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 question and answer session, at which time, if you wish to ask a question, you will need to press star 1-1 on your telephone keypad. Please be advised that today's conference is being recorded. This conference call contains forelooking 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 forelooking 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 following 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 any change in our relationship with our major customers and changes in political, economic, legal and social conditions in Taiwan. For additional discussion of this risk 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 forelooking statements which apply only as of the date of this conference call. And with that, I'll now hand you over to Mr. Thomas Sepenzis, Vice President of Investor Relations and Strategy. Please go ahead.

Good morning, everyone, and welcome to Silicon Motion's third quarter 2026 financial results conference call and webcast. Joining me today is Wallace Koh, 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&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 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. Thank you, Tom.

Hello, thank you for joining us to call today. I'm pleased to report that we deliver another quarter of strong growth with revenue of $560 million and gross margin of 53.7%, driven by the growth in ferrite for automotive, edge AI, and boot drive storage, our edge SD business, and our emerging Mount Titan controller for enterprise SD. We drove another quarter of higher operation performance, delivering the second consecutive quarter of record earnings per ADS. but 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 without sourcing, become a much more meaningful portion of the market. Our unmatched controller technology and design expertise deliver solutions that are better performing, consume less power, and are more cost-efficient and either in-house or other merchant solutions. Our strong share gains are driving things and growth despite end-market weakness and we expect this to continue. Among Titan Enterprise Decontrollers are winning across the ecosystem with leading NAND makers, hyperscalers and CSPs and with module makers that supply AI server 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 incredible solid foundation for our leading enterprise controller products. And then we expect our Mount Titan revenue ramp to accelerate as we introduce our next generation PCIe 6 controller next year. And lastly, for our storage solution segment, our strategy has always been to focus in areas that are underserved by name makers. And we are rapidly growing share in these vital low density, smaller volume market that require more design and customization work. We have spent more than a decade building one of the industry's broadest automotive-grade portfolio, supported by a dedicated quality and supporting 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 solution, our unique combination of broad controller platforms, best-in-class firmware, technical know-how, land supply relationship, and manufacturing capability put us in an ideal position to serve the growing need of the AI infrastructure market. As a result, we are rapidly evolving into much more balanced and profitable company as a new enterprise and AI product enhance our leading consumer controller share Translating our competitive position from AI infrastructure to the edge to deliver long-term sustainable revenue and earning growth. I would like to take a moment to address the current market environment. The AI super cycle has driven robust demand of FBN, DRAN, NAND HDD for the past several quarters, with no sign of slowing down. Prices have risen sharply over the past year, and the strength substrate supply across memory and storage enterprise market remain relatively insensitive to price. But a PC, smartphone, and other consumer device OEM are struggling to bring affordable product to market given today's memory and storage cost, and the consumer unit volume 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 BIT through higher layer count, 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. Our growth is benefiting from more outsourcing and larger opportunity in enterprise and the storage solution market that we are uniquely positioned to win. We are at the beginning of the journey in the enterprise AI market and our early success will drive accelerating demand for our next generation storage technologies. Let me now discuss our embedded EMC and UFS business, which include controller for smartphone IoT connected devices. Our EMC UFS business was up over 100% year-over-year in the first half of 2026, as the NAND makers are shifting their resources toward DRAN and HPN solutions, allowing module makers to take share in the mobile market This has helped drive our market share gains as market makers look to third-party controller partners to make their mobile solution. In the third quarter, EMSC and UFS revenue declined modestly from the prior quarter, reflecting customer launch timing and the challenging smartphone OEM phase in offering affordable devices and many higher NAND and durian prices. We expect the headwind to persist in the near to midterms until additional memory and storage supply comes online. Across the markets that we sell our EMC-UX controller, OEM are reducing specification to try to offset the rising memory and storage cost. We expect our EMC-UX business to remain relatively flat in the near term, given the recent, the current market challenging, but I do believe we can return to growth next year and beyond. There's our new UFS 4.1 controller and UFS 5 controller ramp and driving higher ASPs. Now turning to RSD controller business, which include Edge, and Mount Titan Enterprise-D controllers. This business delivers strong sequential and year-over-year growth. In HSD, our PCIe 5 investment continues to pay off. With growth in both our 4-channel and 8-channel controllers, PCIe 5 currently represents approximately 10% of the PC market, and we expect this will grow to 20% to 25% and many more. Our leading position in PCIe 5 is driving greater market share gains within the PC market. And as the industry transition from PCIe 4 to PCIe 5, we expect to see further top line improvement given the higher ASP 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 expectation to achieve our market share goals of 40%, a true Apple, by 2028. and believe we will continue to improve our position. While PC unit having associated with the higher memory and storage prices present challenges, we believe we will drive further top line growth through the market share gains and ASV increases as the market shift to PCIe 5 continue. 