Silicon Motion Technology Corporation (NASDAQ:SIMO)
Q3 2021 Earnings Call
Oct 28, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the Silicon Motion Technology Corp. Q3 2021 Earnings Conference Call. [Operator Instructions]

[Operator Instructions] Kindly note that 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 information and information from other sources, we believe to be reliable, you should not place undue reliance on them.

These statements involve risks and uncertainties and actual market trends and our results may differ materially from those expressed or implied in these forward-looking statements for a variety of reasons. Potential risks and uncertainties include, but are not limited to, continued competitive pressure in the semiconductor industry and the effect of such pressure on prices, unpredictable changes in technology and consumer demand for multimedia consumer electronics; the state of and any change in our relationship with our major customers and changes in political, economic, legal and social conditions in Taiwan. For additional discussions of these risks and uncertainties and other factors, please see the documents we file from time to time with the securities and Exchange Commission. We assume no 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 our first speaker today, Mr. Chris Chaney, Director of Investor Relations and Strategy. Please go ahead.

Christopher A. Chaney — Director of Investor Relations & Strategy

Thank you, Rohit. Good morning, everyone, and welcome to Silicon Motion’s Third Quarter 2021 Financial Results Conference Call and Webcast. As Rohan mentioned, my name is Chris Chaney. I’m the Director of Investor Relations at Silicon Motion. Joining me today on the call are Wallace Kou, our President and CEO; and Riyadh Lai, our Chief Financial Officer. 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’ll then conclude with a question-and-answer period. Before we get started, I’d 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 the filings with the U.S. Securities and Exchange Commission. For more details on our financial results, please refer to our press release, which was filed on Form 6-K after the close of the market yesterday. This webcast will be available for replay in the Investor Relations section of our website for a limited time. To enhance our 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 matter similar to how we analyze our results. The reconciliation of 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 with that, I’d like to turn the call over to Wallace.

Chia-Chang Kou, Silicon Motion Technology Corporation-Founder, President, CEO, MD & Director three

Thank you, Chris. Hello, everyone, and thank you for joining us today. In the third quarter, sales and earnings reached another quarterly company record. Revenue grew 15% sequentially and over 100% year-over-year to $254 million. Earnings per ADS more than doubled from $0.76 a year ago to $1.70. Our sequential revenue growth last quarter and this quarter were driven by upselling of richer product mix, allocating more product to higher-margin accounts and repricing product to cover higher manufacturing costs. As previously communicated, we have not [Indecipherable] 4:46 received any incremental foundry wafer supply since early this year. Since demand from our customers for our products continue to outstrip our ability to supply because of foundry wafer allocation limitations. Our business has now been exposed to end market seasonality patterns and the other changes in the market condition, for example, relating to smartphone RPCS.

We expect this situation of demanding excess of supply to continue through next year since foundry capacity will likely only start improving in 2023. Our order book remains strong and continues to be well in excess of $1.5 billion for next year. We are seeing, however, some adjustment in our order book with the softening of orders for channel market products and strengthening our product for OEM customers. For example, we are seeing demand for SSD by global PC OEM continue to strengthen. While client SSD for retail markets, especially in China, softening. Since we are supply constrained, we have been looking at our revenue run rate for annualized sales targeting. In the third quarter, we delivered $1 billion in revenue run rate a quarter ahead of when we had previously communicated and expect our revenue run rate to increase further in the fourth quarter as we focus on managing our product mix, customer allocation and pricing. We have already received foundry wafer allocation for 2022. That is incremental to what we have this year, and we are confident we can grow ourselves next year toward our $1.5 billion order book.

We believe demand will continue to exceed supply next year. But even under this scenario, our revenue growth next year will still be very strong. Now let me talk about our major product lines. SSD controller sales were approximately flat sequentially in the third quarter as we had allocated more production toward EMC and UFS controllers for sales in the third quarter. This well received — this will reverse in the fourth quarter as production and sell shift back toward SSD controllers. Year-to-date, our SSD controller sales grew about 70% to 75% year-over-year, significantly faster than market growth. We have been gaining share. In the third quarter, our SSD controller sales total year more than double year-over-year. We are tracking toward gaining five to 10 percentage points of the market share this year. We believe it is important to maintain diversified exposure to different customers and end market and have a good balance between our OEM and channel markets and the diversified balance of NAND flash and module maker customers.

