Good morning everyone and welcome to Silicon Motion's fourth quarter 2025 financial results conference call and webcast. Joining me today is Wallace Kou, our President and CEO, and Jason Tsai, our CFO.

Wallace will first provide a review of our key business developments and then Jason will discuss our fourth quarter results and outlook. Following our prepared remarks, we will conclude with a Q&A session.

Before we begin, I would like to remind you of our safe harbor policy, which was read at the start of this call. For a comprehensive overview of the risks involved in investing in our securities, please refer to our filings with the US Securities and Exchange Commission.

For more details on our financial results, please refer to our press release, which was filed on Form 6-K after the close of market yesterday. This webcast will be available for replay in the Investor Relations section of our website for a limited time.

To enhance investors' understanding of our ongoing economic performance, we will discuss non-GAAP information during this call. We use non-GAAP financial measures internally to evaluate and manage our operations.

We have therefore chosen to provide this information to enable you to perform comparisons of our operating results in a manner consistent with how we analyze our own operating results. The reconciliation of the GAAP to non-GAAP financial data can be found in our earnings release issued yesterday.

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

Thank you, Tom. Hello everyone and thank you for joining the call today.

I'm pleased to report that we delivered another excellent performance in the fourth quarter, exceeding our revenue and near the high end of our operating margin guidance and positioning us for a record-breaking year in 2026. We benefited from strong demand across all our markets and through the introduction of compelling new controller and solutions.

We increased market share in existing and new markets and expect momentum to continue throughout 2026. We remain focused on delivering long-term growth while investing heavily in next-generation products, increasing our engineering resources to support new product and markets, and further positioning Silicon Motion for long-term market share expansion.

While 2026 memory and storage industry dynamics are challenging given the supply tightness of NAND and DRAM and rapidly increasing prices of these components, we believe our resilient operation strategy and our unmatched NAND and maker relationship will allow us to deliver strong growth across our business. Given our current backlog and sales plan, we believe that first quarter 2026 revenue will be the lowest of 2026 and expect sequential growth throughout the remainder of the year.

As we continue to introduce the scale compelling new eMMC and UFS controller, PCIe client SSD controller, MonTitan enterprise SSD controllers, enterprise boot drive solution, and expanding Ferri automotive portfolio, we expect to deliver broad-based growth and to deliver the highest annual revenue in the history of the company in 2026 as we capitalize on multiple new products and execute on our continuing diversification strategy. I would like to start by addressing the current market environment.

The rapid adoption and growth of AI has introduced significant demand across all memory and storage technology, including HBM, DRAM, NAND flash, and even hard drives. The new and growing demand has led more recently to supply constraint, tight market condition, and increasing pricing pressure across multiple markets, including AI and enterprise storage, boot drives, PCs, smartphone, and most other markets that use NAND flash.

AI CSPs have attempt to lock up all the DRAM and NAND supply through 2026, which has made it increasingly difficult for other market player to get product, and is driving significant intra-quarter price increases. Given the growing supply constraint in DRAM and NAND, industry analysts are beginning to take a more cautious approach regarding smartphone, automotive, and PC unit growth in 2026.

Silicon Motion, however, remain extremely well positioned in the consumer market despite the tight condition given our long-standing partnership with all the major flash vendors. Our expanding market share within our existing market and the introduction of new higher ASP products.

We are leveraging our strong relationship with flash makers, OEM, and module maker to help secure NAND supply for our smartphone and PC OEM customers and ensure steady access to NAND even in the tight times. We are delivering greater value-add to both our NAND maker partners and OEM customer, driving stronger partnership that will lead to sustainable long-term growth.

As a result, despite the expected market headwind, based on our existing backlog, we expect growth in all our major product lines in 2026, including automotive, mobile, PC, enterprise SSD, and boot drive storage solutions, given our strong and growing market position and leading product portfolios. I would now like to discuss our highlight in eMMC and UFS.

Growing AI demand in focusing a more disciplined capex approach by memory and storage market to prioritize resources across multiple technology, product, and market. Increasingly, we are seeing additional opportunity for Silicon Motion to supply controller as NAND makers shift their internal resources to focus on DRAM, HBM, and customized memory technology for high-performance AI requirements.

