Silicon Motion Technology Corp

SWB:S9M

Earnings Call Transcript 2021-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Silicon Motion Technology Corporation’s Second Quarter 2021 Earnings Conference Call. [Operator Instructions] And please be advised that today’s conference is being recorded. [Operator Instructions]

And this conference call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 as amended. Such forward-looking statements include, without limitations, statements regarding trends in the semiconductor industry and our future results of operations, financial 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 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 consumers 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 obligations to update any forward-looking statements, which apply only as of the date of the conference call.

I’d now like to hand the conference over to your speaker today, Mr. Chris Chaney, Director of Investor Relations and Strategy. Please go ahead.

[Chris Chaney, Director, IR and Strategy]

Thank you, Annie. Good morning, everyone, and welcome to Silicon Motion’s second 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 CFO.

Following my comments, Wallace will provide a review of our key business developments, and then Riyadh will discuss our second quarter results and our outlook. And then we’ll conclude with a question-and-answer period.

Before we get started, I would like to remind you of our safe harbor policy, which Annie just read at the start of the call. For a comprehensive overview of the risks involved in investing in our securities, please refer to our filings with the U.S. SEC. 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 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 now turn the call over to Wallace.

[Wallace Kou, President and CEO]

Thank you, Chris. Hello, everyone, and thank you for joining us today. In the second quarter, we delivered another quarter of record sales and earnings. Revenue grew 21% sequentially to a record $221 million and earnings per ADS for a record $1.50. Sales of SSD controllers and eMMC+UFS controllers grew in the second quarter and both achieved record quarterly sales. We delivered better-than-expected growth and profitability, primarily by up selling a richer mix of products, allocating more product to higher-margin accounts and where possible, repricing product to cover higher manufacturing costs.

Additionally, our operation team has been actively working with our contract manufacturers to tune back end processes to improve manufacturing yield and lower costs. This 4 pronged initiative of upselling of richer mix of products, optimizing product allocation, better pricing discipline and tuning manufacturing processes is critical for creating continued value-add growth and profitability when our manufacturing capacity this year is capped and manufacturing costs remain elevated.

Based on the fusion of the initiative, we are now also expecting better gross margin for the rest of this year. Earlier this year, we had communicated our 2023 $1 billion sales objective and growth road map. We will likely achieve this target much earlier. Based on our latest sales projection, our annual run rate is expected to be already at least $1 billion by this year’s fourth quarter. We expect sales of ultimately exceed $1 billion next year as we add meaningful incremental foundry capacity already committed to us and from continued execution of our 4 prong initiative, which includes upselling a richer mix of products.

Sales next year will include the rapid scaling of a higher value, high-volume PCIe Gen4 SSD controller. Our customers have also provided us with purchase orders for the next year, and the order book today already exceeds $1.5 billion. Our strong order book is a result of many years of hard work. No last minute opportunistic procurement audit of all the shelf parts by customers. We have been building our business pipeline for many years, leading to these purchase orders. Our OEM projects typically kick off 1 to 3 years before initial sales, depending on product capacity.

Projects start with defining the OEM product features and customization requirement before hardware and firmware product development and end with product comparability, performance verification, analysis, quality assurance and manufacturing support activity before we start to manufacture and sales of our controllers. What is clear from our design wins and order book, we have been gaining share of wallet in some of our NAND flash and Tier 1 module maker customers. Several of our customers have been gaining market share in the SSD and UFS marketplace. SSD and UFS adoption continue to grow in PC and smartphones, and our customers are actively using our controller to develop storage solutions for new applications that include game consoles and automotive systems. Our order book runs through full year 2022, and our pipeline of design wins include delivery beyond 2022.

Now, let me talk about our key products, starting first with our SSD controllers. This quarter, SSD controller sales grew 30% to 35% sequentially. Year-to-date, our SSD controller sales grew 75% to 80% year-over-year, significantly faster than SSD market growth as we gain market share. Our growth continues to be driven by further scaling of our PCIe Gen3 SSD controller sales to a diversified set of NAND flash and Tier 1 module maker customer who are all primarily supplying SSD to leading PC OEM.

Based on our order book, we expect sale of our PCIe Gen3 SSD controller to grow modestly through next year. Our overall SD controller sale growth momentum will continue as we introduce and ramp up our PCIe Gen4 SSD controllers. Our Gen4 controller OEM sales will start in the third quarter of this year, and we expect sales to ramp rapidly through 2022. The our PCIe Gen4 SSD controller design win with NAND flash makers and Tier 1 module maker customers will ramp 3 successive generation of annual performance upgraded, cost reduction and higher layer count and flight support. Three successive generation of PCIe Gen4 controller solutions to be introduced annually from 2021 to 2023. We have timed our rapid introduction of first and second-generation PCIe Gen4 SSD controller, so OEM can align their product with Intel’s notebook CPU platform refresh in the third quarter of this year and introduction of their next-generation much higher volume chipset platform next year.