Currently, we are seeing very strong sales to OEM through both our NAND flash and module maker customers, while the channel market has been soft. We have been shipping our PCIe Gen four SSD controllers in the third quarter of 2020 for SSD, sold in the channel market. In this recent third quarter, we started ramping our Gen four portfolio for PC OEM with two customers and are on track to expanding from two to eight customers beginning early next year. Much longer time is required to bring OEM project to production versus channel market products because of extensive OEM qualification and testing. When our PCIe Gen four OEM project are fully ramped toward the end of 2022 or in the first half of 2023, we expect to be in approximately half of all PC OEM, PCIe Gen four SSD sockets, unchanged from what we had previously communicated. Next year, we will likely pick up five to 10 percent additional points of market share on the top of this gain this year. [Indecipherable] 9:59 from our upcoming flagship enterprise-class PCIe Gen five SSD controller remain on track we continue to expect pilot production to begin in the second half of next year and volume production in second half of 2023.

Now I will discuss our eMMC+UFS controllers. Our third quarter eMMC+UFS controller sales grew 60% to 65% sequentially. As we focus production and sales of both our classic eMMC and next-generation UFS controllers. Sales of eMMC controller approximately doubled sequentially as our module maker customers continue expanding their opportunities with OEM in low-cost smartphones and the large fragmented IoT and smart devices markets. Our eMMC controllers are benefiting from NAND flash vendors beginning to exit this low-density segment of storage market. Additionally, our primary UFS NAND flash customer continues to be very aggressive in the mobile storage market, and we are benefiting from their strong procurement momentum. We believe the mobile storage industry is about to enter another major technological shift, [Indecipherable] 11:33 experienced almost a decade ago with a transition from two-bit-per-cell [Indecipherable] 11:42 to lower cost, higher density, but much more difficult to manage three-bit-per-cell cell TLC NAND flash technology. Today, we are working with both NAND flash makers and smartphone OEM to begin the transition from TLC to four-bit-per-cell cell QLC NAND flash.

The push to use QLC NAND stems from growing focus of smartphone OEM to reduce cost and size and increase features, performance and capacity. For the [Indecipherable] 12:19 inside a smartphone, gigabit capacity from the use of QLC can be much larger than TLC. Also, for that same footprint, the use of QLC is much cheaper than TLC or dollar per gigabit basis. The trade-off is QLC technology is much harder to manage than TLC because of [Indecipherable] 12:52 data integrity issues, much more sophisticated controller technology are necessary to overcome these issues and provide consumer with the same level of trust and user experience. We have a clear controller technology leadership and more experience in the managing QLC NAND technology than any other company in our industry. Several years ago, we developed a controller that enables the first commercialize SSD using QLC NAND and today we continue to supply all the controller using [Indecipherable] 13:36 SSD built with QLC NAND.

Because of our QLC controller leadership, we have also been working extensively with both NAND flash makers and smartphone OEM on UFS embedded storage that enables the use of lower cost, high-density QLC NAND, and we expect product introduction in the 2023 to 2024 time frame. Generally, the smartphone industry adoption of new NAND technology like the PC industry has several years. The adoption of QLC technology in UFS solution using smartphone and other application will further strengthen and expand our position in mobile storage controller market. To recap, we have already received our purchase order for 2022 sales and are busy working with TSMC and other suppliers to plan and schedule production for next year’s sales. The emphasis of our business development and R&D efforts is now for beyond 2022. We are working to further expand our clients the market share, introduce and scale our innovative enterprise-class PCIe Gen five SSD controller [Indecipherable] 15:05 by our merchant market share leadership in class eMMC. Bringing QLC technology to UFS mobile storage and expand our growing presence in the automotive storage market, which I had discussed last quarter. Now I will turn the call over to Riyadh to discuss our financial results and our outlook.

Riyadh Lai — Chief Finance Officer

Thank you, Wallace, and good morning, everyone. I will discuss additional details of our third quarter results and then provide our guidance. Please note that my comments today will focus primarily on our non-GAAP results unless otherwise specifically noted. A reconciliation of our GAAP to non-GAAP data is included with the earnings release issued yesterday. In the third quarter, we grew sales 15% sequentially to $254 million. SSD controller sales were approximately flat sequentially as we temporarily allocated more wafer supply toward eMMC+UFS controllers for third quarter sales. In the fourth quarter, this will change as more wafer supply will be directed toward SSD controller sales. eMMC+UFS controller sales grew 60% to 65% sequentially because of temporary quarter-by-quarter supply planning decisions. SSD solutions sales increased 0% to 5% sequentially. Gross margin in the third quarter declined slightly to 50.2% from 51%.

