Silicon Motion Technology Q3 2026 Earnings Call Transcript

Silicon Motion Technology (NASDAQ:SIMO) reported third-quarter financial results on Thursday. The transcript from the company’s third-quarter earnings call has been provided below.

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Access the full call at https://edge.media-server.com/mmc/p/ru6iza7h

Summary

Silicon Motion Technology reported Q3 2026 revenue of $560 million and a gross margin of 53.7%, with record earnings per ADS driven by growth in automotive, AI, and enterprise SSD solutions.

The company is positioned for continued growth with strategic focuses on automotive Ferri products, new enterprise SSD controllers (Mount Titan), and boot drive solutions, particularly in underserved markets.

Guidance for Q4 2026 indicates expected revenue growth of 5-10% sequentially, with gross margins forecasted to be between 54% and 55%, and operating margins projected to increase to 36-37%.

Silicon Motion Technology raised $1.15 billion through convertible bonds to strengthen its balance sheet and support growth initiatives, with plans to sustain margins and manage NAND pricing dynamics.

Management expressed confidence in achieving 40% revenue growth in 2027, driven by enterprise and AI market opportunities, and highlighted successful customer engagements and new product developments.

Full Transcript

OPERATOR

Good day, and thank you for standing by. Welcome to Silicon Motion Technology Corporation’s third quarter 2026 earnings conference call. At this time, all participants are in listen-only mode. After the speaker’s presentation, there will be a question-and-answer session, at which time, if you wish to ask a question, you will need to press Star 11 on your telephone keypad. Please be advised that today’s conference is being recorded. This conference call contains forward-looking statements within the meaning of Section 27 of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include, without limitation, statements regarding trends in the semiconductor industry and our future results of operations, financial condition, and business prospects. Although such statements are based on our own information and information from other sources we believe to be reliable, you should not place undue reliance on them.

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

For additional discussion of these risks and uncertainties and other factors, please see the documents we file from time to time with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements, which apply only as of the date of this conference call, and with that, I’ll now hand you over to Mr. Tom Sepenzis, Vice President of Investor Relations and Strategy. Please go ahead.

Tom Sepenzis (Vice President of Investor Relations and Strategy)

Good morning, everyone, and welcome to Silicon Motion’s third quarter 2026 financial results conference call and webcast. Joining me today is Wallace Kou, our President and CEO, and Jason Tsai, our CFO. Wallace will first provide a review of our key business developments, and then Jason will discuss our third quarter results and outlook. Following our prepared remarks, we will conclude with a Q and A session. Before we begin, I would like to remind you of our safe harbor policy which was read at the start of this call. For a comprehensive overview of the risks involved in investing in our securities, please refer to our filings with the U.S. Securities and Exchange Commission. For more details on our financial results, please refer to our press release which was filed on Form 6-K after the close of 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 manner consistent with how we analyze our own operating results. The reconciliation of the GAAP to non-GAAP financial data can be found in our earnings release issued yesterday.

We ask that you review it in conjunction with this call. With that, I will turn the call over to Wallace.

Wallace Kou (Founder, President & Chief Executive Officer)

Thank you, Tom. Hello, thank you for joining us on the call today. I’m pleased to report that we delivered another quarter of strong growth with revenue of $560 million and gross margin of 53.7%, driven by the growth in Ferri for automotive, AI and boot drive storage, our Edge SSD business, and our emerging Mount Titan controller for Enterprise SSD. We drove another quarter of higher operating performance, delivering the second consecutive quarter of record earnings per ADS.

We continue to capitalize on our product and market diversification strategy. We are on track to deliver record revenue in 2026 with over 100% top-line growth. Our strategy is simple: deliver real value to customers and focus where we are uniquely differentiated so we can generate strong ROI for shareholders. For our Edge controllers, we have become the de facto standard for mobile, IoT, and PC controller solutions for NAND makers and virtually every module maker. Outsourcing has become a much more meaningful portion of the market. Our NAND controller technology and design expertise deliver solutions that are better performing, consume less power, and are more cost efficient than either in-house or other merchant solutions. Our strong share gains are driving significant growth despite end-market weakness, and we expect this to continue.

On Mount Titan, Enterprise SSD controllers are winning across the ecosystem with leading NAND makers, hyperscalers and CSPs, and with module makers that supply AI servers to hyperscale and enterprise customers. Our success is based on our unique combination of two decades of controller and firmware design experience and our history of managing more NAND than anyone in the industry. This has created an incredibly solid foundation for our leading enterprise controller products, and we expect our Mount Titan revenue ramp to accelerate as we introduce our next-generation PCIe 6 controller next year.

Lastly, for our storage solutions segment, our strategy has always been to focus in areas that are underserved by NAND makers, and we are rapidly growing share in these areas—vital, low-density, smaller-volume markets that require more design and customization work. We have spent more than a decade building one of the industry’s broadest automotive-grade portfolios, supported by a dedicated quality and support team. Today, that foundation positions us to capture fast-growing compute and storage demand across cars, drones, and increasingly robotics.

