Ticker: SIMO

Quarter: Q4 2025

Date: 2026-02-04 08:00:00

Operator: Hello, everyone. Welcome to Silicon Motion Technology Corporation's Q4 2025 Earnings Conference Call. [Operator Instructions] 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 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 informations and informations 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 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 hand the call over to your first speaker today, 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 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.

Chia-Chang Kou: 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 operating margin guidance and positioning us for a record-breaking year in 2026. We benefit from strong demand across all our markets 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 end markets and further positioning Silicon Motion for long-term market share expansion. While 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 unmatched NAND maker relationship will allow us to deliver strong growth across our business. Given our current backlog and sales plan, we believe that first quarter '26 revenue will be the lowest of 2026 and expect sequential growth throughout the remainder of the year. As we continue to introduce the [indiscernible] compelling new eMMC and UFS controller, PCIe client SSD controller, MonTitan enterprise SSD controllers, enterprise bodes solution and our expansion in Ferri automotive 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 constraints, tight market condition and increasing pricing pressure across multiple markets, including AI and enterprise storage, boot drive drives, PC, smartphone and most other markets that use NAND flash. AI CSPs has attempt to lock up all the DRAM and NAND supply through 2026, which has made it increasingly difficult for other market player to get product and is 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, remain extremely well positioned in the consumer market despite the tight condition given our long-standing partnership with all the major flash vendors, our expanding market share within our existing market and the introduction of the new higher ASP products. We are leveraging our strong relationship with flash makers, OEMs and module maker 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 partnership that will lead to sustainable long-term growth. As a result, despite the expected market headwind, 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 solution given our strong and growing market position and leading product portfolios. I would now like to discuss our highlights in eMMC and UFS. Growing AI demand in focusing a more disciplined CapEx approach by memory and storage market to prioritize resources across multiple technology products 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 embedded market. Module maker are seeing great assets to access by using local NAND supply, coupled with our controller, just as many of other NAND flash maker have looked in to exit the mobile market in favor of the enterprise. We will continue to benefit given that we are the only meaningful merchant controller maker for the eMMC and UFS. While the overall smartphone market is expected to decline this year due to higher DRAM and NAND component cost, we expect the continuing shift from NAND flash maker to module maker 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 OEMs and module maker will lead to continuing outperformance for our business. In addition, the market for eMMC are 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 has all but exited for 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 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 maker 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 4-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 customers to create SSD despite DRAM shortage. We have secured design wins with 4 NAND flash makers, including the 2 from South Korea for TLC and QLC SSD 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, remain 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 expectation are for data center and AI infrastructure investment to exceed $1 trillion by 2030 and the [indiscernible] 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. And the industry is increasingly looking to adopt NAND solution in one 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 the 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 one 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 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 tapeout our first 4-nanometer 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 customer and expect this new controller to drive additional success for MonTitan beginning in the 2027, '28 time frame. I'm pleased to announce that we have already secured design wins 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% to 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 midterm. And finally, I would like to discuss our enterprise-grade full drive storage business, which is rapidly evolving into a significant new era of growth for our company. We are allocating -- we are collaborating with multiple customers to develop an enterprise boot dive 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 their -- for several NVLink and Ethernet switches of their new GPU/CPU platform that are 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 customer, including a leader -- leading search engine company to develop enterprise-grade boot storage drive based on our leading controllers. With the enterprise boot drive, our complete SSD product, this business will face greater exposure to our NAND scarcity and the high price environment, placing greater emphasis on sourcing NAND to supply our customer. 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 industrial customers, especially in the tight NAND environment, our customer 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 will also look to balance revenue growth with margin stability to drive profitability growth. In conclusion, the fourth quarter of 2025 delivered a 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 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: 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 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 in 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 increased 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 '25, we continue 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% to 10% to $292 million to $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 to -- at 46% to 47% in the March quarter, given the product mix. But we expect overall margins to recover back to our target range of 48% to 50% throughout the year, as the mix of newer products increases, including our PCIe 5 controllers and our enterprise SSD solutions. Operating margin is expected to be in the range of 16% to 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 to $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 tapeout and development costs, especially from our upcoming 4-nanometer tapeout 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 has 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 drives, storage, high-performance and high-capacity enterprise and data center storage markets. And I look forward to sharing our progress in greater detail when we report again in 3 months. This concludes our prepared remarks. I'd like to open the questions -- open it up to questions now. Operator?

Operator: [Operator Instructions] First question comes from the line of Mehdi Hosseini from SIG (sic) [ SFG ].

Mehdi Hosseini: Two for me. How should I think about the mix of eMMC, UFS revenue, especially in the back half of the year exiting this year? And I'm asking that because I'm under impression that there is a diversification by end market. It used to be a smartphone driven and now there is 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.

Chia-Chang Kou: Our UFS controller majority is smartphone. eMMC controller majority is in IoT devices, smart device, streaming device and set-top box and nonautomotive. So the combination, I think the -- around probably 40% controller -- or probably roughly is similar, 50% for smartphone, 50% for nonsmartphone area.