This slight sequential decline is primarily caused by a significant decline in the gross margins of our SSD solutions. Operating expenses in the third quarter were $53 million, $4.5 million higher than the prior quarter, primarily from higher R&D expenses. Operating margin in the third quarter was 29.4%, a slight increase from 29.2% in the second quarter and up significantly from 23% a year ago. Our effective tax rate in the third quarter was 19.6%, in line with our 20% tax rate guidance. Earnings per ADS were $1.70, 13% higher sequentially and 124% higher year-over-year. Stock-based compensation in our operating expenses, which we exclude from our non-GAAP results, was $5.1 million in the third quarter, within our guidance of $4.5 to $5.5 million. We had $419.5 million of cash, cash equivalents, restricted cash and short-term investments at the end of the third quarter compared to $412.3 million at the end of the second quarter.

We paid $12.2 million in dividends to shareholders, the fourth and final quarterly installment of our $1.40 per ADS annual dividend that was declared last October. Earlier this week, our Board declared a new annual dividend of $2 per ADS, 43% higher than the prior one. The first $0.5 quarterly installment will be paid in November. Now let me turn to our fourth quarter guidance and forward-looking business trends. For the fourth quarter, we expect revenues to be flat to up 5% sequentially to approximately $254 million to $267 million. Due to production scheduling, SSD controller sales will increase in the fourth quarter, while eMMC+UFS controller sales will decline. Fourth quarter gross margin is expected to be in the range of 48.5% to 50.5%. Fourth quarter operating margin should be in the range of 28.5% to 30.5%. In the fourth quarter, we expect stock-based compensation in the range of $9.2 to $10.2 million. In summary, we are quickly approaching the close of the best year in our corporate history from a revenue growth, profit and cash flow perspective.

We expect to gain five to 10 percentage points of market share gain in client SSDs this year, which should continue to expand next year as we ramp PCIe Gen four shipments to more NAND and module maker customers for OEMs. By improving our product sales and customer mix, we have reached our goal of $1 billion in revenue run rate earlier than planned without any incremental wafers from our foundry partners. And next year, with healthy storage market demand and continued market share gains by us and our customers, we expect to continue our growth. We have already secured incremental wafers for 2022, necessary for us to deliver higher volume across our three key product lines: SSD controllers, eMMC+UFS controllers and SSD solutions. We will continue to add R&D resources to develop high-value controller technology for the computing, mobile, data center and automotive markets, maintain stable gross margin and deliver operating leverage. While we have — we already have our foundry wafer supply allocation for next year, which is materially more than this year and have already received customer purchase orders for next year, we are unable to provide 2022 revenue guidance at this time because we still need to perform product mix, customer allocation and prices, confirm product mix, customer allocation and prices and plan in detail the scheduling of our product fabrication. Based on current estimates, we believe demand for our products will continue to exceed our ability to supply through 2022. This concludes our prepared remarks.

We will now open the call to your questions.

Questions and Answers:

Operator

[Operator Instructions] We have a question from the line of Rajvindra Gill from Needham.

Rajvindra Gill — Needham — Analyst

Yes.Thank you and congratulations on great momentum and success this year. Wallace, Riyadh, a question on the capacity that you’re being allocated for 2022 and the purchase orders. I wanted to talk about those negotiations that you’re having with TSMC in terms of getting the capacity and the — and how secure that is and the $1.5 billion kind of purchase orders that you have in hand, could you maybe elaborate a little bit further on kind of the makeup of that — those purchase orders next year relative to this year? How is it different? How is it the same? What are the customers asking in terms of product lines? Any color there in terms of the makeup of the demand funnel and then also some additional details on the supply funnel.