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 ESD solutions deliver high-speed, low-latency storage that targets compute and data storage applications for enterprise AI platforms. Our first two customers began shipping TLC ESD for compute that leveraged 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 TLC-based compute and QLC-based data storage products. TLC-based computer ESD using Mount Titan are expected to grow more quickly than QLC-based data storage ESD in the near term, until a greater supply of 2TB DAI becomes available. Encouragingly, four of our six NAND makers have started production of 2TB QLC DAI today, and we expect all NAND makers to begin shipping two terabit QLC by end of the 2027. So momentum will accelerate throughout next year. During the third quarter, we tape our next generation four nanometer PCI-E4 Mount Titan controller targeting hyperscaler and CFP. Expect to begin sampling in the first quarter of 2027. We have one design. with multiple tier one customers including NAND Fletchmakers, Hyperscalers, and CSP. The new controller was designed for both computer application using TLC and data storage using TLC-NAND as a performance shaping and multiple aging service architecture extremely well suited for a giant AI infrastructure. We continue to see increased inbound interest in our Mount Titan controllers. In fact, 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 FairEye for Automotive, Edge, and Enterprise boot drive storage business. Our solution business, which includes FairEye and boot drives, delivered the strongest result in the third quarter, with revenue up over 75% sequentially, representing over 40% of our revenue. Our automotive business has been a particularly source of strength, delivering better than expected top line results and higher gross margins. We continue to scale this business quickly as we know automotive market and the supply chain extremely well, which has driven significant backlog for long-term growth as we accelerate our share gains. We have spent more than a decade developing our automotive products and certifications. Today, our storage 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 Freeride 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 solar product. We see multiple opportunities in humanoid robots and other physical AI systems, including vision, LIDAR, and compute storage. Our early conversation such as robotic opportunity may be larger than automotive, and we believe FairEye 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 want to design with several new Tier 1 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 SD drives, the NAND makers are no longer prioritized this market. Additionally, our DRAM-less controller delivers the performance, reliability, and endurance this dry needs with lower power consumption requirement, smaller form factor, and the lower cost and DRAM-based design. Bulldry handles the operation system, logging, and system management rather than heavy data workload. So they don't need the expense of onboard DRAN for DPU router and switch products. As AI infrastructure build out at the large numbers of servers, the networking and DPU equipment are increasing rapidly, each needing reliable boot storage, driving the growing demand for DRAN-less boot drives. We have been the primary supplier for DRAN-less boot drive controllers. to the NAND makers that have historically served this market, but they are moving on the higher density opportunity. SiliconMotion is uniquely positioned with the right technology, the right support, 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 drive with onboard DRAM. Given the strong demand of AI inference and agenting AI, near CPU boot drive with DRAM provide lower latency and open compute project features that are increasingly high demand. The name maker have shipped the resources toward HPN D-RAN and high capacity compute and data storage SAD. There is a growing shortage of near CPU boot drives with D-RAN. We estimate that this market will reach over $10 billion by 2030, making it a significant new opportunity for Silicon Motion. We are already in discussion with multiple potential customers for boot drives that leverage our industry-leading and Channel and PCIe5 controller that can serve the near CPU market to further expand our market opportunity and expect to begin ramping product for this market in the second half of 2027. Our Fairlife Automotive, Agile AI and Bootstrap Solution business are performing especially exceptional well. and these are many large and growing opportunity for our product in the segment. Our backlog has increased significantly in just the past three months and we expect many additional customer design wins in automotive, edge AI and boot drive solution to deliver significant future growth. We continue to benefit from our proven ability to secure NAND in a difficult environment from multiple land suppliers. And this continues to be a powerful differentiator for our company. In conclusion, Silicon Motion 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 brought this range of solution and product and more opportunity ahead than at any time in our history. Our broad portfolio served surging AI demand from the data center to the edge. That breadth gives us balance across our market and the flexibility to seize growing opportunity while navigating challenge 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 relationship 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.