We will start the ramp of our first-generation Gen4 with two customers. We will then quickly expand our Gen4 customer base from 2 to 8 customers next year with our second-generation solution. Our third-generation will follow in 2023. We will then follow-up with the upcoming series of PCIe Gen5 SSD controllers. Of our 8 customers next year by our manufacture makers, our 8 customers are developing SSD for OEM projects. When all of our second-generation project are fully ramped towards the end of 2022 in the first half of the following year, we expect to be in approximately half of our PC OEM PCIe Gen4 SSD targets.

Separately, our enterprise-class SSD controller continues to make solid progress in data center application, and we’re ramping toward our first 1 million unit milestone. Our unique hardware plus firmware turnkey enterprise-class PCIe Gen 4 SSD controller expected to start shipping to customers such as Alibaba, Baidu and Kingston by end of this year and lay the foundation for upcoming PCI Gen5 enterprise SSD controllers.

With our upcoming flagship enterprise-class PCIe Gen5 SSD controller, we continue to meet design milestones and track towards doubling in the second half of next year and sale the following years. Feedback from potential U.S. and China hyperscale customers continue to be very positive.

Next, I will discuss our eMMC+UFS controllers. Our eMMC+UFS use sales grew 10% to 15% during the second quarter. Year-to-date, our eMMC+UFS controller sales grew 35% to 40% year-over-year, significantly faster than the overall smartphone market grows as we and our customers gain market share. Our UFS NAND customer with industry-leading NAND and DRAM technologies is very well positioned to gain further market share. Additionally, we continue to support a diversified set of module maker in China and now elsewhere, growing eMMC and new US business activity in the low-cost smartphone as well as the large fragmented IoT and smart devices market.

eMMC standard embedded storage that is generally a low capacity solution usually at the most 64 gigabyte. Manufacture makers who are focusing on maximizing the sales of NAND density, have communicated their intention to exit from this low-density marketing next year, which will create a large incremental opportunity for our EMC controllers. Since we are effecting the sole merchant supply of EMC controllers to this large and growing 1 billion-plus unit eMMC storage market. We also have a responsibility to work with our foundry and other supply chain partners to ensure product availability to OEMs this large market for eMMC controller range from low-cost smartphones to smart TV, smart speakers, Chromebooks, setup box, streaming TV dongles, smart watches and other wearables, drones, portable game console and many more applications popular with consumers.

We are also seeing increasing design activity relating to the adoption of automotive ACQ100 and a spice compliant eMMC and UFS and embed solution, as electronic content in cars and other vehicle grows. And furthermore, we are seeing increasing design activity involving multiple eMMC or uStar devices per vehicle. Automotive OEMs are now designing vehicle with multiple eMMC and UFS based story devices or central console infotainment system, navigation system, real entertainment dashboard instrumentation and ADAS image recognition, route decision and data recording systems that enhance low use safety and parking.

Since going public in 2005, we have seen the explosive proliferation of NAND based storage solution into more and more category of locations. From initially just memory cards and USB drive to embedded storage for smartphones, IoT and smart devices as well as SSD for PC and data center. And now we are seeing growing design activity in automotive applications. We are delighted to share with you our growing NAND controller design activity and our successful results so far by our 4 pronged initiative of optimizing resources to deliver higher value scales and enhanced profitability. We believe current market condition favors commotion in partnership with our customers in continuing market share gains in a broad range application due to our relatively large and favorable position in the supply chain and in managing OEM product availability. In comparison, smaller merchant supplier and program are disadvantaged. We believe current market conditions could remain unchanged for the next few years.

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

[Riyadh Lai, CFO]

Thank you, Wallace, and good morning, everyone. I will discuss additional details of our second 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 second quarter, revenue reached a record $221 million, 21% higher sequentially and 62% higher year-over-year. Earnings per ADS were $1.50, 35% higher sequentially and 84% higher year-over-year.

Now I will walk through the performance of our 3 key products during the first quarter. SSD controller sales increased 30% to 35% sequentially and 105% to 110% year-over-year. Growth was driven entirely by our PCIe Gen 3 SSD controllers, which are primarily for OEMs eMMC+UFS controller sales also reached a record high, growing 10% to 15% sequentially and 25% to 30% year-over-year. Growth was driven by our UFS controllers. SSD solutions sales increased 35% to 40% sequentially and were down 15% to 20% year-over-year. Our Ferri products grew year-over-year, while our Shannon products declined sharply.

