Silicon Motion Technology Corp

SWB:S9M

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Silicon Motion Technology Corporation's First Quarter of 2021 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 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 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.

And please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your first speaker for today, Mr. Chris Chaney, Director of Investor Relations and Strategy. Please go ahead.

[Christopher Chaney, executive]

Thank you, Annie. Good morning, everyone, and welcome to Silicon Motion's First Quarter 2021 Financial Results Conference Call and Webcast. As Annie mentioned, my name is Chris Chaney. I'm the Director of Investor Relations. Joining me today on this call are Wallace Kou, our President and CEO; and Riyadh Lai, our Chief Financial Officer. Following my comments, Wallace will make -- will provide a review of our key business developments, and then Riyadh will discuss our first quarter results and our outlook. We will then conclude with a question-and-answer period.

Before we get started, I'd 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 and uncertainties involved in investing in our securities, please refer to the filings with the U.S. and -- 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 the 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 matter similar to how we analyze our own operating results. The reconciliation of our 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.

And with that, I'd like to turn the call over to Wallace.

[Chia-Chang Kou, executive]

Thank you, Chris. Hello, everyone, and thank you for joining us today. In the first quarter, we delivered record sales and EPS. Sales grew 27% sequentially to a record $182 million, and earnings per ADS were a record $1.11. Our strong revenue growth was driven by strong sales of both our SSD controllers and eMMC+UFS controllers, with both products achieving record quarterly highs.

The outlook of upcoming quarter and the rest of the year continues to be very strong. And as we have secured additional wafers from our foundries, we are raising our full year outlook. Our order book remain very strong and continue to exceed our ability to supply. Looking to next year, we expect solid growth based on continued strong demand from our products and available foundry supply.

We are excited about our trajectory this year. Applications that use SSD and eMMC+UFS are doing well. Adoption of these solutions is growing and, furthermore, we are growing our market share. Let me discuss key factors driving our growth this year.

First, our SSD controllers. While the PC market is experiencing modest growth and SSD attach rate continue to rise, which are all beneficial for growth of our SSD controllers, the primary reason our controller are growing rapidly is market share gains. Several of our customers have been gaining market share, and we have also been gaining share at our customers.

Our customers have also been upsizing their order to us as they consolidate their procurement. We have been gaining SSD controller market share and expect to continue this trend. We have resized the client SSD market, and now believe our market share last year was in the 25% to 30% range. Based on our strong controller sales growth this year, which will primarily be driven by PCIe Gen3 SSD and OEM programs, we believe we should pick up 5 to 10 percentage points of market share.

Our market share is increasing because our PCIe Gen3 PC OEM programs, which we had discussed extensively in the past, are scaling. We are -- will be shipping our Gen3 SSD controller to 6 of 7 NAND flash makers. We are also shipping our Gen3 controller to several module maker with PC OEM programs. SSD using our Gen3 controller will be used by all of our global PC OEMs. Additionally, we are gaining market share because our small merchant competitors and the captive controller resources of NAND flash makers are both also facing foundry supply issues.

Our momentum will pick up further when our PCIe Gen4 SSD controller start ramping. Our Gen4 controller will start shipping in the middle of this year, initially with a few PC OEM using Intel Tiger Lake platform. We expect our Gen4 OEM program to scale quickly next year when Intel's Alder Lake platform become widely available. Based on the size of our current Gen4 design win for OEM programs, when fully ramped, we believe our controller will be used in about half of our PC OEM Gen4 SSDs.

Let me add that we continue to outgun the competition. Last year, our client SDD controller share in the merchant market was 4x bigger than our closest competitor. And we expect our market share to grow further as more of our OEM SSD programs enter production and scale.

Now turning to our eMMC+UFS controllers, which are primarily used in smartphone and IoT devices. For smartphones this year, we are benefiting from an industry recovery. Additionally, with smartphone embedded storage technology continuing to rapidly transition from legacy eMMC to UFS, our UFS controller sales will continue to scale rapidly as we further benefit from this trend.

Furthermore, we expect our share gains to increase our customer gain UFS market share. We believe our U.S. NAND flash partner using our highly competitive, jointly developed UFS controller with their industry-leading NAND and mobile DRAM technology will continue to outperform. We are also seeing positive customer engagement by our Chinese module makers and other customers with their UFS programs.