For our enterprise boot drive solutions, our unique combination of broad controller platforms, best-in-class firmware, technical know-how, NAND supplier relationships, and manufacturing capability put us in an ideal position to serve the growing needs of the AI infrastructure market. As a result, we are rapidly evolving to a much more balanced and profitable company as new enterprise and AI products enhance our leading consumer controller share, strengthening our competitive position from AI infrastructure to the edge to deliver long-term, sustainable revenue and earnings growth.

I would like to take a moment to address the current market environment. The AI supercycle has driven robust demand of HBM, DRAM, NAND, and HDD for the past several quarters with no sign of slowing down. Prices have risen sharply over the past year, and the tight substrate supply across memory and storage enterprise markets remains relatively insensitive to price, but the PC, smartphone, and other consumer device OEMs are struggling to bring affordable products to market given today’s memory and storage costs, and the consumer unit volumes are declining as a result.

We expect conditions to stay difficult until bit supply comes back into balance with demand. New NAND fabs are planned for 2028, and NAND makers continue to add bits through higher layer counts, but we do not see this changing the current supply-demand imbalance to any great degree. Flash makers continue to prioritize enterprise and high-capacity solutions, creating new and expanding opportunity for Silicon Motion Technology. Our growth is benefiting from more outsourcing and larger opportunity in enterprise and the storage solutions market that we are uniquely positioned to win.

We are at the beginning of the journey in the enterprise AI markets, and our early success will drive accelerating demand for our next-generation technologies. Let me now discuss our embedded eMMC and UFS business, which includes controllers for smartphone and IoT-connected devices. Our eMMC/UFS business was up over 100% year over year in the first half of 2026 as the NAND makers are shifting their resources toward DRAM and HBM solutions, allowing module makers to take share in the mobile market. This has helped drive our market share gains as module makers look to third-party controller partners to make their mobile solutions.

In the third quarter, eMMC and UFS revenue declined modestly from the prior quarter, reflecting customer launch timing and the challenges smartphone OEMs face in offering affordable devices amid the higher NAND and DRAM prices. We expect headwinds to persist in the near to mid-terms until additional memory and storage supply comes online. Across the markets that we sell, our eMMC/UFS controller OEMs are reducing specifications to try to offset the rising memory and storage costs.

We expect our eMMC/UFS business to remain relatively flat in the near term given the current market challenges, but I do believe we can return to growth next year and beyond as our new UFS 4.1 controller and UFS 5 controller ramp, driving higher ASPs. Now turning to our SSD controller business, which includes Edge and Mount Titan Enterprise SSD controllers, this business delivered strong sequential and year-over-year growth in Edge SSD. Our PCIe 5 investments continue to pay off with growth in both our 4-channel and 8-channel controllers. PCIe 5 currently represents approximately 10% of our PC market, and we expect this will grow to 20% to 25% of the market by the end of 2027, providing a strong runway for further growth.

Our leading position in PCIe 5 is driving greater market share gains within the PC market, and as the industry transitions from PCIe 4 to PCIe 5, we expect to see further top-line improvement given the higher ASPs associated with these next-generation products. We are currently working with all the major NAND makers and most of the leading module makers to deliver compelling SSD solutions that leverage PCIe 4 and PCIe 5 controllers. We are tracking well ahead of expectations to achieve our market share goals of 40%, excluding Apple, by 2028, and believe we will continue to improve our position.

While PC unit headwinds associated with higher memory and storage prices present challenges, we believe we will drive further top-line growth through market share gains and ASP increases as the market shift to PCIe 5 continues. I would now like to provide you with an update on our new Mount Titan Enterprise SSD business. NAND remains a critically important technology across the enterprise and AI storage ecosystem, and Mount Titan is positioned for rapid growth in the coming years. These SSD solutions deliver high-speed, low-latency storage that target compute and data storage applications for enterprise AI platforms.

Our first two customers began shipping TLC SSDs for compute that leverage our Mount Titan controller in the second quarter, and all seven of our announced customers are on track to begin commercial ramp in 2026 with both QLC-based compute and QLC-based data storage products. TLC-based compute SSDs using Mount Titan are expected to grow more quickly than QLC-based data storage SSDs in the near term until greater supply of 2-terabit die becomes available.

Encouragingly, four of our six NAND makers have started production of 2-terabit QLC die today, and we expect all NAND makers to begin shipping 2-terabit QLC by the end of 2027, so momentum will accelerate throughout next year. During the third quarter, we taped out our next-generation 4-nanometer PCIe 4 Mount Titan controller targeting hyperscalers and CSPs and expect to begin sampling in the first quarter of 2027. We have won designs with multiple tier-one customers, including NAND flash makers, hyperscalers, and CSPs.

The new controller was designed for both compute applications using TLC and data storage using QLC NAND and has performance shaping and multiple aging service architecture extremely well suited for generative AI infrastructure. We continue to see increased inbound interest in our Mount Titan controllers and expect this new enterprise controller segment will help us deliver long-term sustainable top- and bottom-line growth. And finally, I would like to provide an update on our Ferri automotive, Edge AI, and enterprise boot drive storage business. Our solutions business, which includes Ferri and boot drive, delivered the strongest results in the third quarter, with revenue up over 75% sequentially, representing over 40% of our revenue. Our automotive business has been a particular source of strength, delivering better-than-expected top-line results and higher gross margins.