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 had 0% interest and an initial conversion price of $380.5 billion. represents a conversion premium of 65% over the last reported sale price of SYMO 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 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 Ferrari for Automotive, Enterprise Boot Drives, and SSD controllers including Edge and MonTitan for Enterprise. Gross margins of 53.7% was significantly better than guidance as we capitalized on new product introductions and benefited from better mix and better than expected margins in our Ferrari automotive products. Operating expenses slightly decreased sequentially to $120.7 million and operating margin increased 32.1% while 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 increase 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 NAM 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 Ferrari for Automotive, Enterprise Boot Drive Solutions, and Montana 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 to 37% as continued strong revenue growth and higher profitability drives the 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, 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 Ferrari 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, 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 longstanding 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 winds 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 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 1-1 on your telephone keypad and wait for your name to be announced. To withdraw your question, please press star 1-1 again. The star 1-1 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.

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. I'm curious if you could sort of dive into maybe the main drivers of that. I mean, given that gross margin, you expect, you know, sort of resetting the long-term target, it sounds like now. I would expect more of the growth to be driven by, you know, sort of the higher margin business like Fair High and MonTitan, but any comments that you can add further on to 27? Thanks.

Yeah, I think that's right. I think we're seeing, you know, significant traction with MonTitan. we're seeing the automotive fair for automotive you know ramping very aggressively as well a lot of these fair eye projects especially in automotive these are multi-year engagements where you know once we're qualified in you know 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 Montyton, as well as other SSD controllers and FairEye for automotive, we believe that we can sustain these low to mid 50% gross margins.

Okay, great. That's helpful. And then just in this quarter, bringing it back, looking at the FairEye and boot drive, obviously the growth continuing is really great. Could you by any chance, you know, give us some more detail? It sounds like Farai might have outgrew boot drive in the quarter. And obviously, you know, across, beyond automotive, I should say, in Farai. Curious to learn more about the robotics and sort of where you guys play in that. Thanks.

I think because Farai for automotive has been for a long time, so we see the custom base are very strong. So for this year, Daphne's Farai for automotive It grows stronger. However, our boot drive also gaining momentum with diversified customers more than just GPU customers and TPU customers. 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 is still very small, but we try to make sure we'll be in when the markets take a boom.

And keep in mind, a lot of the features within the FairEye for automotive products are the same features that the 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.

Thank you.

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

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?

We see opportunity come from the early third quarter because conventionally this near CPU boot drive with DRAM belong to NAND makers. Because all NAND makers are busy, and try to produce at least 8 terabyte, 16 terabyte computer SD. So they have a less interest of resource on allocation for the low capacity near CPU boot drive. The near CPU boot drive primary density is about 1 terabyte, 2 terabyte, and some also 5, 12 gigabytes. 4 terabytes is very, very few. So I think because we can see it will be probably very very big gap shortage supply for 2027 many many customers come to second motion and we are preparing discussion and I think the solution definitely to have a customized some feature and tailor 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 RAM will be second half 2027.

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 and many more. Thank you. 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 than that 40%? Thank you.

As you know very well, in semiconductor industry today, everything's in shortage, right? From substrate, from material, from wafer, from NAND, from memory, from even test capacity. but I think our manufacturing team did a very good job and we secured our 2027 wafer with TSMC primarily and also we also secured the task capacity and assembly capacity and the substrate material. So we believe we are able to support our growth for 2027. Jason mentioned we see we definitely can grow minimum 40% year over year I think in the next quarterly earning call, we will provide more meaningful guidance for our 2027.

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.

