Ladies and gentlemen, thank you for standing by, and welcome to the Silicon Motion Technology Corporation's Third Quarter 2020 Earnings Conference Call. [Operator Instructions] And please be advised that today's conference is being recorded today..

And this conference call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended.

Such forward-looking statements include, without 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 opinion 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 relationships 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..

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

Thank you, Annie. Good morning, everyone, and welcome to Silicon Motion's Third Quarter 2020 Financial Results Conference Call and Webcast. As Annie just mentioned, my name is Chris Chaney, Director of Investor Relations. And joining me today on the call are Wallace Kou, our President and CEO; and Riyadh Lai, our CFO..

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

Before I get started, 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. SEC.

For more details on our financial results, please refer to our press release, which we 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 our investors' understanding of our ongoing economic performance, we will discuss non-GAAP information during this call. We will use non-GAAP financial measures internally to evaluate and manage our operations.

We have, therefore, chosen to provide this information to enable you to perform comparisons of our operating results in a manner similar to how we analyze our own operating results..

For more consistent year-over-over comparisons for this quarter and our upcoming fourth quarter, we are internally measuring our performance based on non-GAAP less FCI, which was divested in May of 2019. 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..

And now with that, I'd like to turn the call over to Wallace. .

Thank you, Chris. Hello, everyone, and thank you for joining us today. In our third quarter, we delivered $126 million in sales, 5% more than the high end of our guidance. Revenue declined 8% sequentially and increased 11% year-over-year.

Earnings per ADS for this quarter were $0.76, down from $0.81 in the second quarter and up from $0.69 the same quarter last year. For the first 9 months of this year, our revenue grew 33%, and earnings per ADS are 45% higher compared with the same period last year..

Our third quarter results exceeded expectations due to stronger sales of SSD controllers. And as expected, our eMMC+UFS controller sales declined significantly due to temporary customer inventory adjustments, while our SSD solutions sales was softer than anticipated..

Our stronger-than-expected SSD controller sales in the third quarter is a solid reversal of softer sales in the second quarter.

As you may remember, our second quarter SSD controller sales were affected by our NAND flash customers redirecting NAND away from client SSD to meet the surge procurement of data center SSD by the hyperscalers due to unexpected working and learning-from-home demand. Hyperscalers surge procurement is now over.

In the third quarter, we saw hyperscaler procurement of data center SSD drop off, which frees up NAND flash for client SSD..

This quarter, with better availability of NAND, we delivered about 20% sequential SSD controller sales growth, with solid growth in both our NAND and module maker customers and solid growth to both PC OEM and for channel markets.

Growing availability of the lower-cost NAND is favorable for facilitating further growth in the adoption of SSD by PC OEMs and new usage cases for game console and external storage.

Based on our SSD controller sales growth during the first 9 months of this year, we are likely growing roughly twice as fast as the market, and we expect momentum to continue through next year..

Last quarter, we announced several new PCIe Gen 4 SSD controller design win with 5 NAND flash makers. We continue to make so solid progress with our engineering work in bringing these design wins with our 5 NAND flash customers into production beginning in the middle of next year. Four of our 5 Gen 4 NAND customers are existing Gen 3 customers.

One of the 5, however, is new, a Korean NAND flash customer, a partner with whom we have a long, well-established and deep relationship. Furthermore, we have already secured multiple PCIe Gen 4 SSD controller design win with this Korean customer..

Recently, we announced the rollout of a broad range of PCIe Gen 4 SSD controllers, SM2264 for high-performance applications, SM2267 for the mainstream segment and SM2267XT for the value line DRAM-less client SSD.

We believe the rollout of these Gen 4 controllers is well timed with Intel's current and upcoming launch of the new series of 11th generation CPU that are designed specifically for the fast -- faster PCIe Gen 4 connectivity..

In addition to our design wins with 5 NAND flash makers, we also have extensive design win with most of the leading module makers. For example, ADATA, one of our largest module maker customers, begin commercial sales of a new PCIe Gen 4 SSD last month using our controller.

This is one of the first Gen 4 SSD available today that's optimized specifically for notebook PC and other energy-efficient applications. Previously, our Gen 4 SSD were power-hungry and only suitable for desktop PC and other devices always connected to electricity..