The mobile market is a prime example of this trend as NAND makers are actively exiting mobile in favor of DRAM and HBM, which has led our mobile business to outperform in 2025 as our eMMC UFS business grew 25% for the full year, far outperforming the smartphone and embedded market. Module makers are seeing great success by using local NAND supply coupled with our controller, just as many of other NAND flash makers have looked into exit the mobile market in favor of the enterprise.

We will continue to benefit given that we are the only meaningful merchant controller maker for the eMMC and UFS. While the overall smartphone market expected to decline this year due to higher DRAM and NAND component cost, we expect the continuing shift from NAND flash maker to module maker to continue in 2026 and further benefit our eMMC UFS controller business.

Leveraging our strong relationship with local NAND makers and helping to align supply with handset OEM and module maker will lead to continuing outperformance for our business. In addition, the market for eMMC are vast and growing, with over 900 million units shipped annually.

We are shipping eMMC into automotive, industrial, commercial, IoT, smart device, streaming device, and many other markets. As flash makers have all but exited for eMMC market, the competition has diminished significantly, and we are experiencing strong revenue contribution from this segment.

Given our current backlog and customer outlook for 2026, we expect to see significantly outpace the market and deliver another strong year of growth for our eMMC and UFS business despite the difficult market environment. I will now discuss our client SSD business.

2025 marked a turning point of our client SSD business given the success of our new PCIe 5 controllers. We introduced our eight-channel PCIe 5 controller at the end of 2024 with four flash maker partners and nearly all module makers, setting us a clear path to grow our client PC market share from 30% today to 40% over the next few years.

We expect our new DRAM-less four-channel PCIe 5 controller that we introduced last quarter to ramp significantly throughout 2026, targeting the mainstream market and driving higher adoption of PCIe 5 given that as it is DRAM-less, making it easier for our customer to create SSD despite DRAM shortage. We have secured design win with four NAND flash makers, including the two from South Korea for TLC and QLC SSD, and nearly all the module makers for this controller.

We expect to benefit from higher ASP and profitability as this new controller enter the mix. Until the memory and storage makers increase their bit production capacity to alleviate the current shortage, the PC market will likely experience some difficulty driven by both shortage and demand destruction from higher prices.

Silicon Motion, however, remain in excellent position to grow its PC business in the near to long term given market share gains, ASP increases, and growing decision by the NAND flash maker to walk away from the consumer business in favor of AI. We expect continued growth from our client SSD business in 2026.

I will now provide an update on our enterprise business. The opportunity of Silicon Motion in data centers and AI infrastructure expanding daily.

Current expectations are for data center and AI infrastructure investment to exceed $1 trillion by 2030, and the number of applications of NAND technology expanding rapidly to help store and process large volume of data quickly. The need for increased speed and lower latency is driven greater adoption of SSD in the data center, and the industry is increasingly looking to adopt NAND solution in warm storage, compute storage, and eventually near-GPU storage as well.

Interest in our growing portfolio of MonTitan controller increasing as they are ideally suited to address the evolving requirement of AI workload for both compute and storage. In the December quarter, we began end-user qualification of TLC-based high-performance compute SSD using MonTitan with multiple customers.

This qualification will progress throughout the first half of calendar 2026 and will begin to ramp commercially in second half of the year. High-capacity QLC-based storage SSD represent the largest addressable market for MonTitan, and we remain on track with multiple customer to begin qualification this year.

Our MonTitan QLC warm storage solution offers significant advantage over HDD for AI inferences, including speed and power. Additionally, demand for QLC storage solution has accelerated in recent months given the current supply shortage of HDD.

Over the next few years, we expect QLC SSD will become a compelling alternative to HDD as they offer unmatched economies of scale, which will lead to lower prices over time, in addition to the inherent speed and power advantage. During 2026, we plan to tape out our first 4-nanometer chip, a PCIe 6 version of MonTitan that is targeting hyperscalers, NAND flash maker, storage system provider, CSPs, and other tier 1 customers.

We have been developing the chip in association with multiple partner customer, and expect this new controller to drive additional success for MonTitan beginning in the 2027, 2028 time frame. I'm pleased to announce that we have already secured design win with multiple tier 1 customer for this new controller, which is expected to ramp significantly in 2028.

We remain confident that MonTitan will ramp to represent at least 5 to 10% of revenue exiting 2026, and should experience further success in 2027 and beyond as our entry into enterprise market scale meaningfully in the near to medium term. Finally, I would like to discuss our enterprise-grade boot drive storage business, which is rapidly evolving into a significant new era of growth for our company.

