Silicon Motion Technology Corp

SWB:S9M

Earnings Call Analysis

Strong Revenue Growth and Margin Expansion Highlighted in Earnings Call Transcript Summary

The company reported a 25% increase in revenue driven by strong performance across all segments. Operating margins expanded by 3 percentage points due to cost-saving initiatives. Management is optimistic about future growth prospects and expects double-digit revenue growth to continue next year.

Solid Recovery and Strong Margins Drive Optimism

The narrative at Silicon Motion is one of resilience and optimism as the company witnesses a steady recovery across its business spectrum, culminating in the fourth quarter with revenues and gross margins exceeding expectations. Their SSD and eMMC+UFS controllers experienced stronger demand leading to improved pricing and mix, which enhanced the gross margin more than predicted. This turnaround sets the stage for robust growth in 2024, despite only a modest uptick projected in the PC and smartphone markets, attributed mainly to gains in customer share.

Strategic Organizational Reforms for Focused Growth

Silicon Motion has bolstered its foundations by establishing two dedicated business units - Client and Automotive Storage (CAS) and Enterprise Storage and Display Interface Solutions (ASDI). This strategic restructuring leverages industry expertise for a agile market response and customer engagement with high-performance and tailored solutions. Early success is evident with share increase and significant design wins across various markets, signaling strong positioning for continued triumphs in upcoming quarters.

NAND Market Dynamics and Revenue Prospects

The NAND market is seen as increasingly favorable with rising prices and disciplined production, expected to continue improving through 2024 into 2025. Despite the headwinds from these higher NAND flash prices, Silicon Motion is poised to grow its business with module makers, with an impressive forecasted growth of approximately 50% in revenue from flash maker customers during the year.

Technological Leadership Solidifies Market Position

Forging ahead in the competitive landscape, Silicon Motion introduced its first PCIe Gen 5 8 channel controller, securing wins within both flash and module maker spaces, marking a foray into high-end notebook models. Sales of this high-performance controller are anticipated to kick off towards the end of this year, with the company embracing the opportunity to clinch more design wins throughout 2024.

Advancements in Controllers Indicate Growth in Multiple Sectors

The company's technology has been pivotal in adapting to next-generation flash like QLC, equipped with advanced error correction and data protection features. These QLC controllers are gaining traction among flash and module maker customers and receiving wider adoption from PC OEMs; further speaking volumes about the organization's leading-edge capabilities.

Entry into UFS 4.0 Market Renders New Growth Avenues

Silicon Motion's leap into the UFS 4.0 market is expected to bring about a new wave of revenue by the end of this year. Off to a promising start, the company is on track to ramp up with flash maker customers and target the smartphone market with UFS 4.0 solutions, which is poised to become a flagship offering in the foreseeable future.

Financials and Guidance: Strong Growth and Margins Expected

Financially, Silicon Motion finished the fourth quarter with a 17% sequential increase in sales at $202 million. For the full year 2024, they project a revenue surge of 20% to 25%, reaching between $765 million to $800 million. Gross margin is earmarked at 45% to 47%, with operating margins hoped to be within the 14.7% to 16.7% bracket, which showcases a bullish outlook in line with the sustained recovery scenario.

Long-Term Confidence Backed by NAND Maker Relationships

The company is confident in continuing to grow its mobile controller business, propelled by strong UFS 3.1 and UFS 4.0 offerings, with a forecast suggesting that the expansion will persist into 2026. Silicon Motion is benefiting from NAND makers focusing on profitability over market share, creating opportunities for increased outsourcing to third parties for more diversified offerings, fortifying long-term prospects even beyond 2025.

R&D Investment and Operating Margins: Planning for the Long Haul

With R&D expenses projected to amount to approximately $230 million to $240 million for 2024, Silicon Motion is maintaining investment in research to uphold its technological edge. Operating expenses notwithstanding, the company remains committed to its long-standing operating margin targets of 25% to 30%, underscoring management's belief that this range is achievable over the long term.

Earnings Call Transcript 2023-Q4

[Operator]

Good day, and thank you for standing by. Welcome to Silicon Motion Technology Corporation's Q4 2023 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 limitations, statements regarding trends in the semiconductor industry and our future results operations, financial conditions and business prospects. Although such statements are based on our own information and information from other sources we believe to be reliable, you should not place undue reliance on them.

These statements involve risks and uncertainties and actual market trends and our results may differ materially from those expressed or implied in these forward-looking statements for a variety of reasons. Potential risks and uncertainties include, but are not limited to, continued competitive pressure in the semiconductor industry and the effect of such pressure on prices, unpredictable changes in technology and consumer demand for multimedia consumer electronics, the state of and any change in our relations with our major customers and changes in political, economic, legal and social conditions in Taiwan.