As CPU from both Intel and AMD that support PCIe Gen 4 become more widely available, you should expect to see more of our customers release products with our new Gen 4 controllers. And as some of you know, the performance of our new Gen 4 controller based on key metrics are the best of breed versus other similar merchant and captive solutions.

Our broad slate of design win with 5 NAND flash makers and leading module makers is a testament to our very competitive value proposition to customers..

Three years ago, we shipped a little over $150 million of SSD controllers. This year, we are tracking towards roughly doubling that. And based on our current pipeline of design activities, we are confident that more robust SSD controller sales growth lies ahead..

Separately, we are excited about the design work that our team has been planning and executing relating to our upcoming state-of-the-art enterprise-grade PCIe Gen 5 SSD controllers.

This product is designed specifically for the enterprise market and including many technological breakthroughs; and that, we believe, will be well received by target data center customers. I look forward to sharing more about this next year..

Let me now talk about our eMMC+UFS controllers. This quarter, as previously communicated, our eMMC+UFS controller sales declined sharply as our large UFS customer has had to temporarily digest its elevated inventory.

We believe this customer benefited from the strong rebound in smartphone shipment in the third quarter and made good progress depleting its excess UFS inventory.

With smartphone shipment expected to continue growing in the fourth quarter and with a positive booking trends, we believe our UFS controller sales are making good progress toward recovery in the fourth quarter..

Earlier this year, we mentioned that this customer was sampling the industry's first LPDDR5 uMCP, a UFS 3.0 product that position well with OEM for high-volume sales. We are, therefore, delighted with their recent announcement that commercial production has started.

Previously, for several years, we had been shipped -- shipping UFS 2.0 controller to this customer in volume, and we are now excited to add a new UFS 3.0 controller to our sales to them. Similar to our UFS 2.0 program, our UFS 3.0 program also has multiple year road map.

We expect our UFS 3.0 program to take advantage of our customers' upcoming generation of NAND flash as well as incremental UFS 3.0 enhancement..

Separately, we are making good progress with our other NAND customers' UFS 3.0 project, which continue to target initial production by mid-2021. Similar to that of our first UFS customer, this program will also span multiple NAND flash and UFS generations..

The legacy eMMC market has surprised us with this resilience even with smartphone transition to UFS. Several years ago, we supported 0.5 dozen Chinese module makers interesting with eMMC embedded storage for emerging smart set-top box, speakers, TV, game console and a host of other IoT devices.

The volume of these devices have grown to be 1/4 to 1/3 the size of the smartphone market. These module makers have also started shipping eMMC to Tier 2 and Tier 3 smartphone OEM and for low-cost smartphone of Tier 1 OEMs.

Recently, we also expand our module maker customer base to include Kingston and specialty module maker from elsewhere in Asia, North America and Europe for automotive and boot code storage applications..

In the first 9 months of this year, even with our customers' large third quarter inventory adjustment, we were able to grow our eMMC+UFS sales 70% year-over-year. The smartphone industry is roughly halfway through the UFS technology transition, up from roughly 1/3 last year.

And we expect further strong growth next year, with strong continued growth from our first UFS NAND customer, growth from our second UFS NAND customer and further growth from our broad set of module maker customers focused on bringing eMMC+UFS embedded storage to non-smartphone devices..

Turning to our SSD solutions. Sales were softer than expected due to more competitive market conditions and slower hyperscale spending in China.

Our sale of a customer design, Open Channel SSD, to Alibaba were in line with internal plan, with our Shannon standard NVMe SSD faced both more intensive competition from flash makers as well as further weakening of demand for SSD by data center operations in China..

These unfavorable market conditions affected both our sales and gross margins. We are, however, optimistic about next year. Our Alibaba Open Channel SSD project for next year remain on track, and we expect to be shipping to 3 programs next year compared to 1 program this year.

Alibaba increasingly appreciate the enhanced performance of its operation from using Open Channel technology and is keen to expand the rollout and continued upgrade of this technology in its data center infrastructure..