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 solution business continues to grow as a share of revenue hit over 40% in Q3, it is driving greater NAND pricing exposure into Silicon Motion'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.

Yeah, you asked a very good question. I think we definitely manage a NAND price increase and negotiate with customers 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 swap price for model makers now has become challenging. We see the Q3, Q4 name pricing is really similar. For next year, we also see the although will be a single digit growth quarter, but it will be moderate. And for our business, why we focus on automotive and boot drive, because the end customer want to have a long-term contract and support and supply. And so our contract with customers and price will stay with least two quarter 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.

And one more thing, Sebastian, as, you know, I think certainly there's a fear that, you know, 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 despecking going on. I think all things being equal, if NAN 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 respecking to normal specs, as well as additional opportunities, additional customers, that's 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.

Got it. 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 work in capital and inventory build with the cash that you have on hand. Can you maybe just talk a little bit 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?

Yeah, so for us, we're targeting about two quarters turnaround time between when we get the NAND and when we generate the cash flow. So our expectation is to be able to turn Thank you for joining us. 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.

Great. Thank you.

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

Hi, Wallace. Hi, Jason. Hi, Tom. Congratulations on the progress here. The MonTitan product, the higher KB cache density you're expecting, are there innovations coming from HBM and DRAM that might offset the opportunity for SSDs and KB 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 KB cache?

So I think the MonTitan demands from very wide range not only from the AI server and for hyperscaler and also for the CSP, but also for NVIDIA ecosystem. I think we don't know the percentage how, but we see the demand for ComputeSD this year is bigger due to the NAND price is very expensive, but we also see the momentum for high capacity QLC coming for next year. and I believe from when Samsung Hynix 2TB QLC can move to production, we'll see more QLC demand for data storage. And so Mount Titan itself can handle both the compute SD and storage SD. 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 for each of Vera Rubin's trade. So I think this will be probably, they will announce early next year, and I think the related ecosystem will help them provide. I think as long as the CMX or KVCash demand is growing, that's all demand additional ESD. That's good for us on Titan because it increases our controller demand.

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 a kind of a growth rate for OPEX versus revenue that would be kind of a framework for us to think about?

Yeah, we'll get into more specific guidance around 2027 in January, but This year we taped out a number of 6 nanometer as well as 4 nano products. So we're 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.

Okay, thanks. Appreciate it. Thanks, guys.

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.

Yes, thanks for taking my question. A couple of follow-ups from me. Wallace, Jason, can you quantify what percentage of your total revenue were attributable to Farai, BootDrive, and PCIe SSDs? and how each percentage would change into next year. And I have a couple of follow-ups.

So I would say we cannot talk about detail, but for about 40% of our total revenues around the solution from Pujol Automotive, 60% from Controller.

Would those mixes change dramatically next year?

Next year, So far, we didn't accurate, but I think that we see probably will be balanced next year, 50-50 between controller and solution.

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?

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

Okay. I was hoping to get a preview. You mentioned that you're more are all driven by enterprise, and I'm just trying to maybe qualitatively you can help us to... No, I can't do that.

I mean, I think there'll be, you know, I think the enterprise, with enterprise becoming a bigger portion of the mix, Farah becoming a bigger portion of the mix, I think, you know, certainly normal consumer seasonality will certainly be more muted going forward as consumer business becomes a smaller percentage of our business.

Okay. And then... Is there any update on arbitration? It would be great to tell us whether the key milestone and how we track into those.

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.

Okay, thank you.

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 JPMorgan. Please go ahead. Your line is open.

Hi. Thank you very much. So my question is on the near CPU boot drive opportunity. Well, I think you said you will start 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. I just want to understand the time is big, but how quickly can you scale this business?

I think the 10 will be a minimum $10 billion by 2030, and because the density is bigger than the D-RAN is the boot drive. Because NAND maker did not pay attention, but these pieces belong to NAND maker in the past, because they have specially the three NAND maker have D-RAN. All the name makers, they focus on high capacity compute SD and the data storage SD. So there's lack of a 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 maker 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 different 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 control in 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 it could be grow even faster in 28 and 29 because we have the great idea controller and feeding very well and we have the former technology and suddenly the controller very lucky have a certain OCP feature built in. So we don't need to redo the new ASIC. I think a lot of all NAMIC they don't have a certain controller today. So that's why we are in a great position to expand to the new market.