In the legacy eMMC segment, we continue to be positively surprised by both sustained power of eMMC and the expansion of our market opportunities. eMMC remains ideal storage solution for application that do not require large data storage capacity and are price-sensitive, and will continue to be widely used for the foreseeable future by low-cost smartphones as well as IoT and other non-smartphone application, such as smart TV, streaming, dongles, setup box, smart speaker and mainstream Chromebooks.

Our eMMC controller opportunity has also grown significantly larger with NAND maker exiting from the eMMC market as their priority has been changed. We are becoming the primary supplier of eMMC controllers. There are no other meaningful merchant suppliers of eMMC controllers.

Our strong order book is a result of solid end markets and growing demand of our controllers. Demand for our controller continue to exceed our ability to supply to our customers because of the very tight foundry industry capacity.

We still do not have enough foundry capacity to manufacture all the products ordered by our customers. We have, however, secured additional foundry supply and as a result, are able to meet more of our customers' need and increase our full year revenue guidance.

We have also secured additional foundry supply that should enable us to deliver solid growth next year. But again, demand for our product will likely continue to exceed our ability to supply. We are thankful to TSMC and our customers for their support in securing additional foundry supply. And to our many customers with unfulfilled orders, we ask for their understanding on this matter. We continue to work on our securing incremental foundry supply without which the many ecosystems, such as PC and smartphone, that depend on our controller for storage solution could be negatively affected.

Last quarter, we announced our $1 billion sales target by 2023 in 3 years. With stronger sales growth this year and solid growth next year, it is likely we could reach our goal sooner than our original expectation.

Let me conclude by providing an update of enterprise-grade PCIe Gen5 SSD controller. Acting -- engineering work continues, and we have been marketing our unique Gen5 architecture to hyperscalers in both the U.S. and China with very positive feedback. We expect to start sampling this SSD controller with customers in the second half of next year.

Now I will turn the call over to Riyadh to discuss our financial results and our outlook.

[Riyadh Lai, executive]

Thank you, Wallace, and good morning, everyone. I will discuss additional details of our first quarter results and then provide our guidance. 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 with the earnings release issued yesterday.

In the first quarter, revenue reached a record $182 million, 27% higher sequentially and 37% higher year-over-year. Earnings per ADS were $1.11, 29% higher sequentially and 38% higher year-over-year.

Now I will walk through the performance of our 3 key products during the first quarter. SSD controller sales increased 25% to 30% sequentially and 45% to 50% year-over-year. Sequential strength of our first quarter SSD controller sales growth was primarily driven by our PCIe Gen3 OEM programs. Channel market sales also grew sequentially, but more modestly.

eMMC+UFS controller sales also reached a record high, growing 30% to 35% sequentially and 50% to 55% year-over-year. Sequential strength of our eMMC+UFS controller sales growth was primarily driven by our UFS controllers. eMMC controller sales also grew sequentially, but more modestly. SSD solutions sales increased 0% to 5% sequentially and were down 40% to 45% year-over-year.

Gross margin in the first quarter increased from 49.3% in the prior quarter to 50.7%. Gross margin was higher than our guidance, primarily due to our focus on selling a better product mix for non-OEM programs.

Operating expenses in the first quarter were point $43.9 million, $4.4 million higher than the prior quarter, primarily due to higher compensation accruals. Operating margin in the first quarter was 26.6%, an increase from the 21.9% we generated in last year's fourth quarter. Our effective tax rate in the first quarter was 20.9%, above our 15% to 20% tax rate guidance due to more sales from higher tax offering entities.

Stock-based compensation and our operating expense, which we exclude from our non-GAAP results, was $3.0 million in the first quarter, slightly below our guidance of $3.1 million to $3.3 million. We had $371 million of cash, cash equivalents, restricted cash and short-term investments at the end of the first quarter compared to $369.2 million at the end of the fourth quarter last year. We paid $12.2 million in dividends to shareholders, the second quarterly installment of our $1.40 per ADS annual dividend that was announced last October.

Now let me turn to our second quarter and full year guidance and forward-looking business trends. For the second quarter, we expect revenue to increase 5% to 10% sequentially to approximately $192 million to $201 million. We expect all 3 of our key products, SSD controllers, eMMC+UFS controllers and SSD solutions to all grow in the second quarter. As Wallace had discussed, our growth remains capped by foundry supply limitations.

Second quarter gross margin should be in the range of 48% to 50%. Second quarter operating margin should be in the range of 26% to 28%. In the second quarter, we expect stock-based compensation in the range of $2 million to $3 million.

For full year 2021, we are now expecting the following: With additional foundry supply allocation, we now expect revenue to grow in the range of 45% to 55% to $782 million to $836 million. Our ability to meet customer demand, however, will remain capped by foundry supply availability.