For additional discussions of these risks and uncertainties and other factors, please see the documents we file from time to time with the Securities and Exchange Commission. We assume no obligations to update any forward-looking statements, which apply only as of the date of this conference call. Please be advised that today's call is being recorded.

I would now like to hand the call over to Mr. Jason Tsai, Vice President of IR and Finance. Please go ahead.

[Jason Tsai, executive]

Thank you, and good morning, everyone, and welcome to Silicon Motion's Fourth Quarter 2023 Financial Results Conference Call and Webcast. Joining me today is Wallace Kou, our President and CEO. Wallace will first provide a key -- a review of our key business developments, and then I will discuss our fourth quarter results and outlook. Following our prepared remarks, we will conclude with a Q&A session.

Before we get started, I'd like to remind you of our safe harbor policy, which was right at the start of this call. For a comprehensive overview of the risks involved in investing in our securities, please refer to our filings with the U.S. Securities and Exchange Commission. For more details on our financial results, please refer to our press release, which was filed on Form 6-K after the close of market yesterday.

This webcast will be available for replay on the Investor Relations section of our website for a limited time. To enhance investors' understanding of our ongoing economic performance, we will discuss non-GAAP information during this call. We use non-GAAP financial measures internally to evaluate and manage our operations. We have, therefore, chosen to provide this information to enable you to perform comparisons of our operating results in a manner similar to how we analyze our own operating results.

The reconciliation of the GAAP to non-GAAP financial data can be found in our earnings release issued yesterday. We ask that you review it in conjunction with this call. As we have previously shared, Silicon Motion filed its notice of arbitration against MaxLinear for the willful, the material breaches of the merger agreement that was signed on May 5, 2022. The company is seeking payment of the termination fee of $160 million, substantial damages, interest and costs.

The company filed its notice of arbitration claim against MaxLinear in the Singapore International Arbitration Center on October 5, 2023. The arbitration process is confidential, and we will, therefore, not be commenting further on this matter today.

With that, I will turn the call over to Wallace.

[Chia-Chang Kou, executive]

Thank you, Jason. Hello, everyone, and thank you for joining us today. We are pleased by the steady recovery across our business throughout 2023, with fourth quarter revenue and gross margin exceeding expectations. We benefited in the quarter from stronger demand from both our SSD and eMMC+UFS controllers and saw pricing and mix improved to drive stronger gross margin improvement for our business than originally expected.

More importantly, our technology leadership in controller and our unveiling engagement with our customers, both flash makers and module makers has laid the foundation for strong 2024 growth despite only modest growth expecting in the PC and smartphone device markets, driven largely by our ongoing share gains with our customers.

Over the past 6 months, we have been busy making organizational changes to better position Silicon Motion for the future. We restructured our business to better engage in a new opportunity in the market and spend a lot of time reengaging with the customers to win back their confidence in us as a long-term partner.

As you saw, we formed 2 new business units, client and automotive storage, [ CAS, ] and our enterprise storage and display interface solution, [ ASDI ] groups. Our new organizational structure allow us to be more focused on each segment to have a dedicated industry veterans as a leader enable our team to be more agile and responsive to the market and to better engage with customers and anticipate their need with truly differentiated high-performance and classify solutions.

We are seeing the successes of this already as our CAS group have been increasing share as our customers by winning significant new designs with both flash makers and module makers for the PC, smartphone, automotive, industrial and other markets.

Our [ ASDI ] Group has also made incredible progress with some tightened product in a short amount of time, securing more than a dozen sampling customer ready. With these changes, we are better positioned than ever before and look forward to demonstrating the ongoing strength of our business to our investor each quarter.

Now let me move into our business and give you an update on the NAND market dynamic we are seeing today and what we are expecting for 2024. Pricing for NAND flash has been steadily increasing and expected to continue to improve throughout 2024 and into 2025. NAND makers are being disciplined in their production and limiting output, resulting in higher NAND flash prices.

Demand is also expected to pick up this year as both the smartphone and PC markets will grow modestly after 2 years of meaningful decline in unit shipments. While higher pricing may limit the activity we typically see from our module maker customers, many have prebought low-cost NAND in the second half of last year, and we have secured significant wins with them for upcoming products this year. We believe our business with module maker will grow this year despite the headwinds created by higher NAND flash prices.

For flash makers, while higher flash prices over the past few months have improved their profitability, most are still facing negative or very low margin, and this is why we are seeing them increasingly focused on profitability. Flash makers need to prioritize their focused investments from developing new generation of NAND to developing storage solutions to satisfy a wide range of end market requirement.