We are collaborating with multiple customer to develop an enterprise boot drive solution that can work across multiple platforms. In the fourth quarter, we start volume shipment to the leading AI GPU maker for their current DPU product.

We are currently working with this customer to qualify the next-generation version of their DPU, as well as there for several NVLink and Ethernet switches of their new GPU CPU platform that expected to launch in the second half of 2026. These next-generation DPU and switch product require higher capacities with much higher ASP and unit volume, creating a significant new growth opportunity for Silicon Motion.

We are also working with other potential customer, including a leading search engine company, to develop enterprise-grade boot storage drive based on our leading controllers. As the enterprise boot drive are complete SSD product, this business will face greater exposure to our NAND [scarcity?]

scarcity and the high pricing environment, placing greater emphasis on sourcing NAND to supply our customer. While this has become more difficult given the supply constraint and recent price increases, we remain confident that our relationship with the NAND flash maker developed over the past 20 years will help us succeed with these significant new opportunities.

For our Ferri storage solution, we are seeing strong demand from our automotive and industrial customers, especially in the tight NAND environment, our customer are relying more on us for steady and consistent supply to ensure smooth supply chain dynamics. We will continue to play a more strategic role and partner to our Ferri customer, but we're also look to balance revenue growth with margin stability to drive profitability growth.

In conclusion, the fourth quarter of 2025 delivered significant growth for our business and accelerated our boot drive storage business. In 2026, beginning in the first quarter, we expect to continue to reap the reward of our investment in MonTitan, our 6-nanometer client SSD controller, and our new portfolio of eMMC and UFS product that are experiencing rapid growth, and the ramp of automotive business to about 10% of total business by the end of this year.

We have never been better positioned as a company given our expanding product portfolio and scaling in a large new market, including the AI and enterprise storage market. I'm increasingly confident that we will deliver strong, broad-based, sustainable, sequential growth throughout 2026 and beyond as we scale multiple existing and new opportunity.

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

Thank you, Wallace, and good morning to everyone joining us today. I will discuss additional details of our fourth quarter results and then provide our outlook.

Please note that my comments today will focus primarily on our non-GAAP results unless otherwise specifically noted. A reconciliation of our GAAP to non-GAAP data is included in the earnings release issued yesterday.

In the December quarter, sales increased 15% sequentially and over 45% year-on-year to $278.5 million, coming in well above the high end of our guided range and surpassing our $1 billion target run rate set at the start of the year as we experienced continued strength in mobile demand and strong growth in our PCIe 5 client SSD business. Gross margins was at the higher end of our guidance range and increased again in the quarter to 49.2% as we capitalized on new product introductions and benefited from mix shift towards client PC products.

Operating expenses increased sequentially to $83.2 million given increased investments in our emerging AI and enterprise SSD and boot drive storage businesses. Operating margin increased sequentially to 19.3%, within our guided range, driven by the higher than expected revenue and gross margin during the December quarter.

Our earnings per ADS was $1.26. Total stock compensation, which we exclude from non-GAAP results, was $15.8 million in the fourth quarter.

We had $277.1 million in cash, cash equivalents, and restricted cash at the end of fourth quarter compared to $272.4 million at the end of the third quarter of 2025. Cash increased in the fourth quarter from improved operational performance, offset by a combination of dividend payments of $16.7 million and an increase in inventories to support expected strong business ramp.

Our team is executing well despite the difficult NAND and DRAM pricing environment. During the fourth quarter of '25, we continued to invest in new advanced geometry products for our existing markets and for our emerging enterprise markets, including MonTitan SSD and enterprise boot drive solutions.

These investments will be ongoing in 2026 as we support new growing interests for our new enterprise portfolio. For the first quarter of 2026, we now expect revenue to grow 5 to 10% to $292 to $306 million, up sequentially and counter to typical seasonality.

We expect continued strength across nearly all our product segments, with a particular emphasis on mobile, where we expect significant outperformance due to continued market share gains. Gross margins are expected to be slightly lower sequentially at 46 to 47% in the March quarter given the product mix.

We expect overall margins to recover back to our target range of 48 to 50% throughout the year as the mix of newer products increases, including our PCIe 5 controllers and our enterprise SSD solutions. Operating margin is expected to be in the range of 16 to 18%.