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

Thank you, Wallace, and hello, everyone. I will discuss additional details of our third quarter results and then provide our guidance. My comments today will focus primarily on our non-GAAP results less FCI, unless otherwise specifically noted. A reconciliation of our GAAP to non-GAAP is included with the earnings release issued yesterday..

In the third quarter, revenue was $126 million, 8% lower sequentially but 11% higher year-over-year. Year-to-date, revenue of $396 million is 33% higher than for the same period a year ago. Earnings per ADS in Q3 were $0.76, 6% lower sequentially and 10% higher year-over-year.

Year-to-date, earnings per ADS are $2.38, 45% higher than for the same period a year ago..

Now some details starting with performance of our 3 key products. SSD controller sales increased about 20% sequentially due to improved availability of NAND supply and strong demand by PC OEMs and channel markets. Year-to-date, sales are up over 20% year-over-year and growing roughly twice as fast as the market.

eMMC+UFS controller sales declined about 50% sequentially and about 10% year-over-year due to a large customer's temporary UFS inventory adjustment. As discussed last quarter, this large but temporary drop was expected.

Year-to-date, sales are, however, up about 70% year-over-year, as smartphone embedded storage technology transitioned further from legacy eMMC to newer UFS, and our U.S. NAND customer gained market share..

SSD solutions sales declined about 10% sequentially because of continued softness in demand by Chinese hyperscalers and more intense competition from NAND flash makers in the standard enterprise NVMe SSD market. Year-to-date, sales are up about 80% year-over-year, with similar growth from both our Shannon and Ferri products.

Shannon sales are up this year because our first-generation Open Channel SSD only started sales in Q3 last year. This year, we have the benefit of a full year of Open Channel sales. Ferri sales are up this year because last year, NAND prices fell sharply; while this year, NAND prices are more stable..

Gross margin in Q3 declined to 49.1% from 50.0% in the prior quarter due to much lower SSD solutions gross margin.

Gross margin uplift from a slightly higher mix of controllers and gross margins that were unchanged sequentially was more than offset by much lower SSD solutions gross margins, primarily because Shannon standard NVMe SSD gross margins contracted more than expected..

Operating expenses in Q3 were $32.9 million, $5.1 million lower than the prior quarter, primarily due to temporarily lower R&D tape-out expenses. Operating margin in Q3 was 23.0%, an increase from 22.2% in the prior quarter, due to lower operating expenses. Our effective tax rate in Q3 was 10.5%, towards the low end of our 10% to 15% guidance range.

We currently enjoy a tax benefit that will expire in Q4. Without this tax benefit, our Q3 tax rate would have been slightly higher than 15%..

Stock-based compensation in our operating expenses, which we exclude from our non-GAAP results, was $3.1 million in Q3, within our $2.7 million to $3.7 million guidance range. We had $368 million of cash, cash equivalents, restricted cash and short-term investments at end of Q3 compared to $380 million at the end of the prior quarter..

We paid $12.3 million in dividends to shareholders, the fourth quarterly installment of our $1.40 per ADS annual dividend that was announced in October of last year. Our Board recently declared dividends for the next 4 quarters, with quarterly installment payments of $0.35 per ADS, unchanged from the previous 4 quarters..

We repurchased $25 million of ADS during the third quarter, 626,000 ADSs at an average price of $39.91. Since the beginning of the share repurchase program 2 years ago, we have repurchased $84.8 million of ADSs, 2.4 million ADSs that is equivalent to 7% of total shares outstanding, at an average price of $35.38.

Since this 2-year share repurchase program will expire in November and $115.2 million remains unused, our Board recently authorized a 12-month extension to allow for more time to complete the program..

Now let me turn to our fourth quarter guidance and forward-looking business trends. For the fourth quarter, we expect revenue to increase in the range of 3% to 10% sequentially to approximately $130 million to $139 million.

We expect higher SSD controller sales as current positive momentum continues, higher eMMC+UFS controller sales after 1 quarter of UFS customer inventory adjustment and lower SSD solutions sales, as our 2020 Alibaba project seasonally ended at the end of Q3 and our other solution products faced less favorable competitive dynamics..

Fourth quarter gross margin should be in the range of 48% to 50%. We expect that further contraction in SSD solutions gross margin will offset the higher sales mix and stable margins of our controllers..