These solutions range from high performance to value-oriented using DRAM and DRAM-less and as well as utilizing TLC or QLC to serve a broad range of end market need in eMMC+UFS, client SSD, embedded enterprise and industrial applications. We are seeing flash maker focus on their own effort on leading-edge high-performance solution where margin and profitability tend to be highest, and they are turning to us as a partner of choice to help bolster their portfolio with high-performance, lower-cost solutions, utilizing their latest generation of high-performance, high density NAND to serve a broader range of market requirements.

Our progress with our flash maker partner over the past year has resulted in strong backlog of new wins across all our product groups that will drive meaningfully higher share and faster growth this year and lay the foundation for strong long-term growth.

We continue to grow our customer relationships and are on track to grow our business with every NAND flash customer we have this year. Our revenue from flash maker expected to grow approximately 50% this year, a design win across our controller program ramp meaningfully throughout 2024.

Turning to our SD controllers. We take our first PCIe Gen 5 8 channel controller last quarter and have already secured 3 flash maker win and this product as well as several module maker wins. This is the first time that flash makers adopt our controller for high-end notebook models. We expect sales of this high-performance controller to begin late this year. We are engaging with other flash makers as well as numerous other module makers expect to win more designs through 2024.

Our second PCIe Gen 5 controller will be taped out early in the third quarter this year, and we already have significant interest from both flash makers and module makers for the mainstream Gen 5 solution that are expected to ramp in late 2025. While we are excited by our progress with PCIe Gen 5, it's important to point out that we continue to win significant new programs with several flash makers with older generation interface well, including 2 new SSD programs, several PCIe Gen 4 SSD, including while using next-generation QLC flash on the value of PC OEM market and several USB 3.2 portable SSD projects.

Our QLC controller with our proprietary 3D RAID and more advanced LDPC for better aero correction and data protection and recovering offer no compromise solution that maintains high performance and reliability while utilizing the most cost-effective flash to further improve affordability. We are seeing strong traction of QLC controller with both our flash makers and module maker customer and more widespread adoption by PC OEM as well.

Moving on to our eMMC+UFS controller solution. We are taking out our UFS 4.0 solution this quarter and remain on track to ramp with a flash maker customer later this year as well as several module makers targeting the smartphone market. UFS 4 remains a flagship and premium solution this year and expected to expand into high-end mainstream handset market in 2024 and after, aligned with when our solution with our flash maker and module maker customer expected to ramp UFS 3.1 and 2.2 remains a primary solution for mainstream smartphones this year, and we are seeing continuing strong demand for our current UFS controller with additional flash makers and module makers.

We see flash makers focusing on their own internal controller development on the latest flagship generation of UFS, where they get the highest premium for their higher performance solution. As each of UFS generation moved from flagship to mainstream, we are seeing flash maker turning to us to utilize our controller paired with their newest NAND that offer high performance and lower cost, ideal for the mainstream smartphone market.

It is a symbolic relationship that has driven our strong partnership with flash makers and driving move more win and long-term growth for our eMMC+UFS controller business.

Now let me give you an update on the progress of our MonTitan enterprise SSD development platform. We started sampling MonTitan to customers at the end of last year, and we are excited to announce that more than a dozen customers, many of them Tier 1 end companies ranging from NAND flash makers, hyperscaler, storage solution provider, enabler as well as module makers are in the process of evaluating the solution. MonTitan, a highly differentiated storage solution, provides support of both high-performing TLC SSD as well as high-capacity QLC SSD.

We are finding that this ideal balance of performance and features is appealing to customers across all enterprise and data center makers market segment. Based on our ability to support a wide range of customer engagement model from the turnkey to layer firmware stack development, MonTitan accelerates the asset to an extensive amount of data [indiscernible], speed ideal for a variety of applications, including high-performance edge computing and AI interference and machine learning.

We are confident that we will continue to make it enroll during the Gen 5 transition into the AI era, and expect to secure our first design win in the next few months and generate clearly revenue by the end of this year.

Overall, I'm excited by the opportunity ahead of us in 2024. Our team dedicating to maintaining our technology leadership and our varying commitment to our customers has enabled us to continue to win socket after socket and position us strong share growth this year and beyond.

Our position with our flash maker customer has never been stronger as new design wins are expected to ramp [indiscernible] this year. Our module maker customers are coming into 2024 with strong inventory of low-cost NAND and choosing us to help them bring competitive SSD and embedded solutions to the market. We are well positioned to continue to further strengthen our design pipeline in 2024 to drive growth in 2025.

Now let me turn the call over to Jason to go over our financial results and outlook.

[Jason Tsai, executive]

Thank you, Wallace, and good morning, everyone. I will discuss additional details of our fourth quarter results and then provide our guidance. Please note that my comments today will focus primarily on our non-GAAP results, unless otherwise specifically noted.