Gross margin in the second quarter increased slightly to 51% from 50.7% in the prior quarter. As Wallace had discussed earlier, our better gross margin compared to guidance came from the execution of our 4 pronged initiatives of upselling, a richer mix of products, optimizing product allocation, better pricing discipline and the tuning of manufacturing processes. Operating expenses in the second quarter were $48.4 million, $4.5 million higher than the prior quarter, primarily from higher compensation accruals.

Operating margin in the second quarter was 29.2%, an increase from 26.6% in the first quarter and up significantly from 22.2% a year ago. Our 29.2% operating margin this quarter is higher than the 26% to 28% guidance due to stronger revenue growth and better gross margin, partially offset by higher operating expenses. We are delivering strong operating leverage and making good progress towards our 30% operating margin targets.

Our effective tax rate in the second quarter was 18.6%, slightly lower than our 20% tax rate guidance. Stock-based compensation in our operating expense, which we exclude from our non-GAAP results, was $2.4 million in the second quarter, within our guidance of $2 million to $3 million. We had $412.3 million of cash, cash equivalents, restricted cash and short-term investments at the end of the second quarter compared to $371 million at the end of the first quarter. We paid $12.2 million in dividend to shareholders. The third quarterly installment of our $1.40 per ADS annual dividend that was announced last October.

Now let me turn to our third quarter and full year guidance and forward-looking business trends. For the third quarter, we expect revenue to increase 7.5% to 12.5% sequentially to approximately $238 million to $249 million. We expect revenue growth from continued strong SSD controllers and eMMC+UFS controller sales, partially offset by declining SSD solution sales.

Third quarter gross margin is expected to be in the range of 48.5% to 50.5%, which is significantly higher than our gross margin outlook 3 months ago and the result of the execution of our 4 prong initiative, which Wallace discussed previously. Third quarter operating margin should be in the range of 27.5% to 29.5%. In the third quarter, we expect stock-based compensation in the range of $4.6 to $5.6 million.

For the full year 2021, we are now expecting the following: revenue is now expected to grow in the range of 65% to 70% to $890 million to $917 million. Our full year gross margin is now expected to be in the range of 49.5% to 50.5% range, again, much higher than our full year gross margin previously provided 3 months ago and the successful result of the execution of our 4 prong initiatives, which Wallace had previously discussed. Fourth quarter gross margin should be flat sequentially.

Operating margin is expected to be in the range of 27.5% to 29.5%, up sharply from 21.8% last year, up further from our previous guidance and approaching our 30% target. For the full year, we expect stock-based compensation in the range of $18 million to $20 million more than the prior year. We expect our effective tax rate for the year to be about 20%, similar to our year-to-date rate.

To conclude, this year, we will be able to power ahead and pull in our strategic sales and profitability targets without additional incremental foundry wafer supply. Let me reiterate that by the fourth quarter of this year, we will likely meet or meet on a run rate basis, our $1 million -- $1 billion sales target. This $1 billion run rate is the foundation on top of which we expect to add strong sales growth from committed incremental foundry wafer capacity next year and the continued upselling of a richer product mix. Already, our order book for next year is at least $1.5 billion, and our team is currently working to ensure we can deliver this.

Next quarter, we will provide an update on our work. And at the start of next year, we will provide our official 2022 revenue guidance. Additionally, we continue to invest resources to expand our pipeline of R&D activities relating to our core SSD, eMMC and UFS controllers as well as expansion into new applications, such as automotive.

This concludes our prepared remarks, and we will now open the call to your questions.

[Operator]

[Operator Instructions] First question comes from the line of Ariel of Needham and Company.

[Ariel Shusterman, Needham and Company]

Yes. Thank you and congratulations on the great momentum that you’re seeing. When you’re indicating that your order book now points to $1.5 billion. I’m wondering if you could elaborate further on what you’re seeing within that order book. What’s driving the uptick in the growth? And then secondly, can you talk about your conversations with TSMC regarding capacity allocation next year, what have those conversations been like? How much capacity has been allocated to support those targets? Thank you.

[Wallace Kou, President and CEO]

I think regarding from our order book, $1.5 billion majority come from OEM projects and some come from the order, the backlog, we cannot ship this year. So we have a solid $1.5 billion. By end of this year, we believe we should see even much higher in our backlog. Regarding the discussion with the TSMC, as you -- everybody know, TSMC probably has announced they see the wafer allocation will continue through the 2021 also to entire 2022 because all the new investment probably will not contribute mature technology until 2023.