We continue to scale this business quickly as we know the automotive market, its customers, and the supply chain extremely well, which has driven significant backlog for long-term growth as we are accelerating our share gains. We have spent more than a decade developing our automotive products and certifications. Today, our solid controller and firmware offer the broadest portfolio of solutions to serve every part of the automotive market. Our success in automotive has drawn interest in Ferri for other large, growing markets, including robotics, drones, and advanced networking.

In the emerging robotics market, we are actively engaged with several companies that want to use our Ferri products. We’ve seen multiple opportunities in humanoid robots and other physical AI systems including vision, lidar, and compute storage. Our early conversations suggest robotics opportunities may be larger than automotive, and we believe Ferri is ideally suited to address it. Our fast-growing boot drive business is also gaining momentum. We estimate that the market will be approximately $3 billion in 2026, growing to over $5 billion by 2030. In the third quarter, we won designs with several new tier-one customers for networking and AI infrastructure products. These programs are expected to ramp over the next two years and will substantially improve our backlog visibility, as the average capacity of enterprise boot drives is much smaller than compute and data storage SSD drives.

The NAND makers no longer prioritize this market. Additionally, our DRAMless controller delivers the performance, reliability, and endurance boot drives need, with lower power consumption requirements, smaller form factor, and lower cost than DRAM-based designs. Boot drives handle operating system boot, logging, and system management rather than heavy data workloads, so they don’t need the expense of onboard DRAM for DPU, router, and switch products.

As AI infrastructure builds out at large numbers of servers, the networking and GPU equipment shipments are increasing rapidly, each needing reliable boot storage, driving the growing demand for DRAMless boot drives. We have been the primary supplier for DRAMless boot drive controllers to the NAND makers that have historically serviced this market, but they are moving on to higher-density opportunities. Silicon Motion Technology is uniquely positioned with the right technology, the right support for the leading security firmware, and proven ability to procure NAND, making us the best partner for those needing a boot drive solution.

Looking ahead, however, we are seeing significant new opportunity for boot drives with onboard DRAM, driven by strong demand for high inference and generative AI near CPU. Boot drives with DRAM provide lower latency and Open Compute Project features that are in increasingly high demand. As the NAND makers have shifted their resources toward HBM, DRAM, and high-capacity compute and data storage SSD, there is a growing shortage of near-CPU boot drives with DRAM.

We estimate that this market will reach over $10 billion by 2030, making a significant new opportunity for Silicon Motion Technology. We are already in discussion with multiple potential customers for boot drives that leverage our industry-leading NAND channel and PCIe 5 controller that can serve the near-CPU market to further expand our market opportunity, and we expect to begin ramping product for this market in the second half of 2027. Our Ferri for automotive, Edge AI, and boot drive solutions businesses are performing exceptionally well, and there are many large and growing opportunities for our products in these segments. Our backlog has increased meaningfully in just the past three months, and we expect many additional customer design wins in automotive, Edge AI, and boot drive solutions to deliver significant future growth. We continue to benefit from our proven ability to secure NAND in a difficult environment from multiple NAND suppliers, and this continues to be a powerful differentiator for our company.

In conclusion, Silicon Motion Technology delivered its fourth consecutive quarter of record revenue as we executed across a rapidly diversifying business. We are a fundamentally stronger company today with a stronger balance sheet, broadest range of solutions and products, and more opportunities ahead than at any time in our history. Our broad portfolio serves surging AI demand from the data center to the edge. The breadth gives us balance across our markets and the flexibility to seize growing opportunities while navigating challenges like those we face today in PC and smartphones.

I am extremely proud of our teams. Together we have built a durable, diversified business powered by best-in-class technology, expanding share, and new end markets, strengthened by two decades of relationships with OEMs, module makers, and NAND makers. I’m more confident than ever that we will continue to deliver broad-based, sustainable growth long term. Now let me turn the call to Jason to go over our financial performance and outlook.

Jason Tsai (Chief Financial Officer)

Thank you, Wallace, and good morning to everyone joining us today. I will discuss additional details of our third quarter results and then provide our outlook. Please note that my comments today will focus primarily on our non-GAAP results unless otherwise specifically noted. A reconciliation of GAAP to non-GAAP data is included with our earnings release issued yesterday. Before I get into the results, I’d like to comment briefly on our convertible bond issuance. On August 13th, we raised an aggregate $1.15 billion with net proceeds to the company of $1.127 billion. This successful raise was increased from the initial offering of $800 million. This new CB at 0% interest and initial conversion price of $380.50 represents a conversion premium of 65% over the last reported sale price of SIMO on August 10th, the day the deal was announced.

This additional capital significantly strengthens our balance sheet and will help fuel our growth and enhance our working capital and to scale our business. Now turning to our results, we delivered an outstanding third quarter, surpassing our expectations, driven by stronger execution and demand trends. In the September quarter, sales increased 24% sequentially and 131% year on year to $560 million, coming in well above the high end of our guided range of $519 to $541 million, delivering our fourth consecutive quarter of record revenue. We experienced strong growth across most of our businesses in the third quarter with standout growth in Ferri for automotive, enterprise boot drives, and SSD controllers including Edge and MonTitan.