We expect fourth quarter operating margin to be in the range of 19.5% to 20.5%. Operating expenses will increase meaningfully in the fourth quarter due to timing of R&D tape-out expenses. Our fourth quarter tape-out expenses were lighter than normal, while our fourth quarter tape-out expenses will be heavier than normal.

Our overall second half tape-out expenses are at levels consistent with the first half of the year..

In the fourth quarter, we expect stock-based compensation of $8.6 million to $9.6 million, higher than in previous quarters this year but at a consistent pattern with past years due to seasonal timing of RSU brands.

With the expiration of certain tax benefits, we expect our effective tax rate for the fourth quarter to be higher in the 15% to 20% range. Next year, we expect our effective tax rate to stay within this 15% to 20% range. We have cash disbursement authorization to opportunistically repurchase our ADSs in the fourth quarter.

Amounts ultimately repurchased will depend on the market price of our ADSs..

This concludes our prepared remarks. We will now open the call to your questions. .

[Operator Instructions] First question is from the line of Rajvindra Gill of Needham & Company. .

Yes. Congrats on good results in the third and fourth quarter. Question, Wallace, regarding the acquisition of Intel's NAND business by SK Hynix. Wanted to get your thoughts on that. I know that Intel is a large customer for you on the controller side.

Wanted to see what management is thinking in terms of would there be any impact as SK Hynix acquires Intel's NAND business on your business? And how we should think about that?.

Well, thank you for the question. We are excited that our NAND trade partners are taking steps to consolidate and ensure their long-term economy viability. Our relationship with both are long and well-established and stronger than ever.

It is in our interest to see them more profitable and cover their opportunity costs so they are incentivized to continue investing in NAND into the future. As everybody know, Intel leads the industry in QLC NAND technology and supply significant more QLC than any other NAND maker.

This is a significant technology edge, and Hynix will be acquiring the QLC leadership..

In terms of controlling QLC NAND today, our QLC controller technology is likely the best in the industry. All of Intel client SSDs use QLC NAND and our controller technology. Given our unmatched QLC controller leadership and track record, we are confident we will more than likely continue supplying controller to them after the acquisition closed. .

Okay. And the rebound that you're seeing in SSDs going into Q4, how would you characterize kind of NAND pricing environment now? You mentioned that there's more availability of NAND as hyperscalers have started recruitment.

I wanted to get a sense in terms of what the NAND pricing is looking like in Q4 and how should we think about that in terms of calendar '21.

And along those lines, how do we think about the attach rates for client SSDs but also kind of movement into desktops and gaming?.

I think, first, regarding the pricing, NAND pricing is showing some signs of stabilization. We believe the fourth quarter price may be down in the mid-single-digit percentage range.

We are hearing about plan for stronger CapEx spending by the NAND flash maker next year, which could lead to stronger industry supply growth and larger supplier of lower cost next-generation NAND supply..

We have been seeing for many years and consistent with our thesis, client SSD sales benefiting from increasing NAND supply, lower NAND prices and the related price elasticity of demand. And we believe next year, NAND price should be also stabilized. But we don't have a really clear picture regarding NAND price trend in 2021. .

And Raji, to your second part of your question, yes, relating to our market opportunity, our client SSD market opportunity. As you know, based on third-party research like Gartner, the PC OEM SSD market last year was about 160 million units and is expected to -- is forecast to grow about 15% this year, with SSD adoption increasing from 60% to 75%.

Obviously, the adoption is much higher with notebook PCs versus desktop. But for both segments, they are still increasing, and there are still room for further displacement of hard disk drives and use of SSDs..

Additionally, you also have the channel market. Forward Insights, for example, estimates that the channel market for SSD is about 120 million units. The channel market is obviously more inherently volatile and more difficult to predict. But in the third quarter, we saw solid demand from both OEMs and channel customers, which were better than expected.

So overall, we believe the client SSD market should grow about 5% to 10%. And for us, year-to-date, we've been growing over 20% year-to-date. .

Next question is from the line of Karl Ackerman of Cowen. .

Two questions, if I may. Just first one is a clarification. I was hoping you could provide a little bit more color on your commentary, Riyadh, about the expectation for your Ferri solutions business. I think you said it was going to perhaps decline in the fourth quarter.