With the incremental company wafer supply, we have confidence to increase our sales revenue to grow in 2022 with fair amount of percentage. However, we will continue to negotiate discovery TSMC and other foundry maker to increase wafer supply in order to meet the very large amount of demand from our worldwide customers.

[Ariel Shusterman, Needham and Company]

With respect to the upside in gross margins that you’re seeing in the quarter. I’m wondering how sustainable that gross margin shift is, you mentioned in the press release a shift towards higher-value products, higher -- you’re now engaging in where you can actually increase the price. I think that’s a change what you talked about before, where I believe the pricing was set in some of these contracts. So maybe you could talk a little bit about those 2 dynamics in terms of pricing and also in terms of mix of higher, richer mix of products?

[Riyadh Lai, CFO]

We feel very good about our current situation. With the rollout of the initiatives that Wallace had pointed out earlier, focusing on up selling a richer mix of products, allocating more products to higher-margin accounts and where possible, repricing products to cover our higher manufacturing costs. These are all initiatives that we’re already executing, and we’ll continue to execute throughout the rest of the year and into next year. So we feel very good about our gross margins at today’s levels, extending through this year and into next year. And possibly, if there are opportunities, we’d love to take up our gross margin even more than where we are indicating, but there’s a lot of work to do. And for what we’re doing right now, the gross margin guidance that we just talked about, those are numbers that we feel fairly comfortable about.

[Operator]

Next question is from the line of Anthony Stoss of Craig-Hallum.

[Anthony Stoss, Craig-Hallum]

Riyadh, probably for you. Can you give us a breakdown of your non kind of notebook business? What percent of revenues that might be, the IoT bucket, if you will, what kind of growth rates you’re seeing? And then I had a follow-up after that.

[Riyadh Lai, CFO]

So for the notebooks products primarily related to eMMC+UFS as our SSD controllers are very PC, noble PC oriented. Now for the eMMC+UFS, they were about 25% to 30% of sales last year, and we expect this to inch up this year given the very strong growth. And within that bucket, a large part of it is smartphone, but we also have a lot of eMMC going into non smart applications. Was a -- I mentioned a long list of those applications are very popular with consumers, including smart TVs and other application, smart speakers. So these are products that are still growing, and we expect this part of the market to continue to grow modestly over the foreseeable future.

[Anthony Stoss, Craig-Hallum]

Okay. And then just as a follow-up, the question that I get asked most from investors and increasing amounts recently is a share buyback. You have incredible visibility. You’re talking about an order book of over $1.5 billion heading into next year, 3 years worth of visibility, you got a stock trading at an 8 -- cash. It just astounds me and investors that you guys haven’t initiated a share buybacks. So I’m hoping your Board has listened to this call, and I’d love to hear your thoughts on why you haven’t initiated a share buyback.

[Riyadh Lai, CFO]

Tony, our primary means of returning capital to shareholders is from our dividend payments. And historically, we paid up to half of our free cash flow. Given our very strong operating performance and good visibility into 2022, it is likely that our Board during the next dividend declaration in October, they could consider something a dividend higher than what we paid last year.

[Operator]

Next question is from the line of Craig Ellis of B. Riley Securities.

[Craig Ellis, B. Riley Securities]

Congratulations on the very strong performance in the business. I wanted to start with a question for Wallace. And Wallace, what I want to do is kind of pick up where I left off on the last quarter’s call where I inquired about really the trends you were seeing as more of your customers look to outsource eMMC controllers and you lined up with a dominant sure of the market like you talked about again today. And the question is a little bit different, and it focuses on the SSD controller opportunities. Given the very robust outlook you have for PCIe Gen4, do you get the sense that more of the NAND OEMs are starting to outsource more of their controller works? And to the extent that they are, to what extent do you think you’re going to benefit or benefit disproportionately from such a move?

[Wallace Kou, President and CEO]

It’s a very good question. In general, we see NAND maker, they all want to maximize their NAND day solution profitability. For eMMC, it’s very natural because eMMC, the every day is small. Maximum is 64 gigabyte. It’s very few in 120 gigabyte. We see a lot of the even 32 gigabyte application. So NAND maker, they also see the wafer supply constrained. So they move out the wafer, variable wafer move to higher density solid product. That’s why we see tremendous demand from eMMC controller to our company, a direct meter from NAND maker, our leading module maker, we have much more than we can supply and support. But we will continue the effort and try to not industrial breakdown for eMMC solution to many, many consumer electronic devices.

For SSD, that’s another story, because we do see NAND makers, they have a tendency to start to outsource mainstream and value line project to third-party like silicon motion. Because we have a strong track record with long history with all NAND makers that we become the default standard candidate to take the opportunity. Frankly speaking, today, we have a more project opportunity than we can -- we are resorting support. So this is very, very important moment. We’ll continue to grow and recruit talent and R&D to join us and continue work on or really new project to make it successful.