For enterprise, gross margins of 53.7% were significantly better than guidance as we capitalized on new product introductions and benefited from better mix and better-than-expected margins in our Ferri automotive products. Operating expenses slightly decreased sequentially to $120.7 million and operating margin increased to 32.1%, well exceeding our guidance, driven by higher-than-expected revenue and gross margin in the quarter. Earnings per ADS was $4.35, a 79% increase sequentially and a 333% increase compared to the same quarter last year.

Total stock-based compensation, which we exclude from non-GAAP results, was $17.3 million. In the September quarter we had $953.6 million cash, cash equivalents, and restricted cash at the end of the third quarter, compared to $181.8 million at the end of the second quarter. Cash increased in the third quarter due to the successful $1.15 billion convertible notes offering that we executed in the quarter, offset by the increase in working capital, dividend payment, and the repayment of the short-term bank loan.

Our strategy, as Wallace outlined at the start of this call, continues to drive growth and expand our opportunities. Our experience, our customers and partners, and our unmatched technology and development of NAND controllers and solutions has driven a significant transformation of the company. While the NAND market continues to be dynamic, our investments across consumer, enterprise, data center, and AI applications are the foundation of our rapidly growing business.

As a result, we believe the momentum in our business will continue in the fourth quarter and now expect revenue to grow 5% to 10% sequentially to $588 to $616 million, with growth across nearly all our product segments led by Ferri for Automotive, Enterprise Boot Drive Solutions, and MonTitan enterprise SSD controllers. We believe our SSD controller business will be flat to slightly down given the current memory and storage environment and typical seasonality.

Gross margins are expected to increase sequentially to 54% to 55% in the December quarter given the continuing improvement in product mix. Operating margin is expected to grow to 36–37% as continued strong revenue growth and higher profitability drives leverage to the bottom line. Our effective tax rate is expected to be 20% and stock-based comp and dispute-related expenses are expected to be in the range of $34.6 to $35.6 million. 2026 is on track to deliver record revenue for Silicon Motion Technology, with top line expected to more than double year over year. While we continue to invest heavily in R&D this year to expand our portfolio with leading-edge solutions, we are confident that along with the higher revenue and improved gross profitability, our operating margins will exceed 30% exiting this year. We expect this momentum to carry into 2027. Our strong backlog across all of our businesses gives us confidence that we can grow revenue by at least 40% next year, with gross profitability to be in the low to mid-50% range.

Our mix is improving with more contribution from enterprise controllers and Ferri automotive solutions; we should be able to sustain this higher margin level. It’s also worth emphasizing that these new enterprise opportunities represent larger addressable markets than our consumer segments, and because they are greenfield opportunities for Silicon Motion Technology, we can grow significantly by gaining share without depending on further market growth. Any market expansion would only add to our potential upside. We set out to diversify beyond consumer applications into automotive and enterprise, and that strategy is now producing outsized results.

Our long-standing leadership in merchant controllers and our multi-year investments in enterprise and AI SSDs are beginning to bear fruit. The solutions we are winning in these markets offer far greater visibility, much longer product cycles, and significantly higher barriers to entry, which together underpin sustained growth in revenue and profitability. As these wins ramp across a broad mix of end markets, consumer cycles will have less influence on our results.

Our visibility is improving significantly, and our business will become meaningfully more resilient and predictable. Our balance sheet has never been stronger, and we are well positioned to capitalize on the fundamental drivers that are the foundation of the transformation that Wallace spoke about earlier. I look forward to sharing more on our progress next quarter. This concludes our prepared comments. I’d like to open up the questions now.

OPERATOR

Thank you. To ask a question now, please press star 11 on your telephone keypad and wait for your name to be announced. To withdraw your question, please press star 11. Again, star 11 for questions. A moment for our first question. And our first question comes from the line of Neil Young of Needham & Company. Please ask your question. Neil, your line is open.

Neil Young (Analyst at Needham & Company)

Hey, good morning, guys. First question, just given that, you know, you just gave us the expecting revenue to grow by at least 40% next year and gross margin in the low 50% range. Curious if you could sort of dive into maybe the main drivers of that. I mean, given that gross margin you expect sort of resetting the long-term target, it sounds like now I would expect more of the growth to be driven by sort of the higher margin business like Ferri, MonTitan.

But any comments that you can add further on to ’27? Thanks.

Jason Tsai (Chief Financial Officer)

Yeah, I think that’s right. I think we’re seeing significant traction with MonTitan. We’re seeing the automotive Ferri ramping very aggressively as well. A lot of these Ferri projects, especially in automotive, these are multi-year engagements where once we’re qualified in, we’ve got a really long-standing position with that socket, with that customer. We’re working with virtually every automaker in the world for a variety of solutions going into a significant amount of their portfolio, but significant room for growth still.

So based upon our backlog, based upon the growth we anticipate from MonTitan as well as other SSD controllers and Ferri for automotive, we believe that we can sustain these low to mid-50% gross margins.