Reconciliation of our GAAP to non-GAAP data is included with the earnings release issued yesterday. In the fourth quarter, we grew sales 17% sequentially to $202 million. SSD controller sales grew 15% to 20% sequentially. eMMC and UFS controller sales grew 25% to 30% sequentially and SSD solution sales decreased 5% to 10% sequentially.

Gross margins in the fourth quarter increased to 44.1%, reflecting both better mix and higher ASPs. Operating expenses in the fourth quarter were $61.5 million, $12 million higher than the prior quarter due to higher R&D expenses to support our technology leadership. Operating margin in the fourth quarter was 13.8%, flat from the third quarter.

Effective tax rate in the fourth quarter was 2.3%, a decrease from the 22.8% tax rate in the third quarter primarily due to a tax reversal in the quarter. Excluding this, tax rate would have been 28%. Earnings per ADS were $0.93, 48% higher sequentially. The stock-based compensation in our operating expense, which we exclude from our non-GAAP results, was $5.7 million, and we had $369 million in cash, cash equivalents, restricted cash and short-term equivalents -- short-term investments at the end of the fourth quarter compared to $350.3 million at the end of the third quarter.

Inventory increased sequentially in the fourth quarter to $217 million from $199 million in the third quarter.

Now let me turn to our first quarter and full year 2024 guidance and forward-looking business trends. For the first quarter, we expect revenue to be down 10% to 15% sequentially to approximately $172 million to $182 million. We expect SSD controller sales will decline slightly in the first quarter and eMMC and UFS controller sales will decrease.

First quarter gross margin is expected to be in the range of 44% to 45%. First quarter operating margin will be in the range of 10.5% to 11.5%. First quarter effective tax rate to be approximately 19%. And in the first quarter, we expect stock-based compensation and dispute-related expenses to be in the range of $6 million to $7 million.

For the full year 2024, revenue will increase 20% to 25% to $765 million to $800 million. Gross margin is expected to be in the range of 45% to 47%. Operating margin should be in the range of 14.7% to 16.7%, and our effective tax rate for the year is expected to be approximately 19%. Full year stock-based compensation dispute and related expenses will be in the range of $31 million to $33 million.

Let me provide some additional color on our first quarter and full year expectations. As Wallace mentioned, we are making strong progress with our flash maker customers. We have a strong pipeline of design wins and are positioned to gain meaningful share this year. We expect our revenue from all of our flash maker customers will grow in 2024 and to increase approximately 50% this year.

In addition, we have high visibility that 2 additional flash makers will be ramping new projects with us this year in eMMC and UFS and in SSD controllers, and we will be able to grow revenue from each of these flash makers very meaningfully. We expect normal seasonality to impact our business in the first quarter but are confident that we are well positioned to grow sequentially throughout the rest of the year based upon our strong backlog of wins and project ramps.

We expect to see consistent improvement in our gross margins this year, driven by better mix towards newer generation interfaces in our eMMC and UFS and SSD controller sales, a number of new projects ramping and overall pricing starting to normalize and improve.

For operating expenses, we'll continue to invest in maintaining our technology leadership in the market, including the tape-out of 2 6-nanometer controllers, 1 in Q1 for UFS 4 and 1 in Q3 for a second PCIe Gen 5 SSD controller. This will lead to elevated operating expenses in those quarters.

This concludes our prepared remarks. We'll now open the call for your questions.

[Operator]

[Operator Instructions] First question comes from the line of Mehdi Hosseini from Susquehanna International Group.

[Mehdi Hosseini, analyst]

Yes, I have 2. Wallace, can you help me understand what you're seeing in SSD solutions business segment? I understand your continued traction with flash makers and a new product ramps that are more focused on SSD controller and the smartphone, but you could give us a feel for SSD solution and whether you would be able to actually slow down the decline in revenues here? And I have a follow-up.

[Chia-Chang Kou, executive]

I think our SSD solution Ferri has been stable, and we are seeing a strong pipeline of win. I think for Q4 revenue decline due to some of multi-customer see the inventory pile-up and we do see 2024, we have accumulated more design. But we see we have a stronger growth in 2025 from an automotive customer for our Ferri product.

[Mehdi Hosseini, analyst]

Okay. Great. And your 2024 guide is very encouraging. You also ramping a 6-nanometer takeout. I understand what's driving the OpEx increase. I also look at your cash, you have almost $10 of net cash per share. Your just operations should help with additional cash generated, you sound very confident. Why not revisit the capital return, especially with the buyback, especially with the investors that have been patient? Any thoughts, any color here would be appreciated.

[Riyadh Lai, executive]

Yes. Thanks for the question, Mehdi. Look, that's a good question. If we look at our capital allocation program constantly, right? That's something we review with our Board regularly. We have the dividend policy that we've been paying for a very long number of years with the exception of when we were in the acquisition process.