Our full year gross margin expectations remains in the range of 47% to 49%. We expect gross margin in the second half of the year to be less favorable as our back-end and substrate costs have increased, while our prices to customers for OEM programs are bound by contractual terms.

Furthermore, our OEM programs are driving our growth, and despite foundry capacity limitations, scaling faster than expectations and subject to volume discounts. We believe our short-term investment in slightly lower gross margin will pay off in the years to come as we pull further ahead of both merchant and captive competitors and secure our position as the tech industry's primary supplier of NAND controllers.

Operating margin is expected to be in the range of 26% to 28%, up sharply from 21.8% last year and approaching our 30% target. For the full year, we expect stock-based compensation in the range of $16 million to $18 million, more than the prior year. We expect our effective tax rate for the year to be about 20%, similar to the first quarter.

On February 24, we broke ground on the construction of our Hsinchu office building. Construction is budgeted to cost $77 million, with $5 million spent this year and $33 million next year. We expect to complete construction in 2024. Upon construction -- upon completion, we plan on a sale and leaseback of the building.

Separately, on February 18, we won a bid with a third party to build an office building in Taipei, paid $1 million bid bond and expect to execute a property development agreement in the next few weeks at which time, we will pay a $5 million performance bond and other fees. We expect to spend approximately $75 million to $85 million and complete construction in about 6 years.

This concludes our prepared remarks. We will now open the call to your questions.

[Christopher Chaney, executive]

Annie, please go ahead and give instructions for the Q&A session.

[Operator]

[Operator Instructions] Our first question is from the line of Anthony Stoss of Craig-Hallum.

[Anthony Stoss, analyst]

Congrats on just the unbelievable results for you guys. Couple of questions. Riyadh or Wallace, maybe if you could give us your sense right now of when do you think the wafer shortages really start to ease up? TSM and others are talking about in Q3, things will start to loosen up a little bit. So I'm curious what your view is on that?

And then also, either 1 of you 2 guys, you're talking about bookings being sharply above your ability to get wafers. Can you quantify that? Is it 30% higher, 50% higher? Or maybe just if you wouldn't mind sharing kind of your view on where your bookings are for this year.

[Chia-Chang Kou, executive]

Yes. I believe TSMC said they expect current foundry shortage to continue throughout this year and maybe extend into 2022. As many of you know, foundry supply shortage is especially acute with the mature technology nodes, which significantly affect our ability to have a product fabricated. None of our products today are manufacturing using 5- or 7-nanometer. We do not know when the foundry supply will improve.

[Riyadh Lai, executive]

Tony, let me add to Wallace for your other question about our booking, what you think -- your question about how much our bookings could be in excess of our wafer supply. One way to put a framework around that is with -- if we do not have that constraint, we will be significantly on our way towards the $1 billion sales target that we have outlined -- that we had outlined last quarter. And we believe we'll be delivering faster than expected because of our stronger growth this year.

[Anthony Stoss, analyst]

And then as a follow-up, your comments or Wallace's comments about solid growth for 2022. Do you think you could grow faster than the overall, let's say, PC market in 2022 over 2021 revenues?

[Chia-Chang Kou, executive]

I think for the demand, yes. But from the wafer supply, we are not sure. But we already secured additional wafer to support our growth, but the demand is much bigger than the supply we can secure today.

[Operator]

Our next question is from the line of Craig A. Ellis of B. Riley Securities.

[Craig Ellis, analyst]

Congratulations on the real robust execution, guys. Great to see the growth and the margin performance has come through in the first quarter. So the first question is just on the new $1 billion target, and it's really a clarification. So the clarification is this: Can you just identify what the prior and what the new embedded underlying PC growth is in the calendar '21 revenue target, which at a midpoint, I think is $809 million? And is there any benefit from some of the improved product mix and pricing that you're seeing in channel markets in the increase from initial to $809 million now?

[Riyadh Lai, executive]

Okay. Let me start with your first question. The $1 billion target, the underlying assumptions that we had baked in was our growth will be driven primarily from our SSD controllers and also from our eMMC+UFS controllers. The growth from these 2 products will get us to $1 billion. Additionally, we also expect our FerriSSDs to contribute, and we are not expecting our enterprise SSDs to be part of this. Our enterprise SSD, we're building as growth driver beyond the $1 billion.