Neil Young (Analyst at Needham & Company)

Okay, great, that’s helpful. And then, just in this quarter, bringing it back. Looking at the Ferri and boot drive, obviously the growth continuing, it was really great. But could you by any chance, you know, give us some more detail? It sounds like Ferri might have outgrown boot drive in the quarter, and obviously, you know, across beyond automotive, I should say in Ferri. Curious to learn more about the robotics and sort of where you guys play in that.

Wallace Kou (Founder, President & Chief Executive Officer)

I think because of Ferri for automotive has been for a long time, we see the customer base is very strong. So for this year, Ferri for automotive grows stronger. However, our boot drive also gaining momentum with diversified customers, more than just GPU customer and TPU customer. We recently winning all the networking and server customers. We see our enterprise boot drive will grow even much faster next year. And robotics, I think, is still very early stage and the total volume still very small.

But we try to make sure we’ll be in when the markets take a boom.

Jason Tsai (Chief Financial Officer)

And keep in mind, a lot of the features within the Ferri for automotive products are the same features that robotics requires, right? Which is high temp, vibration. All the things that go into a car largely go into the robotics as well. So having that certification already, having those products already, puts us in a significant advantage to penetrate this market as it grows.

Neil Young (Analyst at Needham & Company)

Thank you.

OPERATOR

Thank you. We will now take our next question from the line of Craig Ellis of B. Riley Securities. Please ask your question, Craig. Your line is open.

Craig Ellis (Analyst at B. Riley Securities)

Yeah, thanks for taking the question. And team, congratulations on the tremendous momentum that it seems you have in the business. I wanted to start with a question for you, Wallace. Very exciting to hear about the engagement that you’ve got with near CPU boot drives, because the performance gains given reduced latency with the way that can implement are really quite profound. And it seems like that could be a very significant market. The question is this, do you see this implementing on more of a custom basis across customers, or is JEDEC going to move super quickly and get standards out here in another quarter or two?

And then can you just talk a little bit more about how you would see the early part of the ramp for Silicon Motion?

Wallace Kou (Founder, President & Chief Executive Officer)

Now we see opportunity come from the early third quarter because, conventionally, this near CPU boot drive with VRAN belong to NAND makers. Because all NAND makers are busy and try to produce at least 8 terabytes, 16 terabyte compute SSD, so they have less interest of resource on NAND allocation for the low-capacity near CPU boot drive. The near CPU boot drive primary density is about 1 terabyte, 2 terabytes, and some also 5 gigabytes, 4 terabytes, very, very few.

So I think because we can see it will be probably a very, very big gap of shortage supply for 2027. Many, many customers come to SiliconMotion and we are preparing discussion, and I think the solution definitely to have a customized some feature and tailored for individual server and leading hyperscalers. So this is not a simple work. So we will try to focus on selecting NAND and make sure we follow the OCP requirement and provide the firmware. I think we will be ready for the firmware and solution by early Q1 and production ramp will be second half 2027.

Craig Ellis (Analyst at B. Riley Securities)

That’s really helpful. And then the second question is really a higher-level question for you and Jason. The team has done a phenomenal job operationally this year putting the business in a position to grow 100% plus year on year. Can you help us understand the positioning that you feel like you’re in with wafer supply, packaging, etc., to support the 40% growth, and if demand is greater, given some reports that things like agentic AI CPUs could grow 47% next year?

Can you just help us understand if there’s upside potential in the supply chain to meet greater demand in that 40%? Thank you.

Wallace Kou (Founder, President & Chief Executive Officer)

As you know very well, in the semiconductor industry today everything’s in shortage, right from substrate, material, wafer, NAND, memory, even test capacity. But I think our manufacturing and operating team did a very good job, and we secured our 2027 wafer with TSMC primarily, and we also secured the test capacity, assembly capacity, and the substrate material. So we believe we are able to support our growth for 2027. Jason mentioned we definitely can grow a minimum 40% year over year.

I think in next quarter earning call we will provide more meaningful guidance for 2027.

OPERATOR

Thank you. Thank you. We will now take our next question from the line of Sebastian Nagy of William Blair. Please go ahead. Sebastian, your line is open.

Sebastian Nagy (Analyst at William Blair)

Yeah, thank you and good morning. Thanks for taking the questions and congrats on another record quarter here. My first question is maybe a little bit higher level and strategic. As your SSD solutions business continues to grow as a share of revenue, hit over 40% in Q3, it is driving greater NAND pricing exposure into Silicon Motion Technology’s model. And that’s a little bit of a shift for a company that was largely tied to volume growth historically.

So maybe just how do you think about managing this new pricing dynamic and how it could impact your growth and margins, particularly if NAND pricing starts to come down?

Wallace Kou (Founder, President & Chief Executive Officer)

Yeah, you asked a very good question. I think we definitely manage NAND price increases and negotiate with the customer to pass through the cost to customers, so we benefit from the sales revenue growth. But we believe the NAND price increase will come to moderate because the spot price for margin makers now has become challenging. We see the Q3, Q4 NAND pricing rather similar for next year. We also see that although there will be single-digit growth quarter to quarter, it will be moderate.