I was hoping you could expand a little bit about that, both in the fourth quarter and as you think about calendar 2020. And I have a follow-up. .

Well, overall, for the fourth quarter, we're expecting our SSD solutions to decline sequentially. So the decline sequentially, SSD solutions in the fourth quarter, this is the result of -- on the Shannon side, the -- our Alibaba project ending seasonally at the end of Q3. So we will not benefit from having Alibaba revenue in Q4.

Additionally, for other Shannon as well as Ferri products, we're facing more competitive dynamics, and so this is leading to our overall SSD solutions to be down in the fourth quarter. .

Okay. As a follow-up, one of your merchant SSD controller peers has spoken quite extensively about winning designs for custom SSD controllers to U.S. hyperscale providers.

What are your plans to drive toward leading-edge silicon for your enterprise SSD controller designs? And do you think your capability to support PCIe 4.0 creates greater opportunity for you to address the merchant market for enterprise SSD controller designs beyond the programs you spoke about with Alibaba?.

Yes. We are currently actually in engineering the next-generation of enterprise SSD controller PCIe Gen 5. This will have a very unique architecture with many, many technological invention into the design. We have dedicated ASIC team, dedicated firmware team. We have dedicated architecture for both ASIC and firmware.

And we have a complete [ new C ] modeling team. This really will be a state-of-the-art technology, and will positioned to be the leading product for PCIe Gen 5, which will be available in 2022..

And I think in the meantime, we're also seeing good traction of our current enterprise SSD controller, which is using our Ali Open Channel SSD, and in Kingston data center and other major enterprise customers. They're going to be ramping very sharply in 2021. Our U.S.

customers have been using our controller to build enterprise-grade SSD for leading U.S. server OEMs since late last year. So we are in good progress, and we believe our new product will be stronger and take a leading position. .

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

Nice execution. A couple of questions here. You're talking about your returning Korean customer, and Wallace, I think you mentioned multiple design wins.

Can you help quantify that a little bit more and maybe put a number on the number of design wins or how big you think the opportunity is? Moreover, do you think that they could also return like they had in the past on the smartphone side?.

And then maybe 2 for you, Riyadh.

Can you maybe put a more of a time line on the 3 Alibaba projects? Do they all kick off at once? Are they spread over March, June and September? And then lastly, Riyadh, can you just give us the Q4, the expected tape-out expense?.

Yes. For UFS project, just for our first UFS NAND customers, and really that's because of some multiple generation of NAND and with a different controller, for example, UFS 2.1; and we have 2 different generation, UFS 3.1, for this customer to implement with 2 different generation technology of NAND..

For our second UFS customers, NAND customer, is similar trend because the UFS 3.1, just like UFS 2.1, is going to ramp for the next 3 to 4 years. That's why they're going to adopt for different generation NAND and for different generation mobile DRAM and create a different multiple project.

That's why we position this relationship in business is going to last for multiple years. .

Tony, to your questions, first, relating to our tape-out expenses. Our Q3 tape-out expenses is significantly lighter than they were in the first -- in Q1 and Q2 of this year and certainly will be lighter than in the fourth quarter. Tape-out expenses for us have been running about $7 million to $8 million per quarter in Q1 and Q2.

And in Q3, for us, we do not have any new tape-out, so operating expenses was, therefore, much lower than they were in the previous 2 quarters. In Q4, however, our tape-out expenses will be heavier.

But overall, our first quarter -- our first half 2020 tape-out and related expenses are going to be similar to what we're going to be seeing in the second half of this year..

To your other question, Tony, if you could, could you repeat your second question again?.

Sure.

On Alibaba, the 3 projects, do they all commence at the same time? Are they spread out throughout 2021?.

And then maybe, Wallace, you misunderstood my question. On the returning Korean customer for SSD design wins, kind of the -- you talked about multiple design wins.

Can you quantify that a little bit more?.

Yes. This is our Korean customer for SSD, also including 1 or 2 different PCIe Gen 4 controller with a different type of NAND, including both TLC and QLC. .