Chia-Chang Kou — President, Chief Executive Officer

I think based on the third quarter revenue and fourth quarter guidance, we are ready at a $1 billion sale revenue rate with our current wafer supply. We have already received foundry wafer allocation for 2022 as we state. That’s incremental to what we have this year, and we are confident we can grow our sales next year to around $1.5 billion. We believe the demand will continue to exceed supply next year, but I think we definitely will continue to negotiate and discover TSMC to gain more wafer supply. Regarding the $1.5 billion backlog, I think we — our backlog remained very solid with the purchase order of 2022, continued to be well in excess of $1.5 billion. Most of the backlog consists SSD and eMMC+UFS controller order [Indecipherable] 23:35. An OEM order is strong because our customers have been gaining share, and we have been gaining share of [Indecipherable] 23:41 as these customers. We believe we have secured about 50% of all PC OEM and PCIe Gen four socket for next year. But we have seen, however, some adjustment in our order book with the softening of order for channel market product and strengthening our product for OEM customer. For example, we are seeing demand for SSD by global PC OEM continue to strengthen, our current client SSD for retail market, especially in China, softening.

Rajvindra Gill — Needham — Analyst

Got it. So given those dynamics that are happening in the PC market, the retail versus the OEM, could you remind us kind of your split as it stands this quarter between OEM and retail module maker and how are you adjusting your order book and your capacity to reflect this dynamic next year? I think that’s one of the main concerns that folks have just broadly is that more capacity comes online next year, but growth rates start to decelerate, order patterns start to decelerate, and we get into kind of a potential overbuild situation. I’m not saying it’s going to happen, but that’s the concern. So I’m wondering how you’re adjusting to these changes in your order book with some aspects of the business start to soften a bit.

Riyadh Lai — Chief Finance Officer

Let me start with the numbers, and then I’ll hand over to Wallace for the more qualitative stuff. In terms of our split between our sales of SSD controllers to the channel market versus the OEM market, last year was roughly 1/3 for OEMs and the rest for the channel market. By next year, we’re going to be well in excess of 50%. More than half of our products are going to be going into OEM. And so we’re right now in the process of crossing over more to OEMs and with that, let me hand over to Wallace for more color.

Chia-Chang Kou — President, Chief Executive Officer

Yes, since we also discussed with TSMC and our customers constantly. So I think TSMC and we also recognize there’s also overbooking from the end customer, but they just don’t know where it’s overbooking in the semiconductor supply chain. But to prevent overbooking, we not only check with our customers also chat with our customers, end customers. We want to make sure the product use in the application-specific end customer and market sector. That’s why we handle allocation carefully, we want to make sure all the product will sell-through. Because of our really demand [Indecipherable] 26:37 much larger than wafer allocation to us. So really, I think there will be a room for us to make the better judgment, and we really feel very comfortable for our next year backlog and the sale revenue target.

Riyadh Lai — Chief Finance Officer

Let me also add that right now, we have a very lean, extremely lean inventory on our hands. And on our customer side, our customers are also offering at very lean inventory levels. And so from a perspective of what we see, at least on our side of the business, our customer side of the business, there doesn’t seem to be overbuilding as far as we can see.

Rajvindra Gill — Needham — Analyst

Got it. That’s great to hear. And last question for me. In terms of the gross margins, you mentioned kind of holding steady, they’re around 50% in Q4. How you came about the gross margins next year, I know you’re still determining the allocation and the mix of business. But how are you thinking about the gross margins at a high level, given your — the purchase orders that you have in hand in your backlog, should we be expecting a similar kind of range? Is there potential upside to that number if we get a more of a mix shift to a higher-margin PCIe Gen four products, just any color on the gross margins would be helpful.

Riyadh Lai — Chief Finance Officer

Right now, we — based on what we see with our business going into next year. We’re very confident we should be able to maintain our gross margin around 50%.

Chia-Chang Kou — President, Chief Executive Officer

Yes, I think it’s a very complicated question because, as you all know, TSMC have increased wafer price, 20% in all technology node. UMC and SMIC also increased wafer price twice so far for this year and we definitely have to manage how to pass-through the manufacturer comp to the end customers. It’s a pretty complicated challenging work, but we are confident to really achieve average about 50% gross margin next year.

Operator

Thank you. We have the next question. This is coming from the line of Craig A. Ellis from B. Riley Securities.