It’s very, very important is because the new generation of technology for NAND beyond one layer or even beyond 200 layer is very critical for controller maker have deep knowledge work closely with the NAND maker, so we can provide sufficient compensation for NAND endurance and retention. This is very, very important. We can work closely with NAND maker deliver various profound solution to the OEM customer as well as consumer. So this is a great opportunity, we see the trend will continue, and we are in a very favorable position to take the opportunity on all source opportunity from NAND makers.

[Craig Ellis, B. Riley Securities]

And then for my follow-up question, I wanted to flip it over to Riyadh. Very helpful framework that you’ve provided and that Wallace’s provided on the factors that are leading to higher gross margin. And Riyadh, my question is for the change in gross margin in the back half of the year that we’re seeing very significant improvement from prior expectations. What’s the relative contribution from each of the 4 factors that were mentioned? And as we look to calendar ‘22, which of those factors has the greatest potential? And how significant would that be for further gross margin improvement?

[Riyadh Lai, CFO]

Craig, the largest piece relates to our product mix, which also includes our allocation of products towards higher accounts. The initiatives relating to these moves have been the biggest driver in terms of contributing to higher gross margin. But that said, where possible, we also seek to reprice our products to better reflect the higher cost of our products that we’re seeing going into what we need to do to deliver.

[Operator]

Our next question is from the line of Karl Ackerman of Cowen & Company.

[Unidentified Analyst]

This is Eddie for Karl Ackerman. I have a couple of questions. There have been reports that your largest foundry partner will increase 28-nanometer capacity from 40,000 to 100,000 wafers per month by the end of this year. While that should enable you to fulfill existing customer orders, have you seen any indication from NAND OEMs resourcing earlier decisions to outsource to next year as incremental capacity on the line?

[Wallace Kou, President and CEO]

I cannot comment for TSMC because they have their re capacity guidance and because some factory expansion also relate to some political issue, and we really have no insight, sorry. However, we do know the -- we do have many opportunities come from NAND maker out directly from major OEM customers, including the very large sale customer from automotive as well as other sectors. Now it’s really how we really can manage so many opportunities under the supply shortage condition, it has to be very careful to make a decision because when we commit, we have put all the resource development, IP, support development, quality people, everything and count.

And we have to make sure to use our R&D resources wisely in order to get a sufficient financial return. It’s very, very important. We don’t really worry about the business today. We just -- our constraint is the wafer supply. So that’s the most important thing we should focus on and to secure more supply in order to meet customers’ demand for next year and 2023.

[Riyadh Lai, CFO]

Eddie, let me also add with the investments at TSMC have been announcing, we do not believe it’s going to change the direction of our NAND partners outsourcing to us. The reason Wallace has talked about earlier.

[Unidentified Analyst]

And another question is NAND demand appears to further outset supply and our field work indicates NAND OEMs are prioritizing high capacity SSDS. And in the past, as NAND capacity has silent, OEMS, enterprise SAs and then became a growth challenge for you. May you address why that reasoning may not make sense in the current environment. And thank you, and congrats on the results.

[Riyadh Lai, CFO]

This year, it’s the underlying condition that we’re facing for our business is more about the supply picture. We have demand that is significantly outstripping our ability to deliver. So the underlying conditions on the NAND flash dynamics side of industry conditions, whether their allocation is more towards enterprise or into other applications. Those decisions have no real material impact to our business as it relates to the shifting of the demand picture. Right now, the key focus for us is about the supply side, how we can drive more products given the supply capacity that we have on hand.

[Operator]

Next question is from the line of Suji Desilva of Roth Capital.

[Suji Desilva, Roth Capital]

Congratulations on the momentum here. So given the NAND supply demand situation, I’m wondering if the mix of OEM versus module maker is higher historically if you’re leaning your shipments toward OEM. And if that’s one of the factors in the gross margin tailwind that might correct back if module makers get allocation get the future.

[Wallace Kou, President and CEO]

I think it’s a very good question. I think every company has to make the wise choice but keep a balance. Our definite OEM project is more important because we have to allocate sufficient wafer and to supply the OEM project because that’s what we commit. At the same time, we also want to balance market maker. We don’t want the majority margin make die because many of them being with us for 16 or 18 years. I think we really have a look at the product itself and important for the supply chain. If the customer -- the insisting customer, they have multiple stores, sometimes we will try to reduce the weight. But really, we are sole supplier, we have to make sure we can net to fulfill the supply. It’s a pretty complicated decision equation. But through that, we also will review all of the gross margin from -- among all the products and put as a priority. So this is the thing we feel very comfortable because it doesn’t matter every customer, I think they all based small percentage, a large percentage shortly from Silicon Motion. We feel very sorry for that situation. That’s why we work very hard to try to secure more wafer to meet the customer demand.