Our effective tax rate is expected to be 19%. Stock-based compensation and dispute-related expenses is expected to be in the range of $10.8 to $11.8 million.

We're well positioned for growth this year and expect 2026 to be a record revenue year for Silicon Motion, with sequential revenue growth each quarter. We anticipate additional tape-out and development costs, especially from our upcoming 4-nanometer tape-out in the second quarter, will drive higher operating expenses in the second and third quarters of the year.

Our focus has always been growing profitably, and 2026 is no exception. We anticipate full-year 2026 operating margins to improve as compared to 2025 despite our higher investments this year.

While current supply shortages and resulting component increases are creating headwinds, our pipeline for growth in 2026 and beyond remains stronger than it has ever been in the history of our company. We remain focused on our market and product diversification strategy, which has already begun to deliver results.

We have successfully entered the enterprise market with our boot drive storage solutions and are currently in the end-customer qualifications with our MonTitan enterprise SSD products, which are expected to scale in the second half of 2026. Our leading position in the merchant controller market and unmatched NAND maker partnerships will drive higher share in eMMC and UFS, client SSDs, enterprise, automotive, boot drives, storage, high-performance and high-capacity enterprise and data center storage markets, and I look forward to sharing our progress in greater detail when we report again in three months.

This concludes our prepared remarks. I'd like to open it up to questions now.

Operator?

Yes, thanks for taking my question. Two for me.

How should I think about the mix of eMMC UFS revenue, especially in the back half of the year, exit in this year? I'm asking that because I'm under impression that there's a diversification by end market.

It used to be a smartphone driven and now there is auto and I want to better understand how that diversification is going to play out towards the end of this year. I'll have a follow-up.

Our UFS controller majority is smartphone. eMMC controller majority is in IoT devices, smart device, streaming device, and set-top box, and all automotive.

The combination, I think, around probably 40% controller, probably value is similar, 50% for smartphone, 50% for non-smartphone area.

Okay. Then on BlueField, how will the revenue contribution play out?

I think your commentary implied that there could be some revenue contribution later this year. How would it impact your gross margin?

I'm under impression that for BlueField the COGS is going to change. You actually have to go procure NAND.

If you can just comment on it and let me know if it's the wrong assumption, if it's the correct, and how procuring NAND would actually impact the overall gross margin.

Yes, the BlueField our boot drive is a solution for BlueField and also several others switches platform. We need to procure the NAND, and NAND price is the market price, we had to work out with the customer.

We can pass through the cost increase to the end customer. This is a challenging, but an ongoing process quarter-by-quarter.

It definitely will impact somewhat our gross margin, but we manage the margin pass through. I think that because even the customer, they have at least the two to three suppliers, they based on the price and based on the supply and depend the percentage.

We believe BlueField 3 BlueField-3 is for primary for this year, but BlueField-4 and the NVLink and the Ethernet switches is for second half and really more volume in 2027.

Thank you.

Hi, yeah, thanks for taking my question. My first question is I wanted to understand how you're segmenting revenue from the boot drive opportunity, and same question for MonTitan.

Are they both in SSD solutions or are you placing that in SSD solutions? Then, I think you sort of just answered this, but just for clarification, what point do you anticipate revenue from the next-gen boot drive and those other switch opportunities that you talked about at the leading GPU maker?

When do you expect revenue for those to begin to ramp? Thanks.

Yeah. You're right.

For the boot drive, that's going to be part of our SSD solutions that we talk about each quarter. Enterprise controllers, MonTitan, is part of our controller business.

We will give you guys more color as it's appropriate.

I think that when we talk about 5 to 10% for our company revenue does not include the boot drive solution. Currently that's only come from MonTitan controller, but boot drive solution is part of our enterprise business.

We cannot comment regarding what percentage about the boot drive. I think this year is relatively still small, but I think next year will be much bigger.

Number one is we try to secure the NAND supply. Currently, we have a two NAND supplier.

One is secure, but the other is not. We working with our NAND partner continually to support the major project.

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

Thanks. That's helpful.

Then the second question, I just wanted to ask about the smartphone strength in 1Q. Maybe if you could just provide a little more details, sort of what's driving that.

I think it's predominantly market share gains, but if there's anything, different customer behavior or anything that you guys are seeing, that would be great. Thanks.

As probably two NAND makers walk away from the mobile storage, but they also still selling the wafer to module maker. I think we benefit from majority module maker using Silicon Motion controller.