In terms of PC growth, we are obviously expecting modest PC growth this year, in line with expectations from third-party industry analysts. And within the PC profile, we are expecting notebooks to grow, while desktops to decline. And so that is a favorable tailwind to our overall business.

But clearly, as Wallace had talked about, the key driver is not the PC growth or the transition from hard disk drives to SSD. But rather because of our investments that we had put in place over the last few years in winning design wins with our big customers for OEM programs, these are now going into production and scaling very nicely, leading to very solid market share gains.

[Craig Ellis, analyst]

Yes. Good to see those gains. And Riyadh, a follow-up just on the full year '21 guide implications for some things in the back half. So on revenue, just given your updates into increased supply and the share gain programs you have in Gen4, would you expect revenues to rise sequentially through the back half of the year? Or do you get supply early enough that we would see revenues peak in the third quarter?

And then on the gross margin side, the full year gross margin guidance on average would imply 46.5% gross margin in the back half of the year. But as you've noted, gross margin is very mix dependent. And so what does the order book portend for the way gross margin can play out in the back half?

[Riyadh Lai, executive]

Okay. For the first part of your question, our revenue, we are expecting very modest sequential revenue growth for the rest of the year, quarter-after-quarter, very modest growth. This is going to be in line with additional wafers made available to us. But clearly, our ability to grow is capped by wafer limitations from our foundry suppliers.

In terms of our gross margin, we are -- our gross margin profile is going to be less favorable in the second half of the year as our big OEM programs continue to scale. And as these OEM programs continue to scale, our gross margin will be affected.

For a lot of our OEM programs, the pricing has already been predetermined on -- and baked in contractually, so our flexibility -- so our ability to change prices are fairly limited. And furthermore, there also volume incentive plans. And as these programs get larger and larger, they will impact our gross margin negatively in the second half of the year.

[Chia-Chang Kou, executive]

So let me comment. I think all wafer are available right now. We won't gain any additional wafer. That's why we make a full year guidance based on all the available wafer to us. Now execution about manufacturer back end, all the assembly, testing, everything, and we know exactly the yield, the price, all fixed. That's why I think the guidance, we'll fulfill the full year. It just depend on just the rest of our operational execution.

[Craig Ellis, analyst]

Okay. That's fair, guys. Would it be fair to think that your OEM customer mix would rise from the third to the fourth quarter and, therefore, we would see a sort of gross margin impact to the business sequentially?

[Chia-Chang Kou, executive]

That is correct.

[Operator]

Next question is from the line of Rajvindra Gill of Needham Company.

[Rajvindra Gill, analyst]

Congratulations as well on excellent results. Wallace, you talked about that your market share picture is improving fairly significantly, expecting to pick up 5 to 10 points of market share. I wanted to get a sense of -- maybe if you could elaborate a little bit further, on kind of what's driving that market share gains. How sustainable is it going into next year? And is that a major part of the underlying growth in SSDs and kind of your confidence of achieving that $1 billion target?

[Chia-Chang Kou, executive]

Okay. It's a very good question. I think we have very high confidence to grow 5% to 10% market gain because through our current PC OEM program from NAND makers as well as module makers. And we are ramping very quickly with the available wafer to us.

And due to, as we mentioned, our PCIe Gen4 controller design win, very widely and aligned with Intel Alder Lake next year. So we believe when PCIe Gen4 SSD adopted widely by PC OEM, we were about 50% of our OEM project. That's why we have very high confidence our -- we will have continued market gain for our clients to be continuing to next year and even beyond.

[Rajvindra Gill, analyst]

And your commentary that based on the sales growth this year and what you see next year, that you could achieve the $1 billion target sooner rather than later. You talked about fiscal year '23 achieving the $1 billion target, and you're basically implying that could happen in 2022. I'm just trying to kind of reconcile that with your commentary about the supply constraints kind of continuing at TSMC for the remainder of the year and going into possibly 2022.

Is it that you have -- you're expecting to get additional wafer supply in 2022 that will kind of help you -- give you more confidence about achieving the $1 billion? Is it that the Gen4 programs are going to ramp and you have those purchase orders in hand that's giving you some of the confidence that you could get that -- to get to that number sooner? I'm just curious that you feel that you could get to that number sooner, however, the capacity constraints are still fairly significant.