[Riyadh Lai, CFO]

Suji, let me also add, some of our module makers are now very large and very sophisticated and our ability to -- and are already engaged in taking projects with OEMs like the PC OEMS. And so for these large sophisticated module makers, we don’t treat them any differently than the NAND flash makers. And the level of profitability, it really depends on the projects. It doesn’t necessarily mean that the profitability is better with one class of customers or the other. It really is the value asset that we are bringing that matters.

[Suji Desilva, Roth Capital]

And then the SBC Solutions business, trying to understand where the Shannon revenue level is now, is that going to have a further step down as you kind of manage away from that? And what the margin implications there? I imagine that’s also a lower-margin business that you’d be moving away from?

[Wallace Kou, President and CEO]

Regarding Shannon business, our really main goal this year and net transition has really maintained the relationship with the customer because it’s also Shannon some NAND procurement also is challenging. We do not want to grow Shannon business due to lower margin to dilute overall gross margin. But however, we have maintained certain important part in gate with Alibaba by do a major customer, make sure that our development technology will continue waiting for our really Gen5 major controller coming and to shine the market. But I think it’s also due to -- because we have a wafer constrained with allocation. That’s why we have to allocate carefully that we have so many OEM demand from NAND maker as well PC OEM and smartphone customers.

[Operator]

Next question is from the line of Mehdi Hosseini of SIG.

[Mehdi Hosseini, SIG]

A couple of follow-ups. And thanks for -- and also, thanks for providing visibility into ‘22 with minimum revenue of $1.5 billion. And the question I have here is, what are the key growth assumptions for different sectors? And if you don’t want to elaborate, how should I think about the fastest growth versus the relatively lower growth segment?

[Wallace Kou, President and CEO]

I will say, our client revenue will continue to grow. Although PCIe Gen3 next year growth rate will be modestly, but PCIe Gen will grow very strong to carry because we have a very large design share in PC OEM. We stated almost 50% higher by end of the next year so that we have 8 different customer, 5 on NAND maker with our PCIe Gen4 controller and ramping next year. For eMMC+UFS, we also will grow very, very strongly. It also depends how many wafer we can secure. We say it’s going not to grow for a certain level, we guarantee is exceed the $1 billion of revenue next year. But we think the backlog will continue to pile up by end of this year. But we’ll continue to work very hard to secure more wafer, especially in mature technology because many eMMC are in 55, 40-nanometer and 28 meter, these mature technology wafer are in severe allocation from all foundry makers. So this is very critical, how fast we can porting, work with TSMC as well as other foundry that can grow overall the eMMC+UFS business.

[Mehdi Hosseini, SIG]

Wallace, PCIe 4.0 is used for commercial segment of the notebook. Is that correct?

[Wallace Kou, President and CEO]

It’s used both commercial and consumer. We have 2 generations of mentioned PCIe Gen4 controller. One use 28-nanometer, one use 12 nanometer. This year, we’re ramping with more 28-nanometer next year, majority will be transition to 12 nanometer.

[Mehdi Hosseini, SIG]

I think what I was trying to highlight is there is a concern that a consumer notebook like Chromebook may roll over. It can’t grow 20-some percent plus per year in the perpetuity. But I think commercial segment, which has been relatively quiet or muted, could turn on, and that’s a significant positive catalyst for silicon motion. Am I thinking about this the right way?

[Riyadh Lai, CFO]

Let me just try to get it straight. Chromebook this year, the total volume is around 40 million to 50 million units is very small. And majority use eMMC, not SSD, they’re using embedded SSD. And we are in a very small portion in the Chromebook today and the Chromebook going up and going down, have relatively no impact to our business. And for SSD, we talk about really for mainstream notebook. And for both commercial for corporate accounts of consumer notebook. So that is to use M0.2 SSD. And that portion, I think, will grow very strongly and consistently without the top 5 PC OEMs sure.

[Mehdi Hosseini, SIG]

And then one follow-up for Riyadh. Is it a product mix that is going to put a lid on the gross margin in the back half of the year despite sequential revenue growth, it seems like margins are going to calm down. And I’m just trying to better understand, is that because of a higher base? Is that because of the mix? Or is it just your year-end gross margin operating margin guide is conservative?