Strategy behind the dividend, as you know, has been always a set it at a level that's comfortably affordable and we'll continue to evaluate going forward, whether to increase the dividend in a future time as business continues to scale and cash flow increases longer term.

In terms of things like a share repurchase, as you know, our share repurchase program in the past has been opportunistic. We do not have a program in place today, but the Board is always evaluating ways of returning cash to shareholders, and share repurchase is something they'll continue to look at.

[Operator]

Next question comes from the line of Quinn Bolton from Needham.

[Quinn Bolton, analyst]

Congratulations on the results and outlook. I wanted to follow up, Wallace on your comments. Very encouraging to hear that you'll grow with every NAND manufacturer in 2024. But I think one of the concerns we've heard from investors is that as UFS 4.0 becomes mainstream, that one of your customers that's in-sourced, UFS 4.0 that may be a headwind more in '25 than '24. And so I'm not trying to get you to give guidance for '25.

But overall, would you expect your business in aggregate with NAND vendors to continue to grow in 2025 as UFS 4.0 becomes more mainstream? And then I got a follow-up.

[Chia-Chang Kou, executive]

Yes, we believe we definitely, we can continue to grow from our mobile controller for both UFS and eMMC. As you know very well, the UFS 4.0 still remains the high end for 2024 and 2025 and probably will go to mainstream up to second half of 2026. And we have a very strong UFS 3.1, 2.2 today, not only for existing NAND partner but also winning 1 to 2 additional NAND maker business and going to ramp in 2024 and 2025.

In addition, we also see NAND makers, they focus on the new development. So when UFS 4.0 becomes mainstream, their R&D focuses on UFS 5.0 development and sometimes outsourcing the new UFS 4.0 project to Silicon Motion because our new laser controller can capture the latest new generation high-performing I/O NAND with higher density NAND. So that will become much more attractive and value add to the -- to our [ name ] partner, extend the product life cycle.

So we see our position very well with NAND maker as well as growing margin maker who are moving from eMMC to UFS.

[Riyadh Lai, executive]

And I think also that it's becoming a much more diversified business. It's no longer really driven by one customer. We have a multitude of flash makers and module makers that address the smartphone market all very effectively. And so as we ramp up with these new flash makers and module makers, we're confident that we can continue to grow this business long term.

[Quinn Bolton, analyst]

Great. My second question is more a clarification about the 2 new NAND vendors that ramp this year. Can you give us any color? Is that specifically on the eMMC UFS business? Is it across both mobile as well as the SSD business? Just any color? And then, Jason, just a quick looks like OpEx for the full year probably comes in at about $240 million or on average about $60 million a quarter. I know there's some tape-outs in Q1 and Q3 that will probably increase R&D in that -- in those quarters. But is that sort of $240 million not the right range to be thinking about for OpEx in calendar '24?

[Chia-Chang Kou, executive]

The 2 NAND makers, I think, really is one is for UFS, one is eMMC, but we are continuing looking for engagement with the NAND makers.

[Riyadh Lai, executive]

Yes. And for OpEx, I think -- yes, I think it's in that range. $230 million to $240 million is probably the way to look at it.

[Operator]

Next question comes from the line of Gokul Hariharan from JPMorgan Chase.

[Gokul Hariharan, analyst]

First question is on enterprise, given that you have -- you are getting pretty good traction with your new product and you also reorganized the organization to focus more on enterprise. Wallace, could you give us a little bit more color on how big is the enterprise addressable market or Silicon Motion? What is something that you can really achieve over the next maybe 3, 4 years in terms of the enterprise traction?

And could you also give us a little bit of color in terms of what kind of design wins are you getting? Are you getting more design wins on like core storage products? Or is it like making OEMS and hyperscalers? Is there any mix in terms of where you're getting the payments? Maybe that you will give us a little bit more color on the enterprise addressable market.

[Chia-Chang Kou, executive]

So it's a very good question. I think that we are seeing very good traction today as we continue to sample and go through the qualification process with these Tier 1 customers and by a dozen customers from U.S. and to Taiwan, China. And see, I cannot give you the quantized number. I think by end of 2024, we'll have meaningful revenue.

We have much bigger revenue in 2025 and 2026.

The reason we get traction not only the standard NVMe, we're gaining momentum because the high-performance and all the number index that exceed expectation, but also we get a traction due to the QLC SSD coming into the data center.

And then see, this is for twofold. One is [ FTP ] standard for QLC, also low NAND space for QLC in China. I think U.S., one customer is also very interested for low NAND space. So that makes us a very differentiated compared with conventional easy solution. Due to the AI server demand and AI demand, I think Gen 5 SSD become much more attractive. So this is a similar our demand, and that's why many customers in Gen 4 qualify our Gen 5 solution.