Craig A. Ellis — B. Riley Securities — Analyst

Thanks for taking the questions. Guys, congratulations on the strong execution in the business. Wallace, I wanted to start off with a question that goes back to your prepared remarks on QLC versus TLC. These transitions, whether from 2-bit-per-cell to TLC or now TLC to QLC have been significant for industry and so the question is, as you look at what’s playing out in the smartphone market as it gets ready to go to QLC for all its increased density advantages and the advantages you can bring with a much more sophisticated controller, is the proper analogy for us as observers and investors, something like the transition from PCIe Gen three to Gen 4, where the QLC transition should lead to higher ASPs for CMO and if not so, can you give us some color on how that might play out as we look for this QLC transition in your UFS and eMMC business?

Chia-Chang Kou — President, Chief Executive Officer

Okay. I cannot share more detail, but I can give you a pretty clear example to understand where is the trigger point. I think when iPhone 13 Pro announced the one terabyte integrated NAND density model. I think that really drives quite a lot of the player to looking for how to provide similar density model as well as how to reduce the cost. As you know, as everybody knows, for one terabyte density into the one BGA package, you need around [Indecipherable] 30:58 together. And that is very expensive and with a lower yield. And so that’s much better if you can stack eight, one terabit QLC [Indecipherable] 31:13 which gives you better yield and also much lower cost. So this is what started for almost for a couple of months in the past because we believe some leading smartphone player start to survey and driving the momentum and for explore all different solutions.

Since we are the leading in the market for QLC development in the industry so we work with a couple of NAND vendors and smartphone maker to explore all kind of different solution. It’s not just by controller maker, also need a smartphone maker, certain software enhancement. But this will become very exciting approach in technology because this is going to reduce storage solution cost dramatically and also increase the capacity for consumer to use — to embrace all different new applications for the 5G. So this is very important for us, also expand our opportunity, not just one terabyte. It could be even go lower to 512 gigabytes. So this is a very, very important project for us, and we put a pretty decent R&D team to work together and looking forward to the future transition from 2023 to 2024 time frame, we’re going to see the solution in the market.

Craig A. Ellis — B. Riley Securities — Analyst

That’s really helpful, Wallace. The second question I had is related to the eMMC market and it seems that there’s some very encouraging supply side dynamics taking place as Silicon Motion really takes advantage of a situation where Samsung and Hynix are exiting the market. So the question is this, if the company is able to provide us with market share data on the SSD controller side and five to 10 percentage points of gains this year and expected next year. Is there some similar color that you can provide on the eMMC market so we can get a better grasp of the magnitude of share that you’re picking up there as the supply side consolidates to your favor?

Chia-Chang Kou — President, Chief Executive Officer

Okay. Let me just put some color. So you understand where we are in our position is in eMMC controller. For 2021, this year, unfortunately, we have wafer allocation. Our eMMC backlog is a much bigger allocated wafer we can supply. Because in the past, EMC controller are designed with the legacy technology node, primarily with the 55-nanometer and 40-nanometer. These mature technology node, we have much less [Indecipherable] 34:13 from TSMC and other foundry supplier. So this year, we’re busy to porting a new product into 28-nanometer. So to expand our VMC criteria because our backlog, frankly speaking, for EMC is even higher than 500 million units today. But through the wafer allocating to us, we can probably only support 60% of the backlog.

And we do see an increasing demand from the multiple customer, not just China, Taiwan or Korea, but also from U.S. and Europe and really, very, very strong demand in multi-market application, not just the low end smartphone, but also in all the smart families like Smart TV, smart speakers, smart watch, all the IoT devices, automotive and Chromebook. So this is a very, very strong demand, even some NAND maker because they ask it from EMC, but they still want to provide solution. [Indecipherable] 35:21 come to SMI. So we really have obligation to expand our wafer supply to support to these customers to avoid any potential market segment breakdown. So this is our obligation and try to really increase all the available technology wafer to us to make it more cost effective, also prepared for upcoming new TLC NAND and as well as the legacy NAND support. I just really cannot say what market share we have definitely more than 30%, but just if we can have a sufficient wafer support, we can easily achieve more than 50% of market share next year.