Just to follow up there, when you win business, do you have to win by individual server customer or 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?

So all senior CPU boot drive today is M.2 form factor, 22 by 80. So they need a low power. because our signal meter controller, our SM8008, is ideal to fit in very well. This controller needs just a DDR4, our LPDDR4, so well positioned and to fit in this searching. So there's some NAND makers also want to work with us, but we have limited resources. We just have to make sure the 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, et cetera, which takes time.

So we're 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 support controller but our own solution total solution will be probably ready shipping in second half next year understood understood

Second question is for Jason. So Jason, first of all, on gross margins, historically we've seen Farai and any non-solution business operate in the probably lower than 40 or 40% kind of gross margin levels. Now, obviously, you've made a meaningful step up in gross margins for solution business as well. As man price kind of starts to stabilize or not really go up a lot, how should we think about margins? Are these the steady state margins that you expect the solution business to earn, given it's more enterprise-related? And secondly, could you also talk a little bit about, next year it looks like, based on Wallace's comment, the SSD solutions business will grow faster than the 40%. What is the support that you need from an inventory perspective? The inventory already has gone up to about $800 million or so. Could you talk a little bit about how you think about how much working capital support you would need to kind of support that kind of additional probably 50 plus percent growth in the solution business?

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. 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.

Got it. Okay. Thank you.

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

Thanks, Wallace and Jason, to take 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 boot drive for some of the enterprise SSP. 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 CSP. We have NAND supplier, NAND makers. We also have a lot of module houses. But at the same time, I think competition is still there. So I want to consult you on SiliconMotion's strategy right now in China, both with the netmakers, with competitors, and also how should we address maybe the future demand from the CSP in China?

Okay, you asked a very good question, Daniel. I think we really want to balance between China and also the rest of the world. China has YMTC, NAND maker, they're very strong, they grow very fast. We also support and collaborate with the YMTC directly or indirectly with the module maker. I think the enterprise portion, we see they will become stronger in 2027. I think we definitely work closely for China CFE for hyperscalers. Believe us, I think that's why we try to grow China local R&D. Eventually, when China or local R&D can support China customer, and Taiwan will support the rest of the world, especially for U.S. customers. And secondly, I think China, they are growing enterprise controller company, but in the past, they also like to make enterprise D-drive. In the past, you know, NAND pricing is cyclical. They have a downside, they have an upside. So some enterprise controller company, 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 company, you just convert into selling the whole solution. if you don't win hyperscalers or even NAND makers or CSP customers. I think our strategy is very simple. We win in NAND maker business and design win directly. We win hyperscalers customers in both US 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 name 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. That's why building like Silicon Motion ecosystem, working together, supporting the growing opportunity in both China and US.

I see, very, very clear. Well, if I may follow up, how should we think about the overall competitive landscape on a controller in China right now? Yeah, so I just want to get your opinion.

So for enterprise, we really don't even, there's one or two basic company moved to the IPO, but we don't see they are strong enough to compete in the long term, not just one technology or business model. So I don't really see any threat from them. Even some also want to go overseas. So today we feel pretty comfortable for our position with our technology, and we have a very, very strong design pipeline for both our PCIe Gen 5 as well as Gen 6.

I see, yes, thanks for this. The second question from me is that since right now you are, I think you are 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 that any ratio you're looking at? I think this question is actually coming from some of the investors who subscribe your convertible fund. Thank you.

Yeah, so dividend and capital allocation certainly continues to be a priority. We increase our dividend. a couple weeks ago to $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 is on capital return is 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.

Thank you, Jason. That's all my question. Thank you.

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

Thank you everyone for joining us today and for your continuing interest in second motion. We will be attending several investor conferences over the next few months. The schedule of these events will be posted on the investor relationship section of our corporate website and we look forward to speaking with you.

Thank you for your participation in today's conference. This concludes the program. You may now disconnect your lines.