They not only use the NAND maker from US and Japan, but also use local NAND maker China. That's why we continue gain market share, and we see we gain market share from mainstream and middle line, and we expect to start to ramp the high-end by end of 2026.

Anything else, Neil? Next question?

Thanks for taking the question and congratulations on the great execution, guys. I wanted to start out by going back to the comments on sequential growth through the year and just better understand some of the product-level gives and takes as we go through the year.

I think from what I've heard, it sounds like we'll see some real strength starting the year from eMMC and UFS, and the color on MonTitan transition from sampling to revenue ramp-up would suggest more of a back half of the year orientation towards SSD solutions. I think that would leave SSD controllers plugging along.

Along with that, if we have sequential growth in the 3 to 5% range, we exit the year annualizing at a $1.3 to $1.4 billion run rate. Is that the right level of growth we should be thinking about or are you thinking about growth higher than that?

Thanks for all the color with that.

I think you're right on some of these things. I think, certainly strength in the first half of the year is coming primarily from eMMC and UFS.

We'll see client SSD controllers ramp throughout the year, but first quarter should be seasonally weaker. Then we'll see the MonTitan products begin to scale in the back half of the year.

We do anticipate quarter-on-quarter sequential growth this year. We are not providing full-year guidance specifically beyond just sequential growth.

We expect this year to be a record year.

Let me add some comment. I think we have very strong backlog, and we have a very strong momentum from all product lines.

Because some of the products like automotive, Ferri, and the boot drive, we require to procure the NAND. Case-by-case, some business we probably just bypass, some business because strategic, we're going to take.

Even potentially we have a much higher growth rate, but we might skip some of the business if a margin didn't meet our company target. That's why we balance and the things.

Just found the backlog and the business we decide to engage, we have a sequential growth quarter-by-quarter.

That's helpful. Then the follow-up question is really a longer-term question for you, Wallace.

You and I have known each other a long time. I've seen you transition the business previously from a USB and memory card business to one that's more into smartphones and PCs, and it seems like you're doing it again, transitioning the business to include a very significant enterprise quotient.

The question, do you see a point in the 2027, 2028 time period where that enterprise quotient is actually bigger than the consumer business? Would love to get your views on that and how you see the longer-term arc of the company playing out.

I think enterprise segment definitely is the target one to grow, but when the enterprise portion exceed the consumer portion, we cannot really release to you. We target try to accelerate the momentum.

I think the boot drive is a really pretty strong business for us. We also have a multiple customer, not just one of the GPU customer.

In addition, automotive storage also very strategic, and we believe if we can procure NAND stably, we can grow even much faster. We have a multiple weapon to grow, but enterprise is a stronger portion, and we do have a some new product coming in the next two years.

We're very exciting about the opportunity to grow, but just be patient with us, and hopefully we can grow much faster even 2027.

Will do. Thanks, guys.

Hi, Wallace. Hi, Jason.

Congratulations on the progress here. Maybe stepping back on calendar year '26, you talk about it being a growth year.

You talk about five segments: automotive, PC, enterprise, boot drive. Maybe you can talk about which ones would have the highest percent or dollar contribution to the growth in '26 given some of the moving parts around NAND supply and so forth?

Thanks.

Percentage, I think the enterprise controller definitely grow much faster. Boot drive also is a new to us, it grow percentage-wise much bigger.

From dollar-wise, I think the mobile controller, eMMC UFS, is a bigger one, and it will exceed probably about 35, 40% of our total company revenue. I think these are all strong momentum to grow, but we also see the more balanced growth continually and moving to 2027.

Okay. All right, thanks.

Then specifically on the notebook SSD controllers, can you just talk about the puts and takes of how the year-over-year would trend given there's obviously NAND tightness and PC, a demand impact because of the costs of the inputs going up versus your share or your mix shift to premium, how that would all net together into a year-over-year trend for notebook SSD controller?

This is a very good question. I think as you know very well, DRAM and the NAND supply is really very tight to PC OEM customers.

Some are able to secure the supply, some don't. Give a tremendous opportunity to Silicon Motion because the NAND maker, they move all the resource allocation to CSP.

The left is not enough for all the PC maker to meet their demand. Because we have a four NAND maker using PCIe 5 eight-channel controller, four NAND maker also use a four-channel DRAM-less controller, they balance about their internal allocation to fulfill the demand four NAND maker.