[Gokul Hariharan, analyst]

Got it. For -- my next question is more near term. For 2024, you have a 20% to 25% revenue guidance. Could you give us some color on how you expect client SSD to grow and mobile to grow? And within mobile, recently, we are hearing some concerns about the end of restocking for some of the Chinese customers. Are you seeing the China -- the smartphone customers being a little bit more conservative in terms of procurement in the near term?

[Chia-Chang Kou, executive]

Yes. I think for client SSD, last year, our market share -- global market share is around 25%, 26%. We believe this year will grow to 30% to 32% range because total overall SSD number overall will grow another probably $10 million to $20 million for global unit shipment.

For mobile, we will grow faster and stronger because we have more customers in the pipeline not only the existing NAND maker, they continue to grow compared with last year, but also we have 2 additional NAND maker who joined the group to grow and module maker, we see they will grow even stronger. And we also have a platform development with both Qualcomm and MediaTek. We also have direct engagement with smartphone maker to strengthening our position and technology and pacing for 2025 growth.

[Operator]

Our next question comes from the line of Anthony Stoss from Craig-Hallum.

[Anthony Stoss, analyst]

Jason, I was trying to write as fast as I could. On the tapeout commentary, could you just break that out again by quarter and kind of the cost that you expect for the quarter? And then I had a follow-up for Wallace.

[Jason Tsai, executive]

Yes. So we're expecting to tape out our UFS 4 6-nanometer controller here in the first quarter, and then we'll take out our second PCIe Gen 5 controller early in the third quarter. So that's going to result in more elevated OpEx kind of similar to what you saw here in the fourth quarter for each of those 2 quarters.

And then in Q2 and Q4, that should revert back down to a more normalized level because of those -- because those peers don't have the tape-out. Those tape-outs as we have said in the past, are typically north of $15 million in terms of total development and investment cost for us. So during the quarter, where they're taping out, it's certainly a big step up on the OpEx.

[Anthony Stoss, analyst]

Okay. Got it. And then Wallace, I'd love to hear a little bit more last quarterly conference call, you talked about a new Korean NAND maker coming on as a customer. I'm curious to your view on how quickly they could wrap and could they be a, let's say, a top 3 customer in 2025?

[Chia-Chang Kou, executive]

We cannot comment individual NAND maker customers about their revenue, but we definitely look forward to stronger engagement and broaden our product line and design win. I think we're looking forward to embrace the NAND maker who really can outsource more projects to Silicon Motion, and we add value to them. I think that 2024, '25, there are really a good timing for us to show our technology and serve our NAND maker -- select their R&D extension and looking forward to more exciting results. And we will definitely rollout this year.

[Anthony Stoss, analyst]

Okay. And if I could sneak in one more on your MonTitan SSD, you talked about having secured one design win. Can you give us any color on if it's a data center hyperscaler NAND maker. And then how quickly do you think you can secure additional out of those 12 that have sampled?

[Chia-Chang Kou, executive]

We cannot comment the customer and the type, but I think with Tier 1 customers and with that, we believe we will secure the second one in the second half of 2024. So I think we're confident to win at least 2 Tier 1 customers by end of 2024.

[Operator]

Next question comes from Craig Ellis from B. Riley Securities.

[Craig Ellis, analyst]

Wallace, I wanted to start with you and follow up on some of the outsourcing questions from the call, but also really continue the conversation that you and I have had over the last couple of years. So I think we both expected that there would be an increase in outsourcing from NAND customers.

And the question is this, as you look across the increase in activity that you've observed over the last 12 months or so, can you characterize how extensive that is from OEMs that are maybe just doing 1 or 2 new products to much more wholesale changes? What's happening on the continuum a little bit to a lot? And how much of that is baked into the guidance that you and Jason have given for calendar '24? And then I had a couple of follow-ups.

[Chia-Chang Kou, executive]

I think the -- as you can see through the 2023, it was a difficult year for all the NAND makers because the weak demand and the oversupply, the NAND price declined sharply and nobody really make any planning. Everybody is margin negative. And we are able to gain share because I think we are treated due, recognize the extension of NAND makers on R&D.

So that's why we have been developed such relationship recognition, trust and respect for the past 15 years. And we're capable and handling. So NAND makers, their focus now is not focused on market share. They focus on profitability. So they are not either invest more CapEx in the NAND capacity. They only invest the technology they want to deliver. So their focus on the development is between the high end, more value, they can maximize the profitability they can get.

And the mainstream waterline, they will try to also to third party like Silicon Motion, which we can help them and diversify and bring a more portfolio offered to the very end customer. So this is the idea we bring to the table, and we see more and more outsourcing opportunity from NAND maker when they make a business decision, they tend to go to the third party like Silicon Motion.