Craig A. Ellis — B. Riley Securities — Analyst

That’s really helpful, Wallace. And then I’ll follow-up with one to Riyadh, so that I don’t ignore you, and then I’ll hand it off to others. So the question is this, Riyadh. So given that the company year-to-date has talked about four drivers to executing on gross margin, richer mix, allocations to more profitable accounts, recovering manufacturing costs and then doing things on the back end and with things like transition from much more mature nodes to 28-nanometer for eMMC it seems there would be significant momentum to keep the trajectory on gross margin moving higher next year. So why would we not see gross margin moving up next year versus something that’s at 50%, admittedly, a good point relative to the target range, but it seems there’s momentum in the business for something that would be higher.

Chia-Chang Kou — President, Chief Executive Officer

Well, unfortunately, because TSMC increased wafer price for 20%. So I think, as you know, EMC really is — should be lower cost product because lower density for consumer electronic and automotive devices. So we carefully try to transition the manufacturing costs from wafer and test to the end customers. I think we state we’re targeting, we are confident to reach a 50% gross margin doesn’t mean we cannot have upside, so but just the 50% is our target [Indecipherable] 37:50 for 2022.

Riyadh Lai — Chief Finance Officer

Craig we’re just leaving to our conclusion while we’re targeting 50% you know, we’d love to do more.

Craig A. Ellis — B. Riley Securities — Analyst

Understand. And just given the sector’s broader trailing 10-year trajectory, I think if the company did more, it would be very meaningful for the stock. And with that, I’ll hand it off to others.

Operator

We have the next question. This is coming from the line of Mehdi Hosseini from Susquehanna International.

Mehdi Hosseini — Susquehanna International — Analyst

Thanks for taking my question. A couple of follow-ups. Based on your guide for December quarter, it seems to me that 2021 revenues are on target to increase by 70%. Can you help me have a feel for how blended pricing has changed ’21 versus ’20 and how unit shipment is tracking? I think it’s very important for us to understand the mix and improving ASP? And any color you can provide would be great. And just to extend that into ’22, how do you see a better mix improving your blended pricing without even raising prices on your customer? And I have a follow-up.

Riyadh Lai — Chief Finance Officer

Well, our prices this year, our blended prices have been going up this year, which is quite a good momentum that we have this year, which is a little bit different. I mean, generally, in the past, we would keep our blended ASPs versus this year, our blended ASPs have been going up. And this is coming from the factors that we had previously talked about, everything from selling a richer mix of products, focusing since our wafers are limited we’re focusing on manufacturing products, allocating to higher ASP, higher-margin products, right.

And it’s also giving us an opportunity to be more focused about how we allocate products to customers. And where possible, we are also readjusting our prices and being more disciplined as the cost side, for example, wafer cost and substrate costs, those have been going up and so we need to recover those costs in order to preserve — ability. So all these three factors as well as focusing on improving our manufacturing operations. That’s the fourth leg. All of these are leading to strong gross margins. But obviously, the first three factors are what’s keeping our blended ASPs going up and we expect this trend likely to continue into next year since wafer supply will still be very tight next year.

Mehdi Hosseini — Susquehanna International — Analyst

That’s fair. So on all those four legs or four drivers for 70% revenue growth, which is — which has the highest impact.

Riyadh Lai — Chief Finance Officer

The impact is coming from all three elements from product mix, from customer allocation and also from increasing our prices to recover our costs.

Chia-Chang Kou — President, Chief Executive Officer

Yes. The other point is, I think from mathematically, if we want to achieve higher sales revenue growth, we should ship everything as a component with the packaging, right? That is each wafer we can maximize sell revenue. Doesn’t mean you have the best gross margin, but they have the best sales revenue and best profit. However, we cannot do that because we have obligation to support — for UFS for microSD and some automotive business, and we cannot just for ourselves to allow certain market segment breakdown. So we have obligation because we are largest controller supplier. So we have to be very cautiously to balance where we can achieve the sale revenue and maximize profit also [Indecipherable] 42:11 market sector breakdown.

Mehdi Hosseini — Susquehanna International — Analyst

Got it. And just to look forward, could the mix continue to improve richer mix. So even with a weak channel, a richer mix and therefore, higher blended ASP would be another — would help with another year of double-digit revenue growth. Is that richer mix sustainable into ’22?

Riyadh Lai — Chief Finance Officer

Absolutely, Mehdi. Our wafer capacity is still going to be very tight next year. We don’t expect a foundry wafer supply to loosen up until 2023 and so with wafer capacity being limited, we’re going to be working to optimize our scarce resources where we can deliver the strongest revenue and profitability.