Mehdi Hosseini: Okay. And then on the 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 is the wrong assumption, that is corrected, how procuring NAND would actually impact the overall gross margin?

Chia-Chang Kou: 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 at the market price. So we have to work out with the customer, we can pass through the cost increase to the end customer. So it is challenging but ongoing process quarter-by-quarter. It definitely will impact some of our gross margin but we manage the margin pass-through. So I think because even the customers, they have at least 2 to 3 supplier, so they're based on the price and based on the supply and depends the percentage. We believe BlueField-3 is for -- primarily for this year [indiscernible] and the NVLink and the Ethernet switches is for the second half and really more volume in 2027.

Operator: Next question comes from the line of Neil Young of Needham & Co.

Neil Young: 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 it just the boot drive, are you placing that in SSD solutions? And then at what point -- I think you 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 talked about, with the leading GPU maker? When do you expect revenue for those to begin to ramp?

Jason Tsai: Yes. So you're right. For the boot drives, 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.

Chia-Chang Kou: I think we -- when we talk about 5% to 10% for our company revenue, does not include the boot drive solution. So currently, that's only kind of MonTitan controller. But boot drive solution is part of our enterprise business. The -- we cannot comment regarding what percent about the boot drive. I think this year it's relatively still small but I think next year will be much bigger. But #1 is, we're trying to secure the NAND supply. Currently, we have 2 NAND supplier. One is secure but the other is not. So we're working with our NAND partner continually to support the major project.

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

Neil Young: Okay. 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 detail sort of what's driving that? I think it's predominantly market share gains but if there's anything, different customer behavior or anything that you guys are seeing, that would be great.

Chia-Chang Kou: So first of all, as you know, probably 2 NAND makers walked away from the mobile storage. And we see -- but they're also still selling the wafer to module maker. And I think we benefit from majority module maker using silicon motion controller. They not only use NAND maker from U.S. and Japan but also use local NAND maker in China. That's why we continue to gain market share. And we see -- we gained market share from [indiscernible] and we expect to start to ramp the high end by end of 2026.

Jason Tsai: Anything else, Neil? Next question.

Operator: The next questions comes from Craig Ellis from B. Riley Securities.

Craig Ellis: 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 lead SSD controllers plugging along. Along with that, if we have sequential growth in the 3% to 5% range, we exit the year annualizing at a $1.3 billion to $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?

Jason Tsai: Yes. So you're -- I think you're right on some of these things. I think 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 sequential growth and we expect this year to be a record year.

Chia-Chang Kou: So let me add some comment. I think we have very strong backlog and we have a very strong momentum from all product line. But because some of the products like automotive, Ferri and the boot drive, we required to procure the NAND. So the case by case, some business, we probably just bypass, some business we become 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: 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 for 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.

Chia-Chang Kou: I think enterprise segment definitely is a target one to grow. But when we can -- the enterprise portion exceed the consumer portion, we cannot really reveal 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 customers, not just one of the GPU customer. And in addition, automotive storage 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 stronger portion and we do have a -- some new product coming in the next 2 years. So we're excited -- we're very exciting about the opportunity to grow but just be patient with us and hopefully can grow much faster even 2027.

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

Sujeeva De Silva: Congratulations on the progress here. Maybe stepping back on calendar year '26, you talked about it being a growth year. You talked about 5 segments, auto, mobile, PC, enterprise, boot drive. Maybe you can talk about which ones would have the highest percent or dollar contribution to the growth in '26, given some of the moving parts around NAND supply and so forth?

Chia-Chang Kou: Percentage, I think the enterprise controller definitely grow much faster. Boot drive also is new to us. It growth percentage is 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 these are all strong momentum to grow but we also see a more balanced growth continually moving to 2027.

Sujeeva De Silva: Okay. All right. 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 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?

Chia-Chang Kou: 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 -- are able 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 [indiscernible] is not enough for all the PC maker to meet their demand. So the -- because we have a 4 NAND maker using PCIe 5, 8-channel controller, 4 NAND maker also use a 4-channel [indiscernible] controller that balance about their internal allocation to fulfill the demand for NAND maker. In addition, because there's a shortage from NAND supply to PC OEM, module makers start to take -- takes the opportunity. So because we have majority module maker design win, that's why we fills the other gap. So even the total unit shipment for 2026 PC OEM will decline but I think for 5% to 10%. But we still have a pretty strong confident to grow continually in 2026.

Jason Tsai: And also, Suji, keep in mind, it's a combination of higher share, higher ASP products as we transition to PCIe 5, even with the 4-channel PCIe 5 controller, it's still a much higher ASP than a comparable PCIe 4. So we're going to get the benefit of both higher share and higher ASPs this year in spite of any sort of macro issues around PC unit volumes.

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

Gokul Hariharan: So just wanted to understand, again, on the client SSD controller. 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 to PCIe Gen5 because the general commentary in the industry seems to be about some degree of despecing of certain specs. 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? Yes. That's my first question.