[Chia-Chang Kou, executive]

So maybe we can make it very clear to you guys. Our backlog that's building today is over $1 billion. If we have sufficient supply, this year, we can achieve over $1 billion sales target. However, we are not able to due to wafer supply shortage. Now we secure additional wafer supply, which is supported to continue growth for next year. It's too early to comment 2022 guidance, but we believe we'll continue growth for 2022. And if we can continue negotiate with TSMC to support major critical program, because if we cannot get a sufficient supply, that will impact the ecosystem negatively. So this is very important for us and also for our customer and for the whole industry.

So we believe we current secure additional wafer will support our growth for 2022, but we cannot comment what the eventually sale revenue will be. But we believe we'll be probably early than 2023 is likely.

[Rajvindra Gill, analyst]

That's very helpful. And just my follow-up, I'm going to -- I'll step back in the queue. Riyadh, the gross margin is kind of dipping to 46.5% range in the second half. You talked about that the pricing is committed or predetermined. And at the same time, there's back end and substrate costs that are increasing. That clearly is transitory.

But I'm curious in terms of when do you expect the back end of the substrate cost starting to subside? Is that still is going to be dependent on the capacity constrained environment? And how do you think about that, balancing that with, say, the pricing commitments going into 2022, kind of looking past the second half? How are you balancing the kind of the pricing dynamic with the back end and substrate costs that have been increasing?

[Riyadh Lai, executive]

That's a very good question, Raji. We're -- this is also tied in with, when do we think foundry supply will ease up. So related to this topic is when do we expect substrate and back-end tightness to also ease up. Frankly, it's not that clear right now. We are seeing improvements on the back end and substrates. But when will this lead to a better cost structure in terms of pricing of back end and substrates to us, we're still not quite sure. We are keeping a very close eye on this and continue to see if we can negotiate better terms. And this is something we'll be updating everyone in the following quarters.

[Operator]

Next question is from the line of Karl Ackerman of Cowen.

[Karl Ackerman, analyst]

Two questions, please. I guess, Riyadh, how sustainable are these OEM programs? You've indicated contractual agreements with NAND OEMs, but I'm curious if you could discuss the volume commitments you have with the OEMs that extend into the second half and into 2022 in the event capacity constraints ease. And how that may increase the risk that those OEMs move back toward internal controller solutions?

[Riyadh Lai, executive]

Karl, I'll let Wallace answer this question.

[Chia-Chang Kou, executive]

Yes. I think these OEM programs are not easy to be replaced by either third-party controller or internal controller. Because it's need to predesign and have to be -- put a lot of effort in the design qualification and through their [ end ] customer verification.

And I think we already have a full year forecast from 2022. So we know exactly what is going to last. And this is not just a solution. This is a industrial standard and will continue -- going to stay for more than 3 or 4 years, in the next 3 to 4 years.

So I think the -- we have a -- I think we have a contract price, and it's been discussed 2 years ago. Nobody can predict the COVID-19 and the wafer shortage and all these manufacture-centered related issue.

But so we -- I think we respect the commitment regarding our customers. We have been working together for a long time, and we committed for further agreement and contract. So we think this program is going to empower overall gross margin. However, this is going to drive to further growth and for net profit to the company.

So I think it's a very important project and it's going to be a very unique, outstanding high-growth project for the industry. So it's -- we really try to follow our previous contract and agreement and moving forward.

[Riyadh Lai, executive]

Karl, let me also add a little bit more to what Wallace said. As Wallace as mentioned, these programs took a lot of effort, a long time to put into execution. Our Gen3 projects, our PCIe Gen3 projects, we've been working on these for over 2 years, and they're now finally going to production and beginning to scale.

But as a result of the work that we've been doing with our customers for these OEM programs, we're building a lot of traction, a lot of stickiness. And this is now leading to the Gen4 programs that we have. And so this gives you a sense of what we're working on, solidifying our position as a leading supplier of controllers to the tech industry.

[Karl Ackerman, analyst]

Yes. No, that's very helpful. For my follow-up, how would you characterize the level of channel inventory of controllers today? I ask because I think there have been perhaps some news flow that module makers have been stockpiling PCIe controllers in -- as an afterthought or as a, I guess, perhaps a view that cloud SSD demand remains strong given this recent uptick in cryptocurrency demand. So any thoughts there in terms of the level of channel inventory of controllers today and your ability to service that demand?

[Chia-Chang Kou, executive]

So let me comment. This is a good question. I believe that current channel controller inventory is very, very low, probably almost near 0 because everybody is in shortage today. So the NAND component, NAND supply is not in shortage. So no customer will try to buy additional net inventory or solution put into inventory.