The revenue benefits will be a multiple-year benefit. Our products will start going into production mid of next year and will scale -- and scale even more meaningfully in the following year. So you should expect good things out of our program with this Korean customer..

To your question about Alibaba, we currently still do not have a dollar sales procurement forecast from Alibaba. What we do have are 3 projects that we've been working on. This is 2 projects more than what we've been working on for -- what we've been delivering this year.

This year, we have 1 project that is equivalent to less than 5% of Alibaba's overall petabyte procurement relating to their SSDs. Next year, we believe the petabyte procurements are continuing -- will continue to rise. And so based on 3 projects, we believe our share of Alibaba's overall procurement should be much higher than the share from 1 project.

.

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

Yes. My first one is for Wallace. I'm looking at your guide for the December quarter. And next calendar year, revenue is up 18% on a year-over-year basis, but no leverage in operating margin.

If I just take the midpoint of Q4 operating margin guide, for the whole year, you're actually going to be right around 21% operating margin despite 18% revenue growth. I look back 2018, and when I compare 2020 to 2018, same trend, revenues up 6% and actually margins down 500 basis points.

And this is something that we have been trying to better understand when all of these new tape-out is going to ramp, when Shannon is going to have opening leverage. I believe that 1 or 2 years ago, you did write-down some assets within a Shannon organization, but I still don't see any leverage.

And help me understand how you're thinking about forward and the actions taken to bring some more leverage? And I have a follow-up. .

Yes. Regarding our operating expense versus sales growth, it all depend on our -- when we do the tape-out. As you know, today, most of our new technology, we adopt TSMC 16 or 12 nanometer. I think in 2022, we're going to move to 7 nanometer.

So the tape-out regarding 16 or 12 nanometer, minimum amount of the initial wafer were around $3.5 million easily. So that is to depend when we do the tape-out. For example, like Q3, our operating expense is less than normal quarter, but Q4 will be heavier due to the project tape-out with the 16 nanometer or 12 nanometer in TSMC.

That's why we're definitely looking forward to a future of sales revenue growth momentum further, which will show -- see better operation margin from the operating expense. .

But I guess what I'm asking is, help us understand what gives you confidence that you're going to be able to scale revenue to the point where there will be operating leverage. .

I think we have a pretty strong confidence in 2021. Our RSU product is -- as we state initially in the early this year, our RSU product line should grow. Unfortunately, it's a really unpredictable COVID-19 pandemic. But for next year, regarding the new UFS design win and the smartphone recovery, our mobile business will grow sharply.

Our client SSD, with today's design win pipeline, we have very strong confidence. Our client SSD controller continue to grow rapidly. Our SSD solution also will benefit from China data center-based customers, including Alibaba and other leading customers. Our Ferri business will also grow in 2021.

So we have pretty good confidence, next year, we shall see good and strong growth for our total sales revenue. .

Okay. And my follow-up is for Riyadh.

Given the confidence there is with all the new product ramp and your very strong net cash per share, why not distribute more of the cash to investors if there is such a confidence that both revenues and operating profit would scale in 2021 versus 2020?.

Mehdi, that's a great question. As you know, last week, our Board decided to keep our annual dividend at $1.40 per ADS. Although we are very optimistic as well as I kindly shared just a second ago regarding our growth prospects for next year, we're also very conservative in how we deploy our free cash flow.

We don't want to get ahead of ourselves right now. With the uncertainties of the U.S. elections [ delay ], resurgence of COVID-19 in U.S.

and Europe, escalating U.S.-China geopolitical tensions, broader global unemployment and economic issue and on and on, other issues, we believe it's important to be more conservative and stay financially flexible and have more liquidity. .

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

Wallace, Riyadh, so the -- I wanted to get a sense of the SSD controller share you guys have now.

And how you think about the opportunity for the share -- your share in SATA versus the new PCIe opportunity going forward?.

Yes. So we calculate internally, and with some [ analysts ], we believe we're around 1/3 of the market share today. SATA controller, and it was going to stay, but the PCIe controller is going to grow rapidly next year. 2021, the major driver for client SSD is PCIe Gen 3.

Initially, from mid of next year, PCIe Gen 4 will start to ramp, but the volume is still relatively small.