Mehdi Hosseini — Susquehanna International — Analyst

Okay. Now just — and one last item. Is the enterprise contribution is still more of a ’23 target or is there a chance that you can actually pull that in and then benefit earlier?

Chia-Chang Kou — President, Chief Executive Officer

For enterprise controller, we already start to have a sale revenue, although the volume still is very small, but we will continue to grow. But for really flagship product is our PCIe Gen five controller, which will be commercialized in the second half of next year, but moving to mass production in second half of 2023.

Operator

We have the next question. This is coming from the line of Karl Ackerman from Cowen.

Karl Ackerman — Cowen — Analyst

Yes. Thank you. A few questions from me as well. Maybe first off, Riyadh, you indicated that orders for client SSDs at retail — across retail markets are softening in China. But my understanding was that business is more opportunistic versus NAND OEMs and was instrumental to your $1.5 billion order backlog. And so my question is, for NAND OEMs, do you have quarterly commitments from them that would limit risk from order moderation or pushouts?

Riyadh Lai — Chief Finance Officer

Well, we’re talking more about the current situation right now. Looking at our current sales in Q3 as well as in Q4 what we are seeing is on our client SSD business, the strengthening of sales to OEMs, into the OEM market versus softening of demand in the channel market, specifically the retail market in China.

Chia-Chang Kou — President, Chief Executive Officer

The demand we have from PC OEM and NAND maker, the program really is rock-solid because we got a full year PO from the major OEM customer.

Karl Ackerman — Cowen — Analyst

Understood. That’s helpful. I guess in your prepared comments, I’m not sure I heard much update on the progress you’re seeing for PCIe Gen four enterprise controllers, so then to Europe, China hyperscale providers and so I’m wondering what sort of market adoption are you seeing from them today? I realize that I’m cognizant that Gen five appears to be the primary product opportunity for you for enterprise controllers. But if you could just kind of bridge that time line with what you’re seeing with PCIe Gen four enterprise controllers today, that would be very helpful.

Chia-Chang Kou — President, Chief Executive Officer

Okay. So regarding the PCI and for controller, we are sampling and developing really the solution through the Shannon product solution as well as through the Kingston. Now because we have a wafer allocation and our [Indecipherable] 46:39 solution, the gross margin is lower, much lower than our corporate average. So we only focus on two to three major customer demand. And we do not want the Shannon PCIe Gen four SSD solution really dilute our corporate gross margin. But we focus on the quality, firmware development, make sure our forward capability and performance meets the industry, our customer expectation. The reason we put a focus on PCIe Gen five is our PCIe Gen four controller was late compared with other leading NAND makers such as from Samsung and Intel. But our PCIe Gen five will be ahead of many NAND makers solution. And we believe our PCIe Gen five will be a flagship [Indecipherable] 47:37 early in the industry. So that’s why we will put more focus and preparing from Gen four trending into Gen 5, and we can really ramp with a better position and with a better selling price because we can charge premium in 2023.

Operator

We have the next question. This is coming from Anthony Stoss from CH.

Anthony Stoss — CH — Analyst

Good morning guys. Riyadh, I wanted to follow-up, just so I’m crystal clear on your comments as well as Wallace’s. So if you have, about $1.5 billion in order book, and I think Wallace alluded to this, but again, I want to be clear, based on your materially more wafers at TSMC is committed, could you get close to generating $1.5 billion in revenues in 2022? And then I had a follow-up.

Riyadh Lai — Chief Finance Officer

We are working to get toward our goal. We continue to negotiate for more wafers. But based on the wafer supply commitment that we have today, it’s very likely that supply — demand will continue to be — will be in excess of supply, demand excess of supply. But even with that scenario, we’re still going to be generating very strong growth for 2022.

Anthony Stoss — CH — Analyst

Okay. Let me ask in a different way. Do you think you’ll get at least 50% more wafers in 2022 over 2021?

Chia-Chang Kou — President, Chief Executive Officer

This is impossible because you can see TSMC’s [Indecipherable] 49:30 no overbooking. [Indecipherable] 49:36 got a confirmation. We have incremental wafer increase compared with 2021, but it’s impossible for anyone to get a 50% increase. But I think the really increased sale revenue is not just by wafer numbers by how you probably manage the product mix. And especially, we have a new product PCIe Gen four and UFS 3.1 ramping sharply and so we can transition this portion of high-end product and to driving the better profit and better sale revenue. So it’s not exactly mathematically, you need 50% wafer to create a 50% sale revenue.