[Riyadh Lai, CFO]

Mehdi, our gross margin expectations for the second half of the year is going to be significantly higher than what we had originally guided. But obviously, we still have a lot of work to do. We love to take our gross margin even higher than what we’ve just talked about. And so this is going to be coming from the continued execution of the initiatives that the 4 prong initiatives that Wallace had talked about relating to upselling our product mix to richer product mix, relating to how we allocate towards higher-margin accounts, more profitable accounts relating to the ability to reprice our products where possible to reflect the higher costs that we have in our products.

And furthermore, we’re also working -- our operations team are also working very hard to see how we can better debottleneck our processes with our contract manufacturer back end services. So all 4 of these are still in execution. And the more we are able to work our initiatives, the better our gross margin could be. But as a baseline, the gross margins we talked about are what we’re guiding. And if we can execute even better, we’d love to take up our gross margin higher than what we decided.

[Mehdi Hosseini, SIG]

And on the execution side, you’re executing flawlessly on managing working capital. Your free cash flow margin for the June quarter was 25%. You have grown cash. And if I just take your base assumption for ‘22 of $1.5 billion of revenue, your cash could go towards mid-teens, $15 net cash per share. And I know the question came up earlier, but I’m going to ask it again. Is there something you can offer us, why not become more aggressive with buyback? Or why not consider a strategic options because the cash is going up, valuation not changing, and I’m just trying to think how the management team is thinking about reconciling execution, free cash flow margin with the valuation on share price.

[Wallace Kou, President and CEO]

So I think, let me just answer the question. I think you’re looking for Silicon Motion today, our outstanding share total diluted 35 million shares. So really, it’s not really very meaningful for us to do share buyback. We -- as Riyadh said, we -- and the Board when we have more free cash. We either do more investment for certain MMA or we would have potentially increase the dividend. That is a Board to try to provide to the shareholder. I think this is the direction we think in next quarter is likely to happen, but wait for the next quarter after forming.

[Riyadh Lai, CFO]

And Mehdi, let me add, historically, we’ve been pretty good about returning capital to shareholders. We typically return up to half of our free cash flow, and we’ve been doing that, returning half of our free cash flow to shareholders for over the last few years, and we expect to continue that. And for us, the primary means of returning capital to shareholders is through our dividend payments. And so with our upcoming -- we’ve just paid our third installment of our quarterly dividend. The last one will be coming soon. So by the October of this year, we’ll have to decide on our dividend for the upcoming 4 quarters. And at that time, in October, given the strong performance of our business and good visibility into next year, the likelihood of a higher dividend being declared is a good one. And so back to your question, about what do we do with our cash. And the answer to you is we will continue to return to our shareholders. And for us, the primary mean is through our dividend payments.

[Operator]

Our next question is from the line of Gokul Hariharan of JP Morgan.

[Gokul Hariharan, JP Morgan]

Congrats on the great results. First of all, Wallace or Riyadh, could you talk a little bit about the SSD controller market, you’re growing at almost 100% in the first half, looks like the growth rate is still going to continue around the same pace. How much of that is the volume growth? How much of that is pricing roughly? Are we still looking at average ASP per SSD controller in the $4.50 to $5 range? And could you also give us a bit of context in terms of how much market share you have of your addressable market in SSD controllers, in consumer SS controllers?

[Wallace Kou, President and CEO]

So we will continue to grow our client SSD controller business. We outperformed in the market growth. But we cannot comment regarding ASP dollars, but why we can assure you, the PCIe Gen3 is higher than SATA controller, the PCIe Gen4 also higher than PCIe Ge3. So we definitely expect next year because of strong growth for our PCI Gen4. So every ASP for client controller should go higher. Regarding the market share, we believe, for last year, we are around between 25% to 30% market share this year will grow 5% to 10%. So we roughly -- it’s around 35% to 40% range. We have ambition to grow beyond 40% and just demand. It’s really not depends. It depends how quickly we can build a more R&D team and to serve more demand, especially our NAND makers.

[Gokul Hariharan, JP Morgan]

Okay. So is it fair to assume that most of the growth this year is coming from units and a little bit of it is coming from mix improvement, not really price.

[Wallace Kou, President and CEO]

Also from the mix price improvement.

[Gokul Hariharan, JP Morgan]

Okay. Maybe move on to the second question. I think you talked about M&A. It feels like one of the problems, I think that the market has in terms of evaluating Silicon motion is that the addressable market is still primarily SSD controller, which I think at least is this limited TAM in terms of units, but obviously, there is ASP upgrade. Could you talk about any of the initiatives that silicon motion is doing to potentially address some newer addressable market, either an adjacency or something else that you have in mind given that you’ve executed extremely well in the current SSD controller and eMMC market?