I think every product -- every wafer, every component we make is shipped directly to the end customer. The -- and our agent, our distributor even cannot even keep it in their stock. So we see the inventory is very, very low. Demand depend on product. Some products really high demand, some just moderate. But in average, I believe there's almost no inventory or inventory very, very low for controller in the channel.

[Operator]

Next question is from the line of Donnie Teng of Nomura.

[Donnie Teng, analyst]

And congrats on the good results. The first question is also related to gross margin. So for 2022, do you think there is a chance that we can renegotiate the price with the OEM customers in terms of the -- to revise up the price, as you have said that the foundry supply could be pretty tight all the way into 2022? And also, could you kind of clarify the so-called OEM project includes both SSD controller as well as UFS controller or mainly SSD controller?

[Chia-Chang Kou, executive]

I think that everything is negotiable, but if for a very large program with a contract, it's difficult, it's challenging. Because especially, I think for some additional wafer, also helped by our major OEM customer to negotiate together. We respect the contract, we engage with the customer.

But I think to 2022, we will definitely try the best for the company. And we'll also going to see what the price trend for the wafer. If wafer price increase dramatically, we have to negotiate the price with the customer. By the way, this OEM program is involved for both PCIe as well as UFS.

[Riyadh Lai, executive]

Donnie, let me also add, there are 2 other variables that we also look at. The first is, we're constantly winning new designs, right? So new design, new contracts, new OEM programs. And so with new OEM programs, the terms could be more favorable, more reflective of current circumstances, right?

And the other factor is, while back end, substrates, very tight right now, the industry is always cyclical. Our semiconductor industry is always cyclical. And so sometime down the road, there will be more supply, more back end, more substrates and prices will change. And our gross margin circumstances will also become more favorable. So these are 2 other factors to keep in mind.

[Donnie Teng, analyst]

Yes. Just -- thank you, Riyadh. I think it's very helpful. Just a follow-up. When you mentioned about back-end capacity as well as substrate supply, if we compare with the foundry capacity constraint, when do you think -- I mean, which one would you think that the supply tightness will be easing first?

And also, I think Samsung's Austin fab previously suffered from the difficult weather. So I think they have resumed some production in terms of controllers as well. Have you seen any kind of supply-demand change after they resume their production?

[Chia-Chang Kou, executive]

My personal opinion, the back end, the substrate supply and the assembly capacity, that will be relieved earlier than the wafer supply. I think when we talk about wafer shortage, we need to separate advanced technology node and mature technology node. Currently, I believe, 90% of [indiscernible] company are in mature technology node, and these technology wafer is very hard to increase capacity. Because doesn't matter for TSMC, GlobalFoundries, Samsung, UMC, SMIC, they want to invest any material technology node. It takes a minimum 2 years to get in land, to build a clean room fab and to get new equipment to install, to fine-tune. It will take time. So it won't result -- it won't increase capacity within just 1 to 2 years.

So this -- the tight wafer supply situation will continue, but it also depends if the relief related to overbooking or related to other factors, and maybe that can resolve certain of the tight supply. However, we -- I think, according to TSMC, they don't see there will be a solution this year. And probably the tight capacity will extend to 2022.

[Donnie Teng, analyst]

That's very helpful. And the last question is regarding to the operating margin. So it looks like the gross margin, of course, in the second half, there could be some pressure. But for operating margin, it looks like pretty strong. So Riyadh, just wondering, besides the operating efficiency, are there any other reasons behind the improving operating margin?

[Riyadh Lai, executive]

Donnie, it's a big trade-off that we have, right? With these OEM programs, they're very large. And when they ramp, the trade-off is, we have these volume incentive programs that result in slightly lower gross margin, but the offset is we're getting very significant operating leverage so helps our bottom line significantly.

[Operator]

Next question is from the line of [ Harlo Zayn ] of SIG.

[Mehdi Hosseini, analyst]

Yes, this is actually Mehdi Hosseini. I have a couple of follow-ups. And by the way, congrats for gaining market share. Wallace, how are you seeing new cryptocurrency technologies, specifically Chia. There has been a lot of headlines over the past month as to how the new cryptocurrency is going to consume low-end SSDS. And it appears that maybe some of the channel inventory of a low-end SSDs have been completely depleted. And I'm just wondering if you have any thoughts you can share with us? And I have a follow-up.

[Chia-Chang Kou, executive]

Yes, I think the new crypto technology and the Chia, the preferred really is for capacity drive. And really, it's really easier for HDD, our high-density enterprise SSD, not client SSD. So this is really not related to our business. We didn't pay really actual attention. I think even our channel, we'll focus on the real customer to grow our business and technology. But we just know this relates to the high-density HDD -- enterprise SSD.