But we believe 2022, our PCIe Gen 4 program will all ramp up and will align with the Intel Alder Lake platform, which will create even much stronger momentum to grow our client SSD due to the higher ASP and better picture for the growth momentum. So we think we'll continue and expand. We might gain more market share in 2021 and 2022. .

Okay. And then my other question perhaps for Riyadh. The SSD ASP, has that been stable with the mix of OEM and channel moving around here versus the higher-channel products versus the lower-priced ones? Any color there would be helpful. .

Sure, sure. Our ASPs have always been stable. We have newer products like the PCIe Gen 4 products that are coming in. These are premium products, so the ASPs and margins are always going to be more attractive for these premium products.

While our older products like the SATA 3 projects -- products, the ASPs have been declining and will likely continue to decline. But overall, by having the mix of new products and old products, we've been able to manage our overall blended ASPs at pretty stable basis, helping us preserve -- which also helps us preserve our gross profitability. .

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

I just wanted to first follow-up on the eMMC+UFS business. So it's nice to see your customer working through an inventory issue. But if my model is correct, it seems like fourth quarter revenue could still be about 1/3 lower than what we were seeing before the inventory correction issue.

So the question is, with 5G units very strong and with UFS penetration increasing significantly next year, do you feel like you have visibility for that business to get back to prior highs? And if so, do you feel like you then can exceed this next year just given UFS adoption trend? So the question is really the calendar '21 outlook for UFS. .

Well, we saw a broad-based smartphone industry shipment recovery in Q3 from both large and small OEMs. We've been seeing positive trends continue in Q4. Current indications from our conversation with suppliers up and down the supply chain suggests good smartphone recovery next year. So for us, our -- with our U.S.

NAND UFS customer, we benefited -- they've been benefiting from the rebound in smartphone shipments in Q3. They're making good progress managing down their UFS inventory and have placed a meaningfully larger UFS controller sales with us in Q4..

Our UFS and eMMC controller sales are making good progress towards recovery in the fourth quarter. We may not be fully recovered compared to prior quarters, but we're making very good progress getting to where we previously were.

And certainly, in upcoming quarters, we're going to be growing even to higher levels than what we had previously achieved in past quarters. .

We do have a full... .

Go ahead. .

So we do have a full 2021 forecast from the customer. So the forecast looking very strong in 2021. If everything is on track, I think we shall really fully recover in 2021. And with additional, see, NAND makers ramp by -- in middle of 2021, we shall see much better outlook for 2021 for UFS revenue. .

Okay. That's helpful. And then the follow-up is really going back to Mehdi's question, and I think it's a question regarding the growth of the business that a lot of investors are focused on. And I'll try and position it this way.

As the company looks at calendar '21's growth potential, and clearly, across every segment, there are a number of growth drivers, maybe you can help us by ranking from what you see today -- not looking for specific guidance, but ranking from what you see today, your segments, which would give us the greatest dollar growth next year? SSD controllers, eMMC+UFS versus SSD solutions? And which do you think could give us the best percentage growth?.

I think from the dollar and percentage of a mobile controller, our eMMC+UFS controller business, 2021, will give us the most dollar growth as well as percentage growth. .

And this will be followed by our SSD controllers. Our SSD controllers is by far, much larger, so we are operating from a much larger base. Our SSD controllers are 50%, 60% of our total revenue last year.

So from this larger base, it's also much harder to grow at the rate that our -- the percentage growth rate that our mobile eMMC+UFS will be able to carry itself. But that said, we're also expecting strong sales, dollar-wise, in calendar 2021 from our SSD controllers. And then thirdly, growth from our SSD solutions. .

And if I could ask a follow-up to that, Riyadh, is there any change strategically as the company looks at SSD solutions, just given the comments you had earlier in the call regarding pricing, regarding margins for what you've seen as you've gone through mid-calendar '20?.

Strategically, for our Shannon and Ferri products, we've been focusing on ways to bring more value from what we already have relating to controllers. We have our core competency relating to controllers.

What else can we add to bring more value to our shareholders?.

With our Ferri products, we have existing controllers. They are underserviced markets relating to the industrials, automotive and office automation.