In addition, because there's a shortage from NAND supply to PC OEM, module maker start to take the opportunity. Because we have majority module maker design win, that's why we fill the other gap.

Even the total unit shipment for 2026 PC OEM will decline, but I think for 5 to 10%, but we still have a pretty strong confident to grow continually in 2026.

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

Okay. Thanks, Wallace.

Thanks, Jason.

Hi. Thanks for taking my question.

Just wanted to understand again on the client SSD controllers. What is the conversations you're having from the PC OEMs given many of them are already sounding a little bit more skeptical about overall demand?

Is there any indication that the spec migration is slowing down because of the cost inflation from PCIe Gen 4 to PCIe Gen 5 because the general commentary in the industry seems to be about some degree of de-speccing of certain specs? Just wanted to understand if you can give some indication of what is the baseline PC market expectations that you have, and then how are you building on top of that both for market share and unit and ASP to kind of get to growth in the client SSD business?

That's my first question.

I think, Gokul, you have a very good question is we cannot comment for each individual PC OEM, but overall, I think the 2026 PC unit shipment would decline 5 to 10%, and each OEM perform differently. Now regarding the sharp NAND price and DRAM price increase, PC OEM all face the price increase quickly.

I think from value line and many would de-spec the storage product. So 256 gigabyte go down to 128 gigabyte.

For high-end, they need to increase the price. From de-spec portion, I think they will lose the demand and interest from value line customer.

That is a fact. I think it's impact for each PC OEM are different, and we see this is a current challenging situation for all the PC OEM.

We work with our module makers and work with the NAND maker because we also depend their internal allocation for the NAND quarter-by-quarter. It's very challenging.

Because we have a much better position, we have a much stronger opportunity to grow continually in 2026.

Got it. Any comments about the PCIe Gen 5 penetration?

I think last year I remember it was like 5 to 8% or 5 to 6%. Are we expecting that this goes to like high teens, 20% by end of this

year? PCIe Gen 5 supposed to ramp much stronger in 2026.

For eight-channel high-end, because the DRAM shortage, that's why eight-channel increase will slow down dramatically in 2026. However, the PCIe 5 four-channel DRAM-less, because no DRAM, it's much more to build the SSD to ship.

We see the much stronger demand for DRAM-less PCIe 5 controller, especially on second half to ramp more meaningfully.

Understood. Second question on the boot drive storage.

Could you help us understand how big this business could be because you've got the biggest GPU customer, and looks like for the next platform this is going to be mandatory, and I think you just mentioned you're also getting the biggest ASIC program out there as well. You're kind of locking up probably 80% or 90% of the market share of the market already from addressable market.

How sizable is boot drive storage business going to be, and are you still going to stick with the NAND-bundled kind of model here or is it going to be eventually like NAND pass-through at higher margin?

Let me talk about the TAM. I think first of all, the boot drive business, it depend on the several factors, right, including the success for DPU.

Far we see the volume is very meaningful in 2026. All the leading CPU and GPU maker, they use a multiple supplier, two out of three supplier.

We are not the solely supplier for the DPU program. We see this year revenue relatively around $50 million, but I think next year will be much higher.

It's all depend the NAND procurement from us. It's a case-by-case because we have multiple programs, not just one GPU customer.

We have a multiple customer, and also some will ramp up from Q4 of the new program. Depend how success we secure the NAND, also whether we can pass through the incremental cost to the customer with a meaningful margin.

This is all the negotiation, some is a dynamic. We just make a reasonable meaningful forecast for this year.

It is a very strategic business for us for long term. We work closely and build a partnership with our GPU partners.

Hopefully this will become a much larger business in 2027 and 2028.

Got it. Thank you.

Thanks for taking the follow-up question, team. Wallace, I wanted to just talk about something and ask about something that we've started to see much more broadly with NAND flash and DRAM OEM supply and see if it's got applicability to Silicon Motion.

The topic is long-term supply agreements, LTAs or LTSAs. Is that something that would make sense for SIMO?

If so, where would that be? Would it not make sense for SIMO?

Just talk about the gives and takes with any move in that direction.

Currently we did not have LTA agreement, but I think based on partnership and relationship. See because in the past we never want to build a much bigger revenue from storage solution.