[Riyadh Lai, executive]

Mehdi, apologies, I appreciate if you could repeat your second question.

[Mehdi Hosseini, analyst]

Yes. I was going to get into it. Actually, two-part second question. One for Wallace. You have historically had pretty good assessment of NAND supply and demand. You just told us that there is absolutely no channel inventory of controllers. Does that apply to NAND, especially looking into the second half? And the second part of the second question is for Riyadh. Would it be fair to assume that perhaps OpEx are going to be in the range of $40 million to $42 million on a quarterly basis for a foreseeable future?

[Chia-Chang Kou, executive]

I think let me comment regarding the channel for controller in the NAND. As I said, we believe there is no inventory for controller because every controller we have in hand, it will be sold out. We have a huge backlog in hand, and we cannot fulfill the order.

And regarding the NAND, NAND maker also observe there's a severe controller shortage. So NAND maker move their storage product to higher density product, that going to consume more NAND.

As you can see from PC OEM before, the lower density, 128 gigabyte SSD, not anymore. So value line start from 256 gigabyte. So that is the way how you see NAND maker, they manage to move all the product to higher density, and that can consume the NAND quickly.

That's why we don't see that many even NAND inventory in the market. From Q2, we start to see NAND price going up. And I think the price will continue gradually going up, but within single digit. So we really don't see the high inventory, either controller or storage solution in the channel.

[Riyadh Lai, executive]

Mehdi, to your other question about our OpEx in the second half of the year. We are expecting our OpEx to be fairly stable sequentially in the following quarters. We are expecting our top line to inch up a little bit quarter after quarter. We're expecting our gross margins to drift down a little bit. But we are expecting our operating margins to be fairly stable. So this is going to be coming from fairly stable -- allowing fairly stable operating expense in each one of the quarters in second half.

[Operator]

We have Suji Desilva of ROTH Capital for the next question.

[Sujeeva De Silva, analyst]

Congratulations on the results here. As you approach that $1 billion revenue, can you give us a sense of what kind of mix of SSD and smartphone eMMC+UFS controller we should expect roughly?

[Chia-Chang Kou, executive]

We cannot really tell the detail of percentage. We just -- both the client SSD and eMMC+UFS are very strong. And we also see our Ferri product going strong in the second half this year.

[Sujeeva De Silva, analyst]

Okay. That's helpful. And then for UFS, can you talk about the number of NAND customers that are now ramping? Is it still maybe 2 major ones? Or is it more at this point? And how many do you expect 6, 12 months out?

[Chia-Chang Kou, executive]

So for this year, the momentum is really driven by one major U.S. NAND maker. But we're going to have 5 more customer to grow UFS product in 2022.

[Sujeeva De Silva, analyst]

So all 5 of those will be starting, Wallace, in 2022? Or some come on this year?

[Chia-Chang Kou, executive]

For the year, will be very small, very light looking. But all 5 will grow really 2022.

[Operator]

And we have Matt Bryson from Wedbush for the next question.

[Matthew Bryson, analyst]

As I think Wallace talked to shipping to the 6 of the 7 NAND fabs. Can you remind us where that was a year ago? Also, can you characterize which markets you're getting more traction with your Gen3, Gen4 solutions? Is it primarily product ending up in retail? Is it low-end OEM? Is it across the gamut? And I have one follow-up.

[Chia-Chang Kou, executive]

As we said before, for module maker, we already have around 70% market share. But last year, I think our OEM program were just above -- below 30%. So we start to grow PC OEM program from this year. And the major driver for this year is the PCIe Gen3 controller. So we see the very strong demand from PC OEM as well as customer gain market share and we gain market share. And we see they going carry the momentum through from Gen3 to Gen4 next year because we have roughly around 50% design win socket from our PC OEM Gen4 program to 2022 aligned with the Intel Alder Lake platform.

So we see the momentum will continue, and we will continue to gain market share. Our PC OEM percentage also will gain through -- from '21 to carry to 2022.

[Riyadh Lai, executive]

Matt, the line was a bit choppy. Appreciate if you could repeat your first question again.

[Matthew Bryson, analyst]

I think, Riyadh, that Wallace got most of what I was asking for. Sounds like it's predominantly PC OEMs. But my follow-up is, is there any color you can give us around how much the newest NAND makers growth is contributing to your strong results and better outlook moving -- or strong outlook moving forward?