[Riyadh Lai, CFO]

Gokul, we’re doing really well in the client device market, right? So in this part of the market, SSDs already account for 60%, 65% last year. We’ll probably be up to 75%. But clearly, there is a cap in terms of what’s addressable. Same thing with UFS in smartphones. There’s still a lot of upside opportunity there. But again, there is a natural cap. The opportunities that are coming incremental to the client device and to the smartphone for us includes a couple of pieces. The first piece is our enterprise SSD controller market. We’ve -- year-to-date, we’re just getting to our first million milestone. We have our upcoming Gen5. We’re still executing with our enterprise-class Gen 4.

So this is a huge blue sky opportunity for us. That will be a big piece of how we continue to grow rapidly beyond when our client-based devices start plateauing. But additionally, in addition to the enterprise-class of SSD controllers. We also have our eMMC products, where with the NAND flash makers exiting -- beginning to exit the low-density applications, this creates an opportunity for us to step in. And we’re talking about a 1 billion unit plus opportunity with eMMC. And so this is another interesting area for us to step into. Additionally, Wallace also talked extensively about the automotive applications relating to what we can play in. And this is still at a pretty early stage. But already, we’re seeing a lot of design activities by the automotive OEMs and their partners, and we’ve been involved in a lot of these projects.

[Wallace Kou, President and CEO]

Let me just add ex some comment is as you see from the business model, traditionally, when a storage product become mature and the NAND maker moving to the new generation and the move into higher density, higher performance. But looking for the eMMC, for example, this is one of a great example today because eMMC, the maximum density, probably 120 gigabyte, majority around 64, 32 or even 16 gigabyte. And there’s the last interest for the NAND maker because manufacturing -- similar. But as a financial return, it’s very limited. However, that is a huge -- because it’s standard. There’s a huge demand from all consumer electronics and growing IoT devices, and we become the seller from merchant controller maker provide solution, right? Our really backlog is at 2x than what we can supply today. So there’s quite a lot of things because we continue to develop new controller supporting upcoming new 3D NAND. So that makes us a unique position. NAND maker probably won’t use their R&D resources for this kind of a trend because this product is mature.

Same thing for clients being in the future. And we also have some larger important products to do because really sell revenue is very, very small. We really do not want to talk about it. Going to become very mature, and we will try to talk with the investor analysts because I think Silicon Motion, we are not counting on just a few controller, we have a much bigger ambition than where we are today.

[Operator]

Last question is from the line of Matt Bryson of Wedbush Securities.

[Matt Bryson, Wedbush Securities]

So the prominent pushback or concern I hear from investors around SMI is probably to the cyclicality of end markets for NAND. So whether it’s PCS, handsets, what have you? Wallace, I think what you’ve described as a number of secular growth opportunities that are very company specific, whether it’s new Gen4 PCIe customer wins, opportunities you’re just talking about in IoT with the eMMC new UFS customers. Is there any way we look at that order book of $1.5 billion for 2022, you can talk to how much of that incremental how much of those incremental orders are tied to new business versus either existing designs or follow-on design to existing designs? Like any characterization, you could provide that would be very helpful.

[Wallace Kou, President and CEO]

So I think in the past couple of years, it looked like our business really not show growth consistency. That’s why a lot of the investors have a concern regarding how stable and how fast the commotion can grow. Now I think we are moving to the more healthy business model, all our sales revenue this year is designing from last year or 2 years ago. And while we are working on today is working for next year and beyond next year and 2024. So that’s why the book we have is very, very stable. That’s really doesn’t need any new design that happen today. And that’s why the order book is very rock solid. And I’m pretty sure they will pile up to even higher number by end of this year. And our really main goal is to secure more wafer and such we can fulfill the demand from many, many customers. Some are very, very important project, very, very critical, not just for PC, not just for smartphone, not just for consumer electronic devices, all see the some new innovation. We do have quite a lot for automotive sector. We really haven’t -- really speak for. But I think we have a very diversified product portfolio. We have very strong, very broad customer base. We have many, many opportunities. Now we really want to leverage our base, our technology product and try to have a more manufactural capacity and to fill the demand. And that we think our growth is very, very solid consistent and the market trend favors Silicon Motion and our customers gain market share. That’s a fact.

[Operator]

Now, I’d like to hand the conference back to Mr. Wallace Kou for closing remarks. Please go ahead, sir.

[Wallace Kou, President and CEO]

Thank you, everyone, for joining us today and for your continuing interest in Silicon Motion. We’ll be attending several investor conferences over the next few months, all of which we believe remain virtual events. The schedule of this event will be posted on the Investor Relations section of our corporate website. Thank you, everyone, for joining us today. Goodbye for now.

[Operator]

Thank you. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now all disconnect.