Anthony Stoss — CH — Analyst

Got it. And then shifting gears, and I don’t know if you guys will have this at your fingertips, but what percentage of your total revenue right now is in, call it, consumer IoT and/or auto and how quickly is this new market growing for you guys?

Chia-Chang Kou — President, Chief Executive Officer

Well, we — I think that we really cannot count on customers, but I think we own pretty large eMMC controller business. So customers in everywhere, we have pretty decent smartwatch, smart speakers and smart TV and set top box, even cable modem and in U.S., so it’s a very, very fragmented market sector with a very large potential. Just alone, we can continue to increase wafer supply from our foundry makers, I think we can continue to gain the market share.

Riyadh Lai — Chief Finance Officer

Tony, let me also add that Wallace had earlier talked about that we already have about 500 million units of backlog relating to eMMC for our module maker customers, 500 million units. Right now, we are not able to deliver all of that. We’re delivering maybe 60% of that because of wafer limitations. But if we can deliver 500, that’s equivalent to about half of the market.

Anthony Stoss — CH — Analyst

Got it. Nice job in the quarter.

Operator

We have the next question from the line of Suji Desilva from ROTH Capital.

Suji Desilva — ROTH Capital — Analyst

Hi Chia, hi Riyadh congratulations on what’s looking like a strong year. A question on the transition to QLC from TLC. Are there any — which end markets or QLC most important for, is there a share implication in terms of share gain opportunity as we transition to QLC in terms of technology advantage that might garner you that?

Chia-Chang Kou — President, Chief Executive Officer

I think for TLC, enterprise SSD today, the SEARs primary preferred TLC. It probably takes a couple of years to adopt the QLCs into enterprise SSD. But for client, it’s moving quickly, especially for second half next year and 2023. We believe probably all [Indecipherable] 52:51 SSD will transition to QLC SSD. For the consumer products, I think that because QLC is much more attractive to — because of the cost advantage. Now many, many consumer and customers, they are used to adopt and comfortable to use QLC based product. For the mobile, as I said, we see the really trigger point is a higher density UFS product, which needs to compete with iPhone 13 Pro. However, I think the technology is very challenging because the controller needs a much more — a better unique algorithm and also meet performance, enduring [Indecipherable] 53:37, everything, you need to be similar like TLC, the user feel the same user experience as a TLC based solution. So it will probably take two to three years to see the solution happening. So we see the potential launch market sector will be around second half 2023 to 2024, and we’re going to see QLC based U.S. product in the market.

Suji Desilva — ROTH Capital — Analyst

Okay. That’s very helpful. And then as you look at calendar ’22, I’m curious, are there any additional new NAND flash customers that you’ll be ramping either an SSD or eMMC+UFS and if there are, in light of a tight wafer environment, how would you support additional customers coming online?

Chia-Chang Kou — President, Chief Executive Officer

Yes, it’s a very good question. I think we have a [Indecipherable] 54:30 customer today for SSD. Our target is to try probably get one more in late next year or early 2023, but we cannot — it’s our target, and we cannot comment very too much right now.

Operator

We do not have any further questions at this moment. I would like to hand the conference back to Mr. Wallace Kou for any ending remarks.

Chia-Chang Kou — President, Chief Executive Officer

Thanks everyone, for joining us today and for your continuing interest in Silicon Motion. Next week, we will be featuring our leading-edge technology and comprehensive enterprise solution in-person at the OCP Global Summit in San Jose. In addition, 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. Thank you, everyone, for joining today again. Goodbye for now.

Operator

[Operator Closing Remarks]

Duration: 56 minutes

Call participants:

Christopher A. Chaney — Director of Investor Relations & Strategy

Riyadh Lai — Chief Finance Officer

Chia-Chang Kou — President, Chief Executive Officer

Rajvindra Gill — Needham — Analyst

Craig A. Ellis — B. Riley Securities — Analyst

Mehdi Hosseini — Susquehanna International — Analyst

Karl Ackerman — Cowen — Analyst

Anthony Stoss — CH — Analyst

Suji Desilva — ROTH Capital — Analyst

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