And for our business, why we focus on automotive and boot drive is because the end customer wants to have a long-term contract and support and supply, and so our contract with customers and price will stay with at least two quarters, and we negotiate price every six months. So we are able to manage the price and the cost, and that’s why we can see through the demand and we can manage our gross margin continually. And we see the NAND wafer price will be more stable compared to last year.

Jason Tsai (Chief Financial Officer)

And one more thing, Sebastian. As you know, I think certainly there’s a fear that if NAND flash prices begin to come down, how does that affect our growth? I think one of the things that we’re seeing in automotive, even in boot drives, is that there’s some de-speccing going on. I think, all things being equal, if NAND availability was better, if pricing was better, our customers would double their density or more in some cases. And so I think between a combination of kind of re-speccing to normal specs as well as additional opportunities, additional customers that are coming online over the next 12, 18, 24 months, I think we’re well-positioned to continue to grow even as the NAND market stabilizes over the next two years.

Sebastian Nagy (Analyst at William Blair)

Great, great, that’s helpful. And then maybe just as a related follow-up around the funding that you raised and the working capital needs, I just wanted to get maybe a better sense for your ability to continue funding all of your working capital and inventory build with the cash that you have on hand. Can you maybe just talk a little about how quickly you expect inventory, particularly around NAND, to flow through the model and what it would take to maybe potentially need further capital down the line.

Jason Tsai (Chief Financial Officer)

Yeah, so for us we’re targeting about two-quarter turnaround time between when we get the NAND and when we generate the cash flow. So our expectation is to be able to turn that inventory relatively quickly and generate the cash flow to support ongoing growth of our business. But, you know, when we did the raise, we talked about the raise being sufficient to, you know, fund our growing working capital needs for the next couple of years based upon today’s expectations.

Obviously, as the business continues to grow and hopefully as it exceeds expectations, we’ll continue to reevaluate that. But that’s at least right now, for our visibility, we believe we’re in a good spot.

Sebastian Nagy (Analyst at William Blair)

Great, thank you.

OPERATOR

Thank you. Our next question comes from the line of Suji Da Silva of Ross Capital. Please ask your question. Suji, your line is open.

Suji Da Silva (Analyst at Ross Capital)

Hi Wallace. Hi Jason. Hi Tom. Congratulations on the progress here. The MonTitan product, the higher KV cache density you’re expecting, are there innovations coming from HBM and DRAM that might offset the opportunity for SSDs in KV cache? I’d love to get your thoughts there. And what’s a good concept of the number of MonTitan SSDs needed per GPU for KV cache?

Wallace Kou (Founder, President & Chief Executive Officer)

So I think the MonTitan demand is from a very wide range, not only from the AI server and for hyperscaler and also for the CSP, but also for the NVIDIA ecosystem. I think we don’t know the percentage, but we see the demand for compute SSD this year was bigger due to the NAND price being very expensive, but we also see the momentum for high-capacity QLC coming for next year, and I believe when Samsung, Hynix 2 terabyte QLC can move to production, we’ll see more QLC demand for data storage.

And so MonTitan itself can handle both the compute SSD and storage SSD. And for KV cache, particularly for CMX for NVIDIA structure, I think they will redefine and try—because the price is very expensive—they try to reduce the minimum capacity for each of Vera Rubin trade. So I think this will be probably announced early next year, and I think the related ecosystem will help provide. I think as long as CMX KV cache demand is growing, as long as they demand additional SSD, that’s good for us on MonTitan because it increases our controller demand.

Suji Da Silva (Analyst at Ross Capital)

Okay, thanks Wallace. Very helpful. Any other questions for Jason? Perhaps, you know, 40% plus revenue growth next year. You talked about an operating margin guide in the 30s. Just how are you managing the OPEX and R&D growth given that you have so many different end-marketing projects you’re focusing on, and what’s the kind of a growth rate for OPEX versus revenue? That would be kind of a framework for us to think about.

Jason Tsai (Chief Financial Officer)

Yes, we’ll get into more specific guidance around 2027 in January. But the expectation this year, we taped out a number of 6-nanometer as well as 4-nanometer products, so we were spending a lot of money on tape-out and design this year already. We anticipate continuing to invest next year, and again we’ll talk more about the specific OPEX guidance next year in January. But our expectation is that we will continue to be able to deliver operating margin leverage next year as well.

Suji Da Silva (Analyst at Ross Capital)

Okay, thanks. Appreciate it. Thanks guys.

OPERATOR

Thank you. And our next question comes from the line of Mehdi Hosseini of Susquehanna International Group. Please go ahead. Mehdi, your line is open.

Mehdi Hosseini (Analyst at Susquehanna International Group)

Yes, thanks for taking my question. A couple of follow-ups for me, Wallace, Jason. Can you quantify what percentage of your revenue were attributable to Ferri boot drive and PCIe SSD, and how each percentage would change into next year? And I have a couple of follow-ups.

Wallace Kou (Founder, President & Chief Executive Officer)

I would say we cannot provide detail, but about 40% of our total revenues are around the solution from boot drive and automotive, 60% from controller.

Mehdi Hosseini (Analyst at Susquehanna International Group)

Would those mixes change dramatically next year?