[Craig Ellis, analyst]

Got it. And then the follow-up question is just a continuation. What are the things that you're looking at that will indicate that this is not only a trough cycle reaction from NAND OEMs, but through the sweet spot of the cycle and towards the peak of the cycle, they would sustain this level of outsourcing or perhaps even grow it. And then the follow-up is for Jason. Jason, is MonTitan ramps in calendar '24? How should we think of the gross margin implications relative to corporate average?

[Chia-Chang Kou, executive]

We see this cycle because now NAND is well being shortage. So NAND maker, they carefully to value all the priority inside the company. Every NAND may have a different strategy, and we cannot comment for that. But we believe the cycle will continue until middle of 2025 or late 2025, when supply demand reached balance and NAND makers start to invest more about the CapEx and to meet the higher demand.

[Jason Tsai, executive]

And I also think that -- I think to your question about how much of this outsourcing is temporary versus more of a structural shift. We have wins going into 2025 and further out. So I think this isn't something where they were just using us for a short-term stop gap. This is something where we're building much more substantial long-term relationships with them.

In terms of the MonTitan revenue ramp and margin impact, that's not going to expect it to happen until late into Q4 -- late into 2024, excuse me, in Q4. So it's too early to say what impact it will have more meaningful ramp in 2025.

And certainly, as we have better visibility around that, around timing of wins and scale of the wins, we'll be able to provide more color. But right now, it's a little too early to talk about the impact of both revenue and margins at this point.

[Craig Ellis, analyst]

Got it. And the gross margin color on calendar '24 guide was quite helpful. Can you talk about the visibility that you have, Jason, to gross margins ultimately reattaining that more normalized 50% level?

[Jason Tsai, executive]

Yes. I think we're feeling pretty good about that just given the mix of new products, new projects, new technologies that are coming to market that we already have strong design win and pipeline for. As each day passes, we're also seeing these new engagements bring with them healthier pricing levels at healthier margins, and we're certainly working on our own back end and production to also improve costs as well.

So I think we're on a good track here and the guidance that we provided, we believe that it's attainable.

[Operator]

Our next question comes from Suji Desilva from ROTH MKM.

[Sujeeva De Silva, analyst]

Jason can congrats on the good guidance here. You talked about the module makers securing lower-cost NAND in late '23 that they're selling through now. Can you just talk about the behavior you'd expect as that lower cost NAND gets worked through and how they respond? Would they then look to market conditions? Or just any thoughts there on how that might impact the financials after that gets worked through?

[Chia-Chang Kou, executive]

Most of our leading module makers I think they have been in the market for a long time. So they understand NAND price trend. So they procure a very large amount of NAND through last August to November. So that really is prepared for NAND price up. They understand NAND price, NAND will be in shortage and NAND price will go continually throughout the entire '24. So they're procuring advance and to balance their cost. They will continue to buy some of NAND this year, but the product mix and NAND different pricing makes them to be more competitive to compete with other module makers.

[Sujeeva De Silva, analyst]

Okay. All right. And then my other question is on the MonTitan as it ramps up. Is that the right way to think about that, that maybe some of the AI servers out there creates opportunity for attach rates and content increases in MonTitan? Or is that not the right framework for what might be causing some...

[Chia-Chang Kou, executive]

I cannot comment on that, but I think the current demand is in the very wide range from the hyperscalers and from AI server, from all-flash array, from conventional servers. So I think we're definitely looking forward to -- but the more important is a Tier 1 customer who have a really good volume, and we believe we can -- we have a secured one. We're looking forward to see your second one by second half of 2024.

[Operator]

We have a follow-up questions from Mehdi Hosseini from Susquehanna International Group.

[Mehdi Hosseini, analyst]

Yes. Jason, I understand the 6-nanometer tape-out is going to keep your R&D in the $47 million to $48 million a quarter this year. Should we expect additional tape-outs next year? In other words, should R&D stay at these elevated levels into 2025? Or would it taper off?

[Jason Tsai, executive]

I think we'll continue to invest here. I think it's a little too early for us to comment about what 2025 OpEx looks like at this point. But obviously, it's important for us to continue to invest, to continue to stay ahead. We tape out a 6-nanometer because it's what we need to do.

The technology requirements for performance and power, you can only get both of those to the right levels when you go down to this lower process geometry. I think there are options for us to look at ways of reducing tape-out costs and foundry costs longer term that we're exploring. So stay tuned as we have more to share on that. We will. But certainly, our goal here is to continue to invest, but invest responsibly and try to bring the cost down as much as we can, but still maintain our technology leadership.

[Mehdi Hosseini, analyst]

That's fair. Ultimately, we're just trying to figure out if the company is still targeting mid- to high 20% operating margin and OpEx is a factor here. So any thoughts on the longer-term operating margin target since...

