Bryson: I will jump out and try dialing in again.

Chia-Chang Kou: Okay. Let me answer your previous first question. I think definitely, we have a higher operation expense because we increased R&D and also we have a 6-nanometer tape-out. Next year, we also have a 4-nanometer tape-out with the 6-nanometer tape-out. So operating expense probably will increase slightly. But when we grow strongly in the top line of our revenue, that will help much faster for our operation margin. And so we’re definitely looking forward to move back to 20%, 25% margin in late ’26, and you will see even better margin moving to ’27.

Operator: Our next question comes from the line of Nick Doyle from Needham & Co.

Nicolas Emilio Doyle: Just trying to think about the mobile strength and figuring out how sustainable that is. You mentioned it’s coming — the strength is coming from units and share gains. Is the bulk of that related to this Chinese domestic market dynamic you’ve discussed and you mentioned it again. Just how should we be thinking about that growth into next year and if it’s sustainable?

Chia-Chang Kou: Okay. I think it’s a very good question. We have a very specific strategy to grow our mobile controller for both eMMC and UFS. So, of course, the China market and because of the affordable low-cost mobile DRAM available, that’s why most of the smartphone maker, they like to adopt discrete eMMC or UFS that help the module maker customer to expand quickly. And that’s why when they expand quickly, I think that also will impact some NAND maker for the value line. So, NAND maker — for NAND maker also turn to Silicon Motion controller because they do not want to develop in-house, that will utilize our solution quickly to the market and you can either sell the wafer to module maker or make a lower-cost solution to come in the market.

That’s why we grow very quickly for the value line and the mainstream for both eMMC and UFS. In addition, we see the NAND maker also looking for next generation, for example, UFS 4.1 is in high end, but UFS 5.0 will move to the high end by late ’26 and ’27. So, the 4.1 become mainstream. So, the NAND makers, they don’t have enough resource to develop a new firmware going to the new NAND. So, they come to outsource to third party and SMI in the right position to capture the outsourcing opportunity. So, all this pipeline together continue. You see so many opportunities. Actually, we have so many projects in hand. We don’t have a resource to take. This is what we see the momentum. And we definitely see we’re growing the market share in the mobile and hopefully, we can reach 30% within 2 years.

Nicolas Emilio Doyle: And if I understand correctly, it sounds a bit like this transition to the 4.1 in the mainstream could help the sustainability into next year. Maybe also asking a bit of a different way, I mean, you talked about the module maker inventory and how they’re pulling in orders in almost fear of price hikes later in the year, I mean, how do their inventories compare to historical? Does that make you nervous at all in terms of the future mobile business?

Chia-Chang Kou: We really don’t see — I think our customer in early Q2, some worry about the tariff. But later, it’s stabilized. Really, we don’t see many customers pulling the demand. As you know, and a customer, if they don’t buy that many NAND, they won’t buy controller for inventory, right? So really, they will see the balance. Most of them really plan ahead and make sure they also can prepare the NAND price increase. And I think that’s why we see the very stable pipeline because we can see 6 months backlog right now. That’s why we’re very confident about what we can achieve the $1 billion run rate by year-end.

Operator: [Operator Instructions] At this time, we appear to have no more further questions. I’d like to hand the call back to the management for closing.

Thomas Andrew Sepenzis: Thank you, everyone, for joining today and for your continued interest in Silicon Motion. We will be attending FMS conference in Santa Clara next week, as well as several investor conferences over the next few months. The schedule of this event will be posted in our Investor Relationship section of our corporate website, and we look forward to speaking with you at the event. Thank you, everyone, for joining us today.

Operator: That does conclude today’s conference call. Thank you for your participations. You may now disconnect your lines.