[Riyadh Lai, executive]

The new NAND makers OEM program will contribute from 2022.

[Operator]

The next question is from the line of Craig A. Ellis of B. Riley Securities.

[Craig Ellis, analyst]

Guys, I wanted to go back to the eMMC market. And it's typically not a focus, but there were 2 notable things in the commentary. I wanted to follow-up on one. There is an instance where it appears one OEM, due to some of the recent dynamics that we're seeing in the marketplace and with their manufacturing, may be moving away from doing eMMC internally. And you mentioned that you're the only merchant eMMC supplier.

So the twofold question is this, one, is it possible that the decision around eMMC could be the tip of the iceberg for more controller work, which would actually go merchant, not just eMMC, but SSD controllers? And two, given industry structure with merchant eMMC now, how would you characterize the pricing dynamics? Is it more possible to price for functional value and the value you create, given the industry landscape?

[Chia-Chang Kou, executive]

Okay. Let me try to answer your 3 questions. First, regarding eMMC, it's a very good question. I'd like to answer it. I think the market trend favors SIMO in the next few years. Firstly, it's because the market really demand more low-density storage solution. eMMC is the best solution which you can feed in lower density. Lower density mean is 120 gigabyte or lower or smaller is low density and price sensitive. So eMMC is adopted by not just a low-end smartphone but also from set-top box, from smart TV, smartwatch, smart speaker, IoT and Chromebook and many, many, even cable box, many, many electronic devices. This has become the standard because -- JEDEC standard, that's why it's widely accepted by many, many consumer electronic makers.

But because of controller shortage, wafer shortage become controller shortage, NAND maker tried to utilize their variable controller to make a higher-density solution. That's why NAND maker moving away from eMMC controller. They moved to UFS or higher-density SSD or enterprise SSD or other storage solution. This gave us tremendous opportunity. That's why we see as a huge demand will come to our company, but we cannot even fulfill 50% of the demand because demand is large.

And even there are more NAND maker come to us to place PO, but we have to apologize because we don't have wafer to support the trend. So this is a really market trend. You see NAND maker, even they try outsourcing for the third party, and we are the only one merchant company have the capability and scale and technology to support them. So this is really favor for Silicon Motion.

Second is, we also see for mainstream client SSD, this trend will happen and will continue to happen. Because NAND maker finally realize the -- they don't have to develop the client SSD controller for mainstream or value line. They will focus on high-end client SSD or enterprise SSD. That have added more value to their own benefit. Because our turnkey solution is more cost effective and time to market and serve with our customer with a very integrated technology, good solution. This is much better than the internal development.

So for controller or wafer shortage, the market trend and moving to the direction. That's why we gain almost majority of the NAND makers' business for client SSD. That's why we see our PCIe Gen4 design win is going to occupy minimum, almost half of PCIe Gen4 SSD in next year, ramping 2022.

Regarding the third question is related to the price. I think the -- when wafer's in shortage, the price will become more stable, and it was favoring in our controller side. So we were, based on the product, to do certain adjustments. If certain product in the past is below our corporate average, we'll do a little adjustment. But if this contract base for major OEM, we will respect for the contract.

So I think the price will become more stable as long as our foundry supplier and our back-end service provider, the price -- their adjustment is reasonable, we will not changing the price dramatically. We will really try to monitor the market trend carefully, make sure we can keep a very stable gross margin to our product mix.

[Riyadh Lai, executive]

And furthermore, as Wallace talked about, more and more new businesses coming in our door. To the extent that we can take on new projects, the terms of new projects will be reset at today's conditions. So the margins are -- for new projects will be more favorable than projects that we took on, say, 2 years ago and facing higher costs today.

[Operator]

And as there are no further questions on queue, I'd like to hand the conference back to our President and CEO, Mr. Wallace Kou. Go ahead, please.

[Chia-Chang Kou, executive]

Thank you, everyone, for joining us today and for your continuing interest in Silicon Motion. I would leave you with some final thoughts. I'm extremely proud of our execution over the past several quarters and want to thank our team for their hard work and dedication.

As a large merchant controller supplier, we play an increasingly critical role in both the NAND supply chain and many critical technology ecosystems. Technology today is built on data, and data need to be stored to be used. And solid state storage-required controllers, our competitive position in the storage controller market has never been stronger, and I remain confident that our growth will continue. Thank you for continuing interest and listening to our call. Goodbye for now.

[Operator]

Thank you. And this concludes today's conference call. Thank you for participating. You may now disconnect.