[Jason Tsai, executive]

Yes, that hasn't changed. I think if you take a look at our business in the past, we are typically 48%, 50-plus percent gross margin company and operating margins in that 25% to 30%. There's nothing fundamentally different about our business today that says that, that's not an achievable target for us longer term.

[Operator]

We also have a follow-up question from Craig Ellis from B. Riley Securities.

[Craig Ellis, analyst]

Wallace, you mentioned the company has a collaboration with both MediaTek and Qualcomm. And I was hoping you could comment a little bit further on that, both on the duration of those 2 partnership engagements. And two, the nature of them, are you a reference design partner for those solutions? And if so, to what extent? And to what extent have those been part of UFS revenues in the past? And are they expected to be in '24 and '25?

[Chia-Chang Kou, executive]

It's important for our new products and to qualify on leading SoC provider, like the Qualcomm and MTK for the mobile platform. And then normally, we have direct engagement also through our customer, joint qualification. So they help us to resolve some issue during the preproduction qualification. So this is a joint prequalification and help us to gain confidence for our quality for firmware as well as ASIC.

And we also -- and what we serve Qualcomm for automotive platform qualification. So they extended our product line like Ferri and MediaTek and other NXP. So this is the platform for partner and platform engagement to help accelerate our product readiness, also help our customers to end the production sooner.

[Craig Ellis, analyst]

And how material are those relative to the revenue that we've been seeing and that you would expect to see in 2024?

[Chia-Chang Kou, executive]

I cannot quantize the numbers, but I tell you it's very helpful and our company put a big effort for platform qualification and team and dedicated to help our product line.

[Operator]

Next up, we also have a follow-up question from Gokul Hariharan from JPMorgan Chase.

[Gokul Hariharan, analyst]

I had one question on AI. Wallace, you did highlight the AI adoption on the enterprise side. Could you also talk broadly on what happens when you have more AI adoption on edge devices, especially most of your PC and smartphone customers are launching AI-enabled PCs and smartphones this year and probably more next year? What does it do to NAND flash content? And what does it do to your controller ASPs or controller specs?

[Chia-Chang Kou, executive]

So these are very good questions. Naturally, not only us, all the NAND maker, I think, have spent probably at least half year looking forward to how the AI will impact for storage solution and what a controller maker need to do to improve our value and to enhance AI application. So there's a lot of exciting applications for AI PC. You're looking from the Intel, AMD, the SoC, also Qualcomm and NVIDIA coming provide the solution. They are also third-party [indiscernible] SoC for PC, but not for the notebook, but for desktop and for PC workstation.

So we are involving for what our company is for enterprise AI, the SSD probably because the enterprise -- the server AI is more important for compute. So it's storage solution is really a system role. So the regular latency and sequential results very critical and to supporting the -- all the AI server requirement.

But for the AI PC, that's a story because you cannot use HBN for the PC. You cannot use a very, very high density and limited density for DRAM, so the swapping become very critical. So several technologies, several requirement is really neither SSD controller and a solution to provide to allow to make the edge AI to be more meaningful and more practical. And I cannot go to detail. I'd just say this is all the area we are looking for to add value and study. I think all NAND makers and leading control makers are looking for to provide solution and be part of the edge AI trend.

[Gokul Hariharan, analyst]

Okay. And second, on PCIe Gen 5, could you talk a little bit about the pricing uplift you're expecting as you go from PCIe Gen 4 to PCIe Gen 5? I remember I think you talked about significant premium in the last call. Could you talk a little bit about what you're seeing in the market for the flagship products? And how that is likely to shape out as we get into more mainstream PCIe Gen 5 products towards next year as well?

[Chia-Chang Kou, executive]

I think -- I cannot give you exact number, but our high-end PCIe Gen 5 channel controller is about 2x of PCIe Gen 4 controller today. We are very exciting to see our high-end PCIe Gen 5 controller adopted by 3 NAND maker. We believe there will be additional join in later this year. So this is very important for us to expand our market share for a notebook for PC OEM as well as we see the increase in our sales revenue as well as margin.

And this is a very important milestone. And the PCIe Gen 5 and the high-end controller can also be adopted by the server for boot storage. And I think there's a trend we're seeing. And not just for notebook, but PC for workstation, for gaming PC will be high-end PCIe Gen 5 channel controller.

[Operator]

With that, I would like to hand the call back to the management for closing remarks.

[Chia-Chang Kou, executive]

Thank you, everyone, for joining us today and for your continued interest in Silicon Motion. We will be attending several investor conferences over the next few months. The schedule of this event will be posted on the Investor Relations section of our corporate website. Thank you, everyone, for joining today. Goodbye for now.

[Operator]

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