Chia-Chang Kou: Yes. I think, Gokul, you got a very good question. It's -- we cannot comment for each individual PC OEM. But overall, I think the 2026 PC unit shipment will decline 5% to 10% and each OEM perform differently. Now regarding the sharp NAND price and DRAM price increase, so PC OEM outpaced the price increase quickly. So I think from value line and many would despec the storage product. So [indiscernible] gigabyte go down to 120 gigabyte. But for high end, they need to increase the price. So from despec portion, I think they will lose the demand and interest from value line customer. So that is a fact. So I think the impact for each of PC OEMs are different. And we see this is a current challenging situation for all the PC OEMs. And we work with the -- our module makers and work with the NAND maker because we also depend on their internal allocation for the NAND quarter-by-quarter. So it is very challenging. But because we have a much better position, so we have a much stronger opportunity to grow continually in 2026.

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

Chia-Chang Kou: Yes. So PCIe Gen5 is supposed to ramp much stronger in 2026 but for 8-channel high end because of DRAM shortage, that's why 8-channel increase will slow down dramatically in 2026. However, the PCIe 5 4-channel DRAM-less because no DRAM has much more to build the SSD to ship. So we see the much stronger demand for DRAM-less PCIe 5 controller, especially from the second half to ramp more meaningfully.

Gokul Hariharan: Okay. Understood. Second question on the boot drive storage. Could you help us understand how big this business could be because you've got the biggest GPU customer and it looks like for the next platform, this is going to be mandatory. And I think you just mentioned you're also getting the biggest ASIC 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 addressable 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?

Chia-Chang Kou: Yes. 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 the DPU. But so far, we see the volume is very meaningful in 2026. And the -- all the leading CPU and GPU maker, they use a multiple supplier, 2 or 3 supplier. So we are not the sole supplier for the DPU program. We see this year revenue relatively around $50 million but I think next year will be much higher. So it all depends the NAND procurement from us. So it's a case by case because we have multiple programs, not just one GPU customer. We have a multiple customer and also some will ramp up from Q4, the new program. So it depends how success 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 -- some is dynamic. And we just make a reasonable meaningful forecast for this year. And -- 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 '27 and '28.

Operator: [Operator Instructions] Our question is from Craig Ellis from B. Riley.

Craig Ellis: 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 OEMs of late and see if it's got applicability to Silicon Motion. 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.

Chia-Chang Kou: We currently we 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 for NAND and DRAM maker. That's why many, many major Tier 1 supplier come to Silicon Motion, ask for help. That's why we will case by case to make a decision whether we can support them. If the -- we are able to pass through the incremental cost to the automotive supply chain and we will do the business. If 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 selection, it's take a time and the customer 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 thing 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 supply. So this is the fact. And it's just not one NAND maker cannot supply us because just they really have tough time to do allocation and so many big Tier 1 customer ask for help and ask for supply. So this is a challenging situation right now.

Craig Ellis: 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 5 or 6 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 going to 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?

Chia-Chang Kou: Because in -- AI inferencing is growing much faster than anybody can anticipate. So there's so many new technology, so many new storage technology around, right, for KV cache, how you can improve the latency, how you really -- and capacity also increased dramatically because so many new content, new data need a storage device to keep it. So this is a huge momentum and need the NAND maker to increase capacity. But because there's a limitation for land, for clean room, for equipment build, it all take your time and it need a tremendous CapEx. So a lot of the several NAND, DRAM maker, their preference is definitely DDR and HBM, right? So the left over -- the CapEx for the NAND is limited. But then we see the demand is very strong and so many variable technology and it's just much more and they all need MonTitan to fill the role. And hopefully, I think our customer and ourself can secure the NAND and we can pay our duty to fulfill obligation to be part of the AI game.

Operator: I would like to invite once again Mr. Matt Bryson from Wedbush to ask question.

Matthew Bryson: 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 SIMO over a multiyear 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?

Chia-Chang Kou: I think the Chinese controller maker, they will have tough time to secure TSMC advanced technology node. So I think the -- to beyond 12 nanometers, like 7 nanometer, 6 nanometer, 5 nanometer, it's -- they have to be applied and to be approved by TSMC or Samsung in order to fabricate their advanced technology node product. For mature technology for 22 nanometer, 28 nanometer, China local fab can fabricate but that is really legacy product. So I think that is tough in part and we believe we 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 both YMTC and CXMT, they also try to increase capacity as much as they can but just take time.

Jason Tsai: Another thing, Matt, is that our controllers manage everybody's NAND, right? And so working with a lot of the module makers, especially in China, that does qualify 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.

Chia-Chang Kou: Using our controller not only can sell in China locally, can sell to internationally.

Matthew Bryson: 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: Yes. As we've talked about before, eMMC and UFS, our mobile controllers 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 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.

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

Chia-Chang Kou: Thanks 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 today.

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