These are under-serviced by module makers and the flash makers, which creates an opportunity for us to bring differentiated products with custom firmware to customers and therefore, broadening the overall NAND market..

With the Shannon product, the strategic angle for us is to accelerate our jump into the enterprise market to go from a client-centric product focus to one where we're very quickly in the weeds of the data center hyperscaler market and quickly generating street credibility with our products.

So [ control to that ], but at the same time, generating incremental value-added from the design services that we provide to Alibaba for Open Channel technology. .

Next question is from the line of Gokul Hariharan of JPMorgan. .

My first question is on SSD controller. I think it looks like we have continued to gain market share this year.

Could we talk a little bit about what is the visibility of market share gains that we have going into the next couple of years given your design pipeline? And I think, previously, you had talked about potentially getting into game consoles as a new market opportunity.

Do we have any line of sight into that when we think about 2021 or 2022?.

Second question is back to -- there is a lot of conversation about the change or no change in supply chain as a result of the consolidation in the NAND flash side.

Could you talk a little bit about -- for your Korean customer on SSD controllers, is your engagement primarily to do with QLC NAND? Or does it encompass both TLC as well as QLC NAND from their side?.

Let me just answer your first question. Our current client SSD market share is around 33%. Our long-term goal is 40% and probably a little higher. From design pipeline, we believe we have a strong confidence to do so. The reason is that we have a very strong PC OEM appearance today.

For example, we have the 4 customers, including both NAND and module makers, provide solution to Lenovo. We have also 4 different customer provide solution to Dell and HP. So we have a very strong position from the broad base to provide solutions to the customer..

Second is, as we mentioned, we have a 5 PCIe Gen 5 design wins from NAND makers. One is new with some Korean customer. And this will give us new really [ dilemma ] to grow our client SSD to a different level. And this has become mainstream client SSD with the vendors that will design -- use both TLC and QLC..

By the way, in addition, from the acquisition by SK Hynix, after the acquisition, as you can see, that really give a tremendous benefit for Intel QLC growth as well as the Korean, their own TLC or their QLC. We don't know what return will be, but that gives tremendous financial growth and market share for them to grow into a much bigger level.

So we will benefit because we have programs in there like today, then we can continue to grow with their market share growth..

And with our relationship with Kingston, continued growth into multiple projects, we believe that give us much more benefit to grow beyond the channel as well as the Kingston also penetrating the PC OEM. They will become a strong provider for top 3 PC OEM for 2021.

That give us really the horizon for such a high-confident visibility to grow beyond 33% in 2020. .

Got it.

Can you also talk a little bit about game console as an opportunity? What is the visibility we have on that?.

Yes. Regarding the game console, some of our new PCIe Gen 4 NAND customers are targeting game console and are engineering for upcoming OEM refresh projects. Our new PCIe Gen 4 controllers, which is optimized for Gen 4 performance versus early Gen 4 solution, positioning us very well with these customers.

We are not in the current game console rollout today, but our NAND customers are targeting upcoming product refresh. .

Ladies and gentlemen, that concludes today's question-and-answer session. Now I'd like to hand the call back to Mr. Wallace Kou for closing remarks. Please go ahead. .

Thank you, everyone, for joining us today and for your continued interest in Silicon Motion. I would like to leave you with some final thoughts. This year has been challenging and unpredictable from the perspective of managing our business.

The pandemic sharply reduced our sales visibility, as China went to lockdown in Q1 and the rest of the world followed in Q2.

Unexpected demand from the working and learning from home temporarily affecting our client SSD controller business in Q2 [ unfortunately ] led to our large UFS customer to temporarily overbuild inventory, which affected us in Q3..

Nevertheless, we managed our business flexibly and continued to deliver solid results. Our Q3 year-to-date sales are up 33% year-over-year, and earnings per ADS are up 45% year-over-year. We believe these are good results despite challenging environment. We continue to build our foundation for further growth and look forward to next year.

We will be attending several virtual investor conference through year-end, the schedule of which will be posted on our Investor Relations website..

Thank you for your continued interest and for listening to our call. Stay safe. Goodbye for now. .

Thank you. Ladies and gentlemen, that concludes our conference for today, and thank you for participating. You may now all disconnect..