Wallace Kou (Founder, President & Chief Executive Officer)

Next year the solution boot drive model might grow to 50%, but so far we didn’t accurately define it. But I think we see it probably will be balanced next year, 50/50 between controller and solutions.

Mehdi Hosseini (Analyst at Susquehanna International Group)

Okay, and given how your exposure to the consumer end market is less looking forward compared to prior years, should I assume that there is no more seasonality from Q4 to Q1?

Jason Tsai (Chief Financial Officer)

Again, Mehdi, we’ll get into more specific Q1 and 2027 guidance in January.

Mehdi Hosseini (Analyst at Susquehanna International Group)

Okay. I was hoping to get a preview because you mentioned that you’re more driven by enterprise and I’m just trying to—maybe qualitatively you can help us.

Jason Tsai (Chief Financial Officer)

No, I can. I mean I think with enterprise becoming a bigger portion of the mix, I think certainly normal consumer seasonality will be more muted going forward as consumer business becomes a smaller percentage of our business.

Mehdi Hosseini (Analyst at Susquehanna International Group)

Okay. And then is there any update on arbitration? It would be great to tell us whether the chemoidis drone and how we’re tracking the dose.

Jason Tsai (Chief Financial Officer)

Yeah. So, you know, we did the closing arguments in Singapore arbitration in March, and, you know, we are still anxiously awaiting the results. We don’t have any other updates at this point, but certainly once the results come out, you know, we’ll be talking about those things quite a bit. But right now there’s no additional comments we’re making around the arbitration.

Mehdi Hosseini (Analyst at Susquehanna International Group)

Okay, thank you.

OPERATOR

Thank you. As a reminder before we move to our next question, if you wish to ask a question now, please press Star 11 on your telephone keypad. And our next question comes from the line of Gokul Hariharan of JP Morgan. Please go ahead. Your line is open.

Gokul Hariharan (Analyst at J.P. Morgan)

Hi, thank you very much. So first question is on the near-CPU boot drive opportunity. Wallace, I think you said you will start in your solutions in second half of next year. Could you talk a little bit about how big that opportunity can scale into? Because your enterprise boot drive partnering with NVIDIA, it scaled up very rapidly, but could you talk a little bit about how the opportunity is and how fresh that opportunity is given that there are already a fair number of incumbents there?

Like people don’t understand the TAM is big, but how quickly can you scale this business?

Wallace Kou (Founder, President & Chief Executive Officer)

I think the TAM will be minimum $10 billion by 2030, and because the density is bigger than the durianess boot drive—because NAND makers did not pay attention—but this business belonged to NAND makers in the past because they have, especially the 3 NAND makers have DRAM. But because all the NAND makers, they focus on high-capacity compute SSD and the data storage, so their lack of resource and attention in the near-CPU boot drive with DRAM. So that’s why the supply becomes shortage and many, many tier-one customers come to Silicon Motion.

We see the great opportunity. We also work with the leading NAND makers to see how they want we can work together to resolve the issue—so whether they will support more NAND, and also we need to resolve manufacturing and also including some DRAM supply too. But we believe we’ll start to ramp in second half this year. We also work with some market maker partner because they will use our controller and the firmware, but we will have a different business model to work with them to benefit some financial results.

So anyway, this is a new opportunity, and we just really don’t have enough R&D resources. There’s a great opportunity for Silicon Motion to grow, and this could grow even faster in 2028 and 2029 because we have the great PCIe controller and it fits very well, and we have the firmware technology. And suddenly the controller, very lucky, has certain OCP features built in, so we don’t need to redo the new ASIC. I think a lot of all naming, they don’t have a certain controller today, so that’s why we are in a great position to expand to the new market.

Gokul Hariharan (Analyst at J.P. Morgan)

Just to follow up there, when you win business do you have to win by individual server customer, or do you just design into a chip platform and you kind of become the de facto in that chip platform similar to what you do for the current enterprise boot drive?

Wallace Kou (Founder, President & Chief Executive Officer)

So all the near-CPU boot drive today is M.2 form factor 22 by 80, so they need low power. Because our controller, 6-nanometer controller, our SN8008, is ideal to fit in very well. This controller needs just a DDR4 or LPDDR4, so well-positioned to fit in this solution. So there’s some NAND maker also want to work with us, but we have limited resources. We just have to make sure that firmware is ready. We will support two different NAND by Q1 next year, and hopefully ramping smoothly in second half next year.

So as long as it is M.2 standard you can start shipping. There is no additional qualification by individual server customer, etc., which takes time. So we are already working with our module maker, our customer, and they will support the leading tier-one server maker. So they may be shipped earlier by Q2 next year, but it’s only with a support controller. Our own total solution will be probably ready shipping in the second half of next year. Understood?

Jason Tsai (Chief Financial Officer)

Yeah. So in terms of the gross margin question on the solutions business, as Wallace pointed out, we’re negotiating six-month pricing contracts with our customers and we expect to turn our inventory here within that period as well. So maintaining very tight controls around working capital and price protection and margin protection for our products and our P&L, we anticipate that certainly with automotive, these are qualified products going into projects that are multi-year, three to five years in length.