For automotive, because automotive sector, they are the lowest priority from NAND and DRAM maker. That's why many, many major tier 1 suppliers come to Silicon Motion ask for help.

That's why we will case-by-case to make decision whether we can support them. If we are able to pass through the incremental cost to the automotive supply chain and we'll do the business.

In the other hand, for boot drive, it's more strategic business. In certain case, we might have to sacrifice the margin lower than our corporate average margin because it's more strategic.

I think in the long term because we cannot use a multiple NAND selection. It's take a time, and the customer does not want to change the NAND solution either.

We just have to work out with our NAND partner to get a stable supply. The challenging is much more severe than anybody can imagine because CSPs really demand much more than the current supply can support.

That's why even leading smartphone maker have tough time to procure their NAND and LPDDR5 and the supply. This is the fact.

It's just not what NAND maker cannot supply us because just they really have tough time to do allocation and so many big tier 1 customer ask for help and ask for supply. This is a challenging situation right now.

That's really helpful. The follow-up somewhat relates to the way you concluded that.

It's an inquiry on some of the inside baseball, not asking for customer names, but if we go back to January 5th or 6th when NVIDIA said that, okay, look, the bottleneck in inference is all around the DPU, it's all around the storage, we've got to find a way to drive a 5x increase in inference processing time, we're going to do it with much more NAND-intensive architectures. The question is, what have you seen from existing and new enterprise customers following that?

Have you seen that catalyze new levels of engagement and what does it mean for how you think about R&D and just how you're looking at opportunities going forward?

Because in AI inferencing is growing much faster than anybody can anticipate. Many new storage technology around, right, for KB cache, how you can improve the latency, and capacity also increase dramatically because so many new content, new data need a storage device to keep it.

This is a huge momentum and need the NAND maker to increase capacity. Because there's limitations for land, for cleanroom, for equipment build, it all take time.

You need a tremendous capex. Several NAND DRAM maker, their preference is definitely DDR and HBM, right?

The left-over capex for the NAND is limited. We see the demand is very strong and it's so many variable technology and it's just much more.

They all need a MonTitan to fill the role. Just hopefully, I think our customer and ourselves can secure the NAND, and we can pay our duty to fulfill our obligation to be part of the AI game.

Thanks for that color, Wallace.

Hey, can you hear me now?

Yes, we can.

Awesome. Sorry about that.

Great quarter. One question, one follow-up for me.

You have the large fabs seemingly shifting allocation away from handsets and PCs to support that cloud demand, and that at least to me seems like it creates significant room for share gains for SMI over a multi-year period, particularly in the Chinese handset market. We also know that China tends to prefer Chinese production when it's a viable alternative.

At the same time, it also seems like the Chinese controller vendors have really struggled to compete technically. Would you mind just talking a little bit about competitive dynamics, whether anything's changing in that market, and some of the structural dynamics that might make it hard for the domestic Chinese players to compete?

I think the Chinese controller maker, they will have tough time to secure TSMC advanced technology node. I think to beyond 12 nanometers, like 7, 6, 5 nanometer, is they have to be apply and to be approved by TSMC or Samsung in order to fabricate their advanced technology node product.

For mature technology for 22, 28 nanometer, China local fab can fabricate, but that is really legacy product. I think that's is a tough part, and we don't even need to mention the technology, how good they are or whatever, but that is a manufacturing point of view.

We see due to the NAND supply shortage, I think create another dilemma, so that will probably give even tough time for China local supplier. To say that, I think the both YMTC and CXMT, they also try to increase capacity as much as they can, but just take time.

Another thing, Matt, is that our controllers manage everybody's NAND, right? Working with a lot of module makers, especially in China, that does qualifies a lot of local production there because the module makers are building a lot of these solutions for the Chinese handset OEMs as well.

Using our controller, not only can sell China locally, can sell to internationally.

Makes sense. Just one more quick question.

With regards to the lower gross margins in Q1 on mix, Jason, can you just talk to whether that's lower margins on controllers or whether it's you're shipping more modules and so the NAND weighs on the gross margins?

As we've talked about before, eMMC and UFS, our mobile controller tends to be a little bit below corporate average. As that business is a little bit stronger here in the first quarter, that's going to have some pressure on our gross margins in the near term.

As we have MonTitan and more PC client SSD products ramping in the back half of the year, we do expect to see improvements in our gross margins as we go into the back half of the year.

Awesome. Thank you.

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