And so pricing as well as supply agreements are agreed upon at the beginning of these engagements. And so we’re confident that we can maintain better margins, especially as the solution complexity, the design, the support becomes more onerous. And so having the higher margin supports all of that. In terms of the working capital, as I said, with the raise that we’ve done, we’re confident that we can support the next couple years’ worth of business based upon what current forecasts look like. So we’ll continue to grow inventory, but obviously in anticipation of a 40%-plus year, we’ve grown inventory now. We’ll continue to grow inventory in the next quarter, in the fourth quarter, and then we’ll start seeing obviously the turns of that inventory come back into cash flow as we progress.

OPERATOR

Next question comes from the line of Daniel Yin of Morgan Stanley. Please ask your question. Daniel, your line is open.

Daniel Yin (Analyst at Morgan Stanley)

Thanks, Wallace and Jason, for taking my question and congratulations on a great result. I want to switch here to a very different question. Wallace, you just mentioned about some opportunities, for example for your Blue Drive for some of the enterprise SSD. But I want to ask what will be your strategy right now in China? So I think China is still an important region and I think in China we also have CSPs, we have NAND suppliers, NAND makers, we also have a lot of module hubs there.

But at the same time I think competition is still there. So I want to consult you on Silicon Motion Technology’s strategy right now in China, you know, both with the NAND makers, with competitors, and also how should we address maybe the future demand from pharmacists in China.

Wallace Kou (Founder, President & Chief Executive Officer)

Okay, you asked a very good question, Daniel. I think we really want to balance between China and also the rest of the world. And China has YMTC, a NAND maker. They’re very strong; they grow very fast. We also support and collaborate with YMTC directly or indirectly with module makers. I think the enterprise portion we see will become stronger in 2027. I think we definitely work closely for China CSP for hyperscaler, believe us. And I think that’s why we try to grow China local R&D. Eventually China local R&D can support China customers, and Taiwan we support the rest of the world, especially for the U.S. And secondly, I think in China they are growing enterprise controller companies, but in the past they also liked to make enterprise drives, right? In the past, you know, NAND pricing is cyclical. They have a downside, they have upside. So some enterprise controller companies, they buy the NAND in the downside; they’re selling the drive in the upside. But nowadays there’s no longer the cyclical price going up or stable, right? So very hard for enterprise controller companies to just convert into selling the whole solution if you don’t win hyperscaler or even NAND maker or the CSP customer.

So I think our strategy is very simple. We win NAND maker business and design-win directly; we win hyperscaler customers in both U.S. and China; we also win CSP directly. But we don’t make an enterprise solution. We only sell controller and our firmware. We enable the module maker and the NAND maker. They sell and utilize our solution—our controller and the firmware—make an enterprise solution and sell it to the customer. So this is where we are.

We think that’s why building the Silicon Motion ecosystem, working together, supports the growing opportunity in both China and the U.S.

Daniel Yin (Analyst at Morgan Stanley)

I see, very, very clear, Wallace. If I may follow up, how should we think about the overall competitive landscape on controllers in China right now? So just want to get your opinion.

Wallace Kou (Founder, President & Chief Executive Officer)

So for enterprise, we really don’t—even though there’s one or two ASIC companies moving to the IPO—we don’t see they are strong enough to compete in the long term, not just on one technology or business model, right? So I don’t really see any threat from them, even some also want to go overseas. So today we feel pretty comfortable with our position, with our technology, and we have a very, very strong design-win pipeline for both our PCIe Gen 5 as well as Gen 6.

Daniel Yin (Analyst at Morgan Stanley)

I see, yes. Thanks for this. The second question from me is that since right now you are, I think, issuing the convertible bond, I want to ask if there’s any change on your dividend policy potentially in the future. And also, yeah, I think just overall how should we think about your capital structure going forward? Do you have a target, any ratio you are looking at? I think this question is actually coming from some of the investors who subscribed to your convertible bond.

Jason Tsai (Chief Financial Officer)

Yeah. Thank you. Yeah, so you know, dividend and capital allocation certainly continues to be a priority. We increased our dividend a couple weeks ago from $2 to $2.30 per ADS per year. So we’ve increased—we’ve had a history of increasing—our dividend over the last 10 years or so, and our expectation is that we can continue to look at that strategically over time and continue to look at opportunities to raise that. The three priorities for us on capital return are dividend, share buybacks opportunistically, and then M&A as it makes sense, and that is unchanged.

But certainly right now working capital needs continue to increase as well. The CB raise puts us in a much better position to drive growth in our business with better working capital as well.

Daniel Yin (Analyst at Morgan Stanley)

Thank you, Jason. That’s all my questions. Thank you.

OPERATOR

Thank you. We have now reached the end of the question and answer session. I’ll now turn the conference back to Mr. Wallace Kou for closing comments.

Wallace Kou (Founder, President & Chief Executive Officer)

Thank you everyone for joining us today and for your continued interest in Silicon Motion Technology. We will be attending several investor conferences over the next few months. The schedule of these events will be posted on the Investor Relations section of our corporate website, and we look forward to speaking with you at these events. Goodbye for now.

OPERATOR

